<Page>
As filed with the Securities and Exchange Commission on November 22, 2002
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------
MEDQUEST, INC.
and the Guarantors Listed in the Table Below
(Exact name of registrant as specified in charter)
<Table>
<Caption>
Delaware 8071 22-3860764
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
</Table>
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
Gene Venesky
Chief Executive Officer
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
----------------------------------
WITH A COPY TO:
Rosa A. Testani, Esq.
O'Melveny & Myers LLP
30 Rockefeller Plaza
New York, New York 10112
(212) 408-2400
----------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are 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>
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of To be Offering Price Aggregate Offering Registration
Securities to be Registered Registered Per Note Price(1) Fee
11 7/8% Senior Subordinated Notes, Series B, due
2012........................................... $180,000,000 100% $180,000,000 $16,560(2)
Guarantees of 11 7/8% Senior Subordinated Notes,
Series B, due 2012............................. $180,000,000 (3) (3) (2)
</Table>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The second prospectus that is part of this registration statement will only
be used by J.P. Morgan Securities Inc., which is an affiliate of
MedQuest, Inc., in connection with offers and sales related to market-making
transactions of an indeterminate amount of MedQuest's 11 7/8% Senior
Subordinated Notes, Series B, due 2012. Pursuant to Rule 457(q) of the
General Rules and Regulations, no additional filing fee is required.
(3) Each of MQ Associates, Inc., Anderson Diagnostic Imaging, Inc., Asheville
Open MRI, Inc., BioImaging at Charlotte, Inc., BioImaging of Cool Springs,
Inc., BioImaging at Harding, Inc., Cabarrus Diagnostic Imaging, Inc., Cape
Fear Diagnostic Imaging, Inc., Carolina Imaging, Inc. of Fayetteville,
Chapel Hill Diagnostic Imaging, Inc., Chattanooga Diagnostic Imaging, Inc.,
Dothan Diagnostic Imaging, Inc., Florida Diagnostic Imaging Center, Inc.,
Grove Diagnostic Imaging Center, Inc., Imaging Services of Alabama, Inc.,
Kansas Diagnostic Imaging, Inc., Kenosha Diagnostic Imaging, Inc., Lexington
Open MRI, Inc., Mecklenburg Open MRI, Inc., MedQuest Associates, Inc,
Missouri Imaging, Inc., Mobile Open MRI, Inc., Northeast Columbia Diagnostic
Imaging, Inc., Occupational Solutions, Inc., Open MRI of the
Carolinas, Inc., Open MRI of Georgia, Inc., Open MRI & Imaging of
Georgia, Inc., Open MRI & Imaging of Richmond, Inc., Palmetto
Imaging, Inc., Phoenix Diagnostic Imaging, Inc., Piedmont Imaging, Inc.
(Forsyth), Piedmont Imaging, Inc. (Spartanburg), South Carolina Diagnostic
Imaging, Inc., Sun View Holdings, Inc., Texas Imaging Services of El
Paso, Inc., Triad Imaging, Inc., Tyson's Corner Diagnostic Imaging, Inc.,
Virginia Diagnostic Imaging, Inc., Athens MRI, LLC, Bridgeton MRI and
Imaging Center, LLC, Buckhead Diagnostic Imaging, LLC, Cape Imaging, L.L.C.,
Carolina Medical Imaging, LLC, Coastal Imaging, L.L.C., Cumming Diagnostic
Imaging, LLC, Diagnostic Imaging of Atlanta, LLC, Diagnostic Imaging of
Georgia, LLC, Diagnostic Imaging of Hiram, LLC, Diagnostic Imaging of
Marietta LLC, Duluth Diagnostic Imaging, LLC, Duluth CT Center, LLC, Durham
Diagnostic Imaging, LLC, East Cooper Diagnostic Imaging, LLC, Farmfield
Diagnostic Imaging, LLC, Fort Mill Diagnostic Imaging, LLC, Hapeville
Diagnostic Imaging, LLC, Imaging Center of Central Georgia, LLC,
Jacksonville Diagnostic Imaging, LLC, Kirkwood MRI and Imaging Center, LLC,
Midtown Diagnostic Imaging, LLC, Montgomery Open MRI, LLC, Norwood
Diagnostic Imaging, LLC, Open MRI & Imaging of Conyers, LLC, Open MRI &
Imaging of Albany, LLC, Open MRI & Imaging of Athens, LLC, Open MRI &
Imaging of Douglasville, LLC, Open MRI of Atlanta, LLC, Open MRI of Central
Georgia, LLC, Open MRI & Imaging of DeKalb, LLC, Open MRI & Imaging of North
Fulton, LLC, Open MRI & Imaging of Macon, LLC, Open MRI of Myrtle Beach,
LLC, Open MRI & Imaging of N.E. Georgia, LLC, Open MRI & Imaging of
Snellville, LLC, Open MRI & Imaging of Florence, LLC, Open MRI of
Simpsonville, LLC, Open MRI & Imaging of Richmond, LLC, Richmond West End
Diagnostic Imaging, LLC, Simpsonville Open MRI, LLC, St. Peters MRI &
Imaging Center, LLC, Tricom Diagnostic Imaging, LLC, West Ashley Diagnostic
Imaging, LLC, West Paces Diagnostic Imaging, LLC, Woodstock Diagnostic
Imaging, LLC, Town & Country Open MRI, LLC, Clayton Open MRI, LLC, Wisconsin
Diagnostic Imaging, Inc. and Vienna Diagnostic Imaging, Inc. will guarantee
the obligations of MedQuest, Inc. for the 11 7/8% Senior Subordinated Notes,
Series B, due 2012. No additional consideration for the guarantees of the
11 7/8% Senior Subordinated Notes will be furnished. Pursuant to
Rule 457(n), no additional registration fee is payable with respect such
guarantees.
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.
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<Page>
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
MQ Associates, Inc............... Delaware 8071 52-2148018 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Anderson Diagnostic Imaging,
Inc............................ South Carolina 8071 58-2323513 1011 Ella Street
Anderson, South Carolina 29621
(770) 300-0101
Asheville Open MRI, Inc.......... North Carolina 8071 56-2001227 675 Biltmore Avenue,
Suite A
Asheville, North Carolina 28803
(770) 300-0101
BioImaging at Charlotte, Inc..... Tennessee 8071 62-1745982 1800 Charlotte Avenue
Nashville, Tennessee 37203
(770) 300-0101
BioImaging of Cool Springs,
Inc............................ Tennessee 8071 62-1848634 3310 Aspen Grove Drive,
Suite 101
Franklin, Tennessee 37064
(770) 300-0101
BioImaging at Harding, Inc....... Tennessee 8071 62-1618422 11 Harding Mall Drive Nashville,
Tennessee 37211
(770) 300-0101
Cabarrus Diagnostic Imaging,
Inc............................ North Carolina 8071 62-1715203 925 Bradley Street NE
Concord, North Carolina 28025
(770) 300-0101
Cape Fear Diagnostic Imaging,
Inc............................ North Carolina 8071 62-1833647 1602 Physician's Drive
Suites 101 and 102
Wilmington, North Carolina 28401
(770) 300-0101
Carolina Imaging, Inc. of
Fayetteville................... North Carolina 8071 56-1876345 3628 Cape Center Drive
Fayetteville, North Carolina
28304
(770) 300-0101
Chapel Hill Diagnostic Imaging,
Inc............................ North Carolina 8071 56-2049126 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Chattanooga Diagnostic Imaging,
Inc............................ Tennessee 8071 62-1711908 440 N. Holtzclaw Avenue
Chattanooga, Tennessee 37404
(770) 300-0101
Dothan Diagnostic Imaging, Inc... Alabama 8071 72-1393022 2240 W. Main Street
Dothan, Alabama 36301
(770) 300-0101
Florida Diagnostic Imaging
Center, Inc.................... Florida 8071 59-3551727 908 Mar Walt Drive
Fort Walton Beach, Florida 32547
(770) 300-0101
Grove Diagnostic Imaging Center,
Inc............................ California 8071 330644674 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
Imaging Services of Alabama,
Inc............................ Alabama 8071 63-1270758 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Kansas Diagnostic Imaging,
Inc............................ Kansas 8071 48-1231368 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Kenosha Diagnostic Imaging,
Inc............................ Wisconsin 8071 02-0623553 The Crossing Office Center
8500 75th Street, Suite 106
Kenosha, Wisconsin
(770) 300-0101
Lexington Open MRI, Inc.......... South Carolina 8071 57-1060462 2997 and 2999 Sunset Boulevard
W. Columbia, South Carolina 29169
(770) 300-0101
Mecklenburg Open MRI, Inc........ North Carolina 8071 56-2016235 6324 Fairview Road,
Suite 120-A
Charlotte, North Carolina 28210
(770) 300-0101
MedQuest Associates, Inc......... South Carolina 8071 57-0997427 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Missouri Imaging, Inc............ Missouri 8071 43-1856840 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Mobile Open MRI, Inc............. Alabama 8071 62-1664765 4724 Airport Boulevard
Mobile, Alabama 36608
(770) 300-0101
Northeast Columbia Diagnostic
Imaging, Inc................... South Carolina 8071 30-0077354 21 Gateway Corners Park
Columbia, South Carolina 29223
(770) 300-0101
Occupational Solutions, Inc...... Georgia 8071 58-2504238 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Open MRI of the Carolinas,
Inc............................ South Carolina 8071 57-1121114 377 Carowinds Blvd,
Suite 107
Fort Mill, South Carolina 29715
(770) 300-0101
Open MRI of Georgia, Inc......... Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Open MRI & Imaging of Georgia,
Inc............................ Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Open MRI & Imaging of Richmond,
Inc............................ Virginia 8071 54-2039150 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Palmetto Imaging, Inc............ South Carolina 8071 57-1013875 1331 Lady Street
Columbia, South Carolina 29201
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
Phoenix Diagnostic Imaging,
Inc............................ Arizona 8071 86-0879646 1111 South Dobson
Mesa, Arizona 85202
(770) 300-0101
Piedmont Imaging, Inc.
(Forsyth)...................... North Carolina 8071 56-1876341 750 Highland Oaks
Drive, Suite 200
Winston Salem, North Carolina
27103
(770) 300-0101
Piedmont Imaging, Inc.
