AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 2002
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
RADIOLOGIX, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 8099 75-2648089
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
3600 JP MORGAN CHASE TOWER, 2200 ROSS AVENUE, DALLAS, TEXAS 75201, (214)
303-2776
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive officers)
PAUL M. JOLAS, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
RADIOLOGIX, INC.
3600 JP MORGAN CHASE TOWER
2200 ROSS AVENUE
DALLAS, TEXAS 75201
(214) 303-2776
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPY TO:
WILLIAM R. HAYS, III
HAYNES AND BOONE, LLP
901 MAIN STREET, SUITE 3100
DALLAS, TEXAS 75202-3789
(214) 651-5000
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
10 1/2% Series B Senior Notes due
2008................................. $160,000,000 100% $160,000,000 $14,720
Guarantees of 10 1/2% Series B Senior
Notes due 2008(2).................... -- -- -- None(3)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act.
(2) The 10 1/2% Series B Senior Notes due 2008 are guaranteed by each of the
entities listed in the Table of Additional Registrants.
(3) Pursuant to Rule 457(n), no registration fee is required with respect to the
guarantees of the notes registered hereby.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
STATE OR OTHER JURISDICTION
OF INCORPORATION OR I.R.S. EMPLOYER
NAME, ADDRESS AND TELEPHONE ORGANIZATION IDENTIFICATION NUMBER
- --------------------------- --------------------------- ---------------------
IDE Imaging Partners, Inc.(1)........................ Delaware 16-1536314
Pacific Imaging Partners, Inc.(1).................... California 94-2509195
WB&A Imaging Partners, Inc.(1)....................... Delaware 52-2119156
Treasure Coast Imaging Partners, Inc.(1)............. Delaware 65-0825197
Radiologix Services, Inc.(1)......................... Delaware 52-2120892
Advanced Imaging Partners, Inc.(1)................... Delaware 52-2055550
Mid Rockland Imaging Partners, Inc.(1)............... Delaware 13-3967044
Radiology and Nuclear Medicine Imaging Partners,
Inc.(1)............................................ Delaware 74-2851827
Community Imaging Partners, Inc.(1).................. Delaware 52-2076917
Valley Imaging Partners, Inc.(1)..................... California 94-1704799
Advanced Radiology, LLC(1)........................... Maryland 52-1891450
Advanced Medical Imaging, Inc.(1).................... Maryland 52-1881998
M&S Imaging Partners I, Inc.(1)...................... Delaware 74-2851828
M&S Imaging Investments, Inc.(2)..................... Delaware 52-2068949
M&S Imaging Partners, L.P.(1)........................ Delaware 74-2860076
Questar Cleveland, Inc.(3)........................... Florida 59-3578139
Questar Tampa, Inc.(3)............................... Florida 59-3406647
Questar Orlando, Inc.(3)............................. Florida 59-3457479
Rocky Mountain OpenScan MRI, LLC(3).................. Colorado 84-1349368
Premier Advanced Imaging Network, Ltd.(3)............ Florida 59-3457481
Questar Kansas, Inc.(3).............................. Florida 59-3466223
Questar PVH, Inc.(3)................................. Florida 59-3357556
Questar San Francisco, Inc.(3)....................... Florida 59-3520531
Questar Henderson, Inc.(3)........................... Florida 59-3527959
Questar TriStates, Inc.(3)........................... Florida 59-3540520
Questar Imaging, Inc.(3)............................. Florida 59-3315849
Questar Duluth, Inc.(3).............................. Florida 59-3540519
Questar Lincoln, Inc.(3)............................. Florida 59-3555014
Questar Palm Springs, Inc.(3)........................ Florida 59-3540523
Questar Lower Bucks, Inc.(3)......................... Florida 59-3520451
Questar Toledo, Inc.(3).............................. Florida 59-3520536
Questar Los Alamitos, Inc.(3)........................ Florida 59-3578133
Questar Victorville, Inc.(3)......................... Florida 59-3578129
Questar Columbus, Inc.(3)............................ Florida 59-3578138
Questar Naperville, Inc.(3).......................... Florida 59-3578132
Questar Quakertown, Inc.(3).......................... Florida 59-3520532
Questar Tucson, Inc.(3).............................. Florida 59-3578130
</Table>
- ---------------
(1) The address of each of these additional registrants is: 3600 JP Morgan Chase
Tower, 2200 Ross Avenue, Dallas, TX 75201. The telephone number of each is
214.303.2776.
(2) The address for M&S Imaging Investments, Inc. is: 300 Delaware Avenue, Suite
1704, Wilmington, DE 19801. The telephone number is 302.427.5800.
(3) The address of each of these additional registrants is: 3650 JP Morgan Chase
Tower, 2200 Ross Avenue, Dallas, TX 75201. The telephone number of each is
214.303.2776.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 29, 2002
PROSPECTUS
RADIOLOGIX, INC.
OFFER TO EXCHANGE UP TO
$160,000,000 10 1/2% SERIES A SENIOR NOTES DUE 2008
FOR
$160,000,000 10 1/2% SERIES B SENIOR NOTES DUE 2008
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
---------------------
Upon the terms and subject to the conditions set forth in this prospectus
and the accompanying letter of transmittal, we are offering to exchange up to
$160,000,000 of our 10 1/2% Series B Senior Notes due 2008 (the "New Notes"),
which are registered under the Securities Act of 1933, as amended, for up to
$160,000,000 of our outstanding 10 1/2% Series A Senior notes due 2008 (the "Old
Notes"). We are offering to issue the New Notes to satisfy our obligations
contained in the registration rights agreement we entered into when we sold the
Old Notes. We will not receive any proceeds from the exchange offer.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that the transfer restrictions, registration
rights and liquidated damages provisions of the Old Notes do not apply to the
New Notes. The New Notes will evidence the same debt as the Old Notes and will
be governed by, and entitled to the benefits of, the same indenture under which
we issued the Old Notes.
We will exchange all outstanding Old Notes that you validly tender and do
not withdraw before the exchange offer expires for an equal principal amount of
New Notes. You may withdraw tendered Old Notes at any time prior to the
expiration of the exchange offer.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 2002, UNLESS EXTENDED.
---------------------
To exchange your Old Notes for New Notes:
- you must complete and send the letter of transmittal that accompanies
this prospectus to the exchange agent so that the exchange agent receives
the letter of transmittal before 5:00 p.m., New York city time, on
, 2002; or
- if your Old Notes are held in book-entry form at The Depository Trust
Company, you must instruct The Depository Trust Company, through your
signed letter of transmittal, that you wish to exchange your Old Notes
for New Notes. When the exchange offer closes, your account at The
Depository Trust Company will be changed to reflect your exchange of Old
Notes for New Notes.
You should read the section called "The Exchange Offer" for additional
information on how to exchange your Old Notes for New Notes.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2002
NOTICE TO INVESTORS
Except as described below, based on interpretations of the SEC staff set
forth in no-action letters issued to third parties, we believe that the New
Notes issued in exchange for Old Notes may be offered for resale, resold, and
otherwise transferred by a holder without further registration under the
Securities Act and without delivering a prospectus in connection with any resale
of the New Notes, provided that the holder:
- is acquiring the New Notes in the ordinary course of its business;
- is not participating, and has no arrangement or understanding with any
person to participate, in a distribution of the New Notes;
- is not an "affiliate" of Radiologix within the meaning of Rule 405 under
the Securities Act; and
- is not a broker-dealer who holds Old Notes acquired for its own account
as a result of market-making or other trading activities.
Holders wishing to tender their Old Notes in the exchange offer must
represent to us that these conditions have been met. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the New Notes cannot rely on these
interpretations by the SEC staff and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Unless an exemption from registration is otherwise
available, any secondary resale by a holder intending to distribute New Notes
should be covered by an effective registration statement under the Securities
Act containing the selling security holder information required by Item 507 of
Registration S-K under the Securities Act.
Each broker-dealer who holds Old Notes acquired for its own account as a
result of market-making or other trading activities may exchange the Old Notes
pursuant to the exchange offer. However, the broker-dealer may be deemed to be
an "underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with its initial resale of each New Note received in the exchange
offer. The letter of transmittal states that by acknowledging and delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For so long as the registration statement of which this prospectus is a
part is effective under the Securities Act, a broker-dealer may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with its resales of New Notes received for its account in exchange
for Old Notes that were acquired by the broker-dealer as a result of
market-making or other trading activities. For a period of up to 180 days after
the expiration date of the exchange offer, we expect to keep the registration
statement effective under the Securities Act for, and to make this prospectus
available to, broker-dealers who request in the letter of transmittal to use it
in connection with those resales.
The Old Notes and the New Notes constitute new issues of securities with no
established public trading market. We do not intend to apply for listing of the
Old Notes or the New Notes on any securities exchange or for inclusion of the
Old Notes or the New Notes in any automated quotation system. We cannot assure
you that:
- an active public market for the New Notes will develop;
- any market that may develop for the New Notes will be liquid; or
- holders will be able to sell the New Notes at all or at favorable prices.
Future trading prices of the New Notes will depend on many factors,
including among other things, prevailing interest rates, our operating results,
our credit rating and the market for similar securities.
i
Any Old Notes not tendered or accepted in the exchange offer will remain
outstanding. To the extent that Old Notes are tendered and accepted in the
exchange offer, your ability to sell untendered, and tendered but unaccepted,
Old Notes could be adversely affected. Following consummation of the exchange
offer, the holders of Old Notes will continue to be subject to the existing
restrictions on transfer of the Old Notes, and we will have no further
obligation to those holders, under the registration rights agreement, to
register the Old Notes under the Securities Act. There may be no trading market
for the Old Notes.
We will not receive any proceeds from the exchange offer and have agreed to
bear the full expenses of the exchange offer. No underwriter is being used in
connection with the exchange offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL WE ACCEPT SURRENDERS FOR
EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE
OFFER OR THE ACCEPTANCE THEREOF WOULD VIOLATE THE SECURITIES OR BLUE SKY LAWS OF
THAT JURISDICTION.
ii
SUMMARY
The following summary contains basic information about this exchange offer.
It may not contain all the information that is important to you in making your
investment decision. More detailed information appears elsewhere in this
prospectus and in our consolidated financial statements and accompanying notes
that we incorporate by reference. "The Exchange Offer" and the "Description of
New Notes" sections of this prospectus contain more detailed information
regarding the terms and conditions of the exchange offer and the New Notes.
Except in the "Description of New Notes" section and unless the context clearly
implies otherwise, the words "Radiologix," "company," "we," "our," "ours," and
"us" refer to Radiologix, Inc. and its subsidiaries.
OUR COMPANY
We are a leading national provider of diagnostic imaging services through
our ownership and operation of free-standing, outpatient diagnostic imaging
centers.
Our principal offices are located at 3600 JP Morgan Chase Tower, 2200 Ross
Avenue, Dallas, Texas 75201. Our telephone number is 214.303.2776.
THE EXCHANGE OFFER
On December 12, 2001, we completed a private offering of the Old Notes. At
the time of the private offering we entered into a registration rights agreement
in which we agreed to deliver to you this prospectus and to use our best efforts
to cause the registration statement to be declared effective no later than June
10, 2002.
New Notes..................... $160 million in principal amount of our 10 1/2%
series B senior notes due 2008.
Exchange Offer................ We are offering to issue the New Notes in
exchange for a like principal amount of
outstanding Old Notes that we issued on
December 12, 2001. In general, the Old Notes
are subject to transfer restrictions that will
not apply to the New Notes, so long as:
- you are acquiring the New Notes in the
ordinary course of your business;
- you are not participating, nor have any
arrangement or understanding with any person
to participate, in a distribution of the New
Notes;
- you are not an affiliate of ours; and
- you are not a broker-dealer who holds Old
Notes acquired for its own account as a
result of market-making or other trading
activities.
Expiration Date............... The exchange offer will expire at 5:00 p.m. New
York City time, on , 2002, unless we
decide to extend it.
Purpose of Exchange Offer..... We are making this exchange offer solely to
satisfy our obligations under the registration
rights agreement entered into in connection
with sale of the Old Notes. The issuance of the
New Notes will not provide us with any new
proceeds.
Conditions to the Exchange
Offer......................... The registration rights agreement does not
require us to accept Old Notes for exchange if
the exchange offer or the exchange of
1
the Old Notes would violate any applicable law
or interpretation of the staff of the SEC. The
exchange offer is not conditioned on the tender
of a minimum aggregate principal amount of Old
Notes.
Procedures for Tendering Old
Notes......................... To participate in the exchange offer, you must
complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal, and transmit it together with all
other documents required by the letter of
transmittal to U.S. Bank National Association,
as exchange agent, at the address indicated on
the cover page of the letter of transmittal. In
the alternative, you can tender your Old Notes
by following the procedures for book-entry
transfer described in this prospectus.
If your Old Notes are held through The
Depository Trust Company and you wish to
participate in the exchange offer, you may do
so through the automated tender offer program
of The Depository Trust Company. If you tender
under this program, you will agree to be bound
by the letter of transmittal that we are
providing with this prospectus as though you
had signed the letter of transmittal.
If a broker, dealer, commercial bank, trust
company or other nominee is the registered
holder of your Old Notes, we urge you to
contact that person promptly to tender your Old
Notes in the exchange offer.
All documents must be received by the exchange
agent prior to the expiration of the exchange
offer.
Guaranteed Delivery
Procedures.................... If you wish to tender your Old Notes and you
cannot get your required documents to the
exchange agent on time, you may tender your Old
Notes according to the guaranteed delivery
procedures described in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal of Tenders......... You may withdraw your tender of Old Notes at
any time prior to the expiration of the
exchange offer. To withdraw, you must deliver a
written or facsimile transmission notice of
withdrawal to the exchange agent at its address
indicated on the cover page of the letter of
transmittal before the expiration of the
exchange offer.
Acceptance of Old Notes and
Delivery of New Notes......... We intend to accept any and all Old Notes that
you properly tender in the exchange offer prior
to the expiration of the exchange offer. We
will return any Old Notes that we do not accept
for exchange to you without expense as promptly
as practicable after the expiration of the
exchange offer. We will deliver the New Notes
as promptly as practicable after the expiration
of the exchange offer and acceptance of the Old
Notes for exchange.
Fees and Expenses............. In general, we will bear all expenses related
to the exchange offer.
2
Consequences of Failure to
Exchange Old Notes............ If you do not exchange your Old Notes in this
exchange offer, you will no longer have any
further rights under the registration rights
agreement, including any right to require us to
register your Old Notes or to pay any
liquidated damages. In addition, you will not
be able to resell, offer to resell or otherwise
transfer the Old Notes unless we have
registered the Old Notes under the Securities
Act, or unless you resell, offer to resell or
otherwise transfer them under an exemption from
the registration requirements of, or in a
transaction not subject to, the Securities Act.
To the extent that Old Notes are tendered and
accepted in the exchange offer, your ability to
sell untendered, and tendered but unaccepted,
Old Notes could be adversely affected. There
may be no trading market for the Old Notes.
U.S. Federal Income Tax
Considerations................ The exchange of Old Notes for New Notes in the
exchange offer will not be a taxable event for
U.S. federal income tax purposes.
Exchange Agent................ We have appointed U.S. Bank National
Association, as exchange agent for the exchange
offer. You should direct questions and requests
for assistance, requests for additional copies
of this prospectus or the letter of transmittal
and requests for the notice of guaranteed
delivery to the exchange agent addressed as
follows: U.S. Bank National Association, 180
East Fifth Street, St. Paul, Minnesota 55101;
Attention: Specialized Finance Department,
Corporate Trust Services. Eligible institutions
may make requests by facsimile at (651)
244-1537.
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that the transfer restrictions, registration
rights and liquidated damages provisions do not apply to the New Notes. The New
Notes will evidence the same debt as the Old Notes, and the same indenture will
govern the New Notes and the Old Notes.
The following summary contains basic information about the New Notes and
may not contain all the information that is important to you. For a more
complete description of the New Notes, please refer to the section of this
prospectus entitled "Description of New Notes."
Issuer........................ Radiologix, Inc.
New Notes..................... $160 million aggregate principal amount of
10 1/2% series B senior notes due 2008.
Maturity Date................. December 15, 2008.
Interest Rate and Payment
Dates......................... The New Notes will bear interest at an annual
rate of 10 1/2%, payable semiannually in
arrears on June 15 and December 15 of each
year, commencing June 15, 2002.
Ranking....................... The New Notes will be our senior unsecured
obligations, will rank senior in right of
payment to all of our subordinated indebtedness
and equal in right of payment with all of our
other senior indebtedness.
3
Guarantees.................... The New Notes will be unconditionally
guaranteed on a senior unsecured basis by our
existing and future subsidiaries that are not
unrestricted subsidiaries.
Optional Redemption........... On or after December 15, 2005, we will have the
right to redeem all or some of the New Notes
from time to time at the following redemption
prices, plus accrued and unpaid interest to the
date of redemption
<Table>
<Caption>
FOR THE PERIOD PERCENTAGE
-------------- ----------
On or after December 15, 2005.......... 105.250%
On or after December 15, 2006.......... 102.625%
December 15, 2007 and thereafter....... 100.000%
</Table>
On or prior to December 15, 2004, we may, at
out option, redeem up to 35% of the original
principal amount of the New Notes with the net
proceeds from certain public equity offerings
at a price equal to 110.500% of the principal
amount, plus accrued and unpaid interest to the
date of redemption, provided at least 65% of
the original principal amount of the New Notes
remains outstanding.
Change of Control............. Upon the occurrence of a change of control,
each holder of New Notes will have the right to
require us to purchase all or any part of such
holder's New Notes at an offer price in cash
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest
thereon to the date of purchase.
Asset Sale Offer.............. If we sell assets, we may have to use the net
proceeds to offer to purchase the New Notes at
a price equal to 100% of the principal amount,
plus accrued and unpaid interest thereon to the
date of purchase.
Certain Covenants............. We will issue the New Notes under an indenture
that, among other things, restricts our ability
and the ability of our subsidiaries that are
not unrestricted subsidiaries to:
- borrow money;
- pay dividends on or redeem or repurchase our
stock;
- make investments;
- create liens;
- sell certain assets or merge with or into
other companies;
- enter into certain transactions with
affiliates;
- sell stock in our subsidiaries; and
- restrict dividends, distributions or other
payments from our subsidiaries.
4
RISK FACTORS
There are many risks that may affect your investment in the New Notes. Some
of these risks, but not all of them, are listed below. You should carefully
consider these risks as well as the other information included or incorporated
by reference in this prospectus before investing in the New Notes.
RISKS RELATING TO THE EXCHANGE OFFER
If you do not exchange the Old Notes for New Notes under the exchange
offer, then you will continue to be subject to the existing transfer
restrictions on the Old Notes. In general, the Old Notes may not be offered or
sold unless they are registered or exempt from registration under the Securities
Act of 1933 and applicable state securities laws. Except as required by the
registration rights agreement, we do not intend to register resales of the Old
Notes.
The tender of Old Notes under the exchange offer will reduce the aggregate
principal amount of the Old Notes. This may have an adverse effect upon, and
increase the volatility of, the market price of any Old Notes that you continue
to hold due to the reduction in liquidity.
RISKS RELATED TO OUR INDEBTEDNESS AND TO THE NEW NOTES
The risks described in this section that apply to the New Notes also apply
to any Old Notes not tendered for New Notes in the exchange offer.
OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS ON THE NEW NOTES.
We will have substantial indebtedness after this offering. As of December
31, 2001, we had approximately $197.2 million of indebtedness. In addition, we
have the ability to borrow up to $35 million under our new senior credit
facility. Also, subject to restrictions in the indenture relating to the New
Notes and the new senior credit facility, we may incur additional indebtedness.
Our high level of indebtedness could have important consequences to you,
including the following:
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired;
- we must use a substantial portion of our cash flow from operations to pay
interest on the New Notes and our other indebtedness, which will reduce
the funds available to us for other purposes;
- all of the indebtedness outstanding under the new senior credit facility
will be secured by substantially all of our assets and will mature prior
to the New Notes;
- our high level of indebtedness could place us at a competitive
disadvantage compared to our competitors that have less debt;
- some of our debt has a variable rate of interest, which exposes us to the
risk of increased interest rates; and
- our high level of indebtedness makes us more vulnerable to economic
downturns and adverse developments in our business.
We expect to obtain the money to pay our expenses and to pay the amounts
due under the New Notes, the new senior credit facility and other debt from our
operations and from borrowings under the new senior credit facility. Our ability
to meet our expenses thus depends on our future performance, which will be
affected by financial, business, economic and other factors. We will not be able
to control many of these factors, such as economic conditions in the markets
where we operate and pressure from competitors. Our business may not generate
sufficient cash flow from operations in the future, our currently anticipated
growth in revenue and cash flow may not be realized on schedule and future
borrowings may not be available to us under the new senior credit facility in an
amount sufficient to enable us to repay
5
indebtedness, including the New Notes, or to fund other liquidity needs. If we
do not have enough money, we may be required to refinance all or part of our
then existing debt (including the New Notes), sell assets or borrow more money.
We cannot guarantee that we will be able to do so on terms acceptable to us, or
at all. In addition, the terms of existing or future debt agreements, including
the new senior credit facility and the indenture relating to the New Notes, may
restrict us from adopting any of these alternatives. The failure to generate
sufficient cash flow or to achieve such alternatives could significantly
adversely affect the value of the New Notes and our ability to pay the amounts
due under the New Notes.
BECAUSE THE NEW NOTES ARE UNSECURED, YOUR RIGHT TO ENFORCE REMEDIES IS LIMITED
BY THE RIGHTS OF HOLDERS OF SECURED DEBT.
The New Notes will not be secured. Our new senior credit facility is
secured by substantially all of our assets and a pledge of the capital stock of
all of our wholly owned subsidiaries. If we become insolvent or are liquidated,
or if payment under the new senior credit facility is accelerated, our lenders
would be entitled to exercise the remedies available to a secured lender under
applicable law and will have a claim on those assets before the holders of the
New Notes. The liquidation value of our assets may not be sufficient to repay in
full the indebtedness under the new senior credit facility, as well as our other
indebtedness, including the New Notes.
OUR ABILITY TO REPAY THE NEW NOTES AND OUR OTHER DEBT DEPENDS ON CASH FLOW
FROM OUR SUBSIDIARIES, SOME OF WHICH ARE NOT OBLIGATED TO MAKE FUNDS AVAILABLE
TO MAKE PAYMENTS ON THE NEW NOTES.
We are a holding company. Our only material assets are our ownership
interests in our subsidiaries. Consequently, we depend on distributions or other
intercompany transfers of funds from our subsidiaries to meet our debt service
and other obligations, including with respect to the New Notes. Our
non-guarantor subsidiaries are not obligated to make funds available to us for
payment on the New Notes. Only our subsidiaries that are not unrestricted
subsidiaries will guarantee the New Notes. The historical consolidated financial
statements incorporated by reference in this prospectus are presented on a
consolidated basis, including all of our subsidiaries. The aggregate service fee
revenue and EBITDA for the year ended December 31, 2001 of our subsidiaries that
will not be guarantors of the New Notes were $20.4 million and $5.7 million,
respectively, or 7.4% and 8.5%, respectively, of our total service fee revenue
and EBITDA for the year ended December 31, 2001. The aggregate total assets at
December 31, 2001 of our subsidiaries that will not be guarantors of the New
Notes were $10.8 million, or 3.8% of our total assets at December 31, 2001. The
operating results of our guarantor subsidiaries may not be sufficient to enable
us to make payments on the New Notes. In addition, our rights and the rights of
our creditors, including holders of the New Notes, to participate in the assets
of any of our non-guarantor subsidiaries upon their liquidation or
recapitalization will generally be subject to the prior claims of those
subsidiaries' creditors. As a result, the New Notes are effectively subordinated
to the indebtedness of the non-guarantor subsidiaries. As of December 31, 2001,
the total liabilities of our non-guarantor subsidiaries, excluding intercompany
liabilities, were $4.8 million.
THE INDENTURE FOR THE NEW NOTES AND OUR NEW SENIOR CREDIT FACILITY IMPOSE
SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM
PURSUING CERTAIN BUSINESS OPPORTUNITIES AND TAKING CERTAIN ACTIONS.
The indenture for the New Notes and our new senior credit facility impose
significant operating and financial restrictions on us. These restrictions will
limit our ability to, among other things:
- borrow money;
- pay dividends on or redeem or repurchase our stock;
- make investments;
- create liens;
- sell certain assets or merge with or into other companies;
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- enter into certain transaction with affiliates;
- sell stock in our subsidiaries; and
- restrict dividends, distributions or other payments from our
subsidiaries.
In addition, our new senior credit facility requires us to maintain
specified financial ratios. These covenants could adversely affect our ability
to finance our future operations or capital needs and pursue available business
opportunities. A breach of any of these covenants or our inability to maintain
the required financial ratios could result in a default in respect of the
related indebtedness. If a default occurs, the relevant lenders could elect to
declare the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing that
indebtedness. Acceleration of our other indebtedness could result in a default
under the terms of the indenture governing the New Notes and our assets may not
be sufficient to satisfy our obligations under our indebtedness, including the
New Notes.
A COURT COULD CANCEL THE GUARANTEES UNDER CERTAIN CIRCUMSTANCES.
Each of our subsidiaries that is not an unrestricted subsidiary will
guarantee the New Notes. If, however, a guarantor becomes a debtor in a case
under the United States Bankruptcy Code or encounters other financial
difficulty, under federal or state fraudulent conveyance laws a court might
avoid (that is, cancel) its guarantee. The court might do so if it found that,
when the guarantor entered into its guarantee or, in some states, when payments
became due under its guarantee, it (i) received less than reasonably equivalent
value or fair consideration for the guarantee and (ii) either (a) was or was
rendered insolvent, (b) was left with inadequate capital to conduct its
business, or (c) believed or should have believed that it would incur debts
beyond its ability to pay. The court might also avoid a guarantee, without
regard to the above factors, if it found that the guarantor entered into its
guarantee with actual intent to hinder, delay, or defraud its creditors.
A court would likely find that a guarantor did not receive reasonably
equivalent value or fair consideration for its guarantee unless it benefited
directly or indirectly from the issuance of the New Notes. If a court avoided a
guarantee, you would no longer have a claim against the guarantor. In addition,
the court might direct you to repay any amounts already received from the
guarantor. If the court were to avoid any guarantor's guarantee, we cannot
assure you that funds would be available to pay the New Notes from another
guarantor or from any other source.
The test for determining solvency for purposes of the foregoing will depend
on the law of the jurisdiction being applied. In general, a court would consider
an entity insolvent either if the sum of its existing debts exceeds the fair
value of all its property, or if the present fair saleable value of its assets
is less than the amount required to pay the probable liability on its existing
debts as they become due. For this analysis, "debts" includes contingent and
unliquidated debts.
The indenture states that the liability of each guarantor on its guarantee
is limited to the maximum amount that the subsidiary can incur without risk that
the guarantee will be subject to avoidance as a fraudulent conveyance. This
limitation may not protect the guarantees from a fraudulent conveyance attack
or, if it does, that the guarantees will be in amounts sufficient, if necessary,
to pay obligations under the New Notes when due.
WE MAY NOT BE ABLE TO SATISFY OUR OBLIGATIONS TO HOLDERS OF THE NEW NOTES UPON
A CHANGE OF CONTROL.
Upon the occurrence of a "change of control," as defined in the indenture,
you will have the right to require us to purchase the New Notes at a price equal
to 101% of the principal amount, together with any accrued and unpaid interest
and liquidated damages, if any, to the date of purchase. Our failure to
purchase, or give notice of purchase of, the New Notes would be a default under
the indenture, which would in turn be a default under the new senior credit
facility. Moreover, our failure to repay all amounts outstanding under the new
senior credit facility upon a default would also be a default under the
indenture.
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In addition, a change of control may constitute an event of default under
the new senior credit facility. A default under the new senior credit facility
will result in an event of default under the indenture if the lenders accelerate
the debt under the new senior credit facility.
If a change of control occurs, we may not have enough assets to satisfy all
obligations under the new senior credit facility and the indenture related to
the New Notes. Upon the occurrence of a change of control, we could seek to
refinance the indebtedness under the new senior credit facility and the New
Notes or obtain a waiver from the lenders or you as a holder of the New Notes.
We may not be able to obtain a waiver or refinance our indebtedness on
commercially reasonable terms, if at all.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE NEW NOTES, AND YOU MAY NOT BE
ABLE TO SELL THEM QUICKLY OR AT THE PRICE THAT YOU PAID.
The New Notes are a new issue of securities and there is no established
trading market for the New Notes. We do not intend to apply for the New Notes to
be listed on any securities exchange or to arrange for quotation on any
automated dealer quotation systems. The initial purchasers of the Old Notes have
advised us that they intend to make a market in the New Notes, but they are not
obligated to do so. The initial purchasers of the Old Notes may discontinue any
market making in the New Notes at any time, in their sole discretion. As a
result, we cannot assure you as to the liquidity of any trading market for the
New Notes.
You may not be able to sell your New Notes at a particular time or at
favorable prices. We also cannot assure you as to the level of liquidity of the
trading market for the New Notes or, in the case of any holders of Old Notes
that do not exchange them, the trading market for the Old Notes following the
offer to exchange the Old Notes for New Notes. As a result, you may be required
to bear the financial risk of your investment in the New Notes or, in case of
any holders of Old Notes that do not exchange them, the Old Notes indefinitely.
Future trading prices of the Old Notes and the New Notes may be volatile and
will depend on many factors, including:
- our operating performance and financial condition;
- our ability to complete the offer to exchange the Old Notes for the New
Notes;
- the interest of securities dealers in making a market for them; and
- the market for similar securities.
RISKS RELATED TO OUR COMPANY AND OUR INDUSTRY
OUR REVENUE IS DEPENDENT ON REFERRALS.
We generate most of our revenue from fees charged for the use of our
diagnostic imaging equipment at our centers. This revenue depends on referrals
from third parties, many of which are made by physicians who have no contractual
obligation to refer patients to us. We also generate revenue from service fees
that we receive from the contracted radiology practices. If a sufficiently large
number of physicians discontinues referring patients to us, our procedure volume
could decrease, which would reduce our revenue and operating margins.
Further, commercial third-party payors have implemented programs to control
costs that could limit the ability of physicians to refer patients to us. For
example, prepaid healthcare plans, such as health maintenance organizations, in
certain instances provide diagnostic imaging services directly and contract
directly with providers and require their enrollees to obtain these services
from only these providers. Some insurance companies and self-insured employers
also limit these services to contracted providers. These "closed panel" systems
are now common in the managed care environment. Other systems create an economic
disincentive for referrals to providers outside of the system's designated panel
of providers. We may not be able to compete successfully for managed care
contracts against entities with greater resources within a market area.
8
CHANGES IN THIRD-PARTY REIMBURSEMENT RATES OR METHODS FOR DIAGNOSTIC IMAGING
SERVICES COULD CREATE DOWNWARD PRICING PRESSURE, WHICH WOULD RESULT IN A
DECLINE IN OUR REVENUE AND HARM OUR FINANCIAL POSITION.
Our revenue is derived through our ownership, operation and management of
diagnostic imaging centers and from service fees paid to us by contracted
radiology practices. Substantially all of the revenue of our diagnostic imaging
centers and the contracted radiology practices is currently derived from
commercial third-party payors, government sponsored healthcare programs
(principally, Medicare and Medicaid) and private and other payors. For the year
ended December 31, 2001, revenue generated at our diagnostic imaging centers
consisted of 62% from commercial third-party payors, 28% from Medicare and
Medicaid and 10% from private and other payors.
Rates paid by commercial third-party payors are based on established
physician and hospital charges and are generally higher than Medicare
reimbursement rates. Any decrease in the relative number of patients covered by
commercial third-party payors could decrease our revenue.
Any change in the rates of or conditions for reimbursement from commercial
third-party payors, Medicare or Medicaid could substantially reduce the amounts
reimbursed to us or our contracted radiology practices for services provided.
These reductions could have a significant adverse effect on our revenue and
financial results by creating downward pricing pressure.
WE COULD BE HARMED IF THE CONTRACTED RADIOLOGY PRACTICES TERMINATE THEIR
AGREEMENTS WITH US OR LOSE A SIGNIFICANT NUMBER OF RADIOLOGISTS.
Our diagnostic imaging services include a professional component that must
be provided by radiologists who are not directly employed by us. We do not
control the radiologists who perform professional services for us. Instead,
these radiologists are employed by the contracted radiology practices that
maintain agreements with us. These agreements typically have terms of between 10
and 40 years, but may be terminated by either party under certain limited
conditions. Depending on the termination event, the radiology practice may have
the right to require us to sell, assign and transfer to it, the assets and
related liabilities and obligations associated with the professional and
technical radiology services provided by the radiology practice immediately
prior to the termination. The termination or material modification of any of
them could reduce our revenue.
If a significant number of radiologists terminate their relationships with
the contracted radiology practices and the radiology practices cannot recruit
sufficient qualified radiologists to fulfill practice obligations under our
agreements with them, our ability to maximize the use of our diagnostic imaging
centers could be adversely affected. Competition in recruiting radiologists may
make it difficult for contracted radiology practices to maintain adequate levels
of radiologists. Neither we nor the contracted radiology practices maintain
insurance on the lives of any affiliated physicians.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE OUR MARKET DEVELOPMENT PLANS.
We intend to increase our presence in existing markets through acquisitions
of centers, developing de novo centers and adding additional equipment at
existing centers, establishing additional joint venture and outsourcing
relationships and selectively entering into contractual relationships with
high-quality, profitable radiology practices. We may not be able to expand
either within our existing markets or in new markets. In addition, any expansion
may not be beneficial to our overall strategy, and any such expansion may not
ultimately produce returns that justify our investment.
Our ability to expand is dependent upon many factors, including our ability
to:
- identify attractive and willing candidates for acquisitions, joint
ventures or outsourcing relationships;
- adapt our structure to comply with federal and state legal requirements
affecting our arrangements with contracted radiology practices, including
state prohibitions on fee-splitting, corporate practice of medicine and
self-referrals;
9
- obtain regulatory approvals and certificates of need, where necessary,
and comply with licensing and certification requirements applicable to
our diagnostic imaging centers, the contracted radiology practices and
the physicians associated with the contracted radiology practices;
- recruit a sufficient number of qualified radiology technologists;
- expand our infrastructure and management; and
- obtain adequate financing.