(Spartanburg).................. South Carolina 8071 58-2324016 684 N. Pine Street
Spartanburg, South Carolina 29303
(770) 300-0101
South Carolina Diagnostic
Imaging, Inc................... South Carolina 8071 56-2231622 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Sun View Holdings, Inc........... South Carolina 8071 57-0986433 755 S. Telshor Boulevard
Ste. 101st
Las Cruces, New Mexico 88011
(770) 300-0101
Texas Imaging Services of El
Paso, Inc...................... Texas 8071 74-2760550 1626 Medical Center Street
El Paso, Texas 79902
(770) 300-0101
Triad Imaging, Inc............... North Carolina 8071 56-2001223 2705-A and 2705-B Henry Street
Greensboro, North Carolina 27408
(770) 300-0101
Tyson's Corner Diagnostic
Imaging, Inc................... Virginia 8071 54-2058650 8320 Old Court House Rd.
Suite 150, 130
Vienna, Virginia 22182
(770) 300-0101
Virginia Diagnostic Imaging,
Inc............................ Virginia 8071 54-2027305 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Athens MRI, LLC.................. Georgia 8071 58-2419234 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Bridgeton MRI and Imaging Center,
LLC............................ Missouri 8071 43-1856840 12121 Saint Charles Rock Road
Bridgeton, Missouri 63044
(770) 300-0101
Buckhead Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 2045 Peachtree Road, NE
Terrace Level, Suite 2
Atlanta, Georgia 30339
(770) 300-0101
Cape Imaging, L.L.C.............. Missouri 8071 43-1856840 Auburn Park Place,
Suite 109
3065 William Street
Cape Girardeau, Missouri 63122
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
Carolina Medical Imaging, LLC.... South Carolina 8071 57-1013875 3010 Farrow Road, Suite 100
Columbia, South Carolina 29203
(770) 300-0101
Coastal Imaging, LLC............. North Carolina 8071 56-1876345 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Cumming Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 318 Tribble Gap Road
Cumming, Georgia 30040
(770) 300-0101
Diagnostic Imaging of Atlanta,
LLC............................ Georgia 8071 58-2419234 993 Johnson Ferry Road NE
Building F, Suite 110
Atlanta, Georgia 30342
(770) 300-0101
Diagnostic Imaging of Georgia,
LLC............................ Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Diagnostic Imaging of Hiram,
LLC............................ Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Diagnostic Imaging of Marietta
LLC............................ Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Duluth Diagnostic Imaging, LLC... Georgia 8071 58-2419234 10670 Medlock Bridge Road
Duluth, Georgia 30097
(770) 300-0101
Duluth CT Center, LLC............ Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Durham Diagnostic Imaging, LLC... North Carolina 8071 56-2272517 2609 N. Duke Street,
Suite 303 & 303A
Durham, North Carolina 27704
(770) 300-0101
East Cooper Diagnostic Imaging,
LLC............................ South Carolina 8071 56-2231622 953 Houston Northcutt Boulevard
Mt. Pleasant, South Carolina
29464
(770) 300-0101
Farmfield Diagnostic Imaging,
LLC............................ South Carolina 8071 56-2231622 14C Farmfield Road
Charleston, South Carolina 29407
(770) 300-0101
Fort Mill Diagnostic Imaging,
LLC............................ South Carolina 8071 56-2231622 c/o MedQuest Associates, Inc.
4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Hapeville Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 535 North Central Avenue,
Suite C
Hapeville, Georgia 30309
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
Imaging Center of Central
Georgia, LLC................... Georgia 8071 58-2419234 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Jacksonville Diagnostic Imaging,
LLC............................ North Carolina 8071 94-3419385 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Kirkwood MRI and Imaging Center,
LLC............................ Missouri 8071 43-1856840 473 South Kirkwood
Kirkwood, Missouri 83122
(770) 300-0101
Midtown Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 600 W. Peachtree Street,
Suite 140
Atlanta, Georgia 30308
(770) 300-0101
Montgomery Open MRI, LLC......... Alabama 8071 63-1283359 249 Winton Blount Loop
Montgomery, Alabama 36117
(770) 300-0101
Norwood Diagnostic Imaging,
LLC............................ Alabama 8071 63-1270758 1119 25th St. N.
Birmingham, Alabama 35234
(770) 300-0101
Open MRI & Imaging of Conyers,
LLC............................ Georgia 8071 58-2419234 2287 Salem Road
Conyers, Georgia 30013
(770) 300-0101
Open MRI & Imaging of Albany,
LLC............................ Georgia 8071 58-2419234 2416-C Westgate Boulevard
Albany, Georgia 31707
(770) 300-0101
Open MRI & Imaging of Athens,
LLC............................ Georgia 8071 58-2419234 845 Prince Avenue
Athens, Georgia 30606
(770) 300-0101
Open MRI & Imaging of
Douglasville, LLC.............. Georgia 8071 58-2419234 5788 Fairburn Road
Douglasville, Georgia 30134
(770) 300-0101
Open MRI of Atlanta, LLC......... Georgia 8071 58-2419234 3200 Cobb Galleria Parkway
Suite 120
Atlanta, Georgia 30339
(770) 300-0101
Open MRI of Central Georgia,
LLC............................ Georgia 8071 58-2419234 2706 Watson Boulevard,
Suite D
Warner Robins, Georgia 31093
(770) 300-0101
Open MRI & Imaging of DeKalb,
LLC............................ Georgia 8071 58-2419234 2601 North Decatur Road
Decatur, Georgia 30033
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
Open MRI & Imaging of North
Fulton, LLC.................... Georgia 8071 58-2419234 11660 Alpharetta Hwy,
Suite 145
Roswell, Georgia 30076
(770) 300-0101
Open MRI & Imaging of Macon,
LLC............................ Georgia 8071 58-2419234 2140 River Side Drive
Macon, Georgia 31204
(770) 300-0101
Open MRI of Myrtle Beach, LLC.... South Carolina 8071 57-1013875 900 21st Avenue
Myrtle Beach, South Carolina
29577
(770) 300-0101
Open MRI & Imaging of N.E.
Georgia, LLC................... Georgia 8071 58-2419234 425 Broad Street, #102
Gainesville, Georgia 30501
(770) 300-0101
Open MRI & Imaging of Snellville,
LLC............................ Georgia 8071 58-2419234 2151 Fountain Drive
Suites 203 & 204
Snellville, Georgia 30078
(770) 300-0101
Open MRI & Imaging of Florence,
LLC............................ South Carolina 8071 57-1013875 714 South Coit Street
Florence, South Carolina 29501
(770) 300-0101
Open MRI of Simpsonville, LLC.... South Carolina 8071 58-2419234 413-C Southeast Main Street
Simpsonville, South Carolina
29681
(770) 300-0101
Open MRI & Imaging of Richmond,
LLC............................ Virginia 8071 54-2027305 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Richmond West End Diagnostic
Imaging, LLC................... Virginia 8071 03-0403761 7110 Forest Avenue,
Suite 100
Richmond, Virginia 23226
(770) 300-0101
Simpsonville Open MRI, LLC....... South Carolina 8071 57-1013875 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
St. Peters MRI & Imaging Center,
LLC............................ Missouri 8071 43-1856840 5905 Mexico Road
St. Peters, Missouri 63376
(770) 300-0101
Tricom Diagnostic Imaging, LLC... South Carolina 8071 56-2231622 2851 Tricom Blvd
Charleston, South Carolina 29406
(770) 300-0101
West Ashley Diagnostic Imaging,
LLC............................ South Carolina 8071 56-2231622 Ashley Crossing Shopping Center
1975 Magwood Rd
Charleston, South Carolina 29414
(770) 300-0101
</Table>
<Page>
<Table>
<Caption>
Primary
Standard Address, Including Zip Code,
State or Other Industrial and Telephone Number,
Jurisdiction of Classification I.R.S. Employer Including Area Code,
Exact Name of Registrant Incorporation Code Identification of Registrant's Primary
as Specified in its Charter or Organization Number Number Executive Offices
- --------------------------- ---------------- -------------- --------------- ---------------------------------
West Paces Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 3193 Howell Mill Rd., NW
Suite 113,
Atlanta, Georgia 30327
(770) 300-0101
Woodstock Diagnostic Imaging,
LLC............................ Georgia 8071 58-2419234 300 Parkbrooke Place
Suite 170
Woodstock, Georgia 30189
(770) 300-0101
Town & Country Open
MRI, LLC....................... Missouri 8071 43-1856840 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Clayton Open MRI, LLC............ Missouri 8071 43-1856840 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Wisconsin Diagnostic Imaging,
Inc............................ Wisconsin 8071 16-1637816 4300 North Point Parkway
Alpharetta, Georgia 30022
(770) 300-0101
Vienna Diagnostic Imaging, Inc... Virginia 8071 74-3065759 102 Maple Avenue
Vienna, Virginia 22180
(770) 300-0101
</Table>
<Page>
Explanatory Note
This Registration Statement covers the registration of $180,000,000 aggregate
principal amount of our 11 7/8% Senior Subordinated Notes, Series B, due 2012.
These registered notes will be called the exchange notes and will be guaranteed
by the note guarantors. The exchange notes may be exchanged in the exchange
offer for an equal aggregate principal amount of our outstanding 11 7/8% Senior
Subordinated Notes, Series A, due 2012. The outstanding notes will be called the
old notes and are also guaranteed by the note guarantors. The old notes,
together with the exchange notes, will be called the "notes." This Registration
Statement also covers the registration of exchange notes for resale by J.P.
Morgan Securities, Inc. in market-making transactions. The complete prospectus
relating to the exchange offer follows this explanatory note. Following the
exchange offer prospectus are certain pages of the prospectus relating solely to
market-making transactions that may be made by J.P. Morgan Securities Inc.,
including an alternate front cover page, a section entitled "Risk factors--You
cannot be sure that an active trading market will develop for the exchange
notes" to be used in lieu of the section entitled "Risk factors--Your ability to
transfer the exchange notes may be limited by the absence of an active trading
market, and there is no assurance that any active trading market will develop
for the exchange notes" and alternate sections entitled "Use of proceeds,"
"Legal matters" and "Plan of distribution." In addition, the market-making
prospectus will not include the following captions (or the information set forth
under those captions) contained in the exchange offer prospectus: "Prospectus
summary--Summary of the terms of the exchange offer," "Risk factors--If you do
not participate in the exchange offer, you will continue to hold unregistered
old notes that are subject to transfer restrictions," "The exchange offer,"
"Exchange and registration rights agreement" and "Certain federal income tax
considerations." All other sections of the exchange offer prospectus will be
included in the market-making prospectus.
<Page>
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.
<Page>
Subject to completion, dated November 22, 2002
Prospectus
[GRAPHIC]
MedQuest, Inc.
OFFER TO EXCHANGE ALL OUTSTANDING 11 7/8% SENIOR SUBORDINATED NOTES, SERIES A,
DUE 2012 FOR 11 7/8% SENIOR SUBORDINATED NOTES, SERIES B, DUE 2012 WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
The exchange offer
- We will exchange all old notes that are validly tendered and not validly
withdrawn for an equal principal amount of exchange notes that are freely
tradable.