Our ability to expand is also dependent on our ability to compete for
opportunities. We may not be able to compete effectively for the acquisition of
diagnostic imaging centers, joint venture opportunities or other outsourcing
relationships. Our competitors may have better established operating histories
and greater resources than we do. Competitors may make it more difficult to
complete acquisitions or joint ventures on terms beneficial to us.
Acquisitions involve a number of special risks, including the following:
- possible adverse effects on our operating results;
- diversion of management's attention and resources;
- failure to retain key personnel;
- difficulties in integrating new operations into our existing management
infrastructure;
- amortization or write-offs of acquired intangible assets; and
- risks associated with unanticipated events or liabilities.
Additionally, although we will continue to structure our operations in an
effort to comply with applicable antitrust laws, federal or state governmental
authorities may view us as being dominant in a particular market and, therefore,
cause us to divest ourselves of relationships or assets.
WE AND THE CONTRACTED RADIOLOGY PRACTICES MAY BECOME SUBJECT TO BURDENSOME
LAWSUITS.
We may be subject to professional liability claims, including, without
limitation, for improper use or malfunction of our diagnostic imaging equipment.
We maintain insurance policies with coverages that we believe are appropriate in
light of the risks attendant to our business and consistent with industry
practice. We also require the contracted radiology practices to maintain
professional liability insurance consistent with industry practice. However,
adequate liability insurance may not be available to us and the contracted
radiology practices in the future at acceptable costs or at all.
Providing medical services entails the risk of professional malpractice and
other similar claims. The physicians employed by the contracted radiology
practices are from time to time subject to malpractice claims. We structure our
relationships with the practices under our agreements with them in a manner that
we believe does not constitute the practice of medicine by us or subject us to
professional malpractice claims for acts or omissions of physicians in the
contracted radiology practices. Nevertheless, claims, suits or complaints
relating to services provided by the contracted radiology practices may be
asserted against us in the future, including malpractice.
Any claim made against us not fully covered by insurance could be costly to
defend against, result in a substantial damage award against us and divert the
attention of our management from our operations, which could have an adverse
effect on our financial performance. In addition, claims might adversely affect
our business or reputation.
We have assumed and succeeded to substantially all of the obligations of
some of the operations that we have acquired. Therefore, claims may be asserted
against us for events that occurred prior to these acquisitions. In connection
with our acquisitions, the sellers of the operations that we have acquired have
agreed to indemnify us for certain claims. However, we may not be able to
collect payment under these indemnity agreements, which could affect us
adversely.
10
MOST OF OUR IMAGING MODALITIES REQUIRE THE UTILIZATION OF RADIATION, AND
CERTAIN IMAGING MODALITIES UTILIZE RADIOACTIVE MATERIALS, AND THESE OPERATIONS
GENERATE REGULATED WASTE AND COULD SUBJECT US TO REGULATION, RELATED COSTS AND
DELAYS AND POTENTIAL LIABILITIES FOR INJURIES OR VIOLATIONS OF ENVIRONMENTAL,
HEALTH AND SAFETY LAWS.
Most of our imaging modalities utilize radiation, and certain imaging
modalities utilize radioactive material. These operations generate medical and
other regulated wastes. Storage, use and disposal of these materials and waste
products present the risk of accidental environmental contamination and physical
injury. We are subject to federal, state and local regulations governing
storage, handling and disposal of these materials. We cannot completely
eliminate the risk of accidental contamination or injury from these hazardous
materials. In the event of an accident, we would be held liable for any
resulting damages, and any liability could exceed the limits of or fall outside
the coverage of our insurance. We may not be able to maintain insurance on
acceptable terms, or at all. We could incur significant costs and the diversion
of our management's attention in order to comply with current or future
environmental, health and safety laws and regulations.
WE MAY EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES. THIS
COMPETITION COULD ADVERSELY AFFECT OUR REVENUE AND OUR BUSINESS.
The market for diagnostic imaging services is competitive. We compete
principally on the basis of our reputation for providing multiple modalities,
our conveniently located centers and our cost-effective, high-quality diagnostic
imaging services. We compete locally with groups of radiologists, established
hospitals, clinics and certain other independent organizations that own and
operate imaging equipment. Our major national competitors include Alliance
Imaging, Inc., HEALTHSOUTH Corporation, InSight Health Services Corp., Medical
Resources, Inc., Syncor International Corporation and U.S. Diagnostic, Inc. Some
of our local or national competitors that provide diagnostic imaging services
may now or in the future have access to greater financial resources than we do
and may have access to newer, more advanced equipment.
In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging centers because of the
federal physician self-referral legislation. Final regulations issued in January
2001 clarify certain of the exceptions to the physician self-referral
legislation, which may create opportunities for and encourage some physician
practices to establish their own diagnostic imaging centers within their group
practices, which may compete with us.
TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES
AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.
Technological change in the diagnostic imaging industry has been gradual.
In the future, however, the development of new technologies or refinements of
existing modalities may make our existing equipment technologically or
economically obsolete, or cause a reduction in the value of, or reduce the need
for, our services. Diagnostic imaging equipment is currently manufactured by
numerous companies. Competition among manufacturers for a greater share of the
diagnostic imaging equipment market may result in technological advances in the
speed and imaging capacity of new equipment. Consequently, the obsolescence of
our equipment may be accelerated. We may not have the financial ability to
acquire the new or improved equipment.
A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS COULD ADVERSELY AFFECT
OUR BUSINESS.
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of new diagnostic imaging
11
centers and the acquisition of additional centers and new diagnostic imaging
equipment. We incur capital expenditures to, among other things:
- upgrade and replace existing equipment;
- purchase new diagnostic imaging equipment; and
- expand within our existing markets and enter new markets.
To the extent we are unable to generate sufficient cash from our
operations, funds are not available under our new senior credit facility or we
are unable to structure or obtain operating leases, we may be unable to meet our
capital expenditure requirements. Furthermore, we may not be able to raise any
necessary additional funds through bank financing or the issuance of equity or
debt securities on terms acceptable to us, if at all.
OUR SUCCESS DEPENDS IN PART ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO
RETAIN SUFFICIENT QUALIFIED PERSONNEL.
Our success depends in part on our ability to attract and retain qualified
senior and executive management, managerial and technical personnel. Competition
in recruiting these personnel may make it difficult for us to continue our
growth and success. The loss of their services or our inability in the future to
attract and retain management and other key personnel could hinder the
implementation of our business strategy. We do not maintain key person insurance
for any of our executive officers. Recently, there has been a shortage in
certain of our markets of qualified radiology technologists, the personnel who
operate our equipment. If we are unable to recruit and retain a sufficient
number of qualified technologists, we will be unable to operate our centers at
maximum capacity.
OUR INABILITY TO ENFORCE NON-COMPETE AGREEMENTS WITH THE RADIOLOGISTS MAY
INCREASE COMPETITION.
Each of the contracted radiology practices under our comprehensive services
model has entered into agreements with its physician shareholders and full-time
employed radiologists that generally prohibit those shareholders and
radiologists from competing for a period of two years within defined geographic
regions after they cease to be owners or employees, as applicable. In most
states, a covenant not to compete will be enforced only:
- to the extent it is necessary to protect a legitimate business interest
of the party seeking enforcement;
- if it does not unreasonably restrain the party against whom enforcement
is sought; and
- if it is not contrary to public interest.
Enforceability of a non-compete covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible to predict whether, or to what
extent, a court will enforce the contracted radiology practices' covenants. The
inability of the contracted radiology practices or us to enforce radiologists'
non-compete covenants could result in increased competition from individuals who
are knowledgeable about our business strategies and operations.
IT IS DIFFICULT TO ESTIMATE OUR UNCOLLECTIBLE ACCOUNTS RECEIVABLE AND
CONTRACTUAL ALLOWANCES FOR BILLED CHARGES, WHICH MAY IMPACT OUR EARNINGS.
Due to the complex nature of billing for healthcare services, it is
difficult for us to estimate our uncollectible accounts receivable and our
contractual allowances for billed charges. If we have to revise our estimates
and our existing reserves are not adequate, this may impact our earnings. In
late 2000, we engaged in an extensive review of our collection processes and our
method of determining allowances for contractual adjustments and bad debts. At
that time, management determined, based on reports and analyses not previously
available, that the estimation process needed to be revised and that a portion
of our
12
accounts receivable were no longer collectible. Accordingly, we incurred a $13.3
million pre-tax charge for uncollectible accounts receivable during the fourth
quarter of 2000.
OUR RECORDED GOODWILL AMOUNTS MAY BE IMPAIRED UNDER NEW ACCOUNTING STANDARDS.
At December 31, 2001, we had approximately $28.5 million recorded as
goodwill. Under new accounting standards effective January 1, 2002, we will be
required to assess our recorded goodwill amounts for impairment by applying a
fair-value-based test. We are currently in the process of assessing whether an
impairment charge is warranted as of January 1, 2002. Accordingly, we may be
required to record a non-cash charge by writing down all or a portion of our
recorded goodwill amounts. Such a write down could have a material impact on our
results of operations in 2002 or future periods.
MANAGED CARE CONTRACTS AND CAPITATED FEE ARRANGEMENTS COULD REDUCE OUR
OPERATING MARGINS.
For the year ended December 31, 2001, approximately 91% of revenue
generated at our diagnostic imaging centers was derived from payments made on a
fee-for-service basis and approximately 9% was derived from capitated
arrangements. Under capitated or other risk-sharing arrangements, the healthcare
provider typically is paid a pre-determined amount per-patient per-month from
the payor in exchange for providing all necessary covered services to patients
covered under the arrangement. These contracts pass much of the financial risk
of providing outpatient diagnostic imaging services, including the risk of over-
use, from the payor to the provider. Our success will depend in part on our
ability to negotiate effectively, on behalf of the contracted radiology
practices and the diagnostic imaging centers that we own, operate or manage,
contracts with HMOs, employer groups and other third-party payors for services
to be provided on a risk-sharing or capitated basis by some or all of the
radiology practices and/or diagnostic imaging centers. Risk-sharing arrangements
result in better revenue predictability, but more unpredictability of expenses
and, consequently, profitability. We may not be able to negotiate satisfactory
arrangements on a capitated or other risk-sharing basis, on behalf of our
diagnostic imaging centers or the contracted radiology practices. In addition,
to the extent that patients or enrollees covered by these contracts require more
frequent or extensive care than anticipated, we would incur unanticipated costs
not offset by additional revenue, which would reduce operating margins.
WE MAY BE UNABLE TO GENERATE REVENUE WHEN OUR EQUIPMENT IS NOT OPERATIONAL.
Timely, effective service is essential to maintaining our reputation and
high utilization rates on our imaging equipment. Our warranties and maintenance
contracts do not compensate us for loss of revenue when our systems are not
fully operational. Equipment manufacturers may not be able to perform repairs or
supply needed parts in a timely manner. Thus, if we experience more equipment
malfunctions than anticipated or if we are unable to promptly obtain the service
necessary to keep our equipment functioning effectively, our revenue could
decline and our ability to provide services would be harmed.
OUR CORPORATE ORGANIZATIONAL DOCUMENTS COULD DISCOURAGE ACQUISITION PROPOSALS
AND MAKE DIFFICULT A CHANGE OF CONTROL.
Certain provisions of Radiologix's Restated Certificate of Incorporation,
as amended, Radiologix's Amended and Restated Bylaws and Delaware law could
discourage potential acquisition proposals, delay or prevent a change in control
of Radiologix and, consequently, limit the price that investors might be willing
to pay in the future for shares of our common stock. These provisions include
the inability to remove directors except for cause and our ability to issue,
without further stockholder approval, shares of preferred stock with rights and
privileges senior to the common stock. We are also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with an "interested stockholder" for three years after the
stockholder became an interested stockholder.
13
We have also entered into employment agreements with our four executive
officers, which contain provisions that require us to pay certain amounts to the
executives upon their termination following a change of control. These
agreements may delay or prevent a change of control of Radiologix.
RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS
STATE AND FEDERAL ANTI-KICKBACK AND ANTI-SELF-REFERRAL LAWS MAY ADVERSELY
AFFECT OUR INCOME.
Various federal and state laws govern financial arrangements among
healthcare providers. Federal anti-kickback law prohibits the knowing and
willful offer, payment, solicitation or receipt of any form of remuneration in
return for, or to induce, the referral of Medicare or Medicaid patients, or in
return for, or to induce, the purchase, lease or order of items or services that
are covered by Medicare or Medicaid. Similarly, many state laws prohibit the
solicitation, payment or receipt of remuneration in return for, or to induce,
the referral of patients in private as well as government programs. Violation of
these anti-kickback laws may result in substantial civil or criminal penalties
for individuals or entities and/or exclusion from federal or state healthcare
programs. We believe that we are operating in compliance with applicable law and
believe that our arrangements with providers would not be found to violate the
anti-kickback laws. However, these laws could be interpreted in a manner
inconsistent with our operations.
Federal law prohibiting physician self-referrals (the "Stark Law")
prohibits a physician from referring Medicare or Medicaid patients to an entity
for certain "designated health services" if the physician has a prohibited
financial relationship with that entity, unless an exception applies. Diagnostic
radiology (other than nuclear medicine) is a designated health service. Although
we believe that our operations do not violate these laws, our activities may be
challenged. If a challenge to our activities is successful, it could have an
adverse effect on our operations. In addition, legislation may be enacted in the
future that further addresses Medicare and Medicaid fraud and abuse or that
imposes additional requirements or burdens on us.
All of the states in which our diagnostic imaging centers are located have
adopted a form of anti-kickback law and almost all of those states have also
adopted a form of Stark Law. The scope of these laws and the interpretations of
them vary from state to state and are enforced by state courts and regulatory
authorities, each with broad discretion. A determination of liability under the
laws described in this risk factor could result in fines and penalties and
restrictions on our ability to operate in these jurisdictions.
FEDERAL FALSE CLAIMS ACT VIOLATIONS COULD AFFECT OUR PARTICIPATION IN
GOVERNMENT PROGRAMS.
The Federal False Claims Act provides in part that the federal government
may bring a lawsuit against any person whom it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the
federal government, or who has made a false statement or used a false record to
get a claim approved. The Federal False Claims Act further provides that a
lawsuit thereunder may be initiated in the name of the United States by an
individual who is an original source of the allegations. The government has
taken the position that claims presented in violation of the federal
anti-kickback law or Stark Law may be considered a violation of the Federal
False Claims Act. Penalties include fines ranging from $5,500 to $11,000 for
each false claim, plus three times the amount of damages that the federal
government sustained because of the act of that person. We believe that we are
in compliance with the rules and regulations that apply to the Federal False
Claims Act. However, we could be found to have violated certain rules and
regulations resulting in sanctions under the Federal False Claims Act, and if we
are so found in violation, any sanctions imposed could result in fines and
penalties and restrictions on and exclusions from participation in federal and
state healthcare programs that are integral to our business.
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OUR AGREEMENTS WITH THE CONTRACTED RADIOLOGY PRACTICES MUST BE STRUCTURED TO
AVOID THE CORPORATE PRACTICE OF MEDICINE AND FEE-SPLITTING.
The laws of many states, including many of the states in which the
contracted radiology practices are located, prohibit us from exercising control
over the medical judgments or decisions of physicians and from engaging in
certain financial arrangements, such as the splitting of professional fees with
physicians. These laws and their interpretations vary from state to state and
are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into service
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee. We structure our relationships with the radiology practices,
including the purchase of diagnostic imaging centers, in a manner that we
believe keeps us from engaging in the practice of medicine or exercising control
over the medical judgments or decisions of the radiology practices or their
physicians or violating the prohibitions against fee-splitting. State regulatory
authorities or other parties may assert that we are engaged in the corporate
practice of medicine or that the payment of service fees to us by the radiology
practices constitutes fee-splitting. If such a claim were successfully asserted,
we could be subject to civil and criminal penalties and could be required to
restructure or terminate the applicable contractual arrangements. This result,
or our inability to successfully restructure our relationships to comply with
these statutes, could jeopardize our business strategy.
LICENSING AND CERTIFICATION LAWS MAY LIMIT OUR ABILITY TO EXPAND.
Ownership, construction, operation, expansion and acquisition of diagnostic
imaging centers are subject to various federal and state laws, regulations and
approvals concerning licensing of centers, personnel, certificates of need and
other required certificates for certain types of healthcare centers and major
medical equipment. The laws of some of the states in which we operate limit our
ability to acquire new diagnostic imaging equipment or expand or replace our
existing equipment at diagnostic imaging centers in those states. In addition,
free-standing diagnostic imaging centers that provide services that are not
performed as part of a physician office must meet Medicare requirements to be
certified as an independent diagnostic testing facility to bill the Medicare
program. We may not be able to receive the required regulatory approvals for any
future acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services.
THE REGULATORY FRAMEWORK IS UNCERTAIN AND EVOLVING.
Healthcare laws and regulations may change significantly in the future. We
continuously monitor these developments and modify our operations from time to
time as the regulatory environment changes. We cannot assure you, however, that
we will be able to adapt our operations to address new regulations or that new
regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and state
laws, neither our current or anticipated business operations nor the operations
of the contracted radiology practices have been the subject of judicial or
regulatory interpretation. We cannot assure you that a review of our business by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change in a way that restricts our operations.
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the healthcare industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based managed care
contracting to applicable insurance laws and regulations. These laws and
regulations may require physicians and physician networks to meet minimum
capital requirements and other safety and soundness requirements. Implementing
additional regulations or compliance requirements could result in substantial
costs to us and the contracted radiology practices and limit our ability to
enter into capitated or other risk-sharing managed care arrangements.
15
THE DIAGNOSTIC IMAGING SERVICES INDUSTRY
OVERVIEW
Diagnostic imaging involves the use of less-invasive techniques to generate
representations of internal anatomy that can be recorded on film or digitized
for display on a video monitor. Diagnostic imaging procedures facilitate the
early diagnosis of diseases and disorders, often minimizing the cost and amount
of care required for patients and healthcare providers. Diagnostic imaging
procedures include: magnetic resonance imaging (or MRI), computed tomography (or
CT), positron emission tomography (or PET), nuclear medicine, ultrasound,
mammography, bone densitometry (or DEXA), general radiography (or X-ray) and
fluoroscopy.
The Centers for Medicare & Medicaid Services estimate that national
healthcare spending in 2000 was approximately $1.3 trillion and expect that
spending will grow, on average, in excess of 7% annually through 2008. The
American College of Radiology estimates that over 300 million diagnostic imaging
procedures were performed in the United States during 1999, the most recent year
for which data are available, generating estimated revenue of over $60 billion,
or 5% of total healthcare spending. Furthermore, the American College of
Radiology estimates that over 60% of this diagnostic imaging revenue was
generated on an outpatient basis.
We believe that the diagnostic imaging services industry will continue to
grow as a result of:
The Escalating Demand for Healthcare Services from an Aging Population.
There has been strong demand for healthcare services due to an aging population
in the United States. According to the United States Census Bureau, one of the
fastest growing segments of the population is the group over 65 years of age,
which is expected to increase as much as 16% from 2000 to 2010. We believe the
aging population will help drive the growth for diagnostic imaging procedures
over the coming years because diagnostic imaging utilization tends to increase
as a person ages.
The Increasing Role of Diagnostic Imaging in Healthcare. Advanced imaging
equipment and modalities are allowing physicians to diagnose a wide variety of
diseases and injuries quickly and accurately without exploratory surgery or
other surgical or invasive procedures, which are usually more expensive, involve
greater risk to patients and result in longer rehabilitation time. We believe
that future technological advances will continue to enhance the ability of
radiologists to diagnose and influence treatment. For example, experimental MRI
techniques, such as magnetic resonance spectroscopic imaging, are used to show
the functions of the brain and to investigate how epilepsy, AIDS, brain tumors,
Alzheimer's disease and other abnormalities affect the brain. In addition,
advanced imaging systems are gaining wider acceptance among payors, as they are
increasingly seen and accepted as a tool for reducing long-term healthcare
costs.
Greater Consumer Awareness of and Demand for Preventive Diagnostic
Screening. Diagnostic imaging is increasingly being used as a screening tool
for preventive care. Consumer awareness of and demand for diagnostic imaging as
a less-invasive and preventive screening method has added to the growth in
diagnostic imaging procedures. Consumers are now more aware of the advanced
procedures that are available to them and are requesting them as preventive
procedures from their physicians and healthcare providers. We believe that, with
increased technological advancements, there will be greater consumer awareness
of and demand for diagnostic imaging procedures as preventive and less-invasive
procedures for early diagnosis of diseases and disorders.
An Increased Number of High-End Procedures That Utilize Advancements in
Technology. Recent technological advancements include: magnetic resonance
spectroscopic imaging, which can differentiate malignant from benign lesions;
magnetic resonance angiography, which can produce three-dimensional images of
body parts and assess the status of blood vessels; and enhancements in
teleradiology systems, which permit the digital transmission of radiological
images from one location to another for interpretation. Additional improvements
in imaging technologies, contrast agents and scanning capabilities are leading
to new, less-invasive methods of diagnosing diseases. For example, these
improvements are aiding in detecting
16
blockages in the heart's vital arteries, liver metastases, pelvic diseases and
certain vascular abnormalities without exploratory surgery.
DIAGNOSTIC IMAGING MODALITIES
The principal diagnostic imaging modalities include the following:
Magnetic Resonance Imaging. MRI utilizes a strong magnetic field in
conjunction with low energy electromagnetic waves that are processed by a
computer to produce high-resolution, three-dimensional, cross-sectional images
of body tissue, including the brain, spine, abdomen, heart and extremities.
Unlike CT and conventional X-rays, MRI does not utilize ionizing radiation,
which can cause tissue damage in high doses. A typical MRI examination takes
from 20 to 45 minutes. MRI systems are priced in the range of $0.9 million to
$2.5 million.
Computed Tomography. CT utilizes a computer to direct the movement of an
X-ray tube to produce multiple cross-sectional images of a particular organ or
area of the body. CT is used to detect tumors and other conditions affecting
bones and internal organs. It is also used to detect the occurrence of strokes,
hemorrhages and infections. CT provides higher resolution images than
conventional X-rays, but generally not as well-defined as those produced by
magnetic resonance. A typical CT examination takes from 15 to 45 minutes. CT
systems are priced in the range of $0.3 million to $1.2 million.
Positron Emission Tomography. PET utilizes a scanner to record signals
emitted by compounds with signal-emitting tracers after such compounds are
injected into a patient's body. A scanner records the signals as they travel
through the body and collect in the various organs targeted for examination. A
computer assembles the signals into actual images. PET has proven effective in
the detection and tracking of cancer (including lung, colorectal, breast and
prostate cancers), heart disease and brain disorders, including Alzheimer's
disease, Parkinson's disease and seizure disorders. PET systems are priced in
the range of $1 million to $1.4 million.
Nuclear Medicine. Nuclear medicine utilizes short-lived radioactive
isotopes that release small amounts of radiation that can be recorded by a gamma
camera and processed by a computer to produce an image of various anatomical
structures or to assess the function of various organs such as the heart,
kidneys, thyroid and bones. Nuclear medicine is used primarily to study anatomic
and metabolic functions.
Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to
develop images of internal organs, fetuses and the vascular system. Ultrasound
has widespread applications, particularly for procedures in obstetrics,
gynecology and cardiology.
Mammography. Mammography is a specialized form of radiology utilizing low
dosage X-rays to visualize breast tissue and is the primary screening tool for
breast cancer. Mammography procedures and related services assist in the
diagnosis and treatment planning for breast cancer.
Bone Densitometry. Bone densitometry uses an advanced technology called
dual-energy X-ray absorptiometry, or DEXA, which safely, accurately and
painlessly measures bone density and the mineral content of bone for the
diagnosis of osteoporosis and other bone diseases.
General Radiography (or X-ray) and Fluoroscopy. X-rays utilize roentgen
rays to penetrate the body and record images of organs and structures on film.
Fluoroscopy utilizes ionizing radiation combined with a video viewing system for
real time monitoring of organs. X-ray and fluoroscopy are the most frequently
used imaging modalities. Digital X-ray systems add computer image processing
capability to traditional X-ray images.
17
BUSINESS
OUR COMPANY
We are a leading national provider of diagnostic imaging services through
our ownership and operation of free-standing, outpatient diagnostic imaging
centers. We utilize sophisticated technology and technical expertise to perform
a broad range of imaging procedures, such as MRI, CT, PET, nuclear medicine,
ultrasound, mammography, DEXA, X-ray and fluoroscopy. We operate 120 diagnostic
imaging centers located in 18 states, with a concentration of diagnostic imaging
centers in markets located in California, Florida, Kansas, Maryland, New York,
Texas and Virginia. We offer multi-modality imaging services at 70 of our
diagnostic imaging centers, which provide patients and referring physicians
access to advanced diagnostic imaging services in one convenient location.
We also provide administrative, management and information services to
certain radiology practices that provide professional services in connection
with our diagnostic imaging centers and to hospitals and radiology practices
with which we operate joint ventures. The services we provide leverage our
existing infrastructure and improve radiology practice or joint venture
profitability, efficiency and effectiveness.
For the year ended December 31, 2001, we performed over 1.9 million
diagnostic imaging procedures and generated service fee revenue of $276.7
million. In addition, we generated cash flow from operations of $41 million for
the year ended December 31, 2001. We have achieved substantial growth, having
increased service fee revenue and EBITDA at compounded annual growth rates of
23% and 16%, respectively, from the year ended December 31, 1998 through the
year ended December 31, 2001. Over the same period, we achieved average annual
same center revenue growth of 12.2%.
COMPETITIVE STRENGTHS
We believe that we are well-positioned to take advantage of favorable
demographic and diagnostic imaging services industry trends by capitalizing on
the following strengths:
Our Leading Market Position in Our Core Markets. We have a concentrated
presence in our core markets, which enables us to offer patients, referring
physicians and payors a higher degree of responsiveness and convenience than
independent operators or hospitals. We provide flexible scheduling, convenient
locations and expanded hours of operation, as well as the expeditious delivery
of radiology reports to referring physicians. The 89 centers in our core markets
generated 87% of our service fee revenue for the year ended December 31, 2001.
We believe that payors contract with us because of our strong market presence,
the high quality of our services and our ability to provide a single point of
contact and centralized administration. In addition, our leading position
enables us to increase our procedure volume, optimize equipment utilization,
benefit from economies of scale in purchasing and negotiation of payor contracts
and leverage our administrative and information technology infrastructure in our
core markets.
Comprehensive, Leading-Edge Diagnostic Imaging Services. We provide a
broad range of diagnostic imaging services within our core markets. Our 70
multi-modality centers enable us to offer one-stop shopping to patients,
referring physicians and payors. In our experience, referring physicians and
payors prefer to enter into relationships with diagnostic imaging providers that
offer a broad spectrum of services at convenient locations, benefiting referring
physicians and patients who require more than one type of diagnostic imaging
procedure. From January 1, 1999 to December 31, 2001, we added over $70 million
of equipment and leasehold improvements through purchase or lease to enhance our
diagnostic imaging centers and increase the number of modalities offered per
center to provide services demanded by patients, referring physicians and
payors. Our multi-modality offerings, coupled with the introduction of
technologically advanced imaging equipment, have contributed to an increase in
our volume of procedures and an increase in the average revenue per technical
procedure from $87.61 in 1998 to $112.65 for the year ended December 31, 2001.
18
Diversified Payor Mix and Multi-Modality Service Offerings. Our revenue
base comprises a diverse mix of payors, including managed care organizations,
traditional indemnity providers, Medicare, Medicaid and private and other
payors. For the year ended December 31, 2001, revenue generated at our
diagnostic imaging centers consisted of 62% from commercial third-party payors,
28% from Medicare and Medicaid and 10% from private and other payors. In
addition, we have experienced relatively stable pricing, with modest increases
in most markets and across most modalities. We believe our payor diversity and
multi-modality service offerings mitigate our exposure to possible unfavorable
reimbursement trends within any one payor class and to modality-specific rate
changes.
Strong Relationships with Leading Radiology Practices. In each of our core
markets, we contract with leading radiology practices to provide professional
radiology services in connection with our diagnostic imaging centers. We believe
that our affiliation with these leading radiology practices enhances our
reputation with referring physicians and their patients. We also provide
administrative, management and information services to certain radiology
practices. In light of a recent shortage of radiologists, we believe that our
contractual relationships with large, established radiology practices are
important to maintaining our high quality service.
Experienced Management Team. We have a highly experienced management team
with an average of approximately 20 years of healthcare services experience.
Management has successfully generated growth by increasing same center revenue
and executing a disciplined expansion strategy.
BUSINESS STRATEGY
Our strategy is to enhance our strong market presence and to increase
revenue and cash flow by continuing to pursue the following business strategy:
Increase Procedure Volume and Maximize Revenue at Existing Centers. We
intend to enhance our operations and increase procedure volume and revenue at
our existing centers by:
- expanding referring physician, hospital and payor relationships;
- increasing patient referrals through targeted marketing efforts; and
- leveraging our multi-modality offerings to increase the number of
high-end procedures performed.
Maintain Market Leadership in Our Core Markets. We intend to maintain our
leading market position in our core markets by pursuing strategic "tuck-in"
acquisitions and developing de novo centers. In addition, we believe that we
will have opportunities to increase the use of our diagnostic imaging services
through additional joint venture or outsourcing arrangements with hospitals, in
part due to recent federal healthcare regulatory changes that favor outpatient
centers that are managed or owned in joint venture or outsourcing arrangements
with third parties.
Maximize Equipment Utilization and Enhance Service Offerings. Seventy of
our centers provide multi-modality imaging services, including various
combinations of MRI, CT, PET, nuclear medicine, ultrasound, mammography, DEXA,
X-ray and fluoroscopy. We intend to maximize our equipment utilization by
adding, upgrading and re-deploying equipment where we experience excess demand
and by consolidating, divesting or closing unprofitable centers or markets. In
addition, we intend to enhance our service offerings by adding, upgrading and
replacing our diagnostic imaging equipment to meet referring physician and
patient demands.
OPERATION OF CENTERS
At December 31, 2001, we operated 120 diagnostic imaging centers located in
18 states. We utilize sophisticated technology and technical expertise to
perform a broad range of imaging procedures such as MRI, CT, PET, nuclear
medicine, ultrasound, mammography, DEXA, X-ray and fluoroscopy. As part of
operating our diagnostic imaging centers, we purchase and maintain diagnostic
imaging equipment, hire and train employees, schedule patient appointments,
perform patient procedures, process bills, keep records and obtain and maintain
permits, licenses and insurance.
19
Referrals for diagnostic imaging services at our centers come from
referring physicians, including primary care physicians and specialists. In our
experience, these referrals are influenced by individual patients acting as
consumers as well as by health systems, managed care organizations, insurers and
other entities representing large groups of patients. Offering a wide spectrum
of modalities at a diagnostic imaging center enables us to offer "one-stop
shopping" to referring physicians and patients. For example, a physician may
refer a patient for an X-ray. If the X-ray, when interpreted by a radiologist
who is providing professional services at the diagnostic imaging center, reveals
that further diagnostic imaging (for example, a CT procedure) is necessary, the
radiologist can confer with the referring physician and the patient can undergo
the CT procedure at the same center. Thus, by offering both X-ray and CT
modalities at the diagnostic imaging center, the patient can avoid multiple
visits, thereby decreasing costs and time delays.
Managed care organizations, insurers and other entities often represent
large groups of patients who are dispersed throughout a wide geographic area.
These entities influence referring physicians' decisions by entering into
provider agreements with, or otherwise selecting or approving, healthcare
service providers, including diagnostic imaging service providers. Our
experience is that entities representing large groups of patients often prefer
to enter into managed care contracts with providers who offer a broad array of
diagnostic imaging services throughout a corresponding geographic area. We have
developed our diagnostic imaging networks, in part, to be selected as a
preferred provider for these entities more frequently, which may increase
physician referrals to our centers.
To increase the convenience of our diagnostic imaging centers to patients,
we implement market-wide scheduling systems where practical. In these instances,
each diagnostic imaging center in a market area can access the patient
appointment calendar of other centers in the market area. Each center also can
schedule patient appointments at every other center within the network. This
system permits each of our centers within a market area to efficiently allocate
time available at our diagnostic imaging centers within that market area and to
meet a patient's appointment time, date or location preferences.
We focus on providing quality patient care and service to ensure patient
and referring physician satisfaction. Our development of comprehensive radiology
networks permits us to invest in technologically advanced imaging equipment,
including MRI, open MRI, spiral CT and PET. Our consolidation of diagnostic
imaging centers into coordinated networks improves response time, increases
overall patient accessibility, permits us to standardize certain customer
relations procedures and permits us to develop "best practices" for our
diagnostic imaging centers. We seek the input and participation of the
contracted radiology practices to which we provide administrative, management
and information services to develop best practices and to improve productivity
and the quality of services. By focusing on further improving and, where
appropriate, standardizing the operations of our diagnostic imaging centers, we
believe that we can increase patient and referring physician satisfaction, which
should lead to increased referrals and increased utilization of our diagnostic
imaging centers.
Payment for diagnostic imaging services comes primarily from commercial
third-party payors, governmental payors (including Medicare and Medicaid) and
private and other payors. Our centers are principally dependent on our ability
to attract referrals from primary care physicians, specialists and other
healthcare providers. The referral often depends on the existence of a
contractual arrangement with the referred patient's health benefit plan. For the
year ended December 31, 2001, approximately 9% of our revenue generated at our
diagnostic imaging centers was generated from capitated arrangements. The
following table illustrates our approximate payor mix, based on revenue
generated at our diagnostic imaging centers, for the year ended December 31,
2001:
<Table>
<Caption>
PERCENT OF
PAYOR TOTAL REVENUE
- ----- -------------
Commercial.................................................. 62%
Medicare and Medicaid....................................... 28%
Private and Other........................................... 10%
</Table>
20
CONTRACTED RADIOLOGY PRACTICES
We contract with radiology practices to provide professional services,
including supervision and interpretation of diagnostic imaging procedures
performed in our diagnostic imaging centers. We believe that we do not engage in
the practice of medicine nor do we employ physicians. The radiology practices
maintain full control over the provision of professional radiological services.
The contracted radiology practices generally have outstanding physician and
practice credentials and reputations; strong competitive market positions; a
broad sub-specialty mix of physicians; a history of growth and potential for
continued growth; and a willingness to embrace our strategy for the delivery of
diagnostic imaging services.
We have two models by which we contract with radiology practices: a
comprehensive services model and a technical services model. Under our
comprehensive services model, we enter into a long-term agreement with a
radiology practice group (typically 40 years). Under this arrangement, in
addition to obtaining technical fees for the use of our diagnostic imaging
equipment and the provision of technical services, we provide management
services and receive a fee based on the practice group's professional revenue,
including revenue derived outside of our diagnostic imaging centers. Under our
technical services model, we enter into a shorter-term agreement with a
radiology practice group (typically 10 to 15 years) and pay them a fee based on
cash collections from reimbursements for imaging procedures. In both the
comprehensive services and technical services models, we own the diagnostic
imaging assets, and, therefore, receive 100% of the technical reimbursements
associated with imaging procedures. Additionally, in most instances, both the
comprehensive services and the technical services models contemplate an
incentive technical bonus for the radiology group if the net technical income
exceeds specified thresholds.
The agreements with the radiology practices under our comprehensive
services model contain provisions whereby both parties have agreed to certain
restrictions on accepting or pursuing radiology opportunities within a five to
15-mile radius of any of our owned, operated or managed diagnostic imaging
centers at which the radiology practice provides professional radiology services
or any hospital at which the radiology practice provides on-site professional
radiology services. Each of these agreements also restricts the applicable
radiology practice from competing with us and our other contracted radiology
practices within a specified geographic area during the term of the agreement.
In addition, the agreements require the radiology practices to enter into and
enforce agreements with their physician shareholders at each radiology practice
(subject to certain exceptions) that include covenants not to compete with us
for a period of two years after termination of employment or ownership, as
applicable.
Under our comprehensive services model, we have the right to terminate each
agreement if the radiology practice or a physician employee of the contracted
radiology practice engages in conduct, or is formally accused of conduct, for
which the physician employee's license to practice medicine reasonably would be
expected to be subject to revocation or suspension or is otherwise disciplined
by any licensing, regulatory or professional entity or institution, the result
of any of which (in the absence of termination of this physician or other action
to monitor or cure this act or conduct) adversely affects or would reasonably be
expected to adversely affect the radiology practice. In addition, we may
terminate each of these agreements if, during the first five years of the
agreement, more than one-third of the total number of physicians employed or
retained by the practice are no longer employed or retained by such practice
other than because of certain events, including death, permanent disability,
pre-qualified retirement or involuntary loss of hospital contracts or
privileges.
Under our comprehensive services model, upon termination of an agreement
with a radiology practice, depending upon the termination event, we may have the
right to require the radiology practice to purchase and assume, or the radiology
practice may have the right to require us to sell, assign and transfer to it,
the assets and related liabilities and obligations associated with the
professional and technical radiology services provided by the radiology practice
immediately prior to the termination. The purchase price for the assets,
liabilities and obligations would be the lesser of their fair market value or
the return of the consideration received in the acquisition. However, the
purchase price may not be less than the net book value of the assets being
purchased.
21
The agreements with most of the radiology practices under our technical
services model contain noncompete provisions that are generally less restrictive
than those provisions under our comprehensive services model. The geographic
scope of and types of services covered by the non-compete provisions vary from
practice to practice. Under our technical services model, we generally have the
right to terminate the agreement if a contracted radiology practice loses the
licenses required to perform the service obligations under the agreement,
violates noncompete provisions relating to the modalities offered or if certain
net income thresholds are not met.
DIAGNOSTIC IMAGING CENTERS
We operate 120 diagnostic imaging centers consisting of 86 owned and
operated free-standing diagnostic imaging centers; 21 diagnostic imaging centers
operated by us and owned through 15 joint venture relationships with hospitals,
health systems or radiology practices; and 13 diagnostic imaging centers to
which we provide management, administrative and information services or
diagnostic imaging equipment. Of our 120 centers, 70 offer multiple modalities
of diagnostic imaging services. The number and type of modalities offered are
determined primarily by the demand for such services within their respective
market areas.
Information related to these diagnostic imaging centers is set forth below:
<Table>
<Caption>
DIAGNOSTIC IMAGING CENTERS
----------------------------
JOINT
OWNED VENTURE
MARKET NAME GEOGRAPHIC LOCATION CENTERS CENTERS OTHER
- ----------- ------------------- -------- -------- ------
Mid-Atlantic Baltimore, MD/Washington Metro-Area..... 26 10 0
Finger Lakes Rochester, NY........................... 6 0 3
Bay Area an Francisco/Oakland/San Jose, CA....... 18 0 0
South Texas San Antonio, TX......................... 1 5 0
Northeast Kansas Topeka, KS and Northeast KS............. 1 1 0
Hudson Valley Rockland County, NY..................... 7 0 6
Treasure Coast St. Lucie County, FL.................... 3 0 0
Questar Multiple locations(1)................... 24 5 4
-- -- --
TOTAL..................................................... 86 21 13
== == ==
</Table>
- ---------------
(1) Includes diagnostic imaging centers in Arizona, California, Colorado,
Delaware, Florida, Georgia, Illinois, Kansas, Minnesota, Missouri, Nebraska,
Nevada, Ohio and Pennsylvania that were acquired as part of the Questar
acquisition and are not integrated into our core market areas.
Many of the 21 joint venture diagnostic imaging centers are located on, or
adjacent to, the participating hospital or health center's campus. We are the
general partner or managing member of 13 of our 15 joint ventures, comprising 19
of the 21 joint venture diagnostic imaging centers.
The 13 diagnostic imaging centers to which we provide management,
administrative and information services include 11 locations where we own the
diagnostic imaging equipment. Examples of these 11 locations include hospitals
where we have installed equipment that we operate under an agreement with the
hospital or health center. These relationships permit us to provide services to
hospitals and health centers without directly competing against a radiology
department that is equipped and operated by the hospital or health center. In
the remaining two centers, we do not have an ownership interest in the
equipment, but provide management services and employees.
DIAGNOSTIC IMAGING EQUIPMENT
We currently operate 487 diagnostic imaging units at our 120 centers, of
which 83 are MRI units, 43 are CT units, 6 are PET units, 26 are nuclear
medicine units, 95 are ultrasound units, 71 are
22
mammography units, 27 are DEXA units, 79 are X-ray units and 57 are fluoroscopy
units. The average age of our MRI units is 3.8 years, our CT units is 4.4 years
and our PET units is 1.5 years.
We continue to evaluate the mix of our diagnostic imaging equipment in
response to changes in technology and to maximize utilization of our equipment.
The overall technological competitiveness of our equipment continually improves
through upgrades, disposal and/or trade-in of older equipment and the purchase
or execution of leases for new equipment. Several substantial companies
presently manufacture MRI (including open MRI), CT, PET and other diagnostic
imaging equipment, including GE Medical Systems, Hitachi Medical Systems,
Siemens Medical Systems and Phillips Medical Systems. We maintain good working
relationships with many of the major manufacturers to better ensure an adequate
supply as well as access to the most appropriate types of diagnostic imaging
equipment for the specific imaging center to be established.
Timely, effective maintenance is essential for achieving high utilization
rates of our imaging equipment. Most of our equipment is covered by a one year
warranty from the original equipment manufacturers. We also contract with the
original equipment manufacturers for comprehensive maintenance programs to
minimize the period of time our equipment is unavailable.
SALES AND MARKETING
We selectively invest in marketing and sales resources and activities in an
effort to attract new patients, expand business relationships, grow revenue at
our existing centers and maintain present business alliances and contractual
agreements. Marketing activities include having frequent contact with referring
physicians and their office staffs, organizing and presenting educational
programs on new applications and uses of technology, developing and conducting
customer service programs and proactively calling managed care organizations and
third-party insurance companies to solicit additional contracts. Sales
activities principally focus on referring physicians and managed care entities,
while general awareness programs are targeted to patients and referring
physicians.
GOVERNMENT REGULATION AND SUPERVISION
General. The healthcare industry is highly regulated, and we can give no
assurance that the regulatory environment in which we operate will not change
significantly in the future. Our ability to operate profitably will depend in
part upon us, the contracted radiology practices and their affiliated physicians
obtaining and maintaining all necessary licenses, certificates of need and other
approvals and operating in compliance with applicable healthcare regulations. We
believe that healthcare regulations will continue to change. Therefore, we
monitor developments in healthcare law and modify our operations from time to
time as the business and regulatory environment changes. Although we intend to
continue to operate in compliance, we cannot ensure that we will be able to
adequately modify our operations so as to address changes in the regulatory
environment.
Licensing and Certification Laws. Ownership, construction, operation,
expansion and acquisition of diagnostic imaging centers are subject to various
federal and state laws, regulations and approvals concerning licensing of
centers, personnel, certificates of need and other required certificates for
certain types of healthcare centers and major medical equipment. The laws of
some of the states in which we operate limit our ability to acquire new
diagnostic imaging equipment or expand or replace our existing equipment at
diagnostic imaging centers in those states. In addition, free-standing
diagnostic imaging centers that provide services not performed as part of a
physician office must meet Medicare requirements to be certified as an
independent diagnostic testing facility to bill the Medicare program. We may not
be able to receive the required regulatory approvals for any future
acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services.
Fee-Splitting; Corporate Practice of Medicine. The laws of many states,
including many of the states in which the contracted radiology practices are
located, prohibit us from exercising control over the medical judgments or
decisions of physicians and from engaging in certain financial arrangements,
such as splitting professional fees with physicians. These laws and their
interpretations vary from state to state and
23
are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into service
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee. We structure our relationships with the radiology practices,
including the purchase of diagnostic imaging centers, in a manner that we
believe keeps us from engaging in the practice of medicine or exercising control
over the medical judgments or decisions of the radiology practices or their
physicians or violating the prohibitions against fee-splitting. State regulatory
authorities or other parties may assert that we are engaged in the corporate
practice of medicine or that the payment of service fees to us by the radiology
practices constitutes fee-splitting. If such a claim were successfully asserted,
we could be subject to civil and criminal penalties and could be required to
restructure or terminate the applicable contractual arrangements. This result or
our inability to successfully restructure our relationships to comply with these
statutes could jeopardize our business strategy.
Medicare and Medicaid Reimbursement Program. Our revenue is derived
through our ownership, operation and management of diagnostic imaging centers
and from service fees paid to us by contracted radiology practices. During the
year ended December 31, 2001, approximately 28% of our revenue generated at our
diagnostic imaging centers was derived from government sponsored healthcare
programs (principally, Medicare and Medicaid).
Initiatives have been proposed that, if implemented, would have the effect
of substantially decreasing reimbursement rates for outpatient diagnostic
imaging services provided at hospital facilities. We believe that we will have
opportunities to increase the use of our diagnostic imaging services through
additional joint venture or outsourcing arrangements with hospitals, in part due
to such federal healthcare regulatory changes that favor outpatient centers that
are managed or owned in joint venture or outsourcing arrangements with third
parties. As of January 2002, Medicare has decreased reimbursement rates for
physician and outpatient services, including diagnostic imaging services. Our
centers are principally dependent on our ability to attract referrals from
primary care physicians, specialists and other healthcare providers. The
referral often depends on the existence of a contractual arrangement with the
referred patient's health benefit plan.
Any further change in Medicare or Medicaid rates or conditions for
reimbursement could substantially reduce the amounts reimbursed to us or our
contracted radiology practices for services provided. These reductions could
have a significant adverse effect on our revenue and financial results by
creating downward pricing pressure.
Medicare and Medicaid Fraud and Abuse. Federal law prohibits the knowing
and willful offer, payment, solicitation or receipt of any form of remuneration
in return for, or to induce, (i) the referral of a person, (ii) the furnishing
or arranging for the furnishing of items or services reimbursable under the
Medicare, Medicaid or other governmental programs or (iii) the purchase, lease
or order or arranging or recommending purchasing, leasing or ordering of any
item or service reimbursable under the Medicare, Medicaid or other governmental
programs. Enforcement of this anti-kickback law is a high priority for the
federal government, which has substantially increased enforcement resources and
is scheduled to continue increasing such resources. The applicability of the
anti-kickback law to many business transactions in the healthcare industry has
not yet been subject to judicial or regulatory interpretation. Noncompliance
with the federal anti-kickback legislation can result in exclusion from the
Medicare, Medicaid or other governmental programs and civil and criminal
penalties.
We receive fees under our service agreements for management and
administrative services, which include contract negotiation and marketing
services. We do not believe we are in a position to make or influence referrals
of patients or services reimbursed under Medicare, Medicaid or other
governmental programs to radiology practices or their affiliated physicians or
to receive referrals. However, we may be considered to be in a position to
arrange for items or services reimbursable under a federal healthcare program.
Because the provisions of the federal anti-kickback statute are broadly worded
and have been broadly interpreted by federal courts, it is possible that the
government could take the position that our arrangements with the contracted
radiology practices implicate the federal anti-kickback statute. Violation
24
of the law can result in monetary fines, civil and criminal penalties, and
exclusion from participation in federal or state healthcare programs, any of
which could have an adverse effect on our business and results of operations.
While our service agreements with the contracted radiology practices will not
meet a "safe harbor" to the federal anti-kickback statute, failure to meet a
"safe harbor" does not mean that agreements violate the anti-kickback statute.
We have sought to structure our agreements to be consistent with fair market
value in arms' length transactions for the nature and amount of management and
administrative services rendered. For these reasons, we do not believe that
service fees payable to us should be viewed as remuneration for referring or
influencing referrals of patients or services covered by such programs as
prohibited by statute.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions are commonly known as the "Stark Law." The Stark
Law prohibits a physician from referring Medicare or Medicaid patients to an
entity providing "designated health services," including, without limitation,
radiology services, in which the physician has an ownership or investment
interest or with which the physician has entered into a compensation
arrangement. The penalties for violating the Stark Law include a prohibition on
payment by these governmental programs and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a "circumvention
scheme." We believe that, although we receive fees under our service agreements
for management and administrative services, we are not in a position to make or
influence referrals of patients.
On January 4, 2001, the Health Care Financing Administration, Department of
Health and Human Services, now known as the Centers for Medicare and Medicaid
Services ("CMS"), published final regulations to implement the Stark Law. Under
the final regulations, radiology and certain other imaging services and
radiation therapy services and supplies are services included in the designated
health services subject to the self-referral prohibition. Under the final
regulations, such services include the professional and technical components of
any diagnostic test or procedure using X-rays, ultrasound or other imaging
services, computerized axial tomography, MRI, radiation therapy and diagnostic
mammography services (but not screening mammography services). The final
regulations, however, exclude from designated health services: (i) X-ray,
fluoroscopy or ultrasonic procedures that require the insertion of a needle,
catheter, tube or probe through the skin or into a body orifice; (ii) radiology
procedures that are integral to the performance of, and performed during,
nonradiological medical procedures; (iii) nuclear medicine procedures; and (iv)
"invasive" or "interventional" radiology, because the radiology services in
these procedures are merely incidental or secondary to another procedure that
the physician has ordered.
The Stark Law provides that a request by a radiologist for diagnostic
radiology services or a request by a radiation oncologist for radiation therapy,
if such services are furnished by or under the supervision of such radiologist
or radiation oncologist pursuant to a consultation requested by another
physician, does not constitute a "referral" by a "referring physician." If such
requirements are met, the Stark Law self-referral prohibition would not apply to
such services. The effect of the Stark Law on the radiology practices,
therefore, will depend on the precise scope of services furnished by each such
practice's radiologists and whether such services derive from consultations or
are self-generated. We believe that (other than self-referred patients) all of
the services covered by the Stark Law provided by the contracted radiology
practices derive from requests for consultation by non-affiliated physicians.
Therefore, we believe that the Stark Law is not implicated by the financial
relationships between us and the contracted radiology practices.
In addition, we believe that we have structured our acquisitions of the
assets of existing practices, and we intend to structure any future
acquisitions, so as to not violate the anti-kickback and Stark Law and
regulations. Specifically, we believe the consideration paid by us to physicians
to acquire the tangible and intangible assets associated with their practices is
consistent with fair market value in arms' length transactions and is not
intended to induce the referral of patients. Should any such practice be deemed
to constitute an arrangement designed to induce the referral of Medicare or
Medicaid patients, then our acquisitions could be viewed as possibly violating
anti-kickback and anti-referral laws and regulations. A determination of
liability under any such laws could have an adverse effect on our business,
financial condition and results of operations.
25
The federal government recently announced an initiative to audit all
Medicare carriers, which are the companies that adjudicate and pay Medicare
claims. These audits are expected to intensify governmental scrutiny of
individual providers. An unsatisfactory audit of any of our diagnostic imaging
centers or contracted radiology practices could result in significant repayment
obligations, exclusion from the Medicare, Medicaid, or other governmental
programs and/or civil and criminal penalties.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern our activities and the activities of the radiology
practices. Our or the radiology practices' activities may be investigated,
claims may be made against us or the radiology practices and these increased
enforcement activities may directly or indirectly have an adverse effect on our
business, financial condition and results of operations.
State Anti-kickback and Physician Self-referral Laws. All of the states in
which our diagnostic imaging centers are located have adopted a form of
anti-kickback law and almost all of those states have also adopted a form of
Stark Law. The scope of these laws and the interpretations of them vary from
state to state and are enforced by state courts and regulatory authorities, each
with broad discretion. Generally, state laws cover all referrals by all
healthcare providers for all healthcare services. A determination of liability
under such laws could result in fines and penalties and restrictions on our
ability to operate in these jurisdictions.
Federal False Claims Act. The Federal False Claims Act provides, in part,
that the federal government may bring a lawsuit against any person whom it
believes has knowingly presented, or caused to be presented, a false or
fraudulent request for payment from the federal government, or who has made a
false statement or used a false record to get a claim approved. The Federal
False Claims Act further provides that a lawsuit thereunder may be initiated in
the name of the United States by an individual who is an original source of the
allegations. The government has taken the position that claims presented in
violation of the federal anti-kickback law or Stark Law may be considered a
violation of the Federal False Claims Act. Penalties include civil penalties of
not less than $5,500 and not more than $11,000 for each false claim, plus three
times the amount of damages that the federal government sustained because of the
act of that person. We believe that we are in compliance with the rules and
regulations that apply to the Federal False Claims Act. However, we could be
found to have violated certain rules and regulations resulting in sanctions
under the Federal False Claims Act, and if we are so found in violation, any
sanctions imposed could result in fines and penalties and restrictions on and
exclusion from participation in federal and state healthcare programs that are
integral to our business.
Healthcare Reform Initiatives. Healthcare laws and regulations may change
significantly in the future. We continuously monitor these developments and
modify our operations from time to time as the regulatory environment changes.
We cannot assure you, however, that we will be able to adapt our operations to
address new regulations or that new regulations will not adversely affect our
business. In addition, although we believe that we are operating in compliance
with applicable federal and state laws, neither our current or anticipated
business operations nor the operations of the contracted radiology practices has
been the subject of judicial or regulatory interpretation. We cannot assure you
that a review of our business by courts or regulatory authorities will not
result in a determination that could adversely affect our operations or that the
healthcare regulatory environment will not change in a way that restricts our
operations.
Health Insurance Portability and Accountability Act of 1996. In an effort
to combat healthcare fraud, Congress enacted the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"). HIPAA, among other things, amends
existing crimes and criminal penalties for Medicare fraud and enacts new federal
healthcare fraud crimes, including actions affecting non-governmental payors.
Under HIPAA, a "healthcare benefit program" includes any private plan or
contract affecting interstate commerce under which any medical benefit, item or
services is provided. A person or entity that knowingly and willfully obtains
the money or property of any healthcare benefit program by means of false or
fraudulent representations in connection with the delivery of healthcare
services is subject to a fine and/or
26
imprisonment. In addition, HIPAA authorizes the imposition of civil money
penalties against entities that employ or enter into contracts with excluded
Medicare or Medicaid program participants if such entities provide services to
federal health program beneficiaries. A finding of liability under HIPAA could
have a material adverse effect on our business, financial condition and results
of operations.
Further, HIPAA requires healthcare providers and their business associates
to maintain the privacy and security of individually identifiable health
information. HIPAA imposes federal standards for electronic transactions with
health plans, the security of electronic health information and for protecting
the privacy of individually identifiable health information. The government
recently published regulations to implement the privacy standards with an
initial compliance date of April 14, 2003. We may encounter certain costs
associated with complying with the primary provisions. A finding of liability
under HIPAA's privacy or security provisions may also result in criminal and
civil penalties, and could have a material adverse effect on our business,
financial condition, and results of operations.
Compliance Program. With the assistance of our special healthcare
regulatory counsel, we implemented a program to monitor compliance with federal
and state laws and regulations applicable to healthcare entities. We have
appointed a compliance officer who is charged with implementing and supervising
our compliance program, which includes the adoption of (i) "Standards of
Conduct" for our employees and affiliates and (ii) an "Ethics Process" that
specifies how employees, affiliates and others may report regulatory or ethical
concerns to our compliance officer. We believe that our compliance program meets
the relevant standards provided by the Office of Inspector General of the
Department of Health and Human Services. An important part of our compliance
program consists of conducting periodic audits of various aspects of our
operations and that of the contracted radiology practices. We also conduct
mandatory educational programs designed to familiarize our employees with the
regulatory requirements and specific elements of our compliance program.
Insurance Laws and Regulation. Certain states have enacted statutes or
adopted regulations affecting risk assumption in the healthcare industry,
including statutes and regulations that subject any physician or physician
network engaged in risk-based managed care contracting to applicable insurance
laws and regulations. These laws and regulations may require physicians and
physician networks to meet minimum capital requirements and other safety and
soundness requirements. Implementing additional regulations or compliance
requirements could result in substantial costs to us and the contracted
radiology practices and limit our ability to enter into capitated or other
risk-sharing managed care arrangements.
COMPETITION
The market for diagnostic imaging services is competitive. We compete
principally on the basis of our reputation, our ability to offer multiple
modalities, our conveniently located centers and our cost-effective,
high-quality diagnostic imaging services. We compete locally with groups of
radiologists, established hospitals, clinics and certain other independent
organizations that own and operate imaging equipment. Our major national
competitors include Alliance Imaging, Inc., HEALTHSOUTH Corporation, InSight
Health Services Corp., Medical Resources, Inc., Syncor International Corporation
and U.S. Diagnostic, Inc. Some of our local or national competitors that provide
diagnostic imaging services may now or in the future have access to greater
financial resources than we do and may have access to newer, more advanced
equipment.
In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging centers because of the
federal physician self-referral legislation. Final regulations issued in January
2001 clarify certain of the exceptions to the physician self-referral
legislation, which may create opportunities for and encourage some physician
practices to establish their own diagnostic imaging centers within their group
practices, which may compete with us.
Each of the contracted radiology practices under our comprehensive services
model has entered into agreements with its physician shareholders and full-time
employed radiologists that generally prohibit those shareholders and
radiologists from competing for a period of two years within defined geographic
regions
27
after they cease to be owners or employees, as applicable. In most states, a
covenant not to compete will be enforced only:
- to the extent it is necessary to protect a legitimate business interest
of the party seeking enforcement;
- if it does not unreasonably restrain the party against whom enforcement
is sought; and
- if it is not contrary to public interest.
Enforceability of a non-compete covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible to predict whether, or to what
extent, a court will enforce the contracted radiology practices' covenants. The
inability of the contracted radiology practices or us to enforce radiologists'
non-compete covenants could result in increased competition from individuals who
are knowledgeable about our business strategies and operations.
We may not be able to compete effectively for the acquisition of diagnostic
imaging centers, joint venture opportunities or other outsourcing relationships.
Our competitors may have better established operating histories and greater
resources than we do. Competitors may make it more difficult to complete
acquisitions or joint ventures on terms beneficial to us.
CORPORATE LIABILITY AND INSURANCE
We may be subject to professional liability claims including, without
limitation, for improper use or malfunction of our diagnostic imaging equipment.
We maintain insurance policies with coverages that we believe are appropriate in
light of the risks attendant to our business and consistent with industry
practice. We also require the contracted radiology practices to maintain
sufficient professional liability insurance consistent with industry practice.
However, adequate liability insurance may not be available to us and the
contracted radiology practices in the future at acceptable costs or at all.
Providing medical services entails the risk of professional malpractice and
other similar claims. The physicians employed by the contracted radiology
practices are from time to time subject to malpractice claims. We structure our
relationships with the practices under our agreements with them in a manner that
we believe does not constitute the practice of medicine by us or subject us to
professional malpractice claims for acts or omissions of physicians in the
contracted radiology practices. Nevertheless, claims, suits or complaints
relating to services provided by the contracted radiology practices may be
asserted against us in the future, including malpractice.
Any claim made against us not fully covered by insurance could be costly to
defend against, result in a substantial damage award against us and divert the
attention of our management from our operations, which could have an adverse
effect on our financial performance. In addition, claims might adversely affect
our business or reputation.
The contracted radiology practices maintain professional liability
insurance coverage primarily on a claims made basis. This insurance provides
coverage for claims asserted when the policy is in effect, regardless of when
the events that caused the claim occurred. The contracted radiology practices
are required by the terms of the service agreements to maintain medical
malpractice liability insurance consistent with minimum limits mandated in their
hospital contracts or by applicable state law.
We maintain general liability and umbrella coverage in commercially
reasonable amounts. Additionally, we maintain workers' compensation insurance on
all employees. Coverage is placed on a statutory basis and responds to each
state's specific requirements.
In 1997, a law became effective in the State of Texas that permits injured
patients to sue health insurance carriers, HMOs and other managed care entities
for medical malpractice. This law could increase the cost of liability insurance
to us for services provided in Texas or any other states in which we do business
if similar legislation is adopted in those states.
28
We have assumed and succeeded to substantially all of the obligations of
some of the operations that we have acquired. Therefore, claims may be asserted
against us for events that occurred prior to our acquiring these acquisitions.
In connection with our acquisitions, the sellers of the operations that we have
acquired have agreed to indemnify us for certain claims. However, we may not be
able to collect payment under these indemnity agreements which could affect us
adversely.
EMPLOYEES
As of December 31, 2001, we had approximately 2,600 employees,
approximately 70 of whom are employed at our headquarters and regional offices
and the remainder of whom are employed at our diagnostic imaging centers and
regional administrative operations. We believe that our relationship with our
employees is good.
PROPERTIES
Our corporate headquarters are located at 3600 JP Morgan Chase Tower, 2200
Ross Avenue, Dallas, Texas 75201-2776, in approximately 26,000 square feet
occupied under a lease, which expires on August 31, 2011.
LEGAL PROCEEDINGS
We are not currently subject to any material litigation nor, to our
knowledge, is any material litigation threatened against us. All of our current
litigation is (i) expected to be covered by liability insurance or (ii) not
expected to adversely affect our business. Some risk exists, however, that we
could subsequently be named as a defendant in additional lawsuits or that
pending litigation could adversely affect us.
NO CASH PROCEEDS TO US
This exchange offer is intended to satisfy our obligations under the
registration rights agreement we entered into when we sold the Old Notes. We
will not receive any proceeds from the issuance of the New Notes and have agreed
to pay all of the expenses of the exchange offer. In consideration for issuing
the New Notes, we will receive, in exchange, a like principal amount of Old
Notes. The Old Notes surrendered in exchange for the New Notes will be retired
and canceled and cannot be reissued. Accordingly, issuing the New Notes will not
result in any increase in our outstanding debt.
29
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization as of December 31, 2001. This table should be read in conjunction
with "Management's Discussion and Analysis of Operations and Financial
Condition," "Selected Consolidated Financial and Operating Data" and our
consolidated financial statements and related notes incorporated by reference
herein.
<Table>
<Caption>
AS OF
DECEMBER 31,
2001
--------------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 10,761
========
Long-term debt (including current maturities):
Senior credit facility(1)................................. --
Old Notes offered......................................... 160,000
Other long-term debt...................................... 1,098
Capital lease obligations................................. 11,849
Convertible junior subordinated note...................... 24,205
--------
Total long-term debt................................. 197,152
Total stockholders' equity.................................. 44,476
--------
Total capitalization.............................. $241,628
========
</Table>
- ---------------
(1) Concurrently with the offering of the Old Notes, we entered into a new
senior credit facility that provides for up to $35.0 million of borrowings.
30
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated historical financial and operating data
is derived from our consolidated financial statements contained in our Annual
Reports on Form 10-K for the periods indicated and, as such, reflects the impact
of acquired entities from the effective dates of such transactions. The
information in the table and its notes should be read in conjunction with
"Management's Discussion and Analysis of Operations and Financial Condition" and
with our consolidated financial statements and their notes incorporated by
reference herein.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999 2000 2001
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SERVICE FEE REVENUE...................... $ 9,545 $149,327 $199,700 $246,687 $276,650
COSTS AND EXPENSES:
Salaries and benefits.................. 2,922 42,227 52,826 66,567 75,667
Field supplies......................... 1,036 8,865 11,630 13,265 16,514
Field rent and lease expense........... 852 11,532 18,444 30,191 34,378
Other field expenses................... 1,557 25,311 32,278 45,871(a) 47,339
Bad debt expense....................... 862 13,723 18,838 34,389(b) 25,682
Merger related costs................... -- -- -- 1,772 1,000
Supplemental incentive compensation.... -- -- -- -- 615
Corporate general and administrative... 4,910 9,597 11,192 10,571 13,855
Depreciation and amortization.......... 888 12,178 18,403 22,118 23,504
Interest expense, net.................. 617 7,541 12,357 18,036 15,540
------- -------- -------- -------- --------
Total costs and expenses....... 13,644 130,974 175,968 242,780 254,094
------- -------- -------- -------- --------
Income (loss) before equity in earnings
of investments, non-operating income,
minority interests in consolidated
subsidiaries, taxes and extraordinary
loss................................... (4,099) 18,353 23,732 3,907 22,556
Equity in earnings of investments...... 220 4,339 3,581 4,274 5,017
Non-operating income................... -- -- -- -- 1,300
Minority interests in consolidated
subsidiaries........................ (49) (710) (910) (948) (1,092)
------- -------- -------- -------- --------
Income (loss) before taxes and
extraordinary loss..................... (3,928) 21,982 26,403 7,233 27,781
Income tax expense..................... -- 6,499 10,346 2,900 11,112
------- -------- -------- -------- --------
Income (loss) before extraordinary
loss................................... (3,928) 15,483 16,057 4,333 16,669
Extraordinary loss on early
extinguishment of debt, net of tax..... -- -- -- -- (2,838)
------- -------- -------- -------- --------
Net income (loss)........................ $(3,928) $ 15,483 $ 16,057 $ 4,333 $ 13,831
======= ======== ======== ======== ========
Earnings Per Share:
Basic
Income (loss) before extraordinary
loss................................ $ (1.13) $ 0.83 $ 0.83 $ 0.22 $ 0.85
Income (loss) after extraordinary
loss................................ $ (1.13) $ 0.83 $ 0.83 $ 0.22 $ 0.71
Diluted
Income (loss) before extraordinary
loss................................ $ (1.13) $ 0.80 $ 0.80 $ 0.22 $ 0.78
Income (loss) after extraordinary
loss................................ $ (1.13) $ 0.80 $ 0.80 $ 0.22 $ 0.66
</Table>
31
<Table>
Other Operating Data:
EBITDA(c)........................... $(2,423) $ 41,701 $ 57,163 $ 47,387 $ 65,525
Cash flow provided by (used in):
Operating activities............. (5,333) 9,950 (1,462) 13,325 41,016
Investing activities............. (420) (63,501) (44,957) (23,060) (19,104)
Financing activities............. 7,834 55,464 44,236 9,053 (14,771)
Capital expenditures................ 481 12,651 31,458 14,002 7,184(d)
Ratio of earnings of fixed
charges(e)....................... NM 3.0x 2.5x 1.3x 2.1x
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Working capital......................... $ 25,181 $ 36,682 $ 55,214
Total assets............................ 244,840 268,636 284,725
Long-term debt and capital lease
obligations.......................... 164,840 175,836 172,947
Convertible notes....................... 20,000 20,000 24,205
Stockholders' equity.................... 25,375 29,719 44,476
</Table>
- ---------------
(a) Other field expenses for the year ended December 31, 2000 includes a $3.7
million charge for the write-off in the fourth quarter of 2000 of a note
receivable. See Note 2 to consolidated financial statements incorporated by
reference herein.
(b) Bad debt expense for the year ended December 31, 2000 includes a $13.3
million charge recorded in the fourth quarter of 2000. See Note 2 to
consolidated financial statements incorporated by reference herein.
(c) EBITDA is net income before depreciation and amortization, interest expense,
net, and income tax expense. This measurement has been included because
management believes that certain investors will find it to be a useful tool
for measuring our ability to meet debt service, capital expenditure and
working capital requirements. EBITDA should not be considered an alternative
to, or more meaningful than, income from operations or other traditional
indicators of operating performance and cash flow from operating activities
determined in accordance with generally accepted accounting principles. In
addition, the definition of EBITDA used in this Prospectus may not be
comparable to the definition of EBITDA used by other companies.
(d) Total capital expenditures excludes the buy out of operating leases for
$13.9 million, See Note 6 to the consolidated financial statements
incorporated by reference herein.
(e) For purposes of this calculation, earnings consist of pretax income plus
fixed charges. Fixed charges consist of interest expense, the amortization
of deferred financing costs and an estimate representing that portion of
rental expense deemed representative of an appropriate interest factor.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
We are a leading national provider of diagnostic imaging services through
our ownership and operation of free-standing, outpatient diagnostic imaging
centers. We utilize sophisticated technology and technical expertise to perform
a broad range of imaging procedures, such as magnetic resonance imaging (or
MRI), computed tomography (or CT), positron emission tomography (or PET),
nuclear medicine, ultrasound, mammography, bone densitometry (or DEXA), general
radiography (or X-ray) and fluoroscopy. For the year ended December 31, 2001, we
derived 78% of our service fee revenue from the ownership, management and
operation of our radiology and imaging center network and 22% of our service fee
revenue from the administrative, management and information services provided to
contracted radiology practices. As of December 31, 2001, we owned, operated or
maintained an ownership interest in imaging equipment at 120 locations and
provided management services to ten radiology practices. As of December 31,
2001, our imaging centers are located in 18 states, with concentrated geographic
coverage in markets located in California, Florida, Kansas, Maryland, New York,
Texas and Virginia.