- You may withdraw tenders of old notes at any time prior to the expiration
of the exchange offer.
- The exchange offer expires at 5:00 p.m., New York City time, on
2002, unless we extend the offer.
The exchange notes
- The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the old notes, except that the exchange notes
will be freely tradable by persons who are not affiliated with us.
- No public market currently exists for the old notes. We do not intend to
list the exchange notes on any securities exchange and, therefore, no
active public market is anticipated.
- The exchange notes, like the old notes, will be unsecured and guaranteed
on a senior subordinated basis by our parent, MQ Associates, Inc., and
all of our existing and future domestic subsidiaries. If we fail to make
payments on the exchange notes, MQ Associates, Inc. and our subsidiary
guarantors must make them instead.
- The exchange notes will rank junior in right of payment to all of our
existing and future senior debt, rank equally with any of our future
senior subordinated debt and rank senior to any of our future
subordinated debt. As of September 30, 2002, we had outstanding senior
debt of $46.8 million, of which $43.0 million was outstanding under our
senior credit facility, and there was no debt outstanding that ranked
equally with, or junior in right of payment to, the notes.
- Each broker-dealer that receives exchange notes pursuant to this exchange
offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes.
- If the broker-dealer acquired the old notes as a result of market-making
or other trading activities, such broker-dealer may use this prospectus
for the exchange offer, as supplemented or amended, in connection with
its resales of the exchange notes.
See "Risk factors" beginning on page 16 for a discussion of certain risks that
you should consider before participating in this exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
, 2002
<Page>
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date on the front cover of this
prospectus.
-------------------
Table of contents
<Table>
<Caption>
Page
Disclosure regarding forward-looking
statements.......................... ii
Market and industry data and
forecasts........................... iii
Summary............................... 1
Summary of the terms of the exchange
offer............................... 6
Summary of the terms of the exchange
notes............................... 10
Summary consolidated financial
information......................... 13
Risk factors.......................... 16
The exchange offer.................... 32
The Transactions...................... 44
Use of proceeds....................... 46
Capitalization........................ 47
Unaudited pro forma financial
information......................... 48
Selected historical financial data.... 52
Management's discussion and analysis
of financial condition and results
of operations....................... 55
</Table>
<Table>
<Caption>
Page
Industry.............................. 67
Business.............................. 71
Management............................ 85
Security ownership of certain
beneficial owners and management.... 89
Certain relationships and related
transactions........................ 91
Description of senior credit
facility............................ 95
Description of notes.................. 98
Registration rights................... 163
Description of capital stock of MQ
Associates, Inc..................... 165
Book-entry settlement and clearance... 168
Certain United States federal income
tax consequences.................... 170
Plan of distribution.................. 171
Legal matters......................... 171
Experts............................... 171
Where you can find more information... 172
Index to consolidated financial
statements.......................... F-1
</Table>
-------------------
MedQuest, Inc. is a Delaware corporation. Our principal executive offices are
located at 4300 North Point Parkway, Alpharetta, Georgia 30022, and our
telephone number at that address is (770) 300-0101.
In this prospectus, "we", "us", "our" and "MedQuest" refer to MedQuest, Inc. and
its subsidiaries, unless the context otherwise requires.
Until , 2002 (90 days after the date of this prospectus), all
dealers effecting transactions in the exchange notes, whether or not
participating in this exchange offer, may be required to deliver a prospectus.
i
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Disclosure regarding forward-looking statements
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenue or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions,
business trends and other information that is not historical information and, in
particular, appear under the headings "Summary," "Management's discussion and
analysis of financial condition and results of operations" and "Business." When
used in this prospectus, the words "estimates," "expects," "anticipates,"
"projects," "plans," "intends," "believes," "forecasts" and variations of such
words or similar expressions are intended to identify forward-looking
statements. All forward-looking statements, including, without limitation,
management's examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. However, there can be no assurance that management's
expectations, beliefs and projections will result or be achieved.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
this prospectus. Important factors that could cause our actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth in this prospectus, including under the heading "Risk factors." As
stated elsewhere in this prospectus, such risks, uncertainties and other
important factors include, among others:
- general economic and business conditions, particularly an economic
downturn;
- healthcare industry trends;
- increases in our leverage;
- availability and terms of additional capital to fund our capital
expenditure requirements;
- restrictions imposed by our debt agreements;
- our status as a holding company;
- changes in, or the failure or inability to comply with, governmental
regulations;
- increases in the cost of compliance with laws and regulations, including
regulations imposed by federal and state governments;
- limitations and delays in reimbursement by third-party payors;
- competition;
- introduction of new technologies;
- availability and retention of qualified personnel; and
- costs of integrating future acquisitions.
There may be other factors that may cause our actual results to differ
materially from the forward-looking statements.
ii
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All forward-looking statements attributable to us or persons acting on our
behalf apply only as of the date of this prospectus and are expressly qualified
in their entirety by the cautionary statements included in this prospectus. We
undertake no obligation to publicly update or revise forward-looking statements
which may be made to reflect events or circumstances after the date made or to
reflect the occurrence of unanticipated events.
Market and industry data and forecasts
This prospectus includes market share and industry data and forecasts that we
obtained from industry publications and surveys, reports of governmental
agencies and internal company surveys. Verispan L.L.C., of which SMG Marketing
Group ("SMG") is a part, The American College of Radiology and Frost & Sullivan
were the primary sources for third-party industry data and forecasts. Industry
publications and surveys and forecasts generally state that the information
contained therein has been obtained from sources believed to be reliable, but
there can be no assurance as to the accuracy or completeness of included
information. We have not independently verified any of the data from third-party
sources nor have we ascertained the underlying economic assumptions relied upon
therein. Statements as to our market position relative to our competitors are
based on the number of centers we operated as of May 31, 2002. Statements as to
our local market position are based on survey data for average weekly procedure
volume, which data for our competitors was collected by SMG in the six months
prior to March 31, 2002 and by us internally for our average weekly procedure
volume. Statements as to the diagnostic imaging services industry and the FIC
market refer only to the diagnostic imaging services industry and FIC market in
the United States.
iii
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Summary
THIS SUMMARY HIGHLIGHTS THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS AND SHOULD
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH UNDER "RISK FACTORS" AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS BEFORE MAKING YOUR INVESTMENT DECISION. THE FINANCIAL DATA INCLUDED
IN THIS PROSPECTUS COMES FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF OUR
PARENT, MQ ASSOCIATES, INC. AND OUR SUBSIDIARIES. MQ ASSOCIATES, INC. IS A
GUARANTOR OF THE NOTES AND OF THE SENIOR CREDIT FACILITY AND HAS NO MATERIAL
ASSETS OR OPERATIONS OTHER THAN ITS OWNERSHIP OF 100% OF OUR CAPITAL STOCK. AS A
RESULT, THE CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF MQ
ASSOCIATES, INC. ARE SUBSTANTIALLY THE SAME AS OURS. EXCEPT IN THE "DESCRIPTION
OF NOTES" SECTION AND UNLESS THE CONTEXT OTHERWISE REQUIRES, ANY REFERENCES TO
"MEDQUEST," "WE," "US" OR "OUR" SHALL REFER TO MEDQUEST, INC. AND ITS
SUBSIDIARIES.
The business
We are a leading operator of independent, fixed-site, outpatient diagnostic
imaging centers (each, a "FIC") in the United States. Our centers provide high
quality diagnostic imaging services using a variety of technologies, including
magnetic resonance imaging (MRI), computed tomography (CT), nuclear medicine,
general radiology (fluoroscopy and x-ray), ultrasound, mammography and bone
densitometry. We operate a network of 77 wholly owned centers in 12 states
primarily throughout the southeastern and southwestern United States. Of our
centers, 19 are multi-modality (MRI, CT and other technologies), 27 are dual
modality (MRI and CT) and 31 are MRI only. Based upon available industry data,
we are either the number one or number two FIC provider of MRI, CT and nuclear
medicine services in 20 of the 27 local markets we serve.
We believe that a key driver of our success is providing high quality service to
referring physicians, patients and payors.
- We serve our referring physicians' interests by providing them with
(i) convenient scheduling for their patients, (ii) fast turnaround times
for procedure results, (iii) high quality images and (iv) skilled and
accessible radiologists.
- We focus on providing excellent service to our patients by offering
(i) flexible scheduling with extended operating hours, (ii) convenient
center locations, (iii) short waiting times and (iv) a patient-friendly,
non-clinical environment.
- We provide a high level of service to our payors with (i) geographic
coverage in local markets and (ii) high quality images and radiologist
reports.
Our organization is structured to provide high quality service tailored to each
of our local markets. We empower our center managers to run our centers to meet
the demands of local market conditions, while our corporate structure provides
economies of scale, corporate training programs, standardized policies and
procedures and sharing of best practices across our network. Each of our center
managers is responsible for meeting our standards of patient service, managing
relationships with local physicians and payors and maintaining profitability.
Since 1997, we have grown our operations through a combination of same center
growth, new center ("DE NOVO") openings (38) and acquisitions (29). For the nine
months ended
1
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September 30, 2002, we generated total net revenue of $149.1 million, income
from operations of $22.3 million and EBITDA (as defined) of $39.9 million.
Diagnostic imaging services industry
The diagnostic imaging services industry encompasses all general radiology,
interventional radiology and radiation oncology services, and represents an
approximate $61.0 billion market. We operate in the FIC segment of this market,
which accounts for 27.9%, or approximately $17.0 billion, of the overall
diagnostic imaging market. The American College of Radiology estimates that from
1997 to 2000 (the most recent year for which data are available), the FIC
segment of this market grew at an annual rate of 12.3%, while the overall
diagnostic imaging market grew at an annual rate of 9.9%. According to Frost &
Sullivan, the number of MRI scans performed in the FIC market is expected to
grow at a compound annual growth rate of 13.9% from 2002 to 2007, compared with
growth in the number of MRI scans performed in hospitals of 3.7%.
We believe that the overall diagnostic imaging services market for both
outpatient and inpatient services will continue to increase due to the following
factors:
- a broader acceptance by the physician and payor communities of diagnostic
imaging procedures as a valuable, cost-effective and non-invasive
diagnostic tool;
- an expansion of applications for MRI, CT and other diagnostic imaging
technologies;
- the escalating demand for healthcare services from an aging population;
and
- an increasing emphasis on the role of preventative medicine.
We also believe that the rate of growth in the FIC market will continue to
outpace the growth of the overall diagnostic imaging market. We believe this
growth will result primarily from referring physicians preferring FICs due to
their convenient scheduling, fast turnaround of high quality images and reports
and patients preferring FICs due to their greater convenience and less
institutional settings.
The FIC market is highly fragmented, with approximately 4,200 centers located in
the United States in 2001. In 2001, the largest ten competitors in the FIC
market, including us, represented only 16.0% of the industry's imaging centers.
While the number of centers has increased at a compound annual rate of 7.6%
between 1997 and 2000, the growth in the number of centers has not kept pace
with the compound annual rate of revenue growth in the FIC market of 12.3%
between 1997 and 2000.
Investment strengths
LEADING LOCAL MARKET POSITIONS. Based upon available industry data, we are
either the number one or number two FIC provider of MRI, CT and nuclear medicine
services in 20 of the 27 local markets we serve. We strive to create strong
networks of centers in all of our geographic markets which, when combined with
our service-driven business model, enables us to build strong relationships with
referring physicians and payors, attract and retain top radiologists and
technicians and achieve economies of scale.
SUCCESSFUL TRACK RECORD. Since our inception in 1993, we have grown through a
combination of same center growth, DE NOVO development and acquisitions. We grow
our existing centers by expanding referral sources, improving operating
efficiencies and adding modalities. From January 1, 1998 through September 30,
2002 we have successfully added and integrated 65
2
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centers to our network and have demonstrated our ability to improve their
operational performance. We typically achieve positive cash flow, including
corporate overhead, at our DE NOVO centers within 12 months of opening.
DIVERSIFIED PAYOR MIX. For the nine months ended September 30, 2002,
approximately 58.8% of our net revenue came from commercial payors, 24.8% from
government payors, 5.7% from workers compensation and 10.7% from other sources,
including co-payments and direct payments by patients. We have over 160
different contracts with commercial payors, and no one commercial payor
accounted for more than 5.0% of our net revenue for the nine months ended
September 30, 2002.
MODERN EQUIPMENT BASE. The average age of our MRI machines is 3.0 years as
compared with the estimated useful life of seven years (excluding any upgrades
which may extend the useful life), and the average age of our CT machines is 2.7
years as compared with the estimated useful life of seven years. Additionally,
our rapid growth allows us to improve the effectiveness of our equipment fleet
by placing existing machines in DE NOVO centers (where appropriate) and then
focusing our capital expenditures for new equipment with faster scan times on
established, high volume facilities. Consistent with our strategy of providing a
patient-friendly environment, over 70.0% of our MRI machines are open
architecture, or open MRI.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. Gene Venesky and Ken Luke founded us
in 1993. Mr. Venesky and Mr. Luke together have over 50 years of healthcare and
financial experience. The other members of our executive management team have an
average of over 13 years of healthcare and financial experience. Our executive
management team has a comprehensive understanding of the diagnostic imaging
industry, the dynamics of our local markets and the value of our differentiated
approach. Our management owns approximately 30.0% of our parent's capital stock
(on a fully diluted basis). Both of our co-founders continue to be members of
our executive management team and play an active role in our management.
Business strategy
Our objective is to be the leading provider of outpatient diagnostic imaging
services in the geographic markets we serve by:
PROVIDING HIGH QUALITY SERVICE TO OUR CUSTOMERS. Our business model is geared
towards serving the needs of our three customers: (i) referring physicians;
(ii) patients; and (iii) payors. Our staff is evaluated on customer service
measures which include speed of procedure, accuracy and quality of images,
customer experience "exit" audits and financial performance.
- REFERRING PHYSICIANS: We recognize that by providing convenient
scheduling for patients, fast turnaround times for procedure results,
high quality images and skilled and accessible radiologists, we enable
our referring physicians to improve the quality and efficiency of their
individual medical practices. We focus on developing relationships with
referring physicians to increase patient volume and enable us to
identify and respond quickly to local market needs. We also provide
extended hours of operation to meet patient volume without significant
delay. Our policy is to provide image turnaround and supporting
radiologist reports within one business day after a procedure is
performed.
- PATIENTS: We strive to make the process of undergoing a diagnostic
imaging procedure convenient and comfortable for our patients. Our
customer service
3
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approach includes features that address our patients' needs, such as
flexible scheduling with extended operating hours, convenient center
locations, short waiting times and a patient-friendly, non-clinical
environment.
- PAYORS: We believe that payors value our high quality services,
efficient operations, cost-effectiveness and scale. Our scale is
particularly important to payors as it enables us to satisfy a
significant number of their patients' needs. We seek to improve and
expand our relationships with every significant payor group within the
local markets we serve.
ENHANCING OUR LOCAL MARKET PRESENCE. We build concentrated groups of centers in
the local markets we serve in order to build local market share. These groupings
enable us to (i) build a strong referral base, (ii) establish stronger
relationships with commercial payors, (iii) attract and retain highly qualified
radiologists and (iv) provide our patients with convenient locations that offer
a range of imaging services. We look to deepen and expand our network by adding
centers in our existing or neighboring geographic markets through DE NOVO
development and/or acquisitions until we become a leading provider of outpatient
diagnostic imaging services in these markets.
GROWING OUR EXISTING CENTERS. We generate attractive same center growth within
our existing centers. We do so by extending hours of operation, adding
modalities (progressing from MRI only to MRI and CT to multi-modality centers)
and increasing imaging capacity through equipment upgrades and additional
machines to meet the needs of our local markets. We also increase the
performance of our centers through our focus on improving customer service and
by implementing local sales and marketing programs to expand our referral
sources.
EXPANDING OUR NETWORK. We expand our network of centers through DE NOVO
development and acquisitions, using a disciplined approach for evaluating and
entering new geographic markets. We perform extensive due diligence before
developing a DE NOVO center or acquiring an existing center, including surveying
local referral sources and radiologists, as well as examining the demographics,
reimbursement environment, competitive landscape and intrinsic demand of the
geographic market. We only enter markets where (i) there is sufficient patient
demand for outpatient diagnostic imaging services, (ii) we believe we can gain
sufficient market share, (iii) we can build key local referral relationships and
(iv) payors are receptive to our entry into the market. As of September 30,
2002, we operated in 27 local markets and expect to continue our expansion into
select new geographic markets and regions of the United States.
The Transactions
THE RECAPITALIZATION. On August 15, 2002, we consummated a recapitalization
pursuant to an agreement dated July 16, 2002, as amended on August 8, 2002,
among our parent, MQ Associates, Inc., its then existing stockholders and MQ
Investment Holdings, LLC, which was a newly formed Delaware limited liability
company and is an affiliate of J.P. Morgan Partners, LLC, whereby MQ Investment
Holdings, LLC acquired approximately 70.0% of the total capital stock of MQ
Associates, Inc. (on a fully diluted basis). The recapitalization was valued at
$365.1 million, including transaction costs. Pursuant to the recapitalization
agreement, MQ Associates, Inc. (1) redeemed approximately 76.4% of the shares of
its common stock held by all former stockholders of MQ Associates, Inc.,
including approximately 58.9% of the shares held by the management stockholders
and (2) redeemed 100.0% of the redeemable preferred stock, all of which was held
by TA Associates, Inc. and other private investors. MQ Investment
4
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Holdings, LLC purchased shares of newly issued common and preferred stock
directly from MQ Associates, Inc. The remaining shares of common stock held by
the management stockholders were reclassified into newly issued shares of common
stock and preferred stock of MQ Associates, Inc. (the "management rollover").
The foregoing transactions are collectively referred to as the
"recapitalization."
As a result of the recapitalization, approximately 70.0% of the total capital
stock of our parent, MQ Associates, Inc., is owned by MQ Investment Holdings,
LLC and approximately 30.0% of the total capital stock of MQ Associates, Inc. is
owned by the management stockholders, in each case on a fully diluted basis.
THE SENIOR CREDIT FACILITY. On the closing date for the recapitalization, we
entered into a senior secured credit facility, pursuant to which Wachovia Bank,
National Association, JPMorgan Chase Bank and UBS AG, Stamford Branch, each
affiliates of the initial purchasers of the old notes, were among the lenders.
The senior credit facility consists of an $80.0 million revolving credit
facility. For a description of our senior credit facility, see "Description of
senior credit facility."
The offering of the old notes, the recapitalization and the senior credit
facility are collectively referred to as the "Transactions."
The sponsor
J.P. Morgan Partners, LLC ("JPMP") is a global partnership with over
$30.0 billion in total capital under management. It is a leading provider of
private equity and has closed over 1,800 individual transactions since its
inception in 1984. JPMP has more than 150 investment professionals in nine
offices throughout the world. JPMP is an affiliate of J.P. Morgan Chase & Co.,
one of the largest financial institutions in the United States.
Sources and uses of funds
The following table sets forth the sources and uses of funds in connection with
the Transactions:
<Table>
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Sources Uses
- ---------------------------------------------------------------------------------------------------------------
Senior credit facility(1)................... $ 35.9 Redemption of common equity(4).............. $194.2
Old notes (net of discount)................. 176.2 Repayment of existing debt(5)............... 117.7
Management rollover equity(2)............... 45.9 Redemption of redeemable preferred equity... 19.6
New equity(3)............................... 107.1 Seller transaction fees(6).................. 21.1
Deferred financing costs(7)................. 12.5
------ ------
Total................................... $365.1 Total....................................... $365.1
- ---------------------------------------------------------------------------------------------------------------
</Table>
(1) Represents borrowings made at the closing of the Transactions. Immediately
following the consummation of the Transactions, we had $43.3 million of
available borrowing capacity under the senior credit facility, net of $0.8
million reserved for letters of credit outstanding.
(2) Consists of $30.9 million common stock investment and $15.0 million
redeemable preferred stock investment.
(3) Consists of purchase of $72.1 million of common stock and $35.0 million of
redeemable preferred stock.
(4) Consists of the redemption of common stock of MQ Associates, Inc. and the
rollover by management stockholders of $45.9 million of equity.
(5) Represents amount of debt repaid at the closing of the Transactions.
(6) Consists of transaction fees (primarily legal and accounting fees), success
fees and prepayment penalties payable by MQ Associates, Inc.
(7) Consists of debt issuance costs of $12.5 million.
5
<Page>
Summary of the terms of the exchange offer
On August 15, 2002, in connection with the closing of the transactions, we and
the guarantors of the old notes entered into a registration rights agreement
with the trustee. Under the agreement, we agreed to deliver to you this
prospectus and to complete this exchange offer within 225 days after the date of
original issuance of the old notes. You are entitled to exchange in this
exchange offer your old notes for exchange notes which are identical in all
material respects to the old notes except that:
- the exchange notes have been registered under the Securities Act and will
be freely tradable by persons who are not affiliated with us;
- the exchange notes are not entitled to registration rights which are
applicable to the old notes under the registration rights agreement; and
- our obligation to pay additional interest on the old notes if this
exchange offer is not consummated by March 28, 2003 at a rate of 1.0% per
annum does not apply to the exchange notes.