We focus on providing quality patient care and service to ensure patient
and referring physician satisfaction. Our development of comprehensive radiology
networks permits us to invest in technologically advanced imaging equipment,
including MRI, open MRI, spiral CT and PET. Our consolidation of diagnostic
imaging centers into coordinated networks improves response time, increases
overall patient accessibility, permits us to standardize certain customer
relations procedures and permits us to develop "best practices" for our
diagnostic imaging centers. We seek the input and participation of the
contracted radiology practices to which we provide administrative, management
and information services to develop best practices and to improve productivity
and the quality of services. By focusing on further improving and, where
appropriate, standardizing the operations of our diagnostic imaging centers, we
believe that we can increase patient and referring physician satisfaction, which
should lead to increased referrals and increased utilization of our diagnostic
imaging centers.
We contract with radiology practices to provide professional services,
including the supervision and interpretation of diagnostic imaging procedures
performed in our diagnostic imaging centers. We believe that we do not engage in
the practice of medicine nor do we employ physicians. The radiology practices
maintain full control over the provision of professional radiological services.
The contracted radiology practices generally have outstanding physician and
practice credentials and reputations; strong competitive market positions; a
broad sub-specialty mix of physicians; a history of growth and potential for
continued growth; and a willingness to embrace our strategy for the delivery of
diagnostic imaging services.
Payment for diagnostic imaging services comes primarily from commercial
third-party payors (62%), governmental payors (28% including Medicare and
Medicaid) and private and other payors (10%). In August 2000, Medicare made
significant changes in the reimbursement methodology for hospital outpatient
services. We believe that we will have opportunities to increase the use of our
diagnostic imaging services through additional joint venture or outsourcing
arrangements with hospitals, in part because such federal healthcare regulatory
changes favor outpatient centers that are managed or owned in joint venture or
outsourcing arrangements with third parties. As of January 2002, Medicare has
decreased reimbursement rates for physician and outpatient services, including
diagnostic imaging services. Our centers are principally dependent on our
ability to attract referrals from primary care physicians, specialists and other
healthcare providers. The referral often depends on the existence of a
contractual arrangement with the referred patient's health benefit plan. For the
year ended December 31, 2001, approximately 9% of our revenue generated at our
diagnostic imaging centers was generated from capitated arrangements.
Our service fee revenue is dependent upon the operating results of the
contracted radiology practices and diagnostic imaging centers. Where state law
allows, service fees due under the service agreements for the contracted
radiology practices are derived from two distinct revenue streams: (1) a
negotiated percentage (typically 20% to 30%) of the adjusted professional
revenues as defined in the service agreements; and (2) 100% of the adjusted
technical revenues as defined in the service agreements. In states where the law
requires a flat fee structure, we have negotiated a base service fee, which is
equal to
33
the estimated fair market value of the services provided under the service
agreements and which is renegotiated each year to equal the fair market value of
the services provided under the service agreements. The fixed fee structure
results in us receiving substantially the same amount of service fee as we would
have received under a negotiated percentage fee structure. Adjusted professional
revenues and adjusted technical revenues are determined by deducting certain
contractually agreed-upon expenses (non-physician salaries and benefits, rent,
depreciation, insurance, interest and other physician costs) from the contracted
radiology practices' revenue. Revenues of our subsidiary, Questar Imaging, Inc.
of Tampa, Florida ("Questar") are primarily derived from technical revenues
generated from those imaging centers.
RESULTS OF OPERATIONS
We report the results of our operations through four designated regions of
the United States: Mid-Atlantic, Northeastern, Central and Western regions. In
addition, we report separately the results of our operations of the imaging
centers of our subsidiary, Questar. Our operations in each of the four
designated regions are comprised of the ownership and operation of diagnostic
imaging centers and the provision of administrative, management and information
services to the contracted radiology practices that provide professional
interpretation and supervision services in connection with our diagnostic
imaging centers and to hospitals and radiology practices with which we operate
joint ventures. Our services leverage our existing infrastructure and improve
radiology practice or joint venture profitability, efficiency and effectiveness.
We have divided the operations into the four regions and Questar only for
purposes of the division of internal management responsibilities, but do not
focus on each of these regions as a separate product line or make financial
decisions as if they were separate product lines. The Questar operations are
treated as a separate group only from the perspective that the imaging centers
of Questar do not have the same type of management service agreement with
physicians as we have with each of the contracted radiology practices in the
four designated regions. In addition, any imaging centers of Questar that are in
the same market as the operations of the contracted radiology practices in the
four designated regions are not included in the service agreements of the
contracted radiology practices.
The operating margin in 2001 for each of the four regions and Questar was
impacted by a change in the estimation of contractual allowances of the billed
charges. Generally, the change in the estimation of contractual allowances
increased the contractual allowance which decreased the revenue of the
contracted radiology practices and diagnostic imaging centers recognized and
therefore, the service fee recognized and the operating margin. The operating
margin for the Mid-Atlantic region of 32% and 31% for the twelve months ended
December 31, 2000 and 2001, respectively, remained relatively constant. The
operating margin of the Northeastern region decreased from 30% for the twelve
months ended December 31, 2000 to 26% in 2001. The decline in the operating
margin between periods is primarily the result of a decrease in the fixed fee
recognized at one of the New York practices. The operating margin for the
Central region of 35% and 34% for the twelve months ended December 31, 2000 and
2001, respectively, remained relatively constant. The operating margin for the
Western region of 24% and 26% for the twelve months ended December 31, 2000 and
2001, respectively, also remained relatively constant. The operating margin for
Questar of 23% and 17% for the twelve months ended December 31, 2000 and 2001,
respectively, decreased. The significant decrease in the operating margin was a
direct result of the change in the estimation of contractual allowances for
billed charges and also due to additional costs, such as maintenance agreements
put in place, associated with operating the facilities. These operating margins
as discussed exclude the buyout of operating leases for $13.9 million in the
fourth quarter of 2001 and charges in the fourth quarter of 2000 of $13.3
million for the provision of uncollectible accounts receivable and a $3.7
million charge for the write-off of a note receivable due from one of our
contracted radiology practices.
On August 1, 1999, we acquired all the outstanding stock of Questar, a
private operator of primarily MRI radiology centers. The total 1999
consideration for the transaction was approximately $18.9 million in cash, plus
the assumption of $16.8 million in liabilities. The total consideration for all
other 1999 acquisitions was approximately $6.5 million in cash, 50,264 shares of
our common stock valued at $304,000, plus the assumption of $3.2 million in
liabilities.
34
In March 2000, we completed an acquisition of an imaging center in Osceola,
Florida for total consideration of approximately $2.7 million. During 2000, we
continued to complete the development of imaging centers of Questar for total
consideration of approximately $5.9 million. Total consideration paid for all
other acquisitions and affiliations in 2000 was approximately $1.5 million.
In November 2001, we completed the acquisition of an imaging center in
Laurel, Maryland for total consideration of $906,000.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 2001
SERVICE FEE REVENUE
Revenue of the contracted radiology practices and diagnostic imaging
centers is recorded when services are rendered by the contracted radiology
practices and diagnostic imaging centers based on established charges and
reduced by contractual allowances and estimated bad debts. We use historical
collection experience in estimating contractual allowances and bad debt expense.
The factors influencing the historical collection experience include the
contracted radiology practices' and diagnostic imaging centers' patient mix,
impact of managed care contract pricing and contract revenue and the aging of
patient accounts receivable balances. As these factors change, the historical
collection experience is revised accordingly in the period known. Service fee
revenue represents contracted radiology practices' and diagnostic imaging
centers' revenue less amounts retained by contracted radiology practices. The
amounts retained by contracted radiology practices represents amounts paid to
the physicians pursuant to the service agreements between us and the contracted
radiology practices. Under the service agreements, we provide each contracted
radiology practice with the facilities and equipment used in its medical
practice, assume responsibility for managing the operations of the practice, and
employ substantially all of the non-physician personnel utilized by the
contracted radiology practice. Although we assist in negotiating managed care
contracts for the contracted radiology practices, we assume no risk under these
arrangements.
The following table sets forth the amounts of revenue from the contracted
radiology practices and diagnostic imaging centers and the amounts retained by
contracted radiology practices (in thousands):
<Table>
<Caption>
1999 2000 2001
-------- -------- --------
Revenue from contracted radiology practices and
diagnostic imaging centers, net of contractual
allowances......................................... $286,824 $344,887 $383,527
Less: amounts retained by contracted radiology
practices.......................................... (87,124) (98,200) (106,877)
-------- -------- --------
Service fee revenue, as reported..................... $199,700 $246,687 $276,650
======== ======== ========
</Table>
Revenue from contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, increased $38.6 million, from $344.9 million in
2000 to $383.5 million in 2001. This increase was primarily due to increased
procedure volume, a shift in the mix to "high-end" procedures and the addition
of new reading contracts and agreements with managed care organizations. The
increase in volume growth was primarily attributable to a 14.8% increase in
magnetic resonance imaging ("MRI") procedures and a 13.6% increase in computed
tomography ("CT") procedures provided in imaging centers. Revenue from
contracted radiology practices and diagnostic imaging centers, net of
contractual allowances in 2001, was impacted by a change in the estimation of
contractual allowances of the billed charges. Generally, the change in the
estimation of contractual allowances increased the contractual allowance which
decreased the revenue of the contracted radiology practices and diagnostic
imaging centers and therefore the service fee recognized. Amounts retained by
contracted radiology practices increased from $98.2 million in 2000 to $106.9
million in 2001. This increase is directly attributable to the growth in revenue
from contracted radiology practices and diagnostic imaging centers and the
higher profitability of the contracted radiology practices and diagnostic
imaging centers. The increase in revenue from contracted radiology practices and
diagnostic imaging centers, net of contractual allowances offset by the increase
in amounts retained by contracted radiology practices, resulted in service fee
revenue increasing $30 million, from $246.7 million in 2000 to $276.7 million,
in 2001.
35
COSTS AND EXPENSES
The comparison between periods for costs and expenses discussed below as a
percentage of service fee revenue is impacted in 2001 by the change in the
estimation of contractual allowances of the billed charges. The change in the
estimation of contractual allowances increased the contractual allowance, which
decreased the revenue of the contracted radiology practices and diagnostic
imaging centers and service fee recognized. As a result of this change, costs
and expenses as a percentage of service fee revenue will be at a higher stated
value in 2001 when compared to 2000.
SALARIES AND BENEFITS
Salaries and benefits increased $9.1 million, from $66.6 million in 2000 to
$75.7 million in 2001. As a percentage of service fee revenue, these costs were
27.0% and 27.4% in 2000 and 2001, respectively.
FIELD SUPPLIES
Field supplies increased $3.2 million, from $13.3 million in 2000 to $16.5
million in 2001. As a percentage of service fee revenue, these costs were 5.4%
and 6.0% in 2000 and 2001, respectively. The increase in supplies is primarily
attributable to an increase in volume of speciality procedures. These procedures
require supplies at higher unit cost than typically required for other types of
procedures.
FIELD RENT AND LEASE EXPENSE
Field rent and lease expense increased $4.2 million, from $30.2 million in
2000 to $34.4 million in 2001. As a percentage of service fee revenue, these
costs were 12.2% and 12.4% in 2000 and 2001, respectively. The increase in these
costs is primarily attributable to additional equipment operating leases entered
into subsequent to fiscal 2000.
OTHER FIELD EXPENSES
Other field expenses increased $1.5 million, from $45.9 million in 2000 to
$47.4 million in 2001. As a percentage of service fee revenue, these costs were
18.6% and 17.1% in 2000 and 2001, respectively. During the fourth quarter of
2000, $3.7 million was recognized for the write-off of a note receivable. The
note receivable was due from one of the contracted radiology practices and was
determined in the fourth quarter to no longer be collectible. As a result of the
write-off, we have adjusted this contracted radiology group's incentive
technical bonus potential.
BAD DEBT EXPENSE
Bad debt expense decreased $8.7 million, from $34.4 million in 2000 to
$25.7 million in 2001. As a percentage of service fee revenue, these costs were
13.9% and 9.3% in 2000 and 2001, respectively. Since service fee revenue
represents contracted radiology practices' and diagnostic imaging centers'
revenue less amounts retained by contracted radiology practices, these
percentages are inherently at a higher stated value. Therefore, bad debt expense
should be compared for 2000 and 2001 as a percentage of revenue of the
contracted radiology practices and diagnostic imaging centers, net of
contractual allowances, rather than as a percentage of service fee revenue. As a
percentage of revenue of the contracted radiology practices and diagnostic
imaging centers, bad debt expense was 10.0% and 6.7% in 2000 and 2001,
respectively. This decrease was primarily due to a $13.3 million charge recorded
in the fourth quarter of 2000 for the provision of uncollectible accounts.
During the fourth quarter of 2000, we performed an extensive review of our
accounts receivable and collection experience utilizing reports and analyses not
previously available. Based on this review, we believed that the estimation
process of determining contractual allowances for billed charges needed to be
revised and that a portion of our accounts receivable was no longer collectible.
This review allowed us to better analyze old accounts receivable, however it did
not indicate what our historical collection rates would have been if the newly
implemented collection policies and procedures had been in place. Accordingly,
the adjustment for an increase in the provision for uncollectible accounts was
recognized as a bad debt expense as opposed to an increase in contractual
36
allowances. We recognized the $13.3 million charge in the fourth quarter as a
change in accounting estimate when the information became known.
MERGER RELATED COSTS
During the third quarter of 2001, we recorded $1 million in merger related
costs. The charge was our share of transaction costs incurred by Saunders Karp &
Megrue, L.P. and its affiliates in connection with the proposed merger between
Radiologix and SKM-RD Acquisition Corp. The proposed merger was terminated in
April 2001. In the fourth quarter of 2000, we also incurred a $1.8 million
charge for the write-off of transaction costs incurred in connection with the
proposed merger with SKM.
SUPPLEMENTAL INCENTIVE COMPENSATION
In the fourth quarter of 2001, upon the successful completion of the Old
Notes offering, we incurred $615,000 in supplemental incentive compensation.
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate general and administrative expenses increased $3.3 million, from
$10.6 million in 2000 to $13.9 million in 2001. As a percentage of service fee
revenue, these costs were 4.3% and 5.0% in 2000 and 2001, respectively. The
increase in these costs is primarily due to the further development of our
infrastructure at the corporate office, including additional employees and
associated employee benefits and incentive compensation.
NON-OPERATING INCOME
Non-operating income of $1.3 million was recognized in the fourth quarter
of 2001 as partial consideration for early termination of management services
provided at certain imaging sites not owned or operated by the Company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.4 million, from $22.1
million in 2000 to $23.5 million in 2001. We have continued to buy new equipment
to replace older equipment resulting in increased depreciation expense. As a
percentage of service fee revenue, these costs were 9.0% and 8.5% in 2000 and
2001, respectively.
INTEREST EXPENSE, NET
Interest expense, net, decreased $2.5 million, from $18 million in 2000 to
$15.5 million in 2001. The decrease in interest expense in 2001 from 2000 was
due to lower interest rates and the pay-down of outstanding debt during 2001.
INCOME TAX EXPENSE
Income tax expense of $2.9 million in 2000 and $11.1 million in 2001
remained constant at a 40% effective tax rate.
EXTRAORDINARY LOSS
In the fourth quarter of 2001, we incurred a charge of $4.7 million ($2.8
million, after tax) as an extraordinary loss for the early extinguishment of
debt in relation to terminating our senior credit facility with the proceeds
from our Old Notes issuance in December 2001.
37
NET INCOME
Net income increased from $4.3 million in 2000 to $13.8 million in 2001.
Net income as a percentage of service fee revenue was 5% in 2001, which
increased from 1.8% in 2000. Included in net income for 2001 are $780,000 of
after tax non-operating income offset by $600,000 after tax expense related to
merger costs and $369,000 after tax expense for supplemental incentive
compensation related to our Old Notes offering. In addition, net income for 2001
included an extraordinary loss of $2.8 million after tax. Included in net income
for 2000 is an $8 million after tax charge for the provision of uncollectible
accounts, $2.2 million after tax write-off of a note receivable and $1.1 million
after tax expense related to merger costs.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000
SERVICE FEE REVENUE
Revenue from contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, increased $58.1 million from $286.8 million in
1999 to $344.9 million in 2000. Service fee revenue increased $47 million, to
$246.7 million in 2000 from $199.7 million in 1999. Of the increase from 1999 to
2000, $17.6 million resulted from a 9.3% increase in revenues from same store
facilities. Same store facilities are facilities that were owned and operated by
us during the twelve months ended December 31, 1999 and 2000. This increase was
primarily due to increased procedure volume, a shift in the mix to "high-end"
procedures and the addition of new reading contracts and agreements with managed
care organizations. Of the remaining increase from 1999 to 2000, $24.2 million
resulted from facilities acquired and developed in 1999 and 2000, and $5.2
million resulted from "tuck-in" acquisitions of imaging centers during the
period.
SALARIES AND BENEFITS
Salaries and benefits increased $13.8 million, from $52.8 million in 1999
to $66.6 million in 2000. Of the increase from 1999 to 2000, $7.8 million
resulted from a same store facilities increase of 15.4%. An increase of $4.8
million resulted from facilities acquired and developed in 1999 and 2000, and
the remaining $1.2 million increase resulted from "tuck-in" acquisitions of
imaging centers during 2000. As a percentage of service fee revenue, these costs
were 26.5% and 27.0% in 1999 and 2000, respectively.
FIELD SUPPLIES
Field supplies increased $1.7 million, from $11.6 million in 1999 to $13.3
million in 2000. Of the increase from 1999 to 2000, $451,000 resulted from a
same store facilities increase of 4.1%. An increase of $780,000 resulted from
facilities acquired and developed in 2000, and the remaining $404,000 resulted
from "tuck-in" acquisitions of imaging centers during the period. As a
percentage of service fee revenue, these costs were 5.8% and 5.4% in 1999 and
2000, respectively.
FIELD RENT AND LEASE EXPENSE
Field rent and lease expense increased $11.8 million, from $18.4 million in
1999 to $30.2 million in 2000. Of the increase from 1999 to 2000, $4.9 million
resulted from a same store facilities increase of 30.1%. The increase is
primarily the result of the additional equipment leases entered into during the
year and at December 1999. An increase of $5.6 million resulted from facilities
acquired and developed in 2000, and the remaining $1.3 million resulted from
"tuck-in" acquisitions of imaging centers in 1999 and 2000. As a percentage of
service fee revenue, these costs were 9.2% and 12.2% in 1999 and 2000,
respectively.
OTHER FIELD EXPENSES
Other field expenses increased $13.6 million, from $32.3 million in 1999 to
$45.9 million in 2000. Of the increase from 1999 to 2000, $8.6 million resulted
from existing facilities representing a 28.7% same
38
store increase. An increase of $4.1 million resulted from facilities acquired
and developed in 1999 and 2000, and $898,000 resulted from "tuck-in"
acquisitions of imaging centers in 1999 and 2000. As a percentage of service fee
revenue, these costs were 18.6% and 16.2% in 2000 and 1999, respectively. Other
field expenses include a $3.7 million write-off of a note receivable during the
fourth quarter of 2000. The note receivable was due from one of the contracted
radiology practices and was determined to no longer be collectible. As a result
of the write-off, we have adjusted this contracted radiology group's incentive
technical bonus potential. In addition, other field expenses include repairs and
maintenance, service contracts, utilities and communication costs.
BAD DEBT EXPENSE
Bad debt expense increased $15.6 million, from $18.8 million in 1999 to
$34.4 million in 2000. As a percentage of service fee revenue, these costs were
13.9% and 9.4% in 2000 and 1999, respectively. Since service fee revenue
represents contracted radiology practices' and diagnostic imaging centers'
revenue less amounts retained by contracted radiology practices, these
percentages are inherently at a higher stated value. Therefore, bad debt expense
should be compared for 2000 and 2001 as a percentage of the revenue of the
contracted radiology practice rather than as a percentage of service fee
revenue. As a percentage of revenue of the contracted radiology practice and
diagnostic imaging centers, bad debt expense was 6.6% and 10.0% in 1999 and
2000, respectively. This increase was primarily due to a $13.3 million charge
recorded in the fourth quarter of 2000 for the provision of uncollectible
accounts. During the fourth quarter of 2000, we performed an extensive review of
our accounts receivable and collection experience utilizing reports and analyses
not previously available. Based on this review, we believed that the estimation
process of determining contractual allowances for billed charges needed to be
revised and that a portion of our accounts receivable was no longer collectible.
The review allowed us to better analyze old accounts receivable, however it did
not indicate what our historical collection rates would have been if newly
implemented collection policies and procedures had been in place. Accordingly,
the adjustment for an increase in the provision for uncollectible accounts was
recognized as a bad debt expense as opposed to an increase in contractual
allowances. We recognized the $13.3 million charge in the fourth quarter as a
change in accounting estimate when the information became known.
MERGER RELATED COSTS
During the fourth quarter of 2000, we incurred a $1.8 million charge for
the write-off of transaction costs incurred in connection with the proposed
merger with SKM.
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate general and administrative expenses decreased $600,000, from
$11.2 million in 1999 to $10.6 million in 2000. As a percentage of service fee
revenue, these costs were 5.6% and 4.3% in 1999 and 2000, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $3.7 million, from $18.4
million in 1999 to $22.1 million in 2000. This increase was principally due to
amortization of intangible assets resulting from our acquisition of additional
facilities and practices. In addition, we have continued to buy new equipment to
replace older equipment, and this upgrade of equipment resulted in increased
depreciation expense. As a percentage of service fee revenue, these costs were
9.2% and 9.0% in 1999 and 2000, respectively.
INTEREST EXPENSE, NET
Interest expense, net, increased $5.7 million, from $12.3 million in 1999
to $18 million in 2000. As a percentage of service fee revenue, these costs were
6.2% and 7.3% in 1999 and 2000, respectively. The percentage increase is a
result of our acquisitions throughout 1999, an increase in days sales
outstanding in accounts receivable and the issuance of $20 million of
convertible notes in August 1999 (see Note 5 to
39
consolidated financial statements incorporated by reference herein) to fund the
Questar transaction, all of which resulted in us carrying higher debt levels.
INCOME TAX EXPENSE
Our effective tax rate for 2000 increased to 40.0% from 39.2% in 1999. The
increase is primarily due to the non-deductible amortization of goodwill and a
shift in state income taxes based on our recent expansions.
NET INCOME
Net income decreased from $16.1 million in 1999 to $4.3 million in 2000.
Net income as a percentage of revenue was 1.8% in 2000 compared to 8% in 1999.
Included in net income for 2000, is a $8 million after tax charge for the
provision of uncollectible accounts, $2.2 million after tax write-off of a note
receivable and $1.1 million after tax expense related to merger costs.
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for each
of our last eight fiscal quarters. We believe that all necessary adjustments
have been included in the amounts stated below to present fairly the quarterly
results when read in conjunction with the consolidated financial statements.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.
<Table>
<Caption>
2000 QUARTER Ended 2001 QUARTER ENDED
----------------------------------------- --------------------------------------------
MAR. JUNE SEPT. DEC. MAR. JUNE SEPT. DEC.
31 30 30 31(a) 31 30 30(b) 31(c)
------- ------- -------- ---------- ------- ------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Service fee revenue............... $59,251 $61,783 $62,487 $ 63,166 $65,911 $68,236 $69,175 $73,328
Income (loss) before income taxes
and extraordinary loss.......... 6,784 7,308 7,064 (13,923) 5,830 6,586 6,305 9,060
Extraordinary loss................ -- -- -- -- -- -- -- (2,838)
Net income (loss)................. $4,070 $4,385 $ 4,246 $ (8,368) $3,498 $3,952 $ 3,782 $ 2,599
Income (loss) per share before
extraordinary loss
Basic........................... $ 0.21 $ 0.22 $ 0.22 $ (0.43) $ 0.18 $ 0.20 $ 0.19 $ 0.28
Diluted......................... $ 0.20 $ 0.21 $ 0.20 $ (0.43) $ 0.17 $ 0.19 $ 0.18 $ 0.24
Net Income (Loss) Per Share:
Basic........................... $ 0.21 $ 0.22 $ 0.22 $ (0.43) $ 0.18 $ 0.20 $ 0.19 $ 0.13
Diluted......................... $ 0.20 $ 0.21 $ 0.20 $ (0.43) $ 0.17 $ 0.19 $ 0.18 $ 0.12
Weighted Average Shares
outstanding:
Basic........................... 19,463 19,502 19,506 19,507 19,507 19,507 19,578 19,643
Diluted......................... 22,084 22,067 22,143 19,507 22,171 22,047 22,817 23,584
</Table>
- ---------------
(a) Net loss for the quarter ended December 31, 2000 includes a $13.3 million
charge for the provision of uncollectible accounts, $3.7 million charge for
the write-off of a note receivable and a $1.8 million charge for
transaction related costs. See Note 2 to consolidated financial statements
incorporated by reference herein.
(b) Net income for the quarter ended September 30, 2001 includes $1 million in
merger related costs. See Note 11 to consolidated financial statements
incorporated by reference herein.
(c) Net income for the quarter ended December 31, 2001 includes $615,000 in
supplemental incentive compensation in connection with our senior notes
offering and $1.3 million of non-operating income as partial consideration
for early termination of management services provided at certain imaging
sites not owned or operated by us. In addition, net income for the quarter
ended December 31, 2001
40
includes a $4.7 million ($2.8 million net of tax) extraordinary charge for
the early extinguishment of debt. See Notes 5 and 11 to consolidated
financial statements incorporated by reference herein.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for the year ended December 31, 2001 was derived principally from
net cash proceeds from operating activities, as well as borrowings under our
credit facility and Old Notes. As of December 31, 2001, we had net working
capital of $55.2 million, including cash and cash equivalents of $10.8 million.
We had current liabilities of $40.4 million, including current maturities of
$5.5 million. For the year ended December 31, 2001, we generated $41 million in
net operating cash flow, invested $19.1 million and used cash of $14.8 million
in financing activities.
Net cash from operating activities for the year ended December 31, 2001
increased $27.7 million, from $13.3 million in 2000 to $41 million in 2001. The
increase in cash from operating activities is primarily due to improved
collections of accounts receivable which resulted in a decrease in accounts
receivable days outstanding from 76 days at December 31, 2000 to 69 days at
December 31, 2001, as well as the implementation of certain cash management
strategies. In addition, cash paid for income taxes was only $7.5 million in
2001 compared to $11.5 million in 2000. For the year ended December 31, 1999,
net cash used in operating activities was $1.5 million. For the year ended
December 31, 1999, cash used of $14.7 million for other receivables and other
assets included a $4.2 million income tax receivable, a $3.8 million note due
from an affiliated joint venture and a $4 million note receivable due from a
contracted radiology practice.
Net cash used in investing activities for the years ended December 31,
1999, 2000, and 2001 was $45 million, $23.1 million, and $19.1 million,
respectively. Purchases of property and equipment during the years ended
December 31, 1999, 2000 and 2001 were $31.5 million, $14 million, and $7.2
million, respectively. In addition, for the year ended December 2001, $13.9
million was used to buy out certain operating leases of equipment. Proceeds from
the sale of equipment during the year ended December 31, 1999 were $10 million.
For the years ended December 31, 1999, 2000 and 2001, we paid $25.4 million,
$10.1 million, and $906,000, respectively, for acquisitions and affiliations. In
August 1999, we acquired all the outstanding stock of Questar, a private
operator of primarily MRI radiology centers. The total consideration for the
transaction was $18.9 million in cash, plus the assumption of $16.8 million in
liabilities. The total consideration for all other 1999 acquisitions and
affiliations was approximately $6.5 million in cash, 50,264 shares of our common
stock valued at approximately $304,000, plus the assumption of $3.2 million in
liabilities. In March 2000, we completed an acquisition of an imaging center in
Osceola, Florida for total consideration of approximately $2.7 million. During
2000, we continued to complete the development of imaging centers of Questar for
total consideration of approximately $5.9 million. Total consideration paid for
all other acquisitions and affiliations were approximately $1.5 million. In
November 2001, we completed the acquisition of an imaging center in Laurel,
Maryland for total consideration of $906,000.
Net cash flows from financing activities for the years ended December 31,
1999 and 2000 were $44.2 million and $9.1 million, respectively. Net cash used
in financing activities for the year ended December 31, 2001 was $14.8 million.
Borrowings of long-term debt for the years ended December 31, 1999, 2000 and
2001 were used to enter into contractual arrangements with radiology practices
and the acquisition of Questar, for purchases of equipment and capital
improvements, as well as for working capital needs. At December 31, 2001, we had
outstanding borrowings of $160 million under our Old Notes, $24.2 million
outstanding under our convertible debt obligations and an additional $13 million
in other debt obligations.
On March 30, 2001, we amended our $160 million senior credit facility with
our existing banks. Under the terms of the amended senior credit facility,
borrowings consisted of a $100 million term loan and a $60 million revolving
credit facility, including a $5 million swing line facility. Under the
amendment, we made $4 million of scheduled principal installments on June 29,
2001 and September 28, 2001. Scheduled principal installments for the fiscal
year ended 2001 had been reduced from $48 million under
41
the prior agreement to $12 million under the new amendment. Each of the
facilities would terminate on November 26, 2003. The interest rate was (i) an
adjusted LIBOR rate, plus an applicable margin which could vary from 3.0% to
4.0% dependent on certain financial ratios or (ii) the prime rate, plus an
applicable margin which could vary from 2.0% to 3.0%. In each case, the
applicable margin varied based on financial ratios maintained by us. The senior
credit facility included certain restrictive covenants including prohibitions on
the payment of dividends, limitations on capital expenditures and the
maintenance of certain financial ratios (including minimum fixed charge coverage
ratio and maximum leverage ratio, as defined). Borrowings under the senior
credit facility were secured by all service agreements to which we were a party,
a pledge of the stock of our subsidiaries and all of our assets.
In December 2001, we terminated our senior credit facility with proceeds
from the issuance, of the Old Notes. In connection with the redemption, we
recorded an extraordinary loss from the early extinguishment of our senior
credit facility debt in the amount of $4.7 million, $2.8 million after tax. The
Old Notes bear interest at an annual rate of 10 1/2% payable semiannually in
arrears on June 15 and December 15 of each year, commencing June 15, 2002. The
Old Notes are redeemable on or after December 15, 2005 at various redemption
prices, plus accrued and unpaid interest to the date of redemption. The Old
Notes are unsecured obligations which rank senior in right of payment to all of
our subordinated indebtedness and equal in right of payment with all other
senior indebtedness. The Old Notes are unconditionally guaranteed on a senior
unsecured basis by certain restricted existing and future subsidiaries.
In addition to the Old Notes issuance in December 2001, we entered into a
credit facility whereby we can borrow up to $35 million. At December 31, 2001,
no borrowings were outstanding under the credit facility. Under the credit
facility the interest rate is (i) an adjusted LIBOR rate, plus an applicable
margin, which can vary from 3.0% to 3.5%, or (ii) the prime rate, plus an
applicable margin, which can vary from 1.75% to 2.25%. In each case, the
applicable margin varies based on financial ratios maintained by us. The credit
facility includes certain restrictive covenants, including prohibitions on the
payment of dividends, limitations or capital expenditures and the maintenance of
certain financial ratios (including minimum fixed charge to coverage ratio and
maximum leverage ratio, as defined). Borrowings under the credit facility are
secured by all service agreements to which we are a party, a pledge of the stock
of our subsidiaries and all of our assets.
The contractual obligations of long-term debt, including capital lease
obligations and noncancellable operating leases are as follows (in millions):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-----------------------------------
LESS THAN 1-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
------ --------- ----- ----- -------
Long term debt.............................. $184.2 $ -- $ -- $ -- $184.2
Capital lease obligations................... 13.0 5.5 7.5 -- --
Operating leases............................ 59.4 18.1 37.5 3.8 --
------ ----- ----- ---- ------
Total contractual cash
obligations..................... $256.6 $23.6 $45.0 $3.8 $184.2
====== ===== ===== ==== ======
</Table>
On December 30, 1999, we entered into a sale-leaseback transaction in which
radiology equipment with a net book value of approximately $10 million was sold
for $10 million and leased back for five years. The operating lease bears
interest at 9.96%, and equal monthly payments began in July 2000. In December
2001, we repurchased some of this equipment and other equipment previously held
under operating leases for approximately $13.9 million. Future minimum lease
payments under these operating leases would have been $3.6 million for years
2002 through 2004 and $2.3 million for 2005.
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expense of new diagnostic imaging centers and the
acquisition of additional centers and new diagnostic imaging equipment. To the
extent we are unable to generate sufficient cash from our operations, funds are
not available under our senior credit facility or we are unable to structure or
obtain operating leases, we may be unable to meet our capital
42
expenditure requirements. Furthermore, we may not be able to raise any necessary
additional funds through bank financing or the issuance of equity or debt
securities on terms acceptable to us, if at all.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the use of judgments and
estimates. Our critical accounting policies are described below to provide a
better understanding of how we develop our judgments about future events and
related estimations and how they can impact our financial statements. A critical
accounting policy is one that requires our most difficult, subjective or complex
estimates and assessments and is fundamental to our results of operations. We
identified our most critical accounting policies to be:
- estimation of contractual allowances and bad debts of accounts
receivable; and
- evaluation of intangible and long-lived asset for impairment.
CONTRACTUAL ALLOWANCES AND BAD DEBT
Revenue of the contracted radiology practices and diagnostic imaging
centers is recorded when services are rendered by the contracted radiology
practice and diagnostic imaging center based on established charges and reduced
by estimated contractual allowances. Service fee revenue is recorded net of
estimated contractual allowances and amounts retained by the contracted
radiology practices under the terms of the service agreements. We estimate
contractual allowances based on the patient mix at each contracted radiology
practice and diagnostic imaging center, impact of managed care contract pricing,
and historical collection information. We operate 120 imaging centers in 18
different states, each of which has multiple managed care contracts and a
differing patient mix. We review monthly the estimated contractual allowance
rates for each contracted radiology practice and diagnostic imaging center. The
contractual allowance rate is adjusted as changes to the factors discussed above
become known. We record bad debt expense based on historical collection rates
and our evaluation of each contracted radiology practice and diagnostic imaging
center.
IMPAIRMENT OF INTANGIBLE AND LONG-LIVED ASSETS
Subsequent to an acquisition, we continually evaluate whether events and
circumstances have occurred that indicate the remaining balance of the
intangible assets and property and equipment may not be recoverable or that the
remaining useful lives may warrant revision. We evaluate the potential
impairment of intangibles separately from property and equipment. When factors
indicate that intangible assets or property and equipment should be evaluated
for possible impairment, we determine whether the intangible assets or property
and equipment are recoverable or if impairment exists, in which case an
adjustment is made to the carrying value of the related asset. In making this
determination, we use an estimate of the related contracted radiology practices'
and diagnostic imaging services' undiscounted cash flows over the remaining
lives of the intangible assets or the property and equipment and compare it to
the contracted radiology practices' and diagnostic imaging centers' intangible
assets or property and equipment balances. When an adjustment is required, we
evaluate the remaining amortization periods. An impairment loss recognized would
be measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. We recorded no impairment charges during 1999, 2000 or
2001.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), became effective for us on January 1, 2002.
SFAS No. 142 requires that goodwill and other intangible assets with an
indefinite useful life no longer be amortized as expenses of operations, but
rather carried on the balance sheet as permanent assets. These intangible assets
are to be subject to at least annual assessments for impairment by applying a
fair-value-based test. Amortization of goodwill and other indefinite-lived
intangible assets amounted to $1.2 million ($749,900 on an after tax basis) for
the year ended December 31, 2001. These expense amounts, under SFAS 142, will
not be recorded in years after fiscal 2001. We are developing plans to determine
fair values of our operations in which goodwill and other indefinite-lived
intangibles have been recorded and will assess whether an impairment charge is
43
warranted as of January 1, 2002, or at any other assessment dates. Our service
agreements, included in the consolidated balance sheets as intangible assets,
net, are not considered to have an indefinite useful life and will continue to
be amortized over a useful life of 25 years.
This discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes incorporated by reference
herein.
44
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Throughout this prospectus we make "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements include words such as "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about our acquisition and
development plans. We do not guarantee that the transactions and events
described in this prospectus will happen as described or that any positive
trends noted in this prospectus will continue. The forward-looking statements
contained in this prospectus are generally located in the material set forth
under the headings "Risk Factors," "Capitalization," "Management's Discussion
and Analysis of Operations and Financial Condition," "The Diagnostic Imaging
Services Industry" and "Business," but may be found in other locations as well.
These forward-looking statements generally relate to our plans, objectives and
expectations for future operations and are based upon management's reasonable
estimates of future results or trends. Although we believe that our plans and
objectives reflected in or suggested by such forward-looking statements are
reasonable, we may not achieve such plans or objectives. You should read this
prospectus completely and with the understanding that actual future results may
be materially different from what we expect. We will not update forward-looking
statements even though our situation may change in the future.
SPECIFIC FACTORS THAT MIGHT CAUSE ACTUAL RESULTS TO DIFFER FROM OUR
EXPECTATIONS, MAY AFFECT OUR ABILITY TO PAY TIMELY AMOUNTS DUE UNDER THE NOTES
OR MAY AFFECT THE VALUE OF THE NOTES, INCLUDE, BUT ARE NOT LIMITED TO:
- economic, competitive, demographic, business and other conditions in our
markets;
- a decline in patient referrals;
- changes in the rates or methods of third-party reimbursement for
diagnostic imaging services;
- the termination of our contracts with radiology practices;
- the availability of additional capital to fund capital expenditure
requirements;
- burdensome lawsuits against our contracted radiology practices and us;
- reduced operating margins due to our managed care contracts and capitated
fee arrangements;
- any failure by us to comply with state and federal anti-kickback and
anti-self referral laws or any other applicable healthcare regulations;
- our substantial indebtedness, debt service requirements and liquidity
constraints;
- risks related to the notes and healthcare securities generally; and
- other factors discussed elsewhere in this prospectus.
All future written and verbal forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this prospectus might not occur.
DESCRIPTION OF NEW NOTES
The Old Notes are, and the New Notes will be, governed by an indenture,
dated December 12, 2001, by and among Radiologix, Inc., the Guarantors and U.S.
Bank National Association, as trustee.
The following summaries of certain provisions of the indenture are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the indenture and the
registration rights agreement.
45
You can find the definitions of certain capitalized terms in this section
under the subheading "-- Certain Definitions." For purposes of this section,
references to "Company" or "we," "our," or "us" include only Radiologix, Inc.
and its successors in accordance with the terms of the indenture and, except
pursuant to the terms of the guarantees, not its Subsidiaries.
The terms of the New Notes include those stated in the indenture and those
made part of the indenture by reference to the Trust Indenture Act of 1939, as
amended. The New Notes are subject to all such terms, and holders of New Notes
are referred to the indenture and the Trust Indenture Act of 1939 for a
statement thereof. A copy of the form of indenture is available from the trustee
upon request.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
a holder of the New Notes.
BRIEF DESCRIPTION OF THE NEW NOTES AND THE GUARANTEES
THE NEW NOTES
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that the transfer restrictions and registration
rights provisions of the Old Notes do not apply to the New Notes. The New Notes
are:
- our unsecured general obligations;
- ranked senior in right of payment to all of our existing and future
Subordinated Indebtedness; and
- unconditionally guaranteed by the Guarantors.
The New Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. The New
Notes will constitute "Designated Senior Indebtedness" under the terms of the
Convertible Note.
The term "Subsidiaries" as used in this Description of New Notes does not
include Unrestricted Subsidiaries. Under certain circumstances, we will be able
to designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to the restrictive covenants set
forth in the indenture.
THE GUARANTEES
The New Notes will be jointly and severally irrevocably and unconditionally
guaranteed on a senior basis by each of our present and future Subsidiaries (the
"Guarantors"). Some of our Subsidiaries were designated as Unrestricted
Subsidiaries as of December 12, 2001 and will not be Guarantors. For the year
ended December 31, 2001, our Subsidiaries that are not Guarantors generated 7.4%
of our total service fee revenue and 8.5% of our EBITDA. The obligations of each
Guarantor under its guarantee, however, will be limited in a manner intended to
avoid it being deemed a fraudulent conveyance under applicable law. See "Certain
Bankruptcy Limitations" and "Certain Covenants -- Subsidiary Guarantors" and
"-- Release of Guarantors" below.
PRINCIPAL, MATURITY AND INTEREST; ADDITIONAL NOTES
The New Notes will be initially limited to a maximum aggregate principal
amount of $160.0 million. The indenture provides, in addition to the $160.0
million maximum aggregate principal amount of New Notes, for the issuance of
Additional Notes having identical terms and conditions to the New Notes offered
hereby (the "Additional Notes"), subject to compliance with the terms of the
indenture, including the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Interest will accrue on the
Additional Notes issued pursuant to the indenture from and including the date of
issuance of such Additional Notes. Any such Additional Notes would be issued on
the same terms as the New Notes and would constitute part of the same series of
securities as the New Notes and would
46
vote together as one series on all matters with respect to the Old Notes and the
New Notes. All references to New Notes herein includes the Additional Notes,
except as stated otherwise.
The New Notes will mature on December 15, 2008. The New Notes will bear
interest at the rate of 10.5% per annum from the most recent date to which
interest has been paid on the Old Notes (the "Interest Payment Date") or, if no
interest has been paid, from the Issue Date, payable semi-annually in arrears on
June 15 and December 15 of each year, commencing June 15, 2002 to the Persons in
whose names such New Notes are registered at the close of business on the June 1
or December 1 immediately preceding such Interest Payment Date. Interest will be
calculated on the basis of a 360-day year consisting of 12 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NEW NOTES
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes may be presented for registration of transfer or
exchange, at our office or agency maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York.
Except as set forth below, at our option, payment of interest may be made by
check mailed to the holders of the New Notes at the addresses set forth upon our
registry books. (See "Book-Entry, Delivery and Form -- Same Day Settlement and
Payment"). No service charge will be made for any registration of transfer or
exchange of New Notes, but we may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. Until
otherwise designated by us, our office or agency will be the corporate trust
office of the trustee presently located at the office of the trustee in the
Borough of Manhattan, The City of New York.
CERTAIN BANKRUPTCY LIMITATIONS
We are a holding company, conducting all of our business through our
Subsidiaries, which will guarantee our obligations under the New Notes, and our
Unrestricted Subsidiaries, which will not guarantee our obligations under the
New Notes. Accordingly, our ability to meet our cash obligations is dependent
upon the ability of our subsidiaries to make cash distributions to us.
Furthermore, any right we have to receive the assets of any such subsidiary upon
such subsidiary's liquidation or reorganization (and the consequent right of the
holders of the New Notes to participate in the distribution of the proceeds of
those assets) effectively will be subordinated by operation of law to the claims
of such subsidiary's creditors (including trade creditors) and holders of its
preferred stock, except to the extent that we are recognized as a creditor or
preferred stockholder of such subsidiary in which case our claims would still be
subordinate to any indebtedness or preferred stock of such subsidiary senior in
right of payment to that held by us.
Holders of the New Notes will be direct creditors of each Guarantor by
virtue of its guarantee. Nonetheless, in the event of the bankruptcy or
financial difficulty of a Guarantor, such Guarantor's obligations under its
guarantee may be subject to review and avoidance under state and federal
fraudulent transfer laws. Among other things, such obligations may be avoided if
a court concludes that such obligations were incurred for less than reasonably
equivalent value or fair consideration at a time when the Guarantor was
insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude that a Guarantor did not
receive reasonably equivalent value or fair consideration to the extent that the
aggregate amount of its liability on its guarantee exceeds the economic benefits
it receives in connection with the issuance of the New Notes. The obligations of
each Guarantor under its guarantee will be limited in a manner intended to cause
it not to be a fraudulent conveyance under applicable law, although no assurance
can be given that a court would give the holder the benefit of such provision.
If the obligations of a Guarantor under its guarantee were avoided, holders
of New Notes would have to look to the assets of any remaining Guarantors for
payment. There can be no assurance in that event that such assets would suffice
to pay the outstanding principal and interest on the New Notes.
47
OPTIONAL REDEMPTION
We will not have the right to redeem any New Notes prior to December 15,
2005, other than out of the Net Cash Proceeds of any Public Equity Offering of
our common stock, as described below.
At any time on or after December 15, 2005 we may redeem the New Notes for
cash at our option, in whole or in part, upon not less than 30 days nor more
than 60 days notice to each holder of New Notes, at the following redemption
prices (expressed as percentages of the principal amount) if redeemed during the
12-month period commencing December 15 of the years indicated below, in each
case together with accrued and unpaid interest thereon to the date of redemption
of the New Notes:
<Table>
<Caption>
TABLE PERCENTAGE
- ----- ----------
2005........................................................ 105.250%
2006........................................................ 102.625%
2007 and thereafter......................................... 100.000%
</Table>
At any time or from time to time on or prior to December 15, 2004, upon any
Public Equity Offering of our common stock for cash, up to 35% of the aggregate
principal amount of the Old Notes and the New Notes issued pursuant to the
indenture may be redeemed at our option within 90 days of such Public Equity
Offering, on not less than 30 days, but not more than 60 days, notice to each
holder of the Old Notes or the New Notes to be redeemed, with cash received by
us from the Net Cash Proceeds of such Public Equity Offering, at a redemption
price equal to 110.500% of principal, together with accrued and unpaid interest
thereon to the redemption date; provided, however, that immediately following
such redemption not less than 65% of the aggregate principal amount of the Old
Notes and the New Notes originally issued pursuant to the indenture remain
outstanding.
If the redemption date hereunder is on or after an interest payment record
date ("Record Date") on which the holders of record have a right to receive the
corresponding interest due, and on or before the associated Interest Payment
Date, any accrued and unpaid interest, due on such Interest Payment Date will be
paid to the Person in whose name a New Note is registered at the close of
business on such Record Date.
MANDATORY REDEMPTION
The New Notes will not have the benefit of any sinking fund and we will not
be required to make any mandatory redemption payments with respect to the New
Notes.
SELECTION AND NOTICE
In the case of a partial redemption, the trustee shall select the New Notes
or portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The New Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
holder of each New Note to be redeemed to such holder's last address as then
shown upon the registry books of our registrar. Any notice which relates to a
New Note to be redeemed in part only must state the portion of the principal
amount equal to the unredeemed portion thereof and must state that on and after
the date of redemption, upon surrender of such New Note, another New Note or New
Notes in a principal amount equal to the unredeemed portion thereof will be
issued. On and after the date of redemption, interest will cease to accrue on
the New Notes or portions thereof called for redemption, unless we default in
the payment thereof.
48
REPURCHASE AT THE OPTION OF HOLDERS
REPURCHASE OF NEW NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The indenture provides that in the event that a Change of Control has
occurred, each holder of New Notes will have the right, at such holder's option,
pursuant to an offer (subject only to conditions required by applicable law, if
any) by us (the "Change of Control Offer"), to require us to repurchase all or
any part of such holder's New Notes (provided, that the principal amount of such
New Notes must be $1,000 or an integral multiple thereof) on a date (the "Change
of Control Purchase Date") that is no later than 60 days after the occurrence of
such Change of Control, at a cash price equal to 101% of the principal amount
thereof (the "Change of Control Purchase Price"), together with accrued and
unpaid interest to the Change of Control Purchase Date.
The Change of Control Offer shall be made within 30 days following a Change
of Control and shall remain open for 20 Business Days following its commencement
(the "Change of Control Offer Period"). Upon expiration of the Change of Control
Offer Period, we shall promptly purchase all New Notes properly tendered in
response to the Change of Control Offer.
As used herein, a "Change of Control" means:
(1) any sale, transfer, conveyance or other disposition (other than by
way of merger or consolidation) of all or substantially all of our assets,
on a consolidated basis, in one transaction or a series of related
transactions, to any "person" (including any group that is deemed to be a
"person");
(2) the consummation of any transaction, including, without
limitation, any merger or consolidation, whereby any "person" (including
any group that is deemed to be a "person") is or becomes the "beneficial
owner," directly or indirectly, of more than 35% of the aggregate Voting
Equity Interests of the transferee(s) or surviving entity or entities;
(3) the Continuing Directors cease for any reason to constitute a
majority of our Board of Directors then in office; or
(4) we adopt a plan of liquidation.
As used in this covenant, "person" (including any group that is deemed to
be a "person") has the meaning given by Section 13(d) of the Exchange Act,
whether or not applicable.
Notwithstanding the foregoing, we will not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the indenture applicable to a Change of Control Offer
made by us and purchases all New Notes validly tendered and not withdrawn under
such Change of Control Offer. In addition, if the Convertible Note is
outstanding on the date of a Change of Control that also constitutes a "Change
of Control" as defined in the Convertible Note, the Change of Control notice
delivered to holders pursuant to the indenture shall include a statement that
the Company will prepay or redeem the Convertible Note upon the completion of
the Change of Control Offer in accordance with clause (z) of the covenant
"Limitation on Restricted Payments."
On or before the Change of Control Purchase Date, we will:
(1) accept for payment New Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent for us (the "Paying Agent") cash
sufficient to pay the Change of Control Purchase Price (together with
accrued and unpaid interest) of all New Notes so tendered; and
(3) deliver to the trustee the New Notes so accepted together with an
Officers' Certificate listing the New Notes or portions thereof being
purchased by us.
49
The Paying Agent promptly will pay the holders of New Notes so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest) and the trustee promptly will authenticate and deliver to such
holders a New Note equal in principal amount to any unpurchased portion of the
New Note surrendered. Any New Notes not so accepted will be delivered promptly
by us to the holder thereof. We publicly will announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Purchase Date.
The Change of Control purchase feature of the New Notes may make more
difficult or discourage a takeover of us, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of our assets will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred. In addition, no assurances can be given that we will be
able to acquire New Notes tendered upon the occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and state
securities laws. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, our compliance or
compliance by any of the Guarantors with such laws and regulations shall not in
and of itself cause a breach of their obligations under such covenant.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest due on such Interest Payment Date will be paid to
the Person in whose name a New Note is registered at the close of business on
such Record Date.
SALE OF ASSETS AND SUBSIDIARY STOCK
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, in one or
a series of related transactions, convey, sell, transfer, assign or otherwise
dispose of, directly or indirectly, any of their property, business or assets,
including by merger or consolidation (in the case of a Guarantor or one of our
Subsidiaries), and including any sale or other transfer or issuance of any
Equity Interests of any of our Subsidiaries or Unrestricted Subsidiaries,
whether by us or one of our Subsidiaries or through the issuance, sale or
transfer of Equity Interests by one of our Subsidiaries and including any sale
and leaseback transaction (any of the foregoing, an "Asset Sale"), unless:
(1) at least 75% of the total consideration for such Asset Sale or
series of related Asset Sales consists of cash or Cash Equivalents; and
(2) we receive or such Subsidiary receives, as applicable, fair market
value for such Asset Sale, such determination to be made in good faith by
our Board of Directors for Asset Sales exceeding $2.0 million.
Solely for purposes of (1) above, (a) any Indebtedness (other than
Subordinated Indebtedness) of the Company or such Subsidiary that is expressly
assumed by the transferee in such Asset Sale and with respect to which we are
and our Subsidiaries are fully and unconditionally released from any and all
obligations in connection therewith, (b) property that within 30 days of such
Asset Sale is converted into cash or Cash Equivalents; provided, that such cash
and Cash Equivalents shall be treated as Net Cash Proceeds attributable to the
original Asset Sale for which such property was received, and (c) the fair
market value, as determined in good faith by the Board of Directors, of any
asset (other than securities) received by us or any Subsidiary that, in the good
faith reasonable judgment of our Board of Directors, will immediately constitute
or be a part of a Related Business shall be deemed to be cash or Cash
Equivalents.
50
The indenture provides that within 360 days following such Asset Sale, the
Net Cash Proceeds therefrom are:
(a) invested in fixed assets and property (other than notes, bonds,
obligations and other securities, except in connection with the acquisition
of a Guarantor in a Related Business) that in the good faith reasonable
judgment of our Board of Directors will immediately constitute or be a part
of a Related Business of the Company or such Subsidiary (if it continues to
be a Subsidiary) immediately following such transaction; or
(b) used to retire Purchase Money Indebtedness secured by the asset
that was the subject of the Asset Sale or to permanently reduce the amount
of Indebtedness outstanding under the Credit Agreement; or
(c) applied to the optional redemption of the New Notes in accordance
with the terms of the indenture and our other Indebtedness ranking on a
parity with the New Notes and with similar provisions requiring us to
redeem such Indebtedness with the proceeds from such Asset Sale, including
the Old Notes, pro rata in proportion to the respective principal amounts
(or accreted values in the case of Indebtedness issued with an original
issue discount) of the New Notes and such other Indebtedness then
outstanding.
Pending the final application of any Net Cash Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest the Net Cash
Proceeds in any manner that is not prohibited by the indenture.
The accumulated Net Cash Proceeds from Asset Sales not applied as set forth
in (a), (b) or (c) of the preceding paragraph shall constitute "Excess
Proceeds". Within 30 days after the date that the amount of Excess Proceeds
exceeds $10.0 million, the Company shall apply the Excess Proceeds (the "Asset
Sale Offer Amount") to the repurchase of the New Notes and such other
Indebtedness ranking on a parity with the New Notes and with similar provisions
requiring us to make an offer to purchase such Indebtedness with the proceeds
from such Asset Sale pursuant to a cash offer, including the Old Notes (subject
only to conditions required by applicable law, if any) (pro rata in proportion
to the respective principal amounts (or accreted values in the case of
Indebtedness issued with an original issue discount) of the New Notes and such
other Indebtedness then outstanding) (the "Asset Sale Offer") at a purchase
price of 100% of the principal amount (or accreted value in the case of
Indebtedness issued with an original issue discount) (the "Asset Sale Offer
Price") together with accrued and unpaid interest to the date of payment. Each
Asset Sale Offer shall remain open for 20 Business Days following its
commencement (the "Asset Sale Offer Period").
Upon expiration of the Asset Sale Offer Period, we shall apply the Asset
Sale Offer Amount plus an amount equal to accrued and unpaid interest to the
purchase of all Indebtedness properly tendered in accordance with the provisions
hereof (on a pro rata basis if the Asset Sale Offer Amount is insufficient to
purchase all Indebtedness so tendered) at the Asset Sale Offer Price (together
with accrued interest). To the extent that the aggregate amount of New Notes and
such other pari passu Indebtedness tendered pursuant to an Asset Sale Offer is
less than the Asset Sale Offer Amount, we may use any remaining Net Cash
Proceeds as otherwise permitted by the indenture (other than for making
Restricted Payments that are not Investments) and following the consummation of
each Asset Sale Offer the Excess Proceeds amount shall be reset to zero.
Notwithstanding, and without complying with, the provisions of this
covenant:
(1) we may and our Subsidiaries may, in the ordinary course of
business, (a) convey, sell, transfer, assign or otherwise dispose of
inventory and other assets acquired and held for resale in the ordinary
course of business and (b) liquidate Cash Equivalents;
(2) we may and our Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of assets pursuant to and in accordance with the covenant
"Limitation on Merger, Sale or Consolidation";
51
(3) we may and our Subsidiaries may sell or dispose of damaged, worn
out or other obsolete personal property in the ordinary course of business
so long as such property is no longer necessary for the proper conduct of
our business or the business of such Subsidiary, as applicable;
(4) the Guarantors may convey, sell, transfer, assign or otherwise
dispose of assets to us or any Guarantor;
(5) we may and our Subsidiaries may convey, sell, transfer, assign, or
otherwise dispose of assets (or related assets or in related transactions)
with a fair market value of less than $250,000;
(6) we may and each of our Subsidiaries may surrender or waive
contract rights or settle, release or surrender contract, tort or other
litigation claims in the ordinary course of business or grant (or permit
realization of) Liens not prohibited by the indenture;
(7) we may and our Subsidiaries may make Permitted Investments
(excluding clause (o) in the definition thereof) and Restricted Investments
under the covenant "Limitation on Restricted Payments"; and
(8) we may and our Subsidiaries may exchange assets held by us or such
Subsidiaries for assets held by any Person or entity; provided, that (a)
the assets received by us or such Subsidiaries in any such exchange in the
good faith reasonable judgment of our Board of Directors will immediately
constitute, be a part of, or be used in, a Related Business of the Company
or such Subsidiaries, (b) our Board of Directors has determined that the
terms of any exchange are fair and reasonable, (c) any such exchange shall
be deemed to be an Asset Sale to the extent that we or any of our
Subsidiaries receives cash or Cash Equivalents in such exchange, and (d)
that, in the case of a transaction exceeding $10.0 million of consideration
to any party thereto, we shall have obtained a favorable written opinion by
an independent financial advisor of national reputation in the United
States as to the fairness from a financial point of view to us or such
Subsidiary of the proposed transaction.
In addition to the foregoing and notwithstanding anything herein to the
contrary, (A) we will not, and will not permit any of our Subsidiaries to,
directly or indirectly make any Asset Sale of any of the Equity Interests of any
of our Subsidiaries (other than to us or to a Guarantor) except (i) pursuant to
an Asset Sale of all the Equity Interests of such Subsidiary, (ii) for an Asset
Sale of Equity Interests with no preferences or special rights or privileges and
with no redemption or prepayment provisions, provided, that after such sale we
or our Subsidiaries own a majority of the voting and economic Equity Interests
of such Subsidiary, (iii) to the extent such shares represent directors'
qualifying shares or shares required by applicable law to be held by a Person
other than the Company or a Wholly Owned Subsidiary of the Company, and (B) in
the event of the transfer of substantially all (but not all) of the assets of
the Company and its Subsidiaries as an entirety to a Person in a transaction
covered by and effected in accordance with the covenant "Limitation on Merger,
Sale or Consolidation," the successor corporation shall be deemed to have sold
for cash at fair market value the assets of the Company and its 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 (with such fair market value being deemed to be Net Cash Proceeds for
such purpose).
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this covenant, our
compliance or the compliance of any of our Subsidiaries with such laws and
regulations shall not in and of itself cause a breach of our obligations under
such covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest due on such Interest
Payment Date will be paid to the Person in whose name a New Note is registered
at the close of business on such Record Date.
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CERTAIN COVENANTS
The indenture contains certain covenants that will, among other things,
restrict our ability to borrow money, pay dividends on or repurchase capital
stock, make investments and sell assets or enter into mergers or consolidations.
The following summary of certain covenants of the indenture are summaries only,
do not purport to be complete and are qualified in their entirety by reference
to all of the provisions of the indenture. We urge you to read the indenture
because it, and not this description, details your rights as a holder of the New
Notes.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The indenture provides that, except as set forth in this covenant, we will
not and the Guarantors will not, and neither we nor the Guarantors will permit
any of our Subsidiaries to, directly or indirectly, issue, assume, guaranty,
incur, become directly or indirectly liable with respect to (including as a
result of an Acquisition), or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur" or, as appropriate, an
"incurrence"), any Indebtedness (including Disqualified Capital Stock and
Acquired Indebtedness), other than Permitted Indebtedness.
Notwithstanding the foregoing if:
(1) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro
forma basis to, such incurrence of Indebtedness, and
(2) on the date of such incurrence (the "Incurrence Date"), our
Consolidated Coverage Ratio for the Reference Period immediately preceding
the Incurrence Date, after giving effect on a pro forma basis to such
incurrence of such Indebtedness and, to the extent set forth in the
definition of Consolidated Coverage Ratio, the use of proceeds thereof,
would be at least (x) 2.5 to 1.0, if the incurrence occurs prior to January
1, 2004, and (y) 2.75 to 1.0, if the incurrence occurs thereafter (the
"Debt Incurrence Ratio"), then we and the Guarantors may incur such
Indebtedness (including Disqualified Capital Stock).
In addition, the foregoing limitations of the first paragraph of this
covenant will not prohibit:
(a) our incurrence or the incurrence by any Guarantor of Purchase
Money Indebtedness; provided, that:
(1) the aggregate amount of such Indebtedness incurred and
outstanding at any time pursuant to this paragraph (a) (plus any
Refinancing Indebtedness issued to retire, defease, refinance, replace
or refund such Indebtedness) shall not exceed $10.0 million; and
(2) in each case, such Indebtedness shall not constitute more than
100% of our cost or the cost to such Guarantor (determined in accordance
with GAAP), as applicable, of the property so purchased, constructed,
improved or leased;
(b) if no Event of Default shall have occurred and be continuing, our
incurrence or the incurrence by any Guarantor of Indebtedness in an
aggregate amount incurred and outstanding at any time pursuant to this
paragraph (b) (plus any Refinancing Indebtedness incurred to retire,
defease, refinance, replace or refund such Indebtedness) of up to $17.5
million; and
(c) our incurrence or the incurrence by any Guarantor of Indebtedness
pursuant to the Credit Agreement in an aggregate amount incurred and
outstanding at any time pursuant to this paragraph (c) (plus any
Refinancing Indebtedness incurred to retire, defease, refinance, replace or
refund such Indebtedness) of up to $35.0 million, minus the amount of any
such Indebtedness (1) retired with the Net Cash Proceeds from any Asset
Sale applied to permanently reduce the outstanding amounts or the
commitments with respect to such Indebtedness pursuant to clause (b) of the
second paragraph of the section "Repurchase at the Option of
Holders -- Sale of Assets and Subsidiary Stock" or (2) assumed by a
transferee in an Asset Sale so long as neither the Company nor such
Guarantor continues to be an obligor under such Indebtedness.
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Indebtedness (including Disqualified Capital Stock) of any Person which is
outstanding at the time such Person becomes one of our Subsidiaries (including
upon designation of any subsidiary or other Person as a Subsidiary) or is merged
with or into or consolidated with us or one of our Subsidiaries shall be deemed
to have been incurred at the time such Person becomes or is designated one of
our Subsidiaries or is merged with or into or consolidated with us or one of our
Subsidiaries as applicable.
Notwithstanding any other provision of this covenant, but only to avoid
duplication, a guarantee of our Indebtedness or of the Indebtedness of another
Guarantor incurred in accordance with the terms of the indenture issued at the
time such Indebtedness was incurred or if later at the time the guarantor
thereof became one of our Subsidiaries will not constitute a separate
incurrence, or amount outstanding, of Indebtedness. Upon each incurrence we may
designate pursuant to which provision of this covenant such Indebtedness is
being incurred and we may subdivide an amount of Indebtedness and designate more
than one provision pursuant to which such amount of Indebtedness is being
incurred and such Indebtedness shall not be deemed to have been incurred or
outstanding under any other provision of this covenant, except as stated
otherwise in the foregoing provisions.
LIMITATION ON RESTRICTED PAYMENTS
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, directly
or indirectly, make any Restricted Payment if, after giving effect to such
Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be
continuing;
(2) we are not permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio in the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock"; or
(3) the aggregate amount of all Restricted Payments made by us and our
Subsidiaries, including after giving effect to such proposed Restricted
Payment, on and after the Issue Date, would exceed, without duplication,
the sum of:
(a) 50% of our aggregate Consolidated Net Income for the period
(taken as one accounting period), commencing on the first day of the
first full fiscal quarter commencing after the Issue Date, to and
including the last day of the fiscal quarter ended immediately prior to
the date of each such calculation for which our consolidated financial
statements are required to be delivered to the trustee or, if sooner,
filed with the SEC (or, in the event Consolidated Net Income for such
period is a deficit, then minus 100% of such deficit); plus
(b) the aggregate Net Cash Proceeds received by us from the
issuance or sale of our Qualified Capital Stock (other than (i) to one
of our Subsidiaries and (ii) to the extent applied in connection with a
Qualified Exchange or, to avoid duplication, otherwise given credit for
in any provision of the following paragraph), after the Issue Date; plus
(c) except in each case, in order to avoid duplication, to the
extent any such payment or proceeds have been included in the
calculation of Consolidated Net Income, an amount equal to the net
reduction in Investments (other than returns of or from Permitted
Investments) in any Person resulting from cash distributions on or cash
repayments of any Investments, including payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other
distributions or other transfers of assets, in each case to the Company
or any Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment or from redesignations of Unrestricted Subsidiaries as
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Subsidiary in such Person,
including, if applicable, such Unrestricted Subsidiary, less the cost of
disposition.
54
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit:
(u) repurchases of Capital Stock from our employees or directors (or
their heirs or estates) or employees or directors (or their heirs or
estates) of our Subsidiaries upon the death, disability or termination of
employment in an aggregate amount to all employees or directors (or their
heirs or estates) not to exceed in the aggregate $1.0 million per calendar
year;
(v) Restricted Payments in an aggregate amount not to exceed $5.0
million, and the provisions of the immediately preceding paragraph will not
prohibit:
(w) any dividend, distribution or other payments by any of our
Subsidiaries on its Equity Interests that is paid pro rata to all holders
of such Equity Interests;
(x) a Qualified Exchange;
(y) the payment of any dividend on Qualified Capital Stock within 60
days after the date of its declaration if such dividend could have been
made on the date of such declaration in compliance with the foregoing
provisions; or
(z) in the event of a Change of Control that also constitutes a
"Change of Control" as defined in the Convertible Note, the prepayment or
redemption of the Convertible Note in accordance with Section 4 thereof
(Mandatory Prepayment/Redemption) as in effect on the Issue Date; provided,
that no such prepayment or redemption may be made under this clause (z)
until the Company has made a Change of Control Offer in accordance with the
section "Repurchase at the Option of Holders -- Repurchase of New Notes at
the Option of the Holder Upon a Change of Control" and any Old Notes and
New Notes tendered pursuant thereto have been purchased in accordance
therewith on or prior to the Change of Control Purchase Date; and provided
further, that the Company shall include in the Change of Control Offer
notice delivered to holders a statement that the Company will prepay or
redeem the Convertible Note upon the completion of the Change of Control
Offer in accordance with this clause (z).
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (u), (w) (to avoid duplication, exclusive of amounts that reduced
Consolidated Net Income), (y) and (z) (but not pursuant to clause (v) or (x)) of
the immediately preceding sentence, however, will be counted as Restricted
Payments made for purposes of the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the first
paragraph under the covenant "Limitation on Restricted Payments."
For purposes of this covenant, the amount of any Restricted Payment made or
returned, if other than in cash, shall be the fair market value thereof, as
determined in the good faith reasonable judgment of our Board of Directors,
unless stated otherwise, at the time made or returned, as applicable.
Additionally, on the date of each Restricted Payment, we shall deliver an
Officers' Certificate to the trustee describing in reasonable detail the nature
of such Restricted Payment in excess of $10.0 million that is not a Restricted
Investment, stating the amount of such Restricted Payment, stating in reasonable
detail the provisions of the indenture pursuant to which such Restricted Payment
was made and certifying that such Restricted Payment was made in compliance with
the terms of the indenture.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The indenture provides that we will not and the Guarantors will not, and
neither we nor the Guarantors will permit any of our Subsidiaries to, directly
or indirectly, create, assume or suffer to exist any consensual restriction on
the ability of any of our Subsidiaries to pay dividends or make other
distributions to or on behalf of, or to pay any obligation to or on behalf of,
or otherwise to transfer assets
55
or property to or on behalf of, or make or pay loans or advances to or on behalf
of, us or any of our Subsidiaries, except:
(1) restrictions imposed by the New Notes or the indenture or by our
other Indebtedness (which may also be guaranteed by the Guarantors);
provided, that such restrictions are not materially more restrictive than
those imposed by the indenture and the New Notes;
(2) restrictions imposed by applicable law;
(3) existing restrictions under Existing Indebtedness;
(4) restrictions under any Acquired Indebtedness not incurred in
violation of the indenture or any agreement (including any Equity Interest)
relating to any property, asset, or business acquired by us or any of our
Subsidiaries, which restrictions in each case existed at the time of
acquisition, were not put in place in connection with or in anticipation of
such acquisition and are not applicable to any Person, other than the
Person acquired, or to any property, asset or business, other than the
property, assets and business so acquired;
(5) any restriction imposed by Indebtedness incurred under the Credit
Agreement pursuant to clause (c) of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock"; provided, that
such restriction or requirement is no more restrictive than that imposed by
the Credit Agreement as of the Issue Date;
(6) restrictions with respect solely to any of our Subsidiaries
imposed pursuant to a binding agreement which has been entered into for the
sale or disposition of all of the Equity Interests or assets of such
Subsidiary; provided, that such restrictions apply solely to the Equity
Interests or assets of such Subsidiary which are being sold;
(7) restrictions on transfer contained in Purchase Money Indebtedness
incurred pursuant to clause (a) of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock"; provided, that
such restrictions relate only to the transfer of the property acquired with
the proceeds of such Purchase Money Indebtedness;
(8) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (1), (3), (4) or
(7) or this clause (8) of this paragraph that are not materially more
restrictive than those being replaced and do not apply to any other Person
or assets than those that would have been covered by the restrictions in
the Indebtedness so refinanced; and
(9) customary provisions in partnership agreements, limited liability
company organizational governance documents, joint venture agreements and
other similar agreements entered into in the ordinary course of business
that restrict the transfer of ownership interests in such partnership,
limited liability company, joint venture or similar Person.