<Table>
The Exchange Offer........ We are offering to exchange up to $180,000,000 aggregate
principal amount of our 11 7/8% Senior Subordinated Notes,
Series B, due 2012, which have been registered under the
Securities Act, for up to $180,000,000 aggregate principal
amount of our 11 7/8% Senior Subordinated Notes, Series A, due
2012, which were issued on August 15, 2002.
Resales................... Based on an interpretation by the staff of the Commission set
forth in no-action letters issued to third parties, we believe
that the exchange notes issued pursuant to this exchange offer
in exchange for old notes may be offered for resale, resold and
otherwise transferred by you (unless you are our "affiliate"
within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that you
- are acquiring the exchange notes in the ordinary course of
business, and
- have not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate
in, a distribution of the exchange notes.
Each participating broker-dealer that receives exchange notes
for its own account pursuant to this exchange offer in exchange
for the old notes that were acquired as a result of
market-making or other trading activity must acknowledge that it
will deliver a prospectus in connection with any resale of the
exchange notes. See "Plan of distribution."
</Table>
6
<Page>
<Table>
Any holder of old notes who
- is our affiliate,
- does not acquire the exchange notes in the ordinary course
of its business, or
- tenders in this exchange offer with the intention to
participate, or for the purpose of participating, in a
distribution of exchange notes, cannot rely on the position
of the staff of the Commission expressed in Exxon Capital
Holdings Corporation, Morgan Stanley & Co., Incorporated or
similar no-action letters and, in the absence of an
exemption, must comply with the registration and prospectus
delivery requirements of the Securities Act in connection
with the resale of the exchange notes.
Expiration Date;
Withdrawal of Tenders..... This exchange offer will expire at 5:00 p.m., New York City
time, on , 2002, or such later date and time to which we
extend it. We do not currently intend to extend the expiration
date. A tender of old notes pursuant to this exchange offer may
be withdrawn at any time prior to the expiration date. Any old
notes not accepted for exchange for any reason will be returned
without expense to the tendering holder promptly after the
expiration or termination of this exchange offer.
Conditions to this
Exchange Offer............ This exchange offer is subject to customary conditions, some of
which we may waive. See "The exchange offer--Conditions to
exchange offer."
Procedures for Tendering
Old Notes................. If you wish to accept this exchange offer, you must complete,
sign and date the accompanying letter of transmittal, or a copy
of the letter of transmittal, according to the instructions
contained in this prospectus and the letter of transmittal. You
must also mail or otherwise deliver the letter of transmittal,
or the copy, together with the old notes and any other required
documents, to the exchange agent at the address set forth on the
cover of the letter of transmittal. If you hold old notes
through The Depository Trust Company ("DTC") and wish to
participate in this exchange offer, you must comply with the
Automated Tender Offer Program procedures of DTC, by which you
will agree to be bound by the letter of transmittal.
</Table>
7
<Page>
<Table>
By signing or agreeing to be bound by the letter of transmittal,
you will represent to us that, among other things:
- any exchange notes that you receive will be acquired in the
ordinary course of your business;
- you have no arrangement or understanding with any person or
entity to participate in the distribution of the exchange
notes;
- if you are a broker-dealer that will receive exchange notes
for your own account in exchange for old notes that were
acquired as a result of market-making activities, that you
will deliver a prospectus, as required by law, in connection
with any resale of such exchange notes; and
- you are not our "affiliate" as defined in Rule 405 under the
Securities Act.
Guaranteed Delivery
Procedures................ If you wish to tender your old notes and your old notes are not
immediately available or you cannot deliver your old notes, the
letter of transmittal or any other documents required by the
letter of transmittal or comply with the applicable procedures
under DTC's Automated Tender Offer Program prior to the
expiration date, you must tender your old notes according to the
guaranteed delivery procedures set forth in this prospectus
under "The exchange offer--Guaranteed delivery procedures."
Effect on Holders of Old
Notes..................... As a result of the making of, and upon acceptance for exchange
of all validly tendered old notes pursuant to the terms of, this
exchange offer, we will have fulfilled a covenant contained in
the registration rights agreement and, accordingly, we will not
be obligated to pay liquidated damages as described in the
registration rights agreement. If you are a holder of old notes
and do not tender your old notes in this exchange offer, you
will continue to hold such old notes and you will be entitled to
all the rights and limitations applicable to the old notes in
the indenture, except for any rights under the registration
rights agreement that by their terms terminate upon the
consummation of this exchange offer.
</Table>
8
<Page>
<Table>
Consequences of Failure to
Exchange.................. All untendered old notes will continue to be subject to the
restrictions on transfer provided for in the old notes and in
the indenture. In general, the old notes may not be offered or
sold unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Other than
in connection with this exchange offer, we do not currently
anticipate that we will register the old notes under the
Securities Act.
Certain United States
Federal Income Tax
Considerations............ The exchange of old notes for exchange notes in this exchange
offer should not be a taxable event for United States federal
income tax purposes. See "Certain United States federal income
tax consequences."
Use of Proceeds........... We will not receive any cash proceeds from the issuance of the
exchange notes in this exchange offer.
Exchange Agent............ Wachovia Bank, National Association is the exchange agent for
this exchange offer. The address and telephone number of the
exchange agent are set forth in the section captioned "The
exchange offer--Exchange agent."
</Table>
9
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Summary of the terms of the exchange notes
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THE EXCHANGE NOTES AND IS
NOT INTENDED TO BE COMPLETE. FOR A MORE COMPLETE UNDERSTANDING OF THE EXCHANGE
NOTES, PLEASE REFER TO THE SECTION ENTITLED "DESCRIPTION OF NOTES" IN THIS
PROSPECTUS.
<Table>
Issuer.................... MedQuest, Inc.
Exchange Notes............ $180,000,000 aggregate principal amount of 11 7/8% Senior
Subordinated Notes, Series B, due 2012.
Maturity.................. August 15, 2012.
Interest Payment Dates.... February 15 and August 15 of each year, commencing February 15,
2003.
Holders of old notes whose old notes are accepted for exchange
in this exchange offer will be deemed to have waived the right
to receive any payment in respect of interest on the old notes
accrued from August 15, 2002, the original issue date of the old
notes, to the date of issuance of the exchange notes.
Consequently, holders who exchange their old notes for new notes
will receive the same interest payment on February 15, 2003,
the first interest payment date for the old notes and the
exchange notes after the consummation of this exchange offer,
that they would have received if they did not accept this
exchange offer.
Guarantees................ The exchange notes will be fully and unconditionally guaranteed,
on an unsecured senior subordinated basis, by our holding
company, MQ Associates, Inc., and each of our direct and
indirect subsidiaries and any domestic restricted subsidiaries
created or acquired by us after the issue date. If we fail to
make payments on the exchange notes, our guarantors must make
them instead.
Ranking................... The exchange notes, like the old notes, will be unsecured and
- be subordinated in right of payment to all our existing and
future senior indebtedness, including our obligations in
respect of the senior credit facility;
- rank equally in right of payment with all our future senior
subordinated indebtedness; and
- rank senior to all our future subordinated indebtedness.
Similarly, the guarantees of the exchange notes will be general
unsecured obligations of our guarantors and
</Table>
10
<Page>
<Table>
- be subordinated in right of payment to all existing and
future senior indebtedness of such guarantors, including any
guarantees by those guarantors under the senior credit
facility;
- rank equally in right of payment with all future senior
subordinated indebtedness of the guarantors; and
- rank senior to all future subordinated indebtedness of the
guarantors.
At September 30, 2002:
- we had approximately $46.8 million of senior indebtedness,
all of which was secured indebtedness, to which the notes
were subordinated (which amount does not include
availability of approximately $36.2 million under the senior
credit facility after giving effect to $0.8 million of
letters of credit);
- the guarantors had no senior indebtedness other than their
respective guarantees of our indebtedness under the senior
credit facility; and
- we did not have any senior subordinated indebtedness other
than the notes, and the guarantors did not have any senior
subordinated indebtedness other than their guarantees of the
notes.
Optional Redemption....... We may redeem up to 35% of the notes prior to August 15, 2005
from the proceeds of one or more equity offerings of our common
stock at a redemption price of 111.875% of the principal amount.
In addition, prior to August 15, 2007, if we experience specific
kinds of changes of control, we may redeem the notes within 90
days following the occurrence, in whole but not in part, at a
redemption price equal to the sum of 100% of the then
outstanding principal amount of the notes plus a make-whole
premium and accrued and unpaid interest, if any, to the date of
redemption. Otherwise, we will not have the right to redeem the
notes until August 15, 2007, after which we may redeem some or
all of the notes at the redemption prices described under
"Description of notes--Optional redemption."
</Table>
11
<Page>
<Table>
Mandatory Offer to
Repurchase................ If we sell certain assets or we experience specific kinds of
changes of control, you will have the right to require us to
repurchase all or any part of your notes at a purchase price in
cash equal to 101% of the principal amount thereof, plus any
accrued but unpaid interest to the date of the repurchase. See
"Description of notes--Change of control." Our senior credit
facility prohibits us from purchasing any of the notes, which
would include any purchase we may be required to make as a
result of a change of control. We cannot assure you that we will
be able to amend or obtain a waiver under the senior credit
facility to permit the purchase of the notes or refinance the
senior credit facility with lenders who will allow us to make
the required purchases. Also, if a change of control were to
occur, there can be no assurance that we will have sufficient
funds to purchase any of the notes or be permitted under the
terms of other agreements to purchase the notes. See "Risk
factors" for a description of the possible effects if we are
unable to purchase the notes upon a change of control.
Certain Covenants......... We will issue the exchange notes under the same indenture
governing the old notes. The indenture governing the exchange
notes contains covenants that limit our ability and the ability
of certain of our subsidiaries to, among other things:
- incur additional indebtedness;
- pay dividends and repurchase our capital stock;
- make investments;
- incur liens;
- enter into transactions with our affiliates;
- dispose of assets;
- engage in mergers or consolidations;
- guarantee other indebtedness;
- enter into agreements that restrict dividends from
subsidiaries;
- enter into new lines of business; and
- sell capital stock of our subsidiaries.
These covenants are subject to a number of important
qualifications and limitations. See "Description of
notes--Certain covenants."
</Table>
Risk factors
You should carefully consider the information under the heading "Risk factors"
and all other information in this prospectus before participating in this
exchange offer.