Notwithstanding the foregoing, (a) customary provisions restricting
subletting or assignment of any lease entered into in the ordinary course of
business, consistent with industry practice and (b) any asset subject to a Lien
which is not prohibited to exist with respect to such asset pursuant to the
terms of the indenture may be subject to customary restrictions on the transfer
or disposition thereof pursuant to such Lien.
LIMITATIONS ON LAYERING INDEBTEDNESS
We will not and the Guarantors will not, and neither we nor the Guarantors
will permit any of our Subsidiaries to, directly or indirectly, incur any
Indebtedness that is contractually subordinate to any of our other Indebtedness
or the other Indebtedness of any Guarantor unless, by its terms, such
Indebtedness is made at least as contractually subordinate to the New Notes and
the guarantees, as applicable.
56
LIMITATION ON LIENS
We will not and the Guarantors will not, and neither we nor the Guarantors
will permit any of our Subsidiaries to, create, incur, assume or suffer to exist
any Lien of any kind, other than Permitted Liens, upon any of their respective
assets now owned or acquired on or after the date of the indenture or upon any
income or profits therefrom, unless we provide, and cause our Subsidiaries to
provide, concurrently therewith, that the New Notes and the applicable
guarantees are equally and ratably so secured; provided that if such
Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated
Indebtedness shall be contractually subordinate and junior to the Lien securing
the New Notes (and any related applicable guarantees) with the same relative
priority as such Subordinated Indebtedness shall have with respect to the New
Notes (and any related applicable guarantees).
SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Subsidiaries to, enter
into any sale and leaseback transaction; provided that the Company and its
Subsidiaries may enter into a sale and leaseback transaction if:
(1) the Company or such Subsidiary could have (a) incurred
Indebtedness in an amount equal to the Attributable Indebtedness relating
to such sale and leaseback transaction under the Debt Incurrence Ratio in
the second paragraph of the covenant described above under the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock" and (b) incurred a Lien to secure such Indebtedness pursuant
to the covenant described above under the covenant "Limitation on Liens";
(2) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value, as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to
the trustee, of the property that is the subject of such sale and leaseback
transaction; and
(3) the transfer of assets in such sale and leaseback transaction is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described above under the section "Repurchase
of New Notes at the Option of Holders -- Sale of Assets and Subsidiary
Stock."
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The indenture provides that neither we nor any of our Subsidiaries will be
permitted to enter into or suffer to exist any contract, agreement, arrangement
or transaction with any Affiliate (an "Affiliate Transaction"), or any series of
related Affiliate Transactions, (other than Exempted Affiliate Transactions),
(1) unless it is determined that the terms of such Affiliate Transaction are
fair and reasonable to us, and no less favorable to us than could have been
obtained in an arm's length transaction with a non-Affiliate, and (2) if
involving consideration to either party in excess of $2.0 million, unless such
Affiliate Transaction(s) has been approved by a majority of the members of our
Board of Directors that are disinterested in such transaction, if there are any
directors who are so disinterested, and (3) if involving consideration to either
party in excess of $10.0 million, or $2.0 million if there are no disinterested
directors for such transaction, unless, in addition we, prior to the
consummation thereof, obtain a written favorable opinion as to the fairness of
such transaction to us from a financial point of view from an independent
investment banking firm of national reputation in the United States or, if
pertaining to a matter for which such investment banking firms do not
customarily render such opinions, an appraisal or valuation firm of national
reputation in the United States. Within 5 days of any Affiliate Transaction(s)
involving consideration to either party of $2.0 million or more, the Company
shall deliver to the trustee an Officers' Certificate certifying that such
Affiliate Transaction (or Transactions) complied with clause (1), (2), and (3),
as applicable.
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LIMITATION ON MERGER, SALE OR CONSOLIDATION
The indenture provides that we will not consolidate with or merge with or
into another Person or, directly or indirectly, sell, lease, convey or transfer
all or substantially all of our assets (such amounts to be computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons, or adopt a plan
of liquidation, unless:
(1) either (a) we are the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a plan of liquidation,
the entity which receives the greatest value from such plan of liquidation,
is a corporation organized under the laws of the United States, any state
thereof or the District of Columbia and expressly assumes by supplemental
indenture all of our obligations in connection with the New Notes and the
indenture;
(2) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction;
(3) immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the consolidated surviving or
transferee entity or, in the case of a plan of liquidation, the entity
which receives the greatest value from such plan of liquidation, is at
least equal to our Consolidated Net Worth immediately prior to such
transaction;
(4) unless such transaction is solely the merger of us and one of our
previously existing Guarantors for the purpose of reincorporation into
another jurisdiction and which transaction is not for the purpose of
evading this provision and not in connection with any other transaction,
immediately after giving effect to such transaction on a pro forma basis,
the consolidated resulting, surviving or transferee entity or, in the case
of a plan of liquidation, the entity which receives the greatest value from
such plan of liquidation, would immediately thereafter be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Debt
Incurrence Ratio set forth in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock"; and
(5) each Guarantor, shall have by amendment to its guarantee and the
indenture confirmed in writing that its guarantee shall apply to the
obligations of the Company or the surviving entity in accordance with the
New Notes and the indenture.
Upon any consolidation or merger or any transfer of all or substantially
all of our assets in accordance with the foregoing, the successor entity formed
by such consolidation or into which we are merged or to which such transfer is
made shall succeed to and (except in the case of a lease or any transfer of all
or substantially all of our assets) be substituted for, and may exercise every
right and power of, the Company under the indenture with the same effect as if
such successor entity had been named therein as the Company, and (except in the
case of a lease or any transfer or all or substantially all of our assets) we
shall be released from the obligations under the New Notes and the indenture,
except with respect to any obligations that arise from, or are related to, such
transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, our interest in which constitutes all or substantially all of
our properties and assets, shall be deemed to be the transfer of all or
substantially all of our properties and assets.
LIMITATION ON CASH INTEREST PAYMENTS ON CONVERTIBLE NOTE
Scheduled interest payments in respect of the Convertible Note shall be
paid in kind pursuant to the terms thereof, unless our Consolidated Coverage
Ratio for the Reference Period immediately preceding the date of such interest
payment is at least equal to the Debt Incurrence Ratio, in which case, such
scheduled interest payments shall be payable, at the Company's option, in cash
pursuant to the terms thereof.
58
LIMITATION ON LINES OF BUSINESS
The indenture provides that neither we nor any of our Subsidiaries will
directly or indirectly engage to any substantial extent in any line or lines of
business activity other than that which, in the reasonable good faith judgment
of our Board of Directors, is a Related Business.
SUBSIDIARY GUARANTORS
The indenture provides that all of our present and future Subsidiaries
jointly and severally will guarantee all principal, premium, if any, and
interest on the Old Notes and the New Notes on a senior basis. The term
Subsidiary does not include Unrestricted Subsidiaries.
Notwithstanding anything herein or in the indenture to the contrary, if any
of our Subsidiaries that is not a Guarantor guarantees any of our other
Indebtedness or any other Indebtedness of any of our Subsidiaries, or we or any
of our Subsidiaries, individually or collectively, pledges more than 65% of the
Voting Equity Interests of a Subsidiary (including Foreign Subsidiaries) that is
not a Guarantor to a lender to secure our Indebtedness or any Indebtedness of
any Guarantor, then such Subsidiary must become a Guarantor.
RELEASE OF GUARANTORS
The indenture provides that no Guarantor will consolidate or merge with or
into (whether or not such Guarantor is the surviving Person) another Person
unless, (1) subject to the provisions of the following paragraph and the other
provisions of the indenture, the Person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the trustee, pursuant to which such Person shall
guarantee, on a senior basis, all of such Guarantor's obligations under such
Guarantor's guarantee on the terms set forth in the indenture; (2) immediately
before and immediately after giving effect to such transaction on a pro forma
basis, no Default or Event of Default shall have occurred or be continuing; and
(3) immediately after giving effect to such transaction on a pro forma basis,
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Debt Incurrence Ratio set forth in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." The provisions of the
covenant shall not apply to the merger of any Guarantor with and into another
Guarantor or with or into us.
Upon the sale or disposition (including by merger or stock purchase) of a
Guarantor (as an entirety) to an entity which is not and is not required to
become a Guarantor, or the designation of a Subsidiary to become an Unrestricted
Subsidiary, which transaction is otherwise in compliance with the indenture
(including, without limitation, the provisions of the section "Repurchase at the
Option of Holders -- Sale of Assets and Subsidiary Stock"), such Guarantor will
be deemed released from its obligations under its guarantee of the New Notes;
provided, however, that any such release shall occur only to the extent that all
obligations of such Guarantor under all of its guarantees of, and under all of
its pledges of assets or other security interests which secure, any of our
Indebtedness or any Indebtedness of any other of our Subsidiaries shall also
terminate upon such release, sale or transfer and none of its Equity Interests
are pledged for the benefit of any holder of any of our Indebtedness or any
Indebtedness of any of our Subsidiaries.
DESIGNATION OF UNRESTRICTED SUBSIDIARIES
(1) The Board of Directors of the Company may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) that does not
directly, indirectly or beneficially own any Capital Stock of, or Subordinated
Indebtedness of, or own or hold any Lien on any property of, the Company or any
other Subsidiary of the Company, to be an Unrestricted Subsidiary so long as (a)
such Subsidiary at the time of such designation: (i) has no Indebtedness other
than Non-Recourse Indebtedness; provided, that the Company or a Subsidiary of
the Company may guarantee Indebtedness of an Unrestricted Subsidiary so long as
any such guarantee constitutes an Investment made pursuant to clause (f) of the
59
definition of Permitted Investment; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Subsidiary of the
Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (iii) is a Person with respect to which neither the Company nor any of
its Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests, except to the extent that any such Investment made
for such purpose constitutes an Investment made pursuant to clause (f) of the
definition of Permitted Investment, or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (iv) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Subsidiaries; and (b) each Subsidiary of such Subsidiary shall also be
designated an Unrestricted Subsidiary and shall comply with clause (a) above.
(2) The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Subsidiary, provided, that (a) no Default or Event of Default
is existing or will occur as a consequence thereof and (b) immediately after
giving effect to such designation, on a pro forma basis, the Company could incur
at least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio of the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock."
(3) Each such designation shall be evidenced by filing with the trustee a
certified copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The indenture prohibits us and our Subsidiaries from being required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or from otherwise becoming subject to
regulation under the Investment Company Act.
REPORTS
The indenture provides that whether or not we are subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, we will deliver to the
trustee, to each holder and to prospective purchasers of New Notes identified to
us by an initial purchaser, within 5 days after we are or would have been (if we
were subject to such reporting obligations) required to file such with the SEC,
annual and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the SEC, if we
were subject to the requirements of Section 13 or 15(d) of the Exchange Act,
including, with respect to annual information only, a report thereon by our
certified independent public accountants as such would be required in such
reports to the SEC, and, in each case, together with a management's discussion
and analysis of financial condition and results of operations which would be so
required and, unless the SEC will not accept such reports, file with the SEC the
annual, quarterly and other reports which it is or would have been required to
file with the SEC.
EVENTS OF DEFAULT AND REMEDIES
The indenture defines an "Event of Default" as:
(1) our failure to pay any installment of interest on the Old Notes or
the New Notes as and when the same becomes due and payable and the
continuance of any such failure for 30 days;
(2) our failure to pay all or any part of the principal, or premium,
if any, on the Old Notes or the New Notes when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise,
including, without limitation, payment of the Change of Control Purchase
Price or the Asset Sale Offer Price, on Old Notes or New Notes validly
tendered and not properly withdrawn pursuant to a Change of Control Offer
or Asset Sale Offer, as applicable;
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(3) our failure or the failure by any of our Subsidiaries to observe
or perform any other covenant or agreement contained in the Old Notes, the
New Notes or the indenture and, except for the provisions under "Repurchase
at the Option of Holders -- Repurchase of New Notes at the Option of the
Holder Upon a Change of Control" and "-- Sale of Assets and Subsidiary
Stock," and "Certain Covenants -- Limitation on Merger, Sale or
Consolidation" and "-- Limitation on Restricted Payments," the continuance
of such failure for a period of 60 days after written notice is given to us
by the trustee or to us and the trustee by the holders of at least 25% in
aggregate principal amount of the Old Notes and the New Notes outstanding;
(4) certain events of bankruptcy, insolvency or reorganization in
respect of us or any of our Significant Subsidiaries;
(5) a default in our Indebtedness or the Indebtedness any of our
Subsidiaries with an aggregate amount outstanding in excess of $10.0
million (a) resulting from the failure to pay principal at maturity or (b)
as a result of which the maturity of such Indebtedness has been accelerated
prior to its stated maturity;
(6) final unsatisfied judgments not covered by insurance aggregating
in excess of $5.0 million, at any one time rendered against us or any of
our Subsidiaries and not stayed, bonded or discharged within 60 days; and
(7) any guarantee of a Guarantor that is a Significant Subsidiary
ceases to be in full force and effect or becomes unenforceable or invalid
or is declared null and void (other than in accordance with the terms of
the guarantee and the indenture) or any Guarantor denies or disaffirms its
obligations under its guarantee.
The indenture provides that if a Default occurs and is continuing, the
trustee must, within 90 days after the occurrence of such Default, give to the
holders notice of such Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (4) above relating to us or any of our Significant
Subsidiaries,) then in every such case, unless the principal of all of the Old
Notes and the New Notes shall have already become due and payable, either the
trustee or the holders of at least 25% in aggregate principal amount of the Old
Notes and the New Notes then outstanding, by notice in writing to us (and to the
trustee if given by holders) (an "Acceleration Notice"), may declare all
principal, determined as set forth below, and accrued interest thereon to be due
and payable immediately.
If an Event of Default specified in clause (4), above, relating to us or
any of our Significant Subsidiaries occurs, all principal and accrued interest
thereon will be immediately due and payable on all outstanding Old Notes and New
Notes without any declaration or other act on the part of the trustee or the
holders. The holders of a majority in aggregate principal amount of Old Notes
and New Notes generally are authorized to rescind such acceleration if all
existing Events of Default, other than the non-payment of the principal of,
premium, if any, and interest on the Old Notes and New Notes which have become
due solely by such acceleration and except a Default with respect to any
provision requiring a supermajority approval to amend, which Default may only be
waived by such a supermajority, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Old Notes
and New Notes, the holders of a majority in aggregate principal amount of the
Old Notes and New Notes at the time outstanding may waive on behalf of all the
holders any Default, except a Default with respect to any provision requiring a
supermajority approval to amend, which Default may only be waived by such a
supermajority, and except a Default in the payment of principal of or interest
on any New Note not yet cured or a Default with respect to any covenant or
provision which cannot be modified or amended without the consent of the holder
of each outstanding New Note affected. Subject to the provisions of the
indenture relating to the duties of the trustee, the trustee will be 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 security or indemnity.
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Subject to all provisions of the indenture and applicable law, the holders
of a majority in aggregate principal amount of the Old Notes and New Notes at
the time outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee, or exercising
any trust or power conferred on the trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The indenture provides that we may, at our option and at any time, elect to
discharge our obligations and the Guarantors' obligations with respect to the
outstanding Old Notes and New Notes ("Legal Defeasance"). If Legal Defeasance
occurs, we shall be deemed to have paid and discharged all amounts owed under
the Old Notes and the New Notes, and the indenture shall cease to be of further
effect as to the Old Notes and the New Notes and guarantees, except that:
(1) Holders will be entitled to receive timely payments for the
principal of, premium, if any, and interest on the Old Notes and the New
Notes, from the funds deposited for that purpose (as explained below);
(2) Our obligations will continue with respect to the issuance of
temporary Old Notes and New Notes, the registration of Old Notes and New
Notes, and the replacement of mutilated, destroyed, lost or stolen Old
Notes and New Notes;
(3) The trustee will retain its rights, powers, duties, and
immunities, and we will retain our obligations in connection therewith; and
(4) Other Legal Defeasance provisions of the indenture will remain in
effect.
In addition, we may, at our option and at any time, elect to cause the release
of our obligations and the Guarantors' with respect to most of the covenants in
the indenture (except as described otherwise therein) ("Covenant Defeasance").
If Covenant Defeasance occurs, certain events (not including non-payment and
bankruptcy, receivership, rehabilitation and insolvency events) relating to us
or any Significant Subsidiary described under "Events of Default" will no longer
constitute Events of Default with respect to the Old Notes and the New Notes. We
may exercise Legal Defeasance regardless of whether we previously exercised
Covenant Defeasance.
In order to exercise either Legal Defeasance or Covenant Defeasance (each,
a "Defeasance"):
(1) We must irrevocably deposit with the trustee, in trust, for the
benefit of holders of the Old Notes and the New Notes, U.S. legal tender,
U.S. Government Obligations or a combination thereof, in amounts that will
be sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by us, to pay the principal of,
premium, if any, and interest on the Old Notes and the New Notes on the
stated date for payment or any redemption date thereof, and the trustee
must have, for the benefit of holders of the Old Notes and the New Notes, a
valid, perfected, exclusive security interest in the trust;
(2) In the case of Legal Defeasance, we must deliver to the trustee an
opinion of counsel in the United States reasonably acceptable to the
trustee confirming that:
(A) we have 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 holders of Old Notes or New Notes will
not recognize income, gain or loss for federal income tax purposes as a
result of the 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 the Defeasance had not occurred;
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(3) In the case of Covenant Defeasance, we must deliver to the trustee
an opinion of counsel in the United States reasonably acceptable to the
trustee confirming that holders of Old Notes or New Notes will not
recognize income, gain or loss for federal income tax purposes as a result
of the 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 the Defeasance had not occurred;
(4) No Default or Event of Default may have occurred and be continuing
on the date of the deposit (other than a Default resulting from the
borrowing of funds to be applied to such deposit and the grant of any Lien
securing such borrowing). In addition, no Event of Default relating to
bankruptcy or insolvency may occur at any time from the date of the deposit
to the 91st calendar day thereafter;
(5) The Defeasance may not result in a breach or violation of, or
constitute a default under the indenture or any other material agreement or
instrument to which we or any of our Subsidiaries are a party or by which
we or any of our Subsidiaries are bound;
(6) We must deliver to the trustee an Officers' Certificate stating
that the deposit was not made by us with the intent to hinder, delay or
defraud any other of our creditors; and
(7) We must deliver to the trustee an Officers' Certificate confirming
the satisfaction of conditions in clauses (1) through (6) above, and an
opinion of counsel confirming the satisfaction of the conditions in clauses
(1) (with respect to the validity and perfection of the security interest),
(2), (3) and (5) above.
The Defeasance will be effective on the earlier of (i) the 91st day after
the deposit, and (ii) the day on which all the conditions above have been
satisfied.
If the amount deposited with the trustee to effect a Defeasance is
insufficient to pay the principal of, premium, if any, and interest on the Old
Notes and the New Notes when due, or if any court enters an order directing the
repayment of the deposit to us or otherwise making the deposit unavailable to
make payments under the Old Notes and the New Notes when due, then (so long as
the insufficiency exists or the order remains in effect) our and the Guarantors'
obligations under the indenture and the Old Notes and the New Notes will be
revived, and the Defeasance will be deemed not to have occurred.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of New
Notes) as to all outstanding New Notes when either:
(a) All outstanding New Notes have been delivered to the trustee for
cancellation; or
(b)(1) we have given irrevocable and unconditional notice of
redemption for all of the outstanding New Notes under the indenture's
redemption provisions, or all outstanding New Notes have otherwise become
due and payable, and we have irrevocably deposited or caused to be
deposited with the trustee an amount of money sufficient to pay and
discharge the entire indebtedness (including all principal, premium, if
any, and accrued interest) on all outstanding New Notes,
(2) we have delivered irrevocable instructions to the trustee to
apply the deposited money toward the payment of the New Notes at
maturity or the redemption date, as the case may be,
(3) the trustee, for the benefit of the holders of the New Notes,
has a valid, perfected, exclusive security interest in the trust,
(4) the deposit does not and will not result in a breach or
violation of, or constitute a default under the indenture or any other
material agreement or instrument to which we or any of our Subsidiaries
are a party or are otherwise bound,
(5) we have paid all other amounts payable by us under the
indenture, and
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(6) we have delivered to the trustee an Officers' Certificate
stating that the deposit was not made by us with intent to hinder,
delay, or defraud any other of our creditors.
We must also deliver to the trustee an Officers' Certificate and an opinion
of counsel confirming the satisfaction of the conditions in clauses (3) (with
respect to the validity and perfection of the security interest) and (4) above.
AMENDMENTS AND SUPPLEMENTS
The indenture contains provisions permitting us, the Guarantors and the
trustee to enter into a supplemental indenture for certain limited purposes
without the consent of the holders to (a) cure any ambiguity, defect, or
inconsistency, (b) add to the covenants of the Company or the Guarantors for the
benefit of the holders, or to surrender any right or power conferred upon the
Company or the Guarantors by the indenture or the New Notes, (c) provide for
collateral for or additional Guarantors of the New Notes, (d) evidence the
succession of another Person to the Company, and the assumption by any such
successor of the obligations of the Company under the indenture and the New
Notes in accordance with the terms of the indenture, (e) comply with the Trust
Indenture Act, (f) evidence the succession of another corporation to any
Guarantor and assumption by any such successor of the guarantee of such
Guarantor pursuant to the indenture, (g) evidence the release of any Guarantor,
(h) evidence and provide for the acceptance of appointment of a successor
trustee with respect to the New Notes, or (i) provide for the issuance and
authorization of any Additional Notes in accordance with the limitations set
forth in the indenture.
With the consent of the holders of not less than a majority in aggregate
principal amount of the Old Notes and the New Notes at the time outstanding, we,
the Guarantors and the trustee are permitted to amend or supplement the
indenture or any supplemental indenture or modify the rights of the holders;
provided, that no such modification may, without the consent of holders of at
least 66 2/3% in aggregate principal amount of Old Notes and New Notes at the
time outstanding, modify the provisions (including the defined terms used
therein) governing the terms of the guarantees or, except as set forth in clause
(1) below, the provisions (including the defined terms used therein) of the
section "Repurchase at the Option of Holders -- Repurchase of New Notes at the
Option of the Holder Upon a Change of Control," in either case in a manner
adverse to the holders and provided, that no such modification may, without the
consent of each holder affected thereby:
(1) change the Stated Maturity on any New Note, or reduce the
principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption thereof at our
option, or change the city of payment where, or the coin or currency in
which, any New Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment
on or after the Stated Maturity thereof (or, in the case of redemption at
our option, on or after the Redemption Date), or after an Asset Sale or
Change of Control has occurred, reduce the Change of Control Purchase Price
or the Asset Sale Offer Price with respect to the corresponding Asset Sale
or Change of Control or alter the provisions (including the defined terms
used therein) regarding our right to redeem the New Notes as a right, or at
our option, in a manner adverse to the holders; or
(2) reduce the percentage in principal amount of the outstanding New
Notes, the consent of whose holders is required for any such amendment,
supplemental indenture or waiver provided for in the indenture; or
(3) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of the
indenture cannot be modified or waived without the consent of the holder of
each outstanding New Note affected thereby; or
(4) cause the New Notes or any guarantee to become subordinate in
right of payment to any other Indebtedness.
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GOVERNING LAW
The indenture provides that it and the New Notes will be governed by, and
construed in accordance with, the laws of the State of New York including,
without limitation, Sections 5-1401 and 5-1402 of the New York General
Obligations Law and New York Civil Practice Laws and Rules 327(b).
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS
The indenture provides that no direct or indirect incorporator,
stockholder, employee, officer or director, as such, past, present or future of
the Company, the Guarantors or any successor entity shall have any personal
liability in respect of our obligations or the obligations of the Guarantors
under the indenture or the New Notes solely by reason of his or its status as
such incorporator, stockholder, employee, officer or director, except that this
provision shall in no way limit the obligation of any Guarantor pursuant to any
guarantee of the New Notes.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness (including Disqualified Capital
Stock) of any Person existing at the time such Person becomes a Subsidiary of
the Company, including by designation, or is merged or consolidated into or with
the Company or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or all
or substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise; provided, that with respect to ownership interest in the Company
and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting
power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to possess control.
Notwithstanding the foregoing, Affiliate shall not include Subsidiaries.
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value of the obligation of the
lessee for net rental payments during the remaining term of the lease included
in such sale and leaseback transaction including any period for which such lease
has been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (1) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (2) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3
and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether or
not applicable.
"Board of Directors" means, with respect to any Person, the board of
directors (or if such Person is not a corporation, the equivalent board of
managers or members or body performing similar functions for such Person) of
such Person or any committee of the board of directors of such Person
authorized, with respect to any particular matter, to exercise the power of the
board of directors of such Person.
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"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"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, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means:
(1) securities issued or directly and fully guaranteed or insured by
the United States of America or any agency or instrumentality thereof
(provided, that the full faith and credit of the United States of America
is pledged in support thereof); or
(2) demand and time deposits and certificates of deposit and
commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess
of $500 million; or
(3) commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc.; or
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any commercial bank meeting the specifications of clause (2)
above; or
(5) investments in money market or other mutual funds substantially
all of whose assets comprise securities of the types described in clauses
(1) through (4) above; and in the case of each of (1), (2), and (3)
maturing within one year after the date of acquisition.
"Consolidation" means, with respect to the Company, the consolidation of
the accounts of the Subsidiaries with those of the Company, all in accordance
with GAAP; provided, that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of the Company. The
term "consolidated" has a correlative meaning to the foregoing.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided, that for purposes of
such calculation:
(1) Acquisitions which occurred during the Reference Period or
subsequent to the Reference Period and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of the Reference Period;
(2) transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period;
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(3) other than Indebtedness incurred under any revolving credit
facility, the incurrence of any Indebtedness (including the issuance of any
Disqualified Capital Stock) during the Reference Period or subsequent to
the Reference Period and on or prior to the Transaction Date (and the
application of the proceeds therefrom to the extent used to refinance or
retire other Indebtedness) shall be assumed to have occurred on the first
day of the Reference Period; and
(4) the Consolidated Fixed Charges of such Person attributable to
interest on any Indebtedness or dividends on any Disqualified Capital Stock
bearing a floating interest (or dividend) rate shall be computed on a pro
forma basis as if the average rate in effect from the beginning of the
Reference Period to the Transaction Date had been the applicable rate for
the entire period, unless such Person or any of its Subsidiaries is a party
to an Interest Swap or Hedging Obligation (which shall remain in effect for
the 12-month period immediately following the Transaction Date) that has
the effect of fixing the interest rate on the date of computation, in which
case such rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of:
(1) Consolidated income tax expense (except to the extent attributable
to items of extraordinary or nonrecurring gain or loss as described in
clause (a) of the definition of Consolidated Net Income);
(2) Consolidated depreciation and amortization expense;
(3) Consolidated Fixed Charges;
(4) all other non-cash charges required to be reflected as expenses on
the books and records of such Person and its Consolidated Subsidiaries; and
(5) the amount of any earn-out payment or bonus paid by the Company or
any Subsidiary of the Company for such period to the seller(s) of any
Capital Stock or business acquired by the Company or any such Subsidiary,
which payment is made pursuant to the terms of a purchase or similar
agreement entered into at the time of the acquisition;
less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to
non-cash charges that were added back in determining Consolidated EBITDA
for such period or any prior period; provided, that consolidated income tax
expense and depreciation and amortization of a Subsidiary that is a less
than Wholly Owned Subsidiary shall only be added to the extent of the
equity interest of the Company in such Subsidiary.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of:
(a) interest expensed or capitalized, paid, accrued, or scheduled to
be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations and imputed interest
on Attributable Indebtedness) of such Person and its Consolidated
Subsidiaries during such period, including (1) original issue discount and
non-cash interest payments or accruals on any Indebtedness, (2)
amortization of Indebtedness discount or premium, (3) the interest portion
of all deferred payment obligations, (4) all commissions, discounts and
other fees and charges owed with respect to bankers' acceptances and
letters of credit financings and currency and Interest Swap and Hedging
Obligations, in each case to the extent attributable to such period, and
(5) all interest payable with respect to discontinued operations;
(b) the amount of dividends accrued or payable (or guaranteed) by such
Person or any of its Consolidated Subsidiaries in respect of Preferred
Stock (other than by Subsidiaries of such Person to such Person or such
Person's Wholly Owned Subsidiaries) multiplied by a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of the Company and its
Subsidiaries, expressed as a decimal.
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For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guarantee by such Person or
a Subsidiary of such Person of an obligation of another Person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication):
(a) all gains and losses, together with any related provision for
taxes on such gains or losses, that are either extraordinary (as determined
in accordance with GAAP) or are nonrecurring (including any gain or loss
from the sale or other disposition of assets outside the ordinary course of
business or from the issuance or sale of any capital stock);
(b) the net income, if positive, of any Person, other than a
Consolidated Subsidiary, in which such Person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a
Consolidated Subsidiary of such Person during such period, but in any case
not in excess of such Person's pro rata share of such Person's net income
for such period;
(c) the net income or loss of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition;
(d) the net income, if positive, of any of such Person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the
terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary; and
(e) solely for the purpose of calculating Consolidated Net Income with
respect to paragraph (3)(a) of the covenant "Limitation on Restricted
Payments," the amount of any goodwill impairment and valuation losses, as
reflected in the Company's consolidated financial statements.
"Consolidated Net Worth" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such Person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such Person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such Person or a Consolidated Subsidiary of such Person
subsequent to the Issue Date, and (c) all investments in subsidiaries that are
not Consolidated Subsidiaries and in Persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"Consolidated Tangible Assets" means, as of the date of determination, the
total assets, less goodwill and other intangibles, shown on the balance sheet of
the Company and its Consolidated Subsidiaries as of the most recent date for
which such a balance sheet is available, determined on a consolidated basis in
accordance with GAAP.
"Continuing Directors" means during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Company was approved by a vote of a majority
of the
68
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved, including new directors designated in or provided for in an agreement
regarding the merger, consolidation or sale, transfer or other conveyance, of
all or substantially all of the assets of the Company, if such agreement was
approved by a vote of such majority of directors).
"Convertible Note" means that certain Convertible Junior Subordinated
Promissory Note due July 31, 2009, made by the Company in favor of BT Capital
Partners SBIC, L.P., dated August 1, 1999, as the same may be amended in a
manner not prohibited by the indenture.
"Credit Agreement" means the credit agreement by and among the Company,
certain of our Subsidiaries, certain financial institutions and General Electric
Capital Corporation, as agent, providing for an aggregate $35.0 million
revolving credit facility, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as such
credit agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or holders, and,
subject to the proviso to the next succeeding sentence, irrespective of any
changes in the terms and conditions thereof. Without limiting the generality of
the foregoing, the term "Credit Agreement" shall include any amendment,
amendment and restatement, renewal, extension, restructuring, supplement or
modification to any Credit Agreement and all refundings, refinancings and
replacements of any Credit Agreement, including any Credit Agreement:
(1) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby;
(2) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers include one or more of the Company and its
Subsidiaries and their respective successors and assigns;
(3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder; provided, that on the date such
Indebtedness is incurred it would not be prohibited by the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock"; or
(4) otherwise altering the terms and conditions thereof in a manner
not prohibited by the terms of the indenture.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Capital Stock" means with respect to any Person, (a) Equity
Interests of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of an event or the passage of time or both would be, required to be redeemed or
repurchased including at the option of the holder thereof by such Person or any
of its Subsidiaries, in whole or in part, on or prior to 91 days following the
Stated Maturity of the New Notes and (b) any Equity Interests of any Subsidiary
of such Person other than any common equity with no preferences, privileges, and
no redemption or repayment provisions. Notwithstanding the foregoing, any Equity
Interests that would constitute Disqualified Capital Stock solely because the
holders thereof have the right to require the Company to repurchase such Equity
Interests upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Capital Stock if the terms of such Equity Interests
provide that the Company may not repurchase or redeem any such Equity Interests
pursuant to such provisions prior to the Company's purchase of the New Notes as
are required to be purchased pursuant to the provisions of the indenture as
described under "Repurchase at the Option of Holders."
"Equity Interests" means Capital Stock or partnership, participation or
membership interests and all warrants, options or other rights to acquire
Capital Stock or partnership, participation or membership interests (but
excluding any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership, participation or membership interests).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
69
"Exempted Affiliate Transaction" means (a) customary employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) dividends permitted under
the terms of the covenant "Limitation on Restricted Payments" above and payable,
in form and amount, on a pro rata basis to all holders of common stock of the
Company, (c) transactions solely between or among the Company and any of its
Consolidated Subsidiaries or solely among Consolidated Subsidiaries of the
Company, and (d) transactions in respect of the Convertible Note between the
Company and the holder of the Convertible Note (other than an increase in the
amount of principal or interest payable thereon), including any amendments or
modifications to the conversion provisions thereof (and any related
definitions).
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the Issue Date, reduced to the extent such amounts are repaid, refinanced or
retired.
"GAAP" means United States 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 approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Guarantor" means each of the Company's present and future Subsidiaries
that at the time are guarantors of the New Notes in accordance with the
indenture.
"Indebtedness" of any Person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of such
Person, to the extent such liabilities and obligations would appear as a
liability upon the consolidated balance sheet of such Person in accordance
with GAAP, (1) in respect of borrowed money (whether or not the recourse of
the lender is to the whole of the assets of such Person or only to a
portion thereof), (2) evidenced by bonds, notes, debentures or similar
instruments, (3) representing the balance deferred and unpaid of the
purchase price of any property or services, except those incurred in the
ordinary course of its business that would constitute ordinarily a trade
payable to trade creditors;
(b) all liabilities and obligations, contingent or otherwise, of such
Person (1) evidenced by bankers' acceptances or similar instruments issued
or accepted by banks, (2) relating to any Capitalized Lease Obligation, or
(3) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit;
(c) all net obligations of such Person under Interest Swap and Hedging
Obligations;
(d) all liabilities and obligations of others of the kind described in
the preceding clause (a), (b) or (c) that such Person has guaranteed or
provided credit support or that is otherwise its legal liability or which
are secured by any assets or property of such Person;
(e) any and all deferrals, renewals, extensions, refinancing and
refundings (whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a), (b), (c) or (d), or this clause (e), whether or not between or
among the same parties;
(f) all Disqualified Capital Stock of such Person (measured at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends); and
(g) all Attributable Indebtedness.
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 to be determined in
70
good faith by the Board of Directors of the issuer (or managing general partner
of the issuer) of such Disqualified Capital Stock.
The amount of any Indebtedness outstanding as of any date shall be (1) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, but the accretion of original issue discount in accordance with
the original terms of Indebtedness issued with an original issue discount will
not be deemed to be an incurrence and (2) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in interest rates or currency values, including, without
limitation, any arrangement whereby, directly or indirectly, such Person is
entitled to receive from time to time periodic payments calculated by applying
either a fixed or floating rate of interest on a stated notional amount in
exchange for periodic payments made by such Person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or
otherwise) by such Person (whether for cash, property, services, securities
or otherwise) of Equity Interests, capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other Person or any agreement to make any such
acquisition;
(b) the making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other Person (including the purchase of
property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or
any commitment to make any such advance, loan or extension (but excluding
accounts receivable, endorsements for collection or deposits arising in the
ordinary course of business);
(c) other than guarantees of Indebtedness of the Company or any
Guarantor to the extent permitted by the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock," the entering
into by such Person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of
such other Person;
(d) the making of any capital contribution by such Person to such
other Person; and
(e) the designation by the Board of Directors of the Company of any
Person to be an Unrestricted Subsidiary.
The Company shall be deemed to make an Investment in an amount equal to the
fair market value of the net assets of any subsidiary (or, if neither the
Company nor any of its Subsidiaries has theretofore made an Investment in such
subsidiary, in an amount equal to the Investments being made), at the time that
such subsidiary is designated an Unrestricted Subsidiary, and any property
transferred to an Unrestricted Subsidiary from the Company or a Subsidiary of
the Company shall be deemed an Investment valued at its fair market value at the
time of such transfer. The Company or any of its Subsidiaries shall be deemed to
have made an Investment in a Person that is or was required to be a Guarantor
if, upon the issuance, sale or other disposition of any portion of the Company's
or the Subsidiary's ownership in the Capital Stock of such Person, such Person
ceases to be a Guarantor. The fair market value of each Investment shall be
measured at the time made or returned, as applicable.
"Issue Date" means December 12, 2001, the date of first issuance of the Old
Notes under the indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
71
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and convertible
or exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary), expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less (a) the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its respective Subsidiaries in connection with such Asset Sale
in the taxable year that such sale is consummated or in the immediately
succeeding taxable year, the computation of which shall take into account the
reduction in tax liability resulting from any available operating losses and net
operating loss carryovers, tax credits and tax credit carryforwards, and similar
tax attributes, and (b) appropriate amounts to be provided by the Company or any
of its Subsidiaries, as the case may be, as a reserve required in accordance
with GAAP against any liabilities associated with such Asset Sale and retained
by the Company or any such Subsidiary, as the case may be, after such Asset
Sale, including pensions and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the trustee; provided, however, that any
amounts remaining after adjustments, revaluations or liquidations of such
reserves shall constitute Net Cash Proceeds.
"Non-Recourse Indebtedness" means Indebtedness (a) as to which neither the
Company nor any of its Subsidiaries (1) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (2) is directly or indirectly liable (as a guarantor or
otherwise), or (3) constitutes the lender, and (b) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"Officers' Certificate" means the officers' certificate to be delivered
upon the occurrence of certain events as set forth in the indenture.
"Permitted Indebtedness" means that:
(a) the Company and the Guarantors may incur Indebtedness evidenced by
the Old Notes, New Notes and the guarantees issued pursuant to the
indenture up to the amounts issued on the original Issue Date, less any
amounts repaid or retired;
(b) the Company and the Guarantors, as applicable, may incur
Refinancing Indebtedness with respect to any Existing Indebtedness or any
Indebtedness (including Disqualified Capital Stock), described in clause
(a) above or clause (a) of the third paragraph of, or incurred pursuant to
the Debt Incurrence Ratio test of, the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock," or which was
refinanced pursuant to this clause (b);
(c) the Company and its Subsidiaries may incur Indebtedness solely in
respect of bankers acceptances, letters of credit and performance bonds (to
the extent that such incurrence does not result in the incurrence of any
obligation to repay any obligation relating to borrowed money or other
Indebtedness), all in the ordinary course of business in accordance with
customary industry practices, in amounts and for the purposes customary in
the Company's industry;
(d) the Company may incur Indebtedness owed to (borrowed from) any
Subsidiary, and any Subsidiary may incur Indebtedness owed to (borrowed
from) any other Subsidiary or the Company;
72
provided, that in the case of Indebtedness of the Company, such obligations
shall be unsecured and contractually subordinated in all respects to the
Company's obligations pursuant to the Old Notes and the New Notes and any
event that causes such Subsidiary no longer to be a Subsidiary respectively
(including by designation to be an Unrestricted Subsidiary) shall be deemed
to be a new incurrence by such issuer of such Indebtedness and any
guarantor thereof subject to the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Stock";
(e) any Guarantor may guarantee any Indebtedness of the Company or
another Guarantor that was permitted to be incurred pursuant to the
indenture, substantially concurrently with such incurrence or at the time
such Person becomes a Subsidiary;
(f) the Company and the Guarantors may incur Interest Swap and Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the indenture to be outstanding or any
receivable or liability the payment of which is determined by reference to
a foreign currency; provided, that the notional amount of any such Interest
Swap and Hedging Obligation does not exceed the principal amount of
Indebtedness to which such Interest Swap and Hedging Obligation relates;
(g) 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 if extinguished within five business days of incurrence;
(h) Indebtedness arising in connection with endorsement of instruments
for deposit in the ordinary course of business; and
(i) Indebtedness arising from the payment of interest on the
Convertible Note in the form of additional like securities with a principal
amount equal to the amount of accrued but unpaid interest due thereon in
accordance with the terms of Section 1 (Interest) of the Convertible Note.
"Permitted Investment" means:
(a) any Investment in any of the Old Notes or the New Notes;
(b) any Investment in Cash Equivalents;
(c) intercompany notes to the extent permitted under clause (d) of the
definition of "Permitted Indebtedness";
(d) any Investment by the Company or any Guarantor in a Person in a
Related Business if as a result of such Investment such Person immediately
becomes a Guarantor or such Person is immediately merged with or into the
Company or a Guarantor;
(e) any Investment by the Company or any Subsidiary of the Company in
the Company or in any Guarantor;
(f) any Investment by the Company or any Subsidiary of the Company in
Permitted Joint Ventures made after the Reference Date having an aggregate
fair market value, when taken together with all other Investments made
pursuant to this clause (f) that are at the time outstanding, not exceeding
the greater of (i) $25.0 million and (ii) 10% of the Consolidated Tangible
Assets of the Company as of the last day of the most recent full fiscal
quarter ended immediately prior to the date of such Investment (with the
fair market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value);
(g) any asset exchange permitted by clause (8) of "Repurchase at the
Option of Holders -- Sale of Assets and Subsidiary Stock";
(h) loans and advances to directors, employees and officers of the
Company and its Subsidiaries for bona fide business purposes not in excess
of $2.0 million at any one time outstanding;
73
(i) receivables owing to the Company or any Subsidiary of the Company
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Subsidiary deems reasonable under the circumstances;
(j) lease, utility and other similar deposits in the ordinary course
of business;
(k) 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;
(l) Interest Swap and Hedging Obligations to the extent permitted
under clause (f) of the definition of "Permitted Indebtedness";
(m) advances to radiology practice groups made pursuant to service
agreements in effect on the Issue Date or pursuant to service agreements
similar to service agreements in effect on the Issue Date in the ordinary
course of business consistent with past practice;
(n) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
of its Subsidiaries or in satisfaction of judgments;
(o) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the section "Repurchase
at the Option of Holders -- Sale of Assets and Subsidiary Stock"; and
(p) any Investment acquired solely in exchange for Qualified Capital
Stock.
"Permitted Joint Venture" means any joint venture, partnership or other
Person designated by the Board of Directors of the Company as a Permitted Joint
Venture and (i) at least 20% of whose Voting Equity Interests is at the time
owned (beneficially or directly) by the Company and/or by one or more
Subsidiaries of the Company and if such Permitted Joint Venture is a Subsidiary
of the Company, such Permitted Joint Venture has been designated as an
Unrestricted Subsidiary of the Company in accordance with the covenant "Certain
Covenants -- Designation of Unrestricted Subsidiaries," and (ii) is engaged in a
Related Business; provided that each of our joint ventures existing on the Issue
Date shall be deemed to be a Permitted Joint Venture as of the Issue Date. Any
such designation (other than with respect to the Persons identified in the
preceding sentence) shall be evidenced to the trustee by promptly filing with
the trustee a copy of the resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Permitted Lien" means:
(a) Liens existing on the Issue Date;
(b) Liens imposed by governmental authorities for taxes, assessments
or other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with
respect thereto are maintained on the books of the Company in accordance
with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, material
men, landlords, repairmen or other like Liens arising by operation of law
in the ordinary course of business provided that (1) the underlying
obligations are not overdue for a period of more than 60 days, or (2) such
Liens are being contested in good faith and by appropriate proceedings and
adequate reserves with respect thereto are maintained on the books of the
Company in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other
than borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do
not in any case materially detract from the value of the
74
property, subject thereto (as such property is used by the Company or any
of its Subsidiaries) or interfere with the ordinary conduct of the business
of the Company or any of its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments,
only to the extent, for an amount and for a period not resulting in an
Event of Default with respect thereto;
(g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(h) Liens securing the Old Notes or the New Notes;
(i) Liens securing Indebtedness of a Person existing at the time such
Person becomes a Subsidiary or is merged with or into the Company or a
Subsidiary or Liens securing Indebtedness incurred in connection with an
Acquisition, provided, that such Liens were in existence prior to the date
of such acquisition, merger or consolidation, were not incurred in
anticipation thereof, and do not extend to any other assets;
(j) Liens arising from Purchase Money Indebtedness permitted to be
incurred pursuant to clause (a) of the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock" provided such
Liens relate solely to the property which is subject to such Purchase Money
Indebtedness;
(k) leases or subleases granted to other Persons in the ordinary
course of business not materially interfering with the conduct of the
business of the Company or any of its Subsidiaries or materially detracting
from the value of the related assets of the Company or any Subsidiary;
(l) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the Company or
any of its Subsidiaries in the ordinary course of business;
(m) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured, provided that the Indebtedness
secured is not increased and the Lien is not extended to any additional
assets or property that would not have been security for the Indebtedness
refinanced;
(n) Liens securing Indebtedness incurred under the Credit Agreement in
accordance with the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock";
(o) Liens in favor of the Company or any Guarantor;
(p) 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;
(q) Liens to secure Attributable Indebtedness and that are permitted
to be incurred pursuant to the covenant "Sale and Leaseback Transactions";
provided that any such Lien shall not extend to or cover any assets of the
Company or any Subsidiary other than the assets that are the subject of the
sale and leaseback transaction in which the Attributable Indebtedness is
incurred; and
(r) Liens incurred in the ordinary course of business of the Company
or any Subsidiary with respect to obligations (other than Indebtedness)
that do not in the aggregate exceed $7.0 million at any one time
outstanding.
"Person" or "person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, limited liability
company, unincorporated association, governmental regulatory entity, country,
state or political subdivision thereof, trust, municipality or other entity.
"Preferred Stock" means any Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
75
"Pro Forma" or "pro forma" shall have the meaning set forth in Regulation
S-X of the Securities Act of 1933, as amended, unless otherwise specifically
stated herein.
"Public Equity Offering" means an underwritten public offering pursuant to
a registration statement filed with the SEC in accordance with the Securities
Act of 1933, as amended, of Qualified Capital Stock of the Company.
"Purchase Money Indebtedness" of any Person means any Indebtedness of such
Person to any seller or other Person incurred solely to finance the acquisition
(including in the case of a Capitalized Lease Obligation, the lease),
construction, installation or improvement of any after acquired real or personal
tangible property which is directly related to a Related Business of the Company
and which is incurred within 180 days of such acquisition, construction,
installation or improvement and is secured only by the assets so financed.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Qualified Exchange" means:
(1) any legal defeasance, redemption, retirement, repurchase or other
acquisition of Capital Stock or Indebtedness of the Company with the Net
Cash Proceeds received by the Company from the substantially concurrent
sale of its Qualified Capital Stock (other than to a Subsidiary); or
(2) any issuance of Qualified Capital Stock of the Company solely in
exchange for any Capital Stock or Indebtedness of the Company.
"Reference Period" with regard to any Person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is to
be made pursuant to the terms of the New Notes or the indenture.
"Refinancing Indebtedness" means Indebtedness (including Disqualified
Capital Stock) (a) issued in exchange for, or the proceeds from the issuance and
sale of which are used substantially concurrently to repay, redeem, defease,
refund, refinance, discharge or otherwise retire for value, in whole or in part,
or (b) constituting an amendment, modification or supplement to, or a deferral
or renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness (including Disqualified Capital Stock) in a principal amount or, in
the case of Disqualified Capital Stock, liquidation preference, not to exceed
(after deduction of reasonable and customary fees and expenses incurred in
connection with the Refinancing plus the amount of any premium paid in
connection with such Refinancing in accordance with the terms of the documents
governing the Indebtedness refinanced without giving effect to any modification
thereof made in connection with or in contemplation of such refinancing) the
lesser of (1) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness (including Disqualified
Capital Stock) so Refinanced and (2) if such Indebtedness being Refinanced was
issued with an original issue discount, the accreted value thereof (as
determined in accordance with GAAP) at the time of such Refinancing; provided,
that (A) such Refinancing Indebtedness shall only be used to refinance
outstanding Indebtedness (including Disqualified Capital Stock) of such Person
issuing such Refinancing Indebtedness, (B) such Refinancing Indebtedness shall
(x) not have an Average Life shorter than the Indebtedness (including
Disqualified Capital Stock) to be so refinanced at the time of such Refinancing
and (y) in all respects, be no less contractually subordinated or junior, if
applicable, to the rights of holders of the Old Notes and the New Notes than was
the Indebtedness (including Disqualified Capital Stock) to be refinanced, (C)
such Refinancing Indebtedness shall have a final stated maturity or redemption
date, as applicable, no earlier than the final stated maturity or redemption
date, as applicable, of the Indebtedness (including Disqualified Capital Stock)
to be so refinanced or, if sooner, 91 days after the Stated Maturity of the Old
Notes and the New Notes, and (D) such Refinancing Indebtedness shall be secured
(if secured) in a manner no more adverse to the holders of the Old Notes and the
New Notes than the terms of the Liens (if any) securing such refinanced
Indebtedness.
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"Related Business" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are materially related businesses.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than Permitted Investments.
"Restricted Payment" means, with respect to any Person:
(a) the declaration or payment of any dividend or other distribution
in respect of Equity Interests of such Person;
(b) any payment (except to the extent with Qualified Capital Stock) on
account of the purchase, redemption or other acquisition or retirement for
value of Equity Interests of such Person;
(c) other than with the proceeds from the substantially concurrent
sale of, or in exchange for, Refinancing Indebtedness, any purchase,
redemption, or other acquisition or retirement for value of, any payment in
respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such Person or a
Subsidiary of such Person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may
be, of such Subordinated Indebtedness; and
(d) any Restricted Investment by such Person;
provided, however, that the term "Restricted Payment" does not include (1)
any dividend, distribution or other payment on or with respect to Equity
Interests of an issuer to the extent payable solely in shares of Qualified
Capital Stock of such issuer, or (2) any dividend, distribution or other
payment to the Company, or to any Guarantor, by any Subsidiary of the
Company.
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Stated Maturity," when used with respect to any New Note, means December
15, 2008.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Guarantor that is subordinated in right of payment by its terms or the terms of
any document or instrument relating thereto ("contractually") to the Old Notes
and the New Notes or such guarantee, as applicable, in any respect.
"Subsidiary," with respect to any Person, means (1) any corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, (2) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person, or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof has a majority ownership interest, and (3)
any partnership in which such Person or a Subsidiary of such Person is, at the
time, a general partner. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be a Subsidiary of the Company or of any Subsidiary of the
Company. Unless the context requires otherwise, Subsidiary means each direct and
indirect Subsidiary of the Company.
"Unrestricted Subsidiary" means (1) each of our joint ventures existing on
the Issue Date and (2) any Subsidiary of the Company that is designated as such
in accordance with the covenant "Designation of Unrestricted Subsidiaries."
"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the United
States of America is pledged.
"Voting Equity Interests" means Equity Interests which at the time are
entitled to vote in the election of, as applicable, directors, members or
partners generally.
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"Wholly Owned Subsidiary" means a Subsidiary all the Equity Interests of
which (other than directors' qualifying Shares) are owned by the Company or one
or more Wholly Owned Subsidiaries of the Company or a combination thereof.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, New Notes will be issued in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
The New Notes will be represented by one or more notes in registered,
global form without interest coupons (collectively, the "Global Notes"). The
Global Notes will be deposited upon issuance with the trustee as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of Cede & Co., as nominee of DTC, for credit to the accounts of Direct
Participants and Indirect Participants (both as defined below) in DTC, including
the Euroclear System ("Euroclear") and Clearstream Banking, S.A.
("Clearstream").
Except in certain limited circumstances, the Global Notes may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Transfers of beneficial interests in the Global
Notes are subject to the applicable rules and procedures of DTC and its Direct
or Indirect Participants, including, if applicable, those of Euroclear and
Clearstream, which may change from time to time. Beneficial interests in the
Global Notes may not be exchanged for New Notes in certificated form, except in
certain limited circumstances. See "-- Exchange of Interests in Global Notes for
Certificated Notes."
Initially, the trustee will act as Paying Agent and Registrar. The New
Notes may be presented for registration of transfer and exchange at the offices
of the Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream is provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. Neither
we, the Guarantors nor the trustee takes any responsibility for these operations
and procedures, and we urge investors to contact the applicable system or its
participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Direct Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, including Euroclear and Clearstream. Access to
DTC's system is also available to other entities such as securities brokers and
dealers, banks and trust companies that clear through or maintain a direct or
indirect custodial relationship with a Direct Participant (collectively, the
"Indirect Participants").
We expect that pursuant to procedures established by DTC:
(a) upon deposit of the Global Notes, DTC will credit the accounts of
Direct Participants designated by the exchange agent with portions of the
principal amount of the Global Notes; and
(b) ownership of the New Notes evidenced by the Global Notes will be
shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the interests of the
Direct Participants), the Direct Participants and the Indirect
Participants.
Holders of interests in the Global Notes may hold their interests therein
directly through DTC if they are Direct Participants in such system or
indirectly through organizations that are Direct Participants in such system.
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The laws of some states require that certain persons take physical delivery
in definitive, certified form of securities that they own. This may limit or
curtail the ability to transfer beneficial interests in the Global Notes to such
persons. Because DTC can act only on behalf of Direct Participants, which in
turn on behalf of Indirect Participants and others, the ability of a person
having a beneficial interest in the Global Notes to pledge such interest to
persons or entities that are not Direct Participants in the DTC system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest.
So long as the Global Notes holder is the registered owner of any New
Notes, the Global Notes holder will be considered the sole holder under the
indenture of the New Notes evidenced by the Global Notes. Beneficial owners of
New Notes evidenced by the Global Notes will not be considered the owners or
holders thereof under the indenture for any purpose, including with respect to
receiving any payments or the giving of any directions, instructions or
approvals to the trustee thereunder. Neither we nor the trustee will have any
responsibility or liability for any aspect of the records of DTC or for
maintaining, supervising or reviewing any records of DTC relating to the New
Notes.
Payments in respect of the principal of, premium, if any, and interest, on
any New Notes registered in the name of the Global Notes holder on the
applicable record date will be payable by the trustee to DTC or its nominee
trustee to or at the direction of the Global Notes holder in its capacity as the
registered holder under the Indenture. Consequently, neither we, the Guarantors,
the trustee nor any of our, the Guarantors' or the trustee's agents has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any of the Global Notes or (ii) any other matter relating
to the actions and practices of DTC or any of its Direct Participants or
Indirect Participants.
DTC has advised us that its current practices, upon receipt of any payment
in respect of securities such as the New Notes (including principal, premium, if
any, interest) is to credit the accounts of the relevant Direct Participants
with such payment on the payment date, in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on the
records of DTC. Payments by Direct Participants and Indirect Participants to the
beneficial owners of New Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
trustee, us or the Guarantors. Neither we, the Guarantors nor the trustee will
be liable for any delay by DTC, its Direct Participants or its Indirect
Participants in identifying the beneficial owners of the New Notes, and we, the
Guarantors and the trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
New Notes for all purposes.
DTC has further advised us that it will take any action permitted to be
taken by a holder of New Notes only at the direction of one or more Direct
Participants to whose account DTC has credited interests in the Global Notes and
only in respect of such portion of the aggregate principal amount of the New
Notes as to which such Direct Participant or Direct Participants has or have
given direction. However, if there is any Event of Default under the New Notes,
DTC reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended New Notes in certificated form,
and to distribute such certificated forms of New Notes to its Direct
Participants. See "-- Exchange of Interests in Global Notes for Certificated
Notes."
The information in this section concerning DTC and its book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Neither we, the Guarantors, any of the Initial Purchasers nor the trustee
will have any responsibility for the performance by DTC, Euroclear or
Clearstream or their Direct Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
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EXCHANGE OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive New Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies us that it is unwilling or unable to continue as depositary for the
Global Note and we thereupon fail to appoint a successor depositary within 90
days or (y) has ceased to be a clearing agency registered under the Exchange
Act, (ii) we, at our option, notify the trustee in writing that we elect to
cause the issuance of Certificated Notes or (iii) there shall have occurred and
be continuing a Default or an Event of Default with respect to the New Notes. In
any such case, we will notify the trustee in writing that, upon surrender by the
Direct and Indirect Participants of their interests in such Global Note,
Certificated Notes will be issued to each person that such Direct and Indirect
Participants and the DTC identify as being the beneficial owner of the related
New Notes.
Beneficial interests in Global Notes held by any Direct Participant may be
exchanged for Certificated Notes upon request to DTC by such Direct Participant
(for itself or on behalf of an Indirect Participant), but only upon at least 20
days' prior written notice given to the trustee by or on behalf of DTC in
accordance with customary procedures. Certificated Notes delivered in exchange
for any Global Note or beneficial interest therein will be registered in the
names, and issued in any approved denominations, requested by DTC on behalf of
such Direct Participant (in accordance with DTC's customary procedures).
In all cases described herein, such Certificated Notes will bear the
restrictive legend referred to in the "Notice to Investors" section of this
prospectus unless we determine otherwise in compliance with applicable law.
CERTIFICATED NOTES
Certificated Notes may only be transferred or exchanged for a beneficial
interest in any Global Note if the transferor first delivers to the trustee a
written certificate (and, in certain circumstances, an opinion of counsel)
confirming that, in connection with such transfer, it has complied with the
restrictions on transfer described in the "Notice to Investors" section of this
prospectus.
SAME DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the New Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available same day funds to
the accounts specified by the holder of interests in such Global Note. With
respect to Certificated Notes, we will make all payments of principal, premium,
if any, and interest, if any, by wire transfer of immediately available same day
funds to the accounts specified by the holders thereof or, if no such account is
specified, by mailing a check to each such holder's registered address. We
expect that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by us on December 12, 2001 to Jefferies & Company,
Inc. and Deutsche Banc Alex. Brown Inc., the initial purchasers, pursuant to a
purchase agreement, dated December 7, 2001, between us and the initial
purchasers. The initial purchasers subsequently sold the Old Notes to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, in
reliance on Rule 144A and outside the United States to certain persons in
reliance on Regulation S under the Securities Act. As a condition to the initial
sale of the Old Notes, we and the initial purchasers entered into a registration
rights agreement. Under the registration rights agreement, we agreed that we
would:
- file with the SEC, on or prior to April 11, 2002, a registration
statement under the Securities Act to offer to exchange the New Notes for
the Old Notes; and
- use our best efforts to cause that registration statement to become
effective under the Securities Act as soon as practicable, but not later
than June 10, 2002.
We agreed to issue and exchange New Notes for all Old Notes validly
tendered and not withdrawn before the expiration of the exchange offer. A copy
of the registration rights agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part. This registration
statement is intended to satisfy our obligations under the registration rights
agreement and the purchase agreement.
In the event that due to a change in current interpretations by the SEC, we
are not permitted to effect this exchange offer, we will instead file a shelf
registration statement covering resales by the holders of the Old Notes and will
use our best efforts to cause such shelf registration statement to become
effective no later than 90 days after filing and to keep the shelf registration
statement effective for a maximum of two years after the shelf registration
becomes effective.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any and all Old
Notes validly tendered and not withdrawn prior to the expiration date of the
exchange offer. For each $1,000 principal amount of Old Notes properly tendered
and not withdrawn before the expiration date of the exchange offer, we will
issue you $1,000 principal amount of New Notes.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that:
- the exchange offer is registered under the Securities Act and, therefore,
the New Notes will not bear legends restricting the transfer thereof; and
- holders of the New Notes will not be entitled to any of the exchange,
registration or liquidated damages rights of holders of Old Notes under
the registration rights agreement, which rights will terminate upon the
consummation of the exchange offer.
The New Notes will evidence the same indebtedness as the Old Notes, which
they replace, and will be issued under, and be entitled to the benefits of, the
same indenture under which we issued the Old Notes. The New Notes and the Old
Notes will be treated as a single class of securities under the indenture. As of
the date of this prospectus, $160,000,000 of Old Notes are outstanding, all of
which are registered in the name of Cede & Co., as nominee for DTC, for credit
to an account of a direct or indirect participant in DTC, including Euroclear
and Clearstream.
Solely for reasons of administration, we have fixed the close of business
on [ ], 2002 as the record date for the exchange offer for purposes
of determining the persons to whom this prospectus and the letter of transmittal
will be mailed initially. There will be no fixed record date for determining
holders of the Old Notes entitled to participate in the exchange offer.
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Holders of the Old Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the indenture in connection
with the exchange offer. We intend to conduct the exchange offer in accordance
with the provisions of the registration rights agreement and the applicable
requirements of the Securities Act and the rules and regulations of the SEC
thereunder.
We shall be deemed to have accepted validly tendered Old Notes when, and
if, we have given oral or written notice thereof to U.S. Bank National
Association, as the exchange agent. The exchange agent will act as agent for the
tendering holders of Old Notes for the purpose of receiving the New Notes from
us.
Holders who tender Old Notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes. We will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the exchange offer.
See "The Exchange Offer -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
[ ], 2002, unless we, in our sole discretion, extend the exchange
offer, in which case the exchange offer will expire at the latest date and time
to which we extend the exchange offer.
If we determine to extend the exchange offer, we will, prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date:
- notify the exchange agent of any extension by oral or written notice; and
- issue a press release or other public announcement which shall include
disclosure of the approximate number of Old Notes tendered to date.
We reserve the right, in our sole discretion:
- to delay accepting any Old Notes;
- to extend the exchange offer; or
- if, in the opinion of our counsel, the consummation of the exchange offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the SEC, to terminate or amend the
exchange offer by giving oral or written notice of such delay, extension,
termination or amendment to the exchange agent. Any such delay in
acceptance, extension, termination or amendment will be followed as
promptly as practicable by a press release or other public announcement
thereof.
If the exchange offer is amended in a manner determined by us to constitute
a material change, we will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Old Notes, and we will extend the exchange offer for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the holders, if the exchange offer would otherwise expire
during such five to ten business day period.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, we shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the exchange offer, a holder of Old Notes must either:
- complete, sign and date the letter of transmittal or facsimile thereof,
have the signatures thereon guaranteed if required by the letter of
transmittal, and mail or otherwise deliver such letter of transmittal or
such facsimile or any other required documents to the exchange agent; or
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- if Old Notes are tendered pursuant to the procedures for book-entry
transfer set forth below, a holder tendering Old Notes may transmit an
agent's message (as defined below) to the exchange agent in lieu of the
letter of transmittal,
in either case for receipt on or prior to the expiration date.
In addition, either:
- certificates for Old Notes must be received by the exchange agent along
with the letter of transmittal;
- a timely confirmation of a book-entry transfer, called a "book-entry
confirmation," of the Old Notes into the exchange agent's account at DTC
pursuant to the procedure for book-entry transfer described below; or
- the holder must comply with the guaranteed delivery procedures described
below.
An agent's message is a message, transmitted to the exchange agent's
account at DTC and received by the exchange agent and forming a part of the
book-entry confirmation, which states that such account has received an express
acknowledgment from the tendering participant that such participant has received
and agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against such participant. To be tendered effectively, the
letter of transmittal and other required documents, or an agent's message in
lieu thereof, must be received by the exchange agent at the address set forth
below under "-- Exchange Agent" prior to expiration of the exchange offer.
The tender by a holder that is not withdrawn prior to the expiration of the
exchange offer will constitute an agreement between such holder and us in
accordance with the terms and subject to the conditions set forth herein and in
the letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION OF THE EXCHANGE OFFER. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY
OLD NOTES TO US. YOU MAY REQUEST YOUR BROKER, DEALER, COMMERCIAL BANK, TRUST
COMPANY OR NOMINEE TO EFFECT THE ABOVE TRANSACTIONS FOR YOU.
Any beneficial owner of the Old Notes whose Old Notes are held through a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such intermediary promptly and instruct such
intermediary to tender on such beneficial owner's behalf. If such beneficial
owner wishes to tender on its own behalf, such owner must, prior to completing
and executing the letter of transmittal and delivering such owner's Old Notes:
- make appropriate arrangements to register ownership of the Old Notes in
such owner's name; or
- obtain a properly completed bond power from the registered holder.
The transfer of registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an eligible institution unless the Old Notes are tendered:
- by a registered holder who has not completed the box titled "Special
Delivery Instruction" on the letter of transmittal; or
- for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be made by an eligible institution that is a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible
83
guarantor institution" (within the meaning of Rule 17Ad-15 under the Exchange
Act) that is a member of one of the recognized signature guarantee programs
identified in the letter of transmittal.
If the letter of transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder exactly as the registered holder's name appears on such Old
Notes.
In connection with any tender of Old Notes in definitive certified form, if
the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's Automated Tender Offer
Program to tender Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
us in our sole discretion, which determination will be final and binding. We
reserve the absolute right:
- to reject any and all Old Notes not properly tendered and any Old Notes
our acceptance of which would, in the opinion of our counsel, be
unlawful; and
- to waive any defects, irregularities or conditions of tender as to
particular Old Notes.
Our interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as we shall
determine. Although we intend to notify holders of defects or irregularities in
connection with tenders of Old Notes, neither we, the exchange agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While we have no present plan to acquire any Old Notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any Old Notes that are not tendered pursuant to the exchange offer,
we reserve the right in our sole discretion to purchase or make offers for any
Old Notes that remain outstanding subsequent to the expiration date and, to the
extent permitted by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the exchange offer.
By tendering Old Notes under the exchange offer, each holder of Old Notes
will represent to us that, among other things:
- the New Notes to be acquired by such holder of Old Notes in connection
with the exchange offer are being acquired by such holder in the ordinary
course of business of such holder;
- such holder is not participating, and has no arrangement or understanding
with any person to participate in, a distribution of the New Notes;
- such holder acknowledges and agrees that any person who is participating
in the exchange offer for the purpose of distributing the New Notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale of the New Notes
acquired by such person and cannot rely on the position of the staff of
the SEC set forth in certain no-action letters;
84
- such holder understands that a secondary resale transaction, described
above, should be covered by an effective registration statement
containing the selling security holder information required by Item 507
of Regulation S-K of the SEC; and
- such holder is not an "affiliate," as defined in Rule 405 under the
Securities Act, of ours or, if such holder is an "affiliate" of ours,
that the holder will comply with the registration and prospectus delivery
requirements of the Securities Act applicable to it.
If the holder is a broker-dealer that will receive New Notes for such
holder's own account in exchange for Old Notes that were acquired as a result of
market-making or other trading activities, such holder will be required to
acknowledge in the letter of transmittal that such holder will deliver a
prospectus in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
RETURN OF OLD NOTES
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of:
- Old Notes or a timely book-entry confirmation of such Old Notes into the
exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all
other required documents, or an agent's message in lieu thereof.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if Old Notes are withdrawn or are
submitted for a greater principal amount than the holders desire to exchange,
such unaccepted, withdrawn or otherwise non-exchanged Old Notes will be returned
without expense to the tendering holder thereof (or, in the case of Old Notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described below, such Old Notes
will be credited to an account maintained with DTC) as promptly as practicable.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account at DTC for
purposes of the exchange offer within two business days after the date of this
prospectus, and any financial institution that is a participant in DTC's system
may make book-entry delivery of Old Notes by causing DTC to transfer such Old
Notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. However, although delivery of Old Notes may be effected
through book-entry transfer at DTC, the letter of transmittal or facsimile
thereof, with any required signature guarantees and any other required
documents, or an agent's message in lieu of a letter of transmittal, must, in
any case, be transmitted to and received by the exchange agent at the address
set forth below under "-- Exchange Agent" on or prior to the expiration of the
exchange offer or pursuant to the guaranteed delivery procedures described
below.