12
<Page>
Summary consolidated financial information
The following table sets forth the summary consolidated historical and pro forma
financial data of MQ Associates, Inc. MQ Associates, Inc. is a guarantor of the
notes and of the senior credit facility and has no material assets or operations
other than its ownership of 100% of our capital stock. As a result, the
consolidated financial position and results of operations of MQ
Associates, Inc. are substantially the same as ours. The summary consolidated
historical and pro forma financial data set forth below should be read in
conjunction with and is qualified in its entirety by reference to the audited
consolidated financial statements, the unaudited consolidated financial
statements and the related notes included elsewhere in this prospectus.
The summary consolidated financial data for the fiscal years ended December 31,
1999 and December 31, 2000 have been derived from the financial statements of MQ
Associates, Inc., which have been audited by Elliott Davis, LLC. The summary
consolidated financial data for the fiscal year ended December 31, 2001 have
been derived from the financial statements of MQ Associates, Inc. which have
been audited by PricewaterhouseCoopers LLP. The summary consolidated financial
data for the fiscal years ended December 31, 1997 and 1998 and for the nine
months ended September 30, 2001 and September 30, 2002 have been derived from
unaudited consolidated financial statements of MQ Associates, Inc. In the
opinion of management of MQ Associates, Inc., the unaudited information reflects
all adjustments (consisting only of normal and recurring adjustments) necessary
for a fair presentation of the results for those periods. Results for the nine
months ended September 30, 2002 are not necessarily indicative of the results to
be expected for the full fiscal year.
The summary unaudited pro forma statement of operations data for the fiscal year
ended December 31, 2001 gives effect to the Transactions and the acquisition of
the assets of AMI Outpatient Services, Ltd., which we acquired on September 1,
2001, as if they had occurred on January 1, 2001. The summary unaudited pro
forma statement of operations data for the nine months ended September 30, 2002
gives effect to the Transactions as if they had occurred on January 1, 2002. The
unaudited pro forma condensed consolidated financial data are presented for
informational purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred had the Transactions or
the AMI Outpatient Services acquisition been consummated on or as of the dates
indicated and such data are not necessarily indicative of future operating
results or financial position.
<Table>
<Caption>
Historical Pro forma
-------------------------------------------------------------------------- --------------
For the
Nine months fiscal year
ended ended
Fiscal year ended December 31, September 30, December 31,
---------------------------------------------------- ------------------- --------------
(Dollars in millions) 1997 1998 1999 2000 2001 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Statement of operations data:
Net revenues from services.... $ 18.4 $ 34.0 $ 56.7 $ 85.9 $142.3 $ 99.5 $149.1 $152.9
Costs and expenses
Operating expenses,
excluding depreciation and
amortization.............. 10.1 16.3 25.0 35.6 61.0 41.9 64.8 70.0
Marketing, general and
administrative
expenses(1)............... (0.1) 10.3 17.3 25.6 55.6 40.0 45.0 55.6
Depreciation and
amortization(2)........... 2.2 5.9 9.2 11.2 17.5 12.2 17.0 18.5
-------------------------------------------------------------------------------------------
Income (loss) from
operations................. 6.2 1.5 $ 5.2 $ 13.5 $ 8.2 $ 5.4 $ 22.3 $ 8.8
<Caption>
Pro forma
--------------------
For the
nine months
ended
September 30,
--------------------
(Dollars in millions) 2002
- ------------------------------ --------------------
(unaudited)
Statement of operations data:
Net revenues from services.... $ 149.1
Costs and expenses
Operating expenses,
excluding depreciation and
amortization.............. 64.8
Marketing, general and
administrative
expenses(1)............... 45.0
Depreciation and
amortization(2)........... 17.0
--------------------
Income (loss) from
operations................. $ 22.3
</Table>
13
<Page>
<Table>
<Caption>
Historical Pro forma
-------------------------------------------------------------------------- --------------
For the
Nine months fiscal year
ended ended
Fiscal year ended December 31, September 30, December 31,
---------------------------------------------------- ------------------- --------------
(Dollars in millions) 1997 1998 1999 2000 2001 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Other financial data:
Net cash and cash equivalents
provided by operating
activities................. $ 12.6 $ 5.9 $ 7.1 $ 12.0 $ 20.3 $ 13.1 $ 8.8
Net cash and cash equivalents
used in investing
activities................. (17.1) (23.8) (11.6) (15.0) (60.1) (48.8) (31.7)
Net cash and cash equivalents
provided by financing
activities................. 5.3 20.1 3.6 3.0 42.9 37.0 19.9
EBITDA(3)..................... 8.4 7.4 14.4 24.7 37.1 26.9 39.9 $ 38.7
Interest expense, net(4)...... 1.1 2.4 4.1 4.9 8.2 5.8 20.5 24.3
Capital expenditures:
Maintenance................. 1.3 0.1 0.6 0.8 1.3 1.0 1.5
Expansion and acquisition of
centers and DE NOVO
centers................... 10.6 22.7 11.0 14.2 58.8 46.2 34.3
Ratio of EBITDA to
interest expense, net(4)... 7.6x 3.1x 3.5x 5.0x 4.5x 4.6x 1.9x 1.6x
Ratio of total debt(6) to
EBITDA..................... 1.8x 5.1x 3.2x 2.4x 3.1x 3.6x 5.6x
Ratio of earnings to fixed
charges(5)................. 4.7x -- 1.2x 2.6x 1.0x -- 1.1x --
Operating data (unaudited):
Number of centers:
Total at beginning of
period.................... 7 10 20 33 43 43 66
Additional DE NOVO.......... 1 7 12 5 10 6 3
Additional acquired......... 2 3 1 5 13 9 5
-------------------------------------------------------------------------------------------
Total at end of period...... 10 20 33 43 66 58 74
Balance sheet data at September 30, 2002:
Cash and cash equivalents..................................................................................................
Working capital(7).........................................................................................................
Total assets...............................................................................................................
Total debt.................................................................................................................
Series A and B preferred stock.............................................................................................
Total stockholders' deficit................................................................................................
<Caption>
Pro forma
--------------------
For the
nine months
ended
September 30,
--------------------
(Dollars in millions) 2002
- ------------------------------ --------------------
(unaudited)
Other financial data:
Net cash and cash equivalents
provided by operating
activities.................
Net cash and cash equivalents
used in investing
activities.................
Net cash and cash equivalents
provided by financing
activities.................
EBITDA(3)..................... $ 40.0
Interest expense, net(4)...... 18.2
Capital expenditures:
Maintenance.................
Expansion and acquisition of
centers and DE NOVO
centers...................
Ratio of EBITDA to
interest expense, net(4)... 2.2x
Ratio of total debt(6) to
EBITDA.....................
Ratio of earnings to fixed
charges(5)................. 1.2x
Operating data (unaudited):
Number of centers:
Total at beginning of
period....................
Additional DE NOVO..........
Additional acquired.........
--------------------
Total at end of period......
Balance sheet data at Septembe
Cash and cash equivalents..... $ 2.4
Working capital(7)............ 29.9
Total assets.................. 180.0
Total debt.................... 225.3
Series A and B preferred stock 50.0
Total stockholders' deficit... (118.2)
</Table>
- ------------------------------
(1) For the year ended December 31, 1997, marketing, general and administrative
("MG&A") expenses include a gain of $5.9 million related to the sale of two
centers.
(2) In adopting Statement of Financial Accounting Standards ("SFAS") 142,
effective January 1, 2002, we no longer amortize goodwill and certificates
of need related to business combinations. There was no impairment to
goodwill and certificates of need as a result of the impairment test
performed. Amortization expense for goodwill and certificates of need for
the years ended December 31, 1997, 1998, 1999, 2000 and 2001 and the nine
months ended September 30, 2001 was $0.0 million, $0.1 million,
$0.3 million, $0.6 million, $0.9 million and $0.2 million, respectively.
(3) EBITDA is defined in the indenture as net income before interest expense,
income taxes, depreciation, amortization and other non-cash charges
(consisting in 2001 of the $9.4 million non-cash compensation charge) plus
"success fees" of $0.6 million paid to certain executive officers and other
employees in the Transactions plus the $2.1 million reflected in MG&A
expense which was paid in December 2001 in connection with certain legal
proceedings. See "Business--Legal proceedings."
14
<Page>
The following table reconciles the difference between net income (loss), as
determined under United States generally accepted accounting principles, and
EBITDA (in millions):
<Table>
<Caption>
Historical
--------------------------------------------------------------------------
Nine months
ended
Fiscal year ended December 31, September 30,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss)................................. $ 5.1 $(0.9) $ 1.4 $ 5.2 $(4.1) $(3.7) $ 1.1
Interest expense, net............................. 1.1 2.4 4.1 4.9 8.2 5.8 20.5
Provision (benefit) for income taxes.............. -- -- (0.3) 3.4 4.0 3.2 0.7
Depreciation and amortization..................... 2.2 5.9 9.2 11.2 17.5 12.2 17.0
InMed litigation.................................. 2.1
Success fees...................................... 0.6
Non-cash charges.................................. 9.4 9.4
--------------------------------------------------------------------------
EBITDA............................................ $ 8.4 $ 7.4 $14.4 $24.7 $37.1 $26.9 $39.9
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
Pro forma
-------------------------------
For the fiscal For the nine
year ended months ended
December 31, September 30,
-------------- --------------
2001 2002
- ---------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Net income (loss)........................................... $(13.4) $ 4.4
Interest expense, net....................................... 24.3 18.2
Provision (benefit) for income taxes........................ (2.2) (0.2)
Depreciation and amortization............................... 18.5 17.0
InMed litigation............................................ 2.1
Success fees................................................ 0.6
Non-cash charges............................................ 9.4
-------------------------------
EBITDA...................................................... $ 38.7 $ 40.0
</Table>
We believe EBITDA information enhances an investor's understanding of a
company's ability to satisfy principal and interest obligations with respect
to its indebtedness and to utilize cash for other purposes. In addition,
EBITDA is used as a measure in the indenture in determining our compliance
with certain covenants. However, there may be contractual, legal, economic
or other reasons which may prevent us from satisfying principal and interest
obligations with respect to our indebtedness and may require us to allocate
funds for other purposes. EBITDA does not represent and should not be
considered as an alternative to net income, income from operations or cash
flows from operating activities as determined under United States generally
accepted accounting principles and may not be comparable to other similarly
titled measures of other companies.
(4) The pro forma interest expense, net includes $1.9 million and $1.4 million
of non-cash charges consisting of amortization of debt issuance costs and
discount on the notes for the year ended December 31, 2001 and the nine
months ended September 30, 2002, respectively.
(5) Earnings consist of income before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of (i) interest, whether
expensed or capitalized, (ii) amortization of debt issuance costs and
discount on the notes and (iii) an allocation of one-third of the rental
expense from operating leases, which management considers to be a reasonable
approximation of the interest factor of operating lease payments. For fiscal
1998, and the nine months ended September 30, 2001, fixed charges exceeded
earnings by $0.9 million and $0.4 million, respectively. For the year ended
December 31, 2001, on a pro forma basis, fixed charges exceeded earnings by
$11.5 million. The deficiency in 2001 included a $9.4 million non-cash
compensation charge.
(6) Total debt includes long-term debt plus obligations under capital leases,
including the current portion of obligations under capital leases.
(7) Working capital is current assets, excluding cash and cash equivalents,
minus current liabilities, excluding the current portion of long term debt
and line of credit.
15
<Page>
Risk factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AS WELL AS OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS BEFORE PARTICIPATING IN THIS
EXCHANGE OFFER.
Risks related to the notes
Our level of indebtedness could adversely affect our ability to raise additional
capital to fund our operations, limit our ability to react to changes in the
economy or our industry and prevent us from meeting our obligations under the
notes.
We are highly leveraged and our total indebtedness at September 30, 2002 was
approximately $224.5 million. The following chart shows our level of
indebtedness and certain other information at September 30, 2002.
<Table>
- -------------------------------------------------------------------------------
As of
September 30,
(Dollars in millions) 2002
- -------------------------------------------------------------------------------
Senior subordinated notes (net of discount)................. $176.2
Senior credit facility...................................... 43.0
-----------------
Total debt................................................ 219.2
Redeemable preferred stock.................................. 50.0
Stockholders' deficit....................................... $118.2
- -------------------------------------------------------------------------------
</Table>
<Table>
- ------------------------------------------------------------------------------------------------------
Pro forma
-------------------------------------------
Year ended Twelve months ended
December 31, 2001 September 30, 2002
------------------- ---------------------
Ratio of earnings to fixed charges....................... 0.5x(a) 1.2x
- ------------------------------------------------------------------------------------------------------
</Table>
(a) Fixed charges exceeded earnings by $11.5 million.
Our high degree of leverage could have important consequences for you, including
the following:
- It may limit our ability to obtain additional financing for working
capital, capital expenditures, product development, debt service
requirements, acquisitions and general corporate or other purposes;
- A substantial portion of our cash flows from operations must be dedicated
to the payment of principal and interest on our indebtedness and is not
available for other purposes, including our operations, capital
expenditures and future business opportunities;
- The debt service requirements of our other indebtedness could make it
more difficult for us to make payments on the notes;
- Certain of our borrowings, including borrowings under our senior credit
facility, are at variable rates of interest, exposing us to the risk of
increased interest rates;
- It may limit our ability to adjust to changing market conditions and
place us at a competitive disadvantage compared to our competitors that
have less debt; and
16
<Page>
- We may be vulnerable in a downturn in general economic conditions or in
our business, or we may be unable to carry out capital spending that is
important to our growth.
We may not be able to generate sufficient cash to service all of our
indebtedness, including the notes, and be forced to take other actions to
satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations
depends on our financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial,
business and other factors beyond our control. These factors include:
- fluctuations in interest rates;
- increased operating costs;
- changes in reimbursement rates;
- trends in diagnostic imaging; and
- regulatory developments.
We cannot assure you that we will maintain a level of cash flows from operating
activities sufficient to permit us to pay the principal, premium, if any, and
interest on our indebtedness. See "Disclosure regarding forward-looking
statements" and "Management's discussion and analysis of financial condition and
results of operations--Liquidity and capital resources."
If our cash flows and capital resources are insufficient to fund our debt
service obligations, we may be forced to reduce or delay capital expenditures,
sell assets, seek additional capital or restructure or refinance our
indebtedness, including the notes. These alternative measures may not be
successful and may not permit us to meet our scheduled debt service obligations.
In the absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet our debt service and other obligations. The senior
credit facility and the indenture restrict our ability to dispose of assets and
use the proceeds from the disposition. We may not be able to consummate those
dispositions or to obtain the proceeds which we could realize from them and
these proceeds may not be adequate to meet any debt service obligations then
due. See "Description of senior credit facility" and "Description of notes."
Restrictive covenants may adversely affect us.
The indenture governing the notes contains various covenants that limit our
ability to engage in specified types of transactions. These covenants limit our
ability to, among other things:
- incur additional debt or issue redeemable preferred stock;
- incur liens;
- redeem or repurchase capital stock or subordinated debt;
- sell capital stock of our subsidiaries;
- engage in transactions with affiliates;
- make some types of investments or sell assets; or
17
<Page>
- consolidate or merge with or into, or sell substantially all of our
assets to, another person.
In addition, our senior credit facility contains restrictive covenants and
requires us to maintain specified financial ratios and satisfy other financial
condition tests. Our ability to meet those financial ratios and tests can be
affected by events beyond our control, and we cannot assure you that we will
continue to meet those tests. A breach of any of these covenants could result in
a default under our senior credit facility and/or the notes. Upon the occurrence
of an event of default under our senior credit facility, the lenders could elect
to declare all amounts outstanding under our senior credit facility to be
immediately due and payable and terminate all commitments to extend further
credit. If we were unable to repay those amounts, the lenders under our senior
credit facility could proceed against the collateral granted to them to secure
that indebtedness. We have pledged a significant portion of our assets as
collateral under our senior credit facility. If the lenders under our senior
credit facility accelerate the repayment of borrowings, we cannot assure you
that we will have sufficient assets to repay our senior credit facility and our
other indebtedness, including the notes. See "Description of senior credit
facility."
Our variable rate indebtedness subjects us to interest rate risk, which could
cause our debt service obligations to increase significantly.
Certain of our borrowings, primarily borrowings under our senior credit
facility, are at variable rates of interest and expose us to interest rate risk.
If interest rates increase, our debt service obligations on the variable rate
indebtedness would increase even though the amount borrowed remained the same,
and our net income would decrease.
If we default on our obligations to pay our indebtedness we may not be able to
make payments on the notes.
Any default under the agreements governing our indebtedness, including a default
under our senior credit facility that is not waived by the required lenders, and
the remedies sought by the holders of such indebtedness could make us unable to
pay principal, premium, if any, and interest on the notes and substantially
decrease the market value of the notes. If we are unable to generate sufficient
cash flow and are otherwise unable to obtain funds necessary to meet required
payments of principal, premium, if any, and interest on our indebtedness, or if
we otherwise fail to comply with the various covenants, including financial and
operating covenants, in the instruments governing our indebtedness (including
covenants in our indenture and our senior credit facility), we could be in
default under the terms of the agreements governing such indebtedness, including
our senior credit facility and our indenture. In the event of such default, the
holders of such indebtedness could elect to declare all the funds borrowed
thereunder to be due and payable, together with accrued and unpaid interest, the
lenders under our senior credit facility could elect to terminate their
commitments thereunder, cease making further loans and institute foreclosure
proceedings against our assets, and we could be forced into bankruptcy or
liquidation. If our operating performance declines we may in the future need to
obtain waivers from the required lenders under our senior credit facility to
avoid being in default. If we breach our covenants under our senior credit
facility and seek a waiver, we may not be able to obtain a waiver from the
required lenders. If this occurs, we would be in default under our senior credit
facility, the lenders could
18
<Page>
exercise their rights, as described above, and we could be forced into
bankruptcy or liquidation. See "Description of senior credit facility" and
"Description of notes."
We are a holding company with virtually no independent operations. Our ability
to repay our debt depends upon the performance of our subsidiaries and their
ability to make distributions to us.
Substantially all of our operations are conducted by our subsidiaries and,
therefore, our cash flow and our ability to service indebtedness, including our
ability to pay the interest on and principal of the notes when due, are
dependent upon cash dividends and distributions or other transfers from our
subsidiaries. In addition, any payment of dividends, distributions, loans or
advances to us by our subsidiaries could be subject to restrictions on dividends
or repatriation of earnings under applicable local law and monetary transfer
restrictions in the jurisdictions in which our subsidiaries operate. In
addition, payments to us by our subsidiaries are contingent upon our
subsidiaries' earnings.
Our subsidiaries are separate and distinct legal entities and, except for the
existing and future domestic subsidiaries that will be subsidiary guarantors of
the notes, they will have no obligation, contingent or otherwise, to pay amounts
due under the notes or to make any funds available to pay those amounts, whether
by dividend, distribution, loan or other payments. Any right that we have to
receive any assets of any future non-guarantor subsidiaries upon liquidation or
reorganization of those subsidiaries, and the consequent right of holders of
notes to realize proceeds from the sale of the assets of those subsidiaries,
will be structurally subordinated to the claims of those subsidiaries'
creditors, including trade creditors and holders of debt issued by those
subsidiaries. In addition, any guarantee of the notes will be subordinated to
any indebtedness of a subsidiary guarantor that is either senior or secured.
We may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we will be
required to offer to repurchase all outstanding notes at 101% of their principal
amount. We may not be able to repurchase the notes upon a change of control
because we may not have sufficient funds. Further, we may be contractually
restricted under the terms of our senior indebtedness from repurchasing all of
the notes tendered by holders upon a change of control. Accordingly, we may not
be able to satisfy our obligations to purchase your notes unless we are able to
refinance or obtain waivers under our senior credit facility. Our failure to
repurchase the notes upon a change of control would cause a default under the
indenture and a cross-default under the senior credit facility. Our senior
credit facility also provides that a change of control will be a default that
permits lenders to accelerate the maturity of borrowings thereunder. Any of our
future debt agreements may contain similar provisions. In addition, important
corporate events, such as leveraged recapitalizations that would increase the
level of our indebtedness, would not constitute a "Change of Control" under the
indenture. Therefore, if an event occurs that does not constitute a "Change of
Control," we will not be required to make an offer to repurchase the notes and
you may be required to continue to hold your notes despite the event. See
"Description of senior credit facility" and "Description of notes--Change of
control."
19
<Page>
Despite current indebtedness levels, we may still be able to incur substantially
more debt. This could further exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional indebtedness
in the future. The terms of the indenture do not fully prohibit us or our
subsidiaries from doing so. Our senior credit facility provides commitments up
to $80.0 million. All of those borrowings would be senior to the notes and the
guarantees of the notes by our holding company and the subsidiary guarantors. If
we incur any additional indebtedness that ranks equally with the notes, the
holders of that debt will be entitled to share ratably with you in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of us. This may have the effect of reducing the
amount of proceeds paid to you. If new debt is added to our current debt levels,
the related risks that we and our subsidiaries now face could intensify.
Your right to receive payments on the notes is junior to our existing
indebtedness and, possibly, all our future borrowings.
The notes and the guarantees rank behind all of our and the guarantors' existing
indebtedness and all of our and their future borrowings, except:
- trade payables; and
- any future indebtedness that expressly provides that it ranks equal with,
or is subordinated in right of payment to, the notes and the guarantees.
As a result, upon any distribution to our creditors or the creditors of the
guarantors in a bankruptcy, liquidation or reorganization or similar proceeding,
the holders of senior debt will be entitled to be paid in full in cash before
any payment may be made on the notes or the guarantees. At September 30, 2002,
the aggregate principal amount of our senior indebtedness at the issuer level
and the guarantor level was $46.8 million.
In addition, all payments on the notes and the guarantees will be blocked in the
event of a payment default on senior debt and may be blocked for up to 179 of
360 consecutive days in the event of certain non-payment defaults on senior
debt.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of notes will participate
with all other holders of subordinated indebtedness in the assets remaining
after we have paid all of the senior debt. Because the indenture requires that
amounts otherwise payable to holders of the notes in a bankruptcy or similar
proceeding be paid to holders of senior debt, holders of the notes may receive
less, ratably, than holders of trade payables in any bankruptcy or similar
proceeding. In any of these cases, we and the guarantors may not have sufficient
funds to pay all our creditors, and holders of notes may receive less, ratably,
than the holders of senior debt. We will be permitted to borrow substantial
additional indebtedness, including senior debt, in the future under the terms of
the indenture.
Federal and state fraudulent transfer laws permit a court to void the notes and
the guarantees, and, if that occurs, you may not receive any payments on the
notes.
The issuance of the notes and the guarantees may be subject to review under
federal and state fraudulent transfer and conveyance statutes. While the
relevant laws may vary from state to state, under such laws the payment of
consideration will be a fraudulent conveyance if (1) we
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paid the consideration with the intent of hindering, delaying or defrauding
creditors or (2) we or any of our guarantors, as applicable, received less than
reasonably equivalent value or fair consideration in return for issuing either
the notes or a guarantee, and, in the case of (2) only, one of the following is
also true:
- we or any of our guarantors were or was insolvent or rendered insolvent
by reason of the incurrence of the indebtedness; or
- payment of the consideration left us or any of our guarantors with an
unreasonably small amount of capital to carry on the business; or
- we or any of our guarantors intended to, or believed that we or it would,
incur debts beyond our or its ability to pay as they mature.
If a court were to find that the issuance of the notes or a guarantee was a
fraudulent conveyance, the court could void the payment obligations under the
notes or such guarantee or further subordinate the notes or such guarantee to
presently existing and future indebtedness of ours or such guarantor, or require
the holders of the notes to repay any amounts received with respect to the notes
or such guarantee. In the event of a finding that a fraudulent conveyance
occurred, you may not receive any repayment on the notes. Further, the voidance
of the notes could result in an event of default with respect to our other debt
and that of our subsidiaries that could result in acceleration of such debt.
Generally, an entity would be considered insolvent if, at the time it incurred
indebtedness:
- the sum of its debts, including contingent liabilities, was greater than
the fair salable value of all its assets; or
- the present fair salable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts and liabilities, including contingent liabilities, as they become
absolute and mature; or
- it could not pay its debts as they become due.
We cannot be certain as to the standards a court would use to determine whether
or not we or the guarantors were solvent at the relevant time, or regardless of
the standard that a court uses, that the issuance of the notes and the
guarantees would not be subordinated to our or any guarantor's other debt.
If any of the guarantees were legally challenged, such challenged guarantee
could also be subject to the claim that, since the guarantee was incurred for
our benefit, and only indirectly for the benefit of the guarantor, the
obligations of the applicable guarantor were incurred for less than fair
consideration. A court could thus void the obligations under the guarantees,
subordinate them to the applicable guarantor's other debt or take other action
detrimental to the holders of the notes.
Your ability to receive payments on these notes is junior to those lenders who
have a security interest in our assets.
Our obligations under the notes are unsecured, but our obligations under our
senior credit facility and each guarantor's obligations under their guarantees
are secured by a security interest in substantially all of our assets. If we are
declared bankrupt or insolvent, or if we default under our senior credit
facility, the lenders could declare all of the funds borrowed thereunder,
together with accrued interest, immediately due and payable. If we were unable
to
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repay such indebtedness, the lenders could foreclose on the pledged assets to
the exclusion of holders of the notes, even if an event of default exists under
the indenture at such time. Furthermore, if the lenders foreclose and sell the
equity interests in MQ Associates, Inc. or any subsidiary guarantor under the
notes, then that guarantor will be released from its guarantee of the notes
automatically and immediately upon such sale. In any such event, because the
notes will not be secured by any of our assets or the equity interests in MQ
Associates, Inc., it is possible that there would be no assets remaining from
which claims of the holders of notes could be satisfied or, if any assets
remained, they might be insufficient to satisfy such claims fully. See
"Description of senior credit facility."
Your ability to transfer the exchange notes may be limited by the absence of an
active trading market, and there is no assurance that any active trading market
will develop for the exchange notes.
The exchange notes are a new issue of securities for which there is no
established public market. We do not intend to have the exchange notes listed on
a national securities exchange or automated dealer quotation system. J.P. Morgan
Securities Inc., UBS Warburg LLC and Wachovia Securities, Inc. have advised us
that they intend to make a market in the exchange notes as permitted by
applicable laws and regulations; however, they are not obligated to make a
market in the exchange notes, and they may discontinue their market-making
activities at any time without notice. In addition, because J.P. Morgan
Securities Inc. is our affiliate, it will be required to deliver a market-making
prospectus when effecting offers and sales of the exchange notes. If we are
unable to maintain a current market-making prospectus, J.P. Morgan
Securities Inc. may be required to discontinue its market-making activities
without notice. Therefore, we cannot assure you that an active market for the
exchange notes will develop or, if developed, that it will continue.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the exchange notes. We cannot assure you that the market, if any, for
the exchange notes will be free from similar disruptions or that any such
disruptions may not adversely affect the prices at which you may sell your
exchange notes.
If you do not participate in the exchange offer, you will continue to hold
unregistered old notes that are subject to transfer restrictions.
We will only issue exchange notes in exchange for old notes that are timely
received by the exchange agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the old notes and you should
carefully follow the instructions on how to tender your old notes. Neither we
nor the exchange agent are required to tell you of any defects or irregularities
with respect to your tender of the old notes. If you are eligible to participate
in this exchange offer and do not tender your old notes or if we do not accept
your old notes because you did not tender your old notes properly, then, after
we consummate this exchange offer, you will continue to hold old notes that are
subject to the existing transfer restrictions and you will no longer have any
registration rights or be entitled to any additional interest with respect to
the old notes. In addition:
- if you tender your old notes for the purpose of participating in a
distribution of the exchange notes, you will be required to comply with
the registration and prospectus
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delivery requirements of the Securities Act in connection with any resale
of the exchange notes; and
- if you are a broker-dealer that receives exchange notes for your own
account in exchange for old notes that you acquired as a result of
market-making activities or any other trading activities, you will be
required to acknowledge that you will deliver a prospectus in connection
with any resale of those exchange notes.
We have agreed that, for a period of 180 days after this exchange offer is
consummated, we will make this prospectus available to any broker-dealer for use
in connection with any resales of the exchange notes.
After this exchange offer is consummated, if you continue to hold any old notes,
you may have difficulty selling them because there will be fewer old notes
outstanding.
Risks related to government regulation of our business
We conduct business in a heavily regulated industry and if we fail to comply
with these laws and government regulations, we could suffer penalties or be
required to make significant changes to our operations.
We are subject to extensive regulation at both the federal and state levels for
those states in which we conduct our business. The laws that directly or
indirectly affect our ability to operate our business include the following:
- the federal Medicare and Medicaid Anti-Kickback Law;
- federal and state billing and claims submission laws and regulations;
- the federal Health Insurance Portability and Accountability Act of 1996;
- the federal physician self-referral prohibition commonly known as the
Stark Law and state equivalents of the Stark Law;
- state laws that prohibit the practice of medicine by non-physicians and
prohibit fee-splitting arrangements involving physicians; and
- federal and state laws governing the diagnostic imaging equipment we use
in our business concerning patient safety, equipment operating
specifications and radiation exposure levels.
If our operations are found to be in violation of any of the laws and
regulations described in this risk factor or the other governmental regulations
which govern our activities, we may be subject to the applicable penalty
associated with the violation, including civil and criminal penalties, damages,
fines and the curtailment of our operations. Any material penalties, damages,
fines or curtailment of our operations, individually or in the aggregate, would
adversely affect our ability to operate our business and our financial results.
The risk of our being found in violation of these laws and regulations is
increased by the fact that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are open to a variety
of interpretations. Any action against us for violation of these laws or
regulations, even if we successfully defend against it, could cause us to incur
significant legal expenses and divert our management's attention from the
operation of our business.
In addition, 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
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regulatory environment changes. We cannot assure you, however, that those new
regulations will not adversely affect our business. 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.
Providers in the healthcare industry have been the subject of federal and state
investigations, and we could become subject to investigations in the future.
Both federal and state government agencies have heightened and coordinated civil
and criminal enforcement efforts as part of numerous ongoing investigations of
healthcare companies, as well as their executives and managers. In addition,
amendments in 1986 to the Federal False Claims Act have made it easier for
private parties to bring "qui tam" whistleblower lawsuits against companies. The
Federal False Claims Act provides, in part, that an action can be brought
against any person or entity who 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 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. In
addition, some states have adopted similar state whistleblower and false claims
provisions.
We are not aware of any government investigations involving any of our
facilities, our executives or managers. While we believe we are in material
compliance with applicable governmental regulations, any future investigations
of us, our executives or our managers could result in significant liabilities or
penalties to us, as well as adverse publicity.
If we fail to comply with various licensure, certification and accreditation
standards we may be subject to loss of licensure, certification or accreditation
which would adversely affect our operations.
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, other required
certificates for certain types of healthcare centers and major medical
equipment. In addition, free-standing diagnostic imaging centers that provide
services independent of a physician's office must be enrolled by Medicare 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 opportunity to expand our services.
Our facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensure and certification. If any facility loses its certification under
the Medicare program, then the facility will be ineligible to receive
reimbursement from the Medicare and Medicaid programs. A change in the
applicable license or enrollment status of one of our facilities laws could
adversely affect our other facilities and in turn us as a whole. We intend to
conduct