GUARANTEED DELIVERY PROCEDURES
If a holder of the Old Notes desires to tender its Old Notes and the Old
Notes are not immediately available or the holder cannot deliver its Old Notes
(or complete the procedures for book-entry transfer), the letter of transmittal
or any other required documents to the exchange agent prior to the expiration of
the exchange offer, a holder may effect a tender if:
- the tender is made through an eligible institution;
- prior to the expiration of the exchange offer, the exchange agent
receives from such eligible institution (by facsimile, mail or hand
delivery) a properly completed and duly executed notice of guaranteed
delivery substantially in the form provided by us setting forth the name
and address of
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the holder, the certificate number(s) of such Old Notes (if applicable)
and the principal amount of Old Notes tendered, stating that the tender
is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the expiration date:
- the letter of transmittal (or a facsimile thereof), or an agent's
message in lieu thereof;
- the certificate(s) representing the Old Notes in proper form for
transfer or a book-entry confirmation, as the case may be; and
- any other documents required by the letter of transmittal;
will be deposited by the eligible institution with the exchange agent; and
- such properly executed letter of transmittal (or facsimile thereof), or
an agent's message in lieu thereof, as well as the certificate(s)
representing all tendered Old Notes in proper form for transfer or a
book-entry confirmation, as the case may be, and all other documents
required by the letter of transmittal, are received by the exchange agent
within three New York Stock Exchange trading days after the expiration
date.
Upon request to the exchange agent, a form of notice of guaranteed delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to the expiration of the exchange offer.
To withdraw a tender of Old Notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth herein prior to the expiration of the exchange
offer. Any such notice of withdrawal must:
- specify the name of the person having deposited the Old Notes to be
withdrawn;
- identify the Old Notes to be withdrawn (including the certificate number
or numbers, if applicable, and principal amount of such Old Notes); and
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such Old Notes were tendered
(including any required signature guarantees).
If Old Notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of DTC. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by us, in our sole discretion, which determination shall be final and
binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the exchange offer, and no New Notes will be issued with respect
thereto, unless the Old Notes so withdrawn are validly re-tendered. Properly
withdrawn Old Notes may be re-tendered by following one of the procedures
described above under "-- Procedures for Tendering Old Notes" at any time prior
to the expiration of the exchange offer.
TERMINATION OF CERTAIN RIGHTS
All exchange, registration and liquidated damages rights accorded to
holders of the Old Notes will terminate upon consummation of the exchange offer.
However, for a period of up to 180 days after the expiration date of the
exchange offer, we will keep the registration statement effective and provide
copies of the latest version of the prospectus solely to any broker-dealer that
requests copies of such prospectus for use in connection with any resale by such
broker-dealer of New Notes received for its own account pursuant to the exchange
offer in exchange for Old Notes acquired for its own account as a result of
market-making or other trading activities. See "Notice to Investors."
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EXCHANGE AGENT
U.S. Bank National Association, has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or the letter of transmittal and requests
for a copy of the notice of guaranteed delivery should be directed to the
exchange agent addressed as follows:
<Table>
By Overnight Courier or Hand Delivery: By Registered or Certified Mail:
U.S. Bank National Association U.S. Bank National Association
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 St. Paul, Minnesota 55101
Attention: Specialized Finance Department Attention: Specialized Finance Department
Corporate Trust Services Corporate Trust Services
By Facsimile (eligible institutions only): Confirm by Telephone:
(651) 244-1537 (800) 934-6802
</Table>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by us. The principal
solicitation is being made by mail; however, additional solicitation may be made
by facsimile, telephone, electronic means or in person by our officers and
regular employees or those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses.
The expenses to be incurred in connection with the exchange offer,
including registration fees, fees and expenses of the exchange agent and the
trustee, accounting and legal fees, and printing costs, will be paid by us.
We will pay all transfer taxes, if any, applicable to the exchange of Old
Notes under the exchange offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the Old Notes under the exchange offer, then
the amount of any such transfer taxes (whether imposed on the registered holder
or any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the letter of transmittal, the amount of the transfer taxes will be billed
directly to the tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the exchange offer is voluntary. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Old Notes that are not exchanged for the New Notes pursuant to the exchange
offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) under the Securities Act. Accordingly, such Old Notes may not be
offered, sold, pledged or otherwise transferred except:
- to us;
- to a person whom the seller reasonably believes is a "qualified
institutional buyer" within the meaning of Rule 144A purchasing for its
own account or for the account of a qualified institutional buyer in a
transaction meeting the requirements of Rule 144A;
- to an institutional accredited investor that is acquiring the notes for
its own account or for the account of an institutional accredited
investor for investment purposes and not with a view to, or for offer or
sale in connection with, any distribution in violation of the Securities
Act;
87
- in an offshore transaction complying with Rule 904 of Regulation S under
the Securities Act;
- under an effective registration statement under the Securities Act; or
- under any other available exemption from the registration requirements of
the Securities Act, and, in each case, in accordance with all other
applicable securities laws.
ACCOUNTING TREATMENT
For accounting purposes, we will recognize no gain or loss as a result of
the exchange offer. The expenses of the exchange offer will be amortized over
the term of the New Notes.
PLAN OF DISTRIBUTION
Except as described below, based on interpretations of the SEC staff set
forth in no-action letters issued to third parties, we believe that the New
Notes issued in exchange for Old Notes may be offered for resale, resold, and
otherwise transferred by a holder without further registration under the
Securities Act and without delivering a prospectus in connection with any resale
of the New Notes, provided that the holder:
- is acquiring the New Notes in the ordinary course of its business;
- is not participating, and has no arrangement or understanding with any
person to participate, in a distribution of the New Notes;
- is not an "affiliate" of Radiologix within the meaning of Rule 405 under
the Securities Act; and
- is not a broker-dealer who holds Old Notes acquired for its own account
as a result of market-making or other trading activities.
Holders wishing to tender their Old Notes in the exchange offer must
represent to us that these conditions have been met. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Each broker-dealer who holds Old Notes acquired for its own account as a
result of market-making or other trading activities may exchange the Old Notes
pursuant to the exchange offer. However, the broker-dealer may be deemed to be
an "underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with its initial resale of each New Note received in the exchange
offer. We will not receive any proceeds from any sale of New Notes by
broker-dealers.
For so long as the registration statement of which this prospectus is a
part is effective under the Securities Act, a broker-dealer may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with its resales of New Notes received for its account in exchange
for Old Notes that were acquired by the broker-dealer as a result of
market-making or other trading activities. For a period of up to 180 days after
the expiration date of the exchange offer, we expect to keep the registration
statement effective under the Securities Act for, and to make this prospectus
available to, broker-dealers who request in the letter of transmittal to use it
in connection with those resales.
Broker-dealers receiving New Notes for their own account pursuant to the
exchange offer may sell the New Notes from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of these resale
methods, at market prices prevailing at the time of resale or negotiated prices.
Any such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such participating broker-dealer.
We, however, have not sought, and do not intend to seek, our own no-action
letter and there can be no assurance that the SEC staff would make a similar
determination with respect to our exchange offer. Any holder who tenders in the
exchange offer for the purpose of participating in a distribution of the New
88
Notes cannot rely on these interpretations by the SEC staff and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
We have agreed to pay certain expenses relating to our performance under
the registration rights agreement, including the costs of providing this
prospectus, and to indemnify the holders of Old Notes against certain
liabilities, including liabilities under the Securities Act.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax consequences
to U.S. holders and non-U.S. holders relating to the exchange offer and the
ownership and disposition of the New Notes received in the exchange offer. As
used herein, a "U.S. holder" means a beneficial holder of New Notes received in
the exchange offer that is (i) a citizen or resident (within the meaning of
Section 7701(b) of the Code) of the U.S., (ii) a corporation, partnership or
other entity formed under the laws of the U.S. or any political subdivision
thereof, or (iii) an estate the income of which is subject to U.S. federal
income taxation regardless of its source and a trust subject to the primary
supervision of a court within the U.S. and the control of a U.S. fiduciary as
described in Section 7701(a)(30) of the Code. A "non-U.S. holder" is any holder
of a New Note other than a U.S. holder.
This discussion does not purport to address all aspects of U.S. federal
income taxation that may be relevant to particular holders in light of their
personal circumstances or the effect of any applicable state, local or foreign
tax laws. In addition, this discussion does not deal with persons that are
subject to special tax rules, such as (i) dealers or traders in securities or
currencies, (ii) financial institutions or other U.S. holders that treat income
in respect of the New Notes as financial services income, (iii) insurance
companies, (iv) tax-exempt entities, (v) persons holding New Notes as part of a
straddle, conversion transaction or other arrangement involving more than one
position, or (vi) persons whose functional currency is not the U.S. dollar. This
discussion assumes that the New Notes will be held as "capital assets" within
the meaning of Section 1221 of the Code.
This discussion is based upon provisions of the Code, the Treasury
Regulations, and judicial and administrative interpretations of the Code and
Treasury Regulations, all as in effect as of the date hereof, and all of which
are subject to change (possibly on a retroactive basis) or different
interpretation. There can be no assurance that the Internal Revenue Service (the
"IRS") will not challenge one or more of the tax consequences described herein.
We have not obtained, nor do we intend to obtain, a ruling from the IRS with
respect to the United States federal income tax consequences of the exchange
offer.
In considering the exchange of Old Notes in the exchange offer, you are
urged to consult your own tax advisors to determine your particular tax
consequences of exchanging Old Notes in the exchange offer and the ownership and
disposition of the New Notes under U.S. federal and applicable state, local and
foreign tax laws.
U.S. HOLDERS
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of the Old Notes for the New Notes in the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. A U.S. holder will have an initial tax basis in the New Notes equal to
the tax basis the holder had in the Old Notes exchanged therefor, and the U.S.
holder's holding period for the New Notes will include the period during which
the U.S. holder held the Old Notes.
TAXATION OF INTEREST
You must include interest earned on the New Notes as ordinary income at the
time it is received or accrued, in accordance with your regular method of
accounting for U.S. federal income tax purposes.
89
TAXATION OF MARKET DISCOUNT
The market discount rules discussed below apply to any New Note purchased
after original issue at a price less than its stated redemption price at
maturity.
If you purchase a New Note at a market discount, you generally will be
required to treat any principal payments on, or any gain on the disposition of
such note, as ordinary income to the extent of the accrued market discount (not
previously included in income) at the time of such payment or disposition. In
general, subject to a de minimis exception, market discount is the amount by
which the note's stated redemption price at maturity exceeds your tax basis in
the note immediately after the note is acquired. A note is not treated as
purchased at a market discount, however, if the market discount is less than
0.25 percent of the stated redemption price at maturity of the note multiplied
by the number of complete years to maturity from the date when you acquired the
note. Market discount on a note will accrue on a straight-line basis, unless you
elect to accrue such discount on a constant yield to maturity basis. This
election is irrevocable and applies only to the note for which it is made. You
may also elect to include market discount in income currently as it accrues.
This election, once made, applies to all market discount obligations acquired on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the IRS. If you acquire a note at
a market discount and dispose of such note in any non-taxable transaction (other
than a nonrecognition transaction defined in section 1276(c) of the Code),
accrued market discount will be includable as ordinary income to you as if you
had sold the note at its fair market value. Even to the extent that it is
otherwise deductible, you may still be required to defer the deduction of all or
a portion of the interest expense attributable to debt incurred or continued to
purchase or carry a note with market discount until the maturity of the note or,
in certain circumstances, its earlier disposition, unless the election to
include the market discount in income on a current basis is made.
TAXATION OF AMORTIZABLE BOND PREMIUM
If you purchase a New Note for an amount in excess of its stated redemption
price at maturity, you will generally be considered to have purchased the note
with "amortizable bond premium." The amount of amortizable bond premium is
computed based on the redemption price on an earlier call date if such
computation results in a smaller amortizable bond premium attributable to the
period of such earlier call date. You generally may elect to amortize such
premium using the constant yield to maturity method. The amount amortized in any
year will generally be treated as a reduction of your interest income on the
note. If the amortizable bond premium allocable to a year exceeds the amount of
interest allocable to that year, the excess would be allowed as a deduction for
that year but only to the extent of your prior interest inclusions on the note.
If you do not make such an election, the premium on a note will decrease the
gain or increase the loss otherwise recognized on the sale, redemption,
retirement or other disposition of the note. The election to amortize the
premium on a constant yield to maturity method, once made, generally applies to
all bonds held or subsequently acquired by you on or after the first day of the
first taxable year to which the election applies. You may not revoke this
election without the consent of the IRS.
SALE, EXCHANGE, OR REDEMPTION OF NOTES
Upon the sale, exchange or redemption of a New Note, you generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received on the sale,
exchange or redemption (except to the extent such amount is attributable to
accrued interest income not previously included in income, which will be taxable
as ordinary income, or is attributable to accrued interest that was previously
included in income, which amount may be received without generating further
income) and (ii) your adjusted tax basis in the note. Your adjusted tax basis in
a note generally will equal the cost of the note, increased by market discount
previously included in income, if any, and reduced by any bond premium
previously amortized. Subject to the market discount rules discussed above, such
capital gain or loss will be long-term capital gain or loss if your holding
period in the New Note is more than one year at the time of sale, exchange or
redemption. Long-term capital
90
gains recognized by certain noncorporate U.S. holders, including individuals,
will generally be subject to a maximum tax rate of 20%. The deductibility of
capital losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of U.S. federal income tax, at a rate of up to 30%, may
apply to payments pursuant to the terms of a New Note if you are a U.S. holder
and not an "exempt recipient" and if you fail to provide certain identifying
information (such as your TIN) in the manner required. Generally, individuals
are not exempt recipients. Corporations are exempt recipients, whereas other
entities may be exempt recipients. Any amount withheld from a payment to you
under the backup withholding rules is allowable as a refund or credit against
your U.S. federal income tax, provided that the required information is
furnished to the IRS in a timely manner.
NON-U.S. HOLDERS
EXCHANGE OF OLD NOTES FOR NEW NOTES
The exchange of the Old Notes for the New Notes in the exchange offer will
not be treated as an "exchange" for federal income tax purposes because the New
Notes will not be considered to differ materially in kind or extent from the Old
Notes. A non-U.S. holder will have an initial tax basis in the New Notes equal
to the tax basis the holder had in the Old Notes exchanged therefor, and the
non-U.S. holder's holding period for the New Notes will include the period
during which the non-U.S. holder held the Old Notes.
TAXATION OF INTEREST
Payments of principal or interest on the New Notes by us or any paying
agent to a beneficial owner of a New Note that is a non-U.S. holder will not be
subject to U.S. withholding tax, provided that, in the case of interest (i) you
do not own, actually or constructively, 10% or more of the total combined voting
power of all classes of our stock entitled to vote, (ii) you are not a
"controlled foreign corporation" that is related to us directly or indirectly
through stock ownership, (iii) you are not a bank with respect to which the
payments are received on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of your trade or business and (iv)
certain certification requirements are satisfied.
To satisfy the certification requirements referred to in (iv) above, either
(a) the beneficial owner of a note must certify, under penalties of perjury, to
us or our paying agent, as the case may be, that such owner is a non-U.S. holder
and must provide such owner's name and address, and U.S. taxpayer identification
number, if any, or (b) a securities clearing organization, bank or other
financial institution that holds customer securities in the ordinary course of
its trade or business (a "Financial Institution") and holds the note on behalf
of the beneficial owner thereof must certify, under penalties of perjury, to us
or our paying agent, as the case may be, that such certificate has been received
from the beneficial owner and must furnish the payor with a copy thereof. Such
requirement will be fulfilled if the beneficial owner of a note certifies on IRS
Form W-8BEN or successor form, under penalties of perjury, that it is a non-U.S.
holder and provides its name and address or any Financial Institution holding
the note on behalf of the beneficial owner files a statement with the
withholding agent to the effect that it has received such a statement from the
beneficial owner (and furnishes the withholding agent with a copy thereof). The
applicable regulations generally also require, in the case of a note held by a
foreign partnership, that (i) the certification described above be provided by
the partners and (ii) the partnership provide certain information, including,
under certain circumstances, a United States taxpayer identification number.
Further, a look-through rule will apply in the case of tiered partnerships.
Prospective investors should consult their tax advisors regarding the
certification requirements for non-U.S. holders.
Interest on New Notes not excluded from U.S. withholding tax as described
above generally will be subject to U.S. withholding tax at a 30% rate, except
where an applicable U.S. income tax treaty provides for the reduction or
elimination of such withholding tax (and you provide the appropriate
certification) or
91
if interest on the New Notes is effectively connected with your conduct of a
trade or business in the U.S., which is described more fully below.
SALE, EXCHANGE, OR REDEMPTION OF NOTES
Provided that we have been at no time within the 5-year period ending on
the date of the exchange a U.S. real property holding corporation within the
meaning of Section 897(c) of the Code, a non-U.S. holder generally will not be
subject to U.S. federal income tax on gain or income realized on the sale,
exchange or retirement of New Notes, unless, (i) in the case of an individual
non-U.S. holder, such holder either (A) is present in the U.S. for 183 days or
more in the year of such sale or (B) has gain from the disposition of New Notes
that is attributable to an office or other fixed place of business in the U.S.,
and (ii) in the case of a corporate non-U.S. holder, such holder has gain from
the disposition of New Notes that is attributable to an office or other fixed
place of business in the U.S.
INCOME OR GAINS EFFECTIVELY CONNECTED WITH A U.S. TRADE OR BUSINESS
If you are engaged in a trade or business in the U.S. and if interest on
the New Notes or gain realized on the sale, exchange or other disposition of a
New Note is effectively connected with the conduct of such trade or business
(and, if certain tax treaties apply, is attributable to a U.S. permanent
establishment maintained by you in the U.S.), you, although exempt from U.S.
withholding tax (provided that the certification requirements discussed in the
next sentence are met), will generally be required to pay U.S. federal income
tax on such interest or gain on a net income basis in the same manner as if you
were a U.S. holder. In lieu of the certificate described above, you would be
required, under currently effective Treasury Regulations, to provide us with a
properly executed IRS Form W-8ECI or successor form in order to claim an
exemption from U.S. withholding tax. In addition, if you are a foreign
corporation, you may be subject to a branch profits tax equal to 30% (or such
lower rate provided by an applicable U.S. income tax treaty) of a portion of
your effectively connected earnings and profits for the taxable year.
U.S. FEDERAL ESTATE TAX
A New Note held by an individual who at the time of death is not a citizen
or resident of the U.S. (as specially defined for U.S. federal estate tax
purposes) will not be subject to U.S. federal estate tax if the individual did
not actually or constructively own 10% or more of the total combined voting
power of all classes of our stock and, at the time of the individual's death,
payments with respect to such note would not have been effectively connected
with the conduct by such individual of a trade or business in the U.S.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, backup withholding and information reporting will not apply to
payments made by us or our paying agents, in their capacities as such, to a
non-U.S. holder if the holder has provided the required certification that the
holder is not a U.S. person as described in Section 7701 of the Code, provided
that neither we nor our paying agent has actual knowledge that the holder is a
U.S. person. Payments of the proceeds from a disposition by a non-U.S. holder of
a New Note made to or through a foreign office of a broker will generally not be
subject to information reporting or backup withholding. However, information
reporting will apply to those payments, if the broker is: (i) a U.S. person,
(ii) a controlled foreign corporation for U.S. federal income tax purposes,
(iii) a foreign person 50% or more of whose gross income from all sources is
effectively connected with a U.S. trade or business for a specified three-year
period, or (iv) a foreign partnership, if at any time during its tax year, one
or more of its partners are U.S. persons, as defined in Treasury Regulations,
who in the aggregate hold more than 50% of the income or capital interest in the
partnership or if, at any time during its tax year, the foreign partnership is
engaged in a U.S. trade or business, unless (A) such broker has documentary
evidence in its records that the beneficial owner is not a U.S. person and
certain other conditions are met or (B) the beneficial owner otherwise
establishes an exemption.
92
Payments of the proceeds from a disposition by a non-U.S. holder of New
Notes made to or through the U.S. office of a broker are subject to information
reporting and backup withholding unless the statement that the payee is not a
U.S. person described above has been received (and the payor does not have
actual knowledge that the beneficial owner is a U.S. person) or the holder or
beneficial owner otherwise establishes an exemption from information reporting
and backup withholding.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL TAX CONSIDERATIONS IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU ARE URGED TO
CONSULT YOUR TAX ADVISORS AS TO THE PARTICULAR CONSEQUENCES TO YOU OF THE
OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING THE EFFECT AND
APPLICABILITY OF STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, AS WELL AS THE
CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
LEGAL MATTERS
Certain legal matters with regard to the validity of the New Notes will be
passed upon for Radiologix by Haynes and Boone, LLP, Dallas, Texas.
INDEPENDENT AUDITORS
Our consolidated financial statements incorporated in this prospectus by
reference to our Annual Report on Form 10-K for the year ended December 31,
2001, have been incorporated in reliance on the report of Arthur Andersen, LLP,
independent public accountants, given on the authority of said firm as experts
in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available over the Internet at the SEC's website at http://www.sec.gov. You may
also read and copy any document we file at the SEC's public reference room at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call
1-800-SEC-0330 for further information on the operations of the public reference
room.
We may "incorporate by reference" in this prospectus the information we
file with the SEC, which means:
- incorporated documents are considered part of this prospectus;
- we can disclose important information to you by referring you to those
documents; and
- information that we subsequently file with the SEC will automatically
update and supersede the information in this prospectus and any
information that was previously incorporated by reference in this
prospectus. Any statement so updated or superseded shall not be deemed,
except as so updated or superseded, to constitute part of this
prospectus.
You can obtain any of the filings incorporated by reference in this
prospectus through us or from the SEC through the SEC's website or at the
address listed above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents that are not
specifically incorporated by reference in such documents. You can request a copy
of the documents incorporated by reference in this prospectus and a copy of the
indenture, registration rights agreement and other
93
agreements referred to in this prospectus by requesting them in writing or by
telephone from us at the following address:
Radiologix, Inc.
3600 JP Morgan Chase Tower, 2200 Ross Avenue
Dallas, Texas 75201
Attention: Investor Relations
Telephone: (214) 303-2776
This prospectus constitutes part of a registration statement on Form S-4 we
filed with the SEC under the Securities Act. This prospectus omits some of the
information contained in the registration statement, as permitted under the
rules and regulations of the SEC. Copies of the registration statement and its
exhibits are on file at the offices of the SEC and may be obtained from the SEC
for a prescribed fee or examined at its offices or on its website, as described
above.
INCORPORATION BY REFERENCE
We incorporate by reference into this prospectus the documents listed
below:
- our Annual Report on Form 10-K for the year ended December 31, 2001; and
- all documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this prospectus and prior
to the termination of the exchange offer.
94
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NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO ISSUE ONLY THE NEW NOTES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
---------------------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Notice to Investors................... i
Summary............................... 1
Risk Factors.......................... 5
The Diagnostic Imaging Services
Industry............................ 16
Business.............................. 18
No Cash Proceeds to Us................ 29
Capitalization........................ 30
Selected Consolidated Financial and
Operating Data...................... 31
Management's Discussion and Analysis
of Operations and Financial
Condition........................... 33
Cautionary Statement on
Forward-Looking Statements.......... 45
Description of New Notes.............. 45
The Exchange Offer.................... 81
Plan of Distribution.................. 88
Certain U.S. Federal Tax
Considerations...................... 89
Legal Matters......................... 93
Independent Auditors.................. 93
Where You Can Find Additional
Information......................... 93
Incorporation by Reference............ 94
</Table>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
RADIOLOGIX, INC.
OFFER TO EXCHANGE UP TO
$160,000,000 10 1/2% SERIES A NOTES DUE 2008
FOR
$160,000,000 10 1/2% SERIES B NOTES DUE 2008
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
, 2002
------------------------------------------------------
------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Radiologix's bylaws, as amended, provide that Radiologix shall, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law,
as amended from time to time, indemnify all persons whom it may indemnify
pursuant thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with any action, suit or proceedings brought by third parties by
reason of the fact that they were or are directors, officers, employees or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon fairly
and reasonably entitled to indemnify for such expenses despite such adjudication
of liability.
Article VI of Radiologix's amended and restated certificate of
incorporation provides that Radiologix's directors will not be personally liable
to Radiologix or its stockholders for monetary damages resulting from breaches
of their fiduciary duty as directors except for liability (a) for any breach of
the duty of loyalty to Radiologix or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) under Section 174 of the Delaware General Corporation Law or (d) for
any transaction from which the director derived an improper personal benefit.
Reference is made to Article VIII of Radiologix's amended and restated
bylaws, as filed with the SEC, which provides for indemnification of directors
and officers.
Radiologix entered into an indemnification agreement with certain of its
directors, pursuant to which Radiologix agreed to indemnify such persons for
losses arising out of any untrue statement or alleged untrue statement of a
material fact contained in this registration statement.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.1 -- Indenture, dated as of December 12, 2001, between
Radiologix, Inc., as Issuer, and U.S. Bank National
Association, as Trustee.
4.2 -- Form of New Note due 2008.
4.3 -- Registration Rights Agreement, dated as of December 12,
2001, between Radiologix, Inc. and Jeffries & Company, Inc.
and Deutsche Banc Alex. Brown Inc., as representatives of
the Initial Purchasers.
5.1 -- Opinion of Haynes and Boone, LLP regarding the validity of
the New Notes.
12.1 -- Statement of Computation of Ratio of Earnings to Fixed
Charges.
23.1 -- Consent of Haynes and Boone, LLP (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen, LLP.
24.1 -- Power of Attorney (included on the signature pages of this
registration statement).
</Table>
II-1
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1 of U.S. Bank National Association, as
Trustee.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Clients.
99.4 -- Form of Letter to Registered Holders.
99.5 -- Form of Instruction to Registered Holder from Owner.
99.6 -- Form of Exchange Agent Agreement.
</Table>
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to rule 424(b) if,
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration Statement
when it becomes effective; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) that, for the 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 a 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.
(5) that, for the purposes 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 there, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) that, for the purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
II-2
as amended, that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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 foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 29th day of March, 2002.
RADIOLOGIX, INC.
By: /s/ MARK L. WAGAR
------------------------------------
Mark L. Wagar
Chairman of the Board and
Chief Executive Officer
II-4
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS: That the undersigned officers and
directors of Radiologix, Inc., a Delaware corporation, do hereby constitute and
appoint Mark L. Wagar and Paul M. Jolas, and either of them, their true and
lawful attorneys-in-fact and agents or attorney-in-fact and agent, with power
and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, and any one of them, determine may
be necessary or advisable or required to enable said corporation to comply with
the Securities Act of 1933, as amended, and any rules or regulations or
requirements of the Securities and Exchange Commission in connection with this
registration statement. Without limiting the generality of the foregoing power
and authority, the powers granted include the full power of authority of
substitution and resubstitution, for them and in their name, place and stead, in
any and all capacities, the power and authority to sign the names of the
undersigned officers and directors in the capacities indicated below to this
registration statement, to any and all amendments (including any post-effective
amendments) and supplements thereto, and to any and all instruments or documents
filed as part of or in connection with such registration statement, and each of
the undersigned hereby ratifies and confirms all that said attorneys and agents,
or any of them, shall do or cause to be done by virtue hereof. The Power of
Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the 29th day of March, 2002.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on the 29th day of March, 2002.
<Table>
<Caption>
SIGNATURE
---------
/s/ MARK L. WAGAR Chairman of the Board, Chief Executive
- ------------------------------------------------ Officer and Director
Mark L. Wagar
/s/ SAMI S. ABBASI Executive Vice President and Chief Financial
- ------------------------------------------------ Officer
Sami S. Abbasi
/s/ PAUL D. FARRELL Director
- ------------------------------------------------
Paul D. Farrell
/s/ JOSEPH C. MELLO Director
- ------------------------------------------------
Joseph C. Mello
/s/ DERACE L. SCHAFFER, M.D. Director
- ------------------------------------------------
Derace L. Schaffer, M.D.
/s/ MICHAEL L. SHERMAN, M.D. Director
- ------------------------------------------------
Michael L. Sherman, M.D.
</Table>
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 29th day of March, 2002.
IDE IMAGING PARTNERS, INC.
PACIFIC IMAGING PARTNERS, INC.
QUESTAR IMAGING, INC.
WB&A IMAGING PARTNERS, INC.
TREASURE COAST IMAGING PARTNERS, INC.
RADIOLOGIX SERVICES, INC.
ADVANCED IMAGING PARTNERS, INC.
MID ROCKLAND IMAGING PARTNERS, INC.
RADIOLOGY AND NUCLEAR MEDICINE IMAGING
PARTNERS, INC.
COMMUNITY IMAGING PARTNERS, INC.
VALLEY IMAGING PARTNERS, INC.
ADVANCED RADIOLOGY, LLC
ADVANCED MEDICAL IMAGING, INC.
M&S IMAGING PARTNERS I, INC.
M&S IMAGING PARTNERS, L.P. (BY M&S
IMAGING PARTNERS, INC., ITS GENERAL
PARTNER)
QUESTAR CLEVELAND, INC.
QUESTAR TAMPA, INC.
QUESTAR ORLANDO, INC.
ROCKY MOUNTAIN OPENSCAN MRI, LLC
PREMIER ADVANCED IMAGING NETWORK, LTD.
(BY QUESTAR ORLANDO, INC., ITS
GENERAL
PARTNER)
QUESTAR KANSAS, INC.
QUESTAR PVH, INC.
QUESTAR SAN FRANCISCO, INC.
QUESTAR HENDERSON, INC.
QUESTAR TRISTATES, INC.
QUESTAR DULUTH, INC.
QUESTAR LINCOLN, INC.
QUESTAR PALM SPRINGS, INC.
QUESTAR LOWER BUCKS, INC.
QUESTAR TOLEDO, INC.
QUESTAR LOS ALAMITOS, INC.
QUESTAR VICTORVILLE, INC.
QUESTAR COLUMBUS, INC.
QUESTAR NAPERVILLE, INC.
QUESTAR QUAKERTOWN, INC.
QUESTAR TUCSON, INC.
By: /s/ MARK L. WAGAR
------------------------------------
Mark L. Wagar
Chairman of the Board and
Chief Executive Officer
II-6
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS: That the undersigned officers and
directors of the registrants do hereby constitute and appoint Mark L. Wagar and
Paul M. Jolas, and either of them, their true and lawful attorneys-in-fact and
agents or attorney-in-fact and agent, with power and authority to do any and all
acts and things and to execute any and all instruments which said attorneys and
agents, and any one of them, determine may be necessary or advisable or required
to enable said corporation to comply with the Securities Act of 1933, as
amended, and any rules or regulations or requirements of the Securities and
Exchange Commission in connection with this registration statement. Without
limiting the generality of the foregoing power and authority, the powers granted
include the full power of authority of substitution and resubstitution, for them
and in their name, place and stead, in any and all capacities, the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this registration statement, to any and all
amendments (including any post-effective amendments) and supplements thereto,
and to any and all instruments or documents filed as part of or in connection
with such registration statement, and each of the undersigned hereby ratifies
and confirms all that said attorneys and agents, or any of them, shall do or
cause to be done by virtue hereof. The Power of Attorney may be signed in
several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the 29th day of March, 2002.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on the 29th day of March, 2002.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ MARK L. WAGAR Chairman of the Board,
- ------------------------------------------------ Chief Executive Officer
Mark L. Wagar and Director
/s/ MARK S. MARTIN President and Chief Operating Officer
- ------------------------------------------------
Mark S. Martin
/s/ SAMI S. ABBASI Executive Vice President,
- ------------------------------------------------ Chief Financial Officer
Sami S. Abbasi and Treasurer
/s/ PAUL M. JOLAS Executive Vice President, General Counsel,
- ------------------------------------------------ Secretary and Director
Paul M. Jolas
</Table>
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on this 29th day of March, 2002.
M&S IMAGING INVESTMENTS, INC.
By: /s/ MARK L. WAGAR
------------------------------------
Mark L. Wagar
Chairman of the Board and
Chief Executive Officer
II-8
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS: That the undersigned officers and
directors of M&S Imaging Investments, Inc., a Delaware Corporation, do hereby
constitute and appoint Mark L. Wagar and Paul M. Jolas, and either of them,
their true and lawful attorneys-in-fact and agents or attorney-in-fact and
agent, with power and authority to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, and any one of them,
determine may be necessary or advisable or required to enable said corporation
to comply with the Securities Act of 1933, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this registration statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the full power of
authority of substitution and resubstitution, for them and in their name, place
and stead, in any and all capacities, the power and authority to sign the names
of the undersigned officers and directors in the capacities indicated below to
this registration statement, to any and all amendments (including any
post-effective amendments) and supplements thereto, and to any and all
instruments or documents filed as part of or in connection with such
registration statement, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or any of them, shall do or cause to be done
by virtue hereof. The Power of Attorney may be signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the 29th day of March, 2002.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities indicated on the 29th day of March, 2002.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ MARK L. WAGAR Chairman of the Board,
------------------------------------------------ Chief Executive Officer
Mark L. Wagar and Director
/s/ MARK S. MARTIN President and Chief Operating Officer
------------------------------------------------
Mark S. Martin
/s/ SAMI S. ABBASI Executive Vice President,
------------------------------------------------ Chief Financial Officer
Sami S. Abbasi and Treasurer
/s/ PAUL M. JOLAS Executive Vice President, General Counsel,
------------------------------------------------ Secretary and Director
Paul M. Jolas
</Table>
II-9
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.1 -- Indenture, dated as of December 12, 2001, between
Radiologix, Inc., as Issuer, and U.S. Bank National
Association, as Trustee.
4.2 -- Form of New Note due 2008.
4.3 -- Registration Rights Agreement, dated as of December 12,
2001, between Radiologix, Inc. and Jeffries & Company, Inc.
and Deutsche Banc Alex. Brown Inc., as representatives of
the Initial Purchasers.
5.1 -- Opinion of Haynes and Boone, LLP regarding the validity of
the New Notes.
12.1 -- Statement of Computation of Ratio of Earnings to Fixed
Charges.
23.1 -- Consent of Haynes and Boone, LLP (included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen, LLP.
24.1 -- Power of Attorney (included on the signature pages of this
registration statement).
25.1 -- Statement of Eligibility under the Trust Indenture Act of
1939 on Form T-1 of U.S. Bank National Association, as
Trustee.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Form of Letter to Clients.
99.4 -- Form of Letter to Registered Holders.
99.5 -- Form of Instruction to Registered Holder from Owner.
99.6 -- Form of Exchange Agent Agreement.
</Table>
II-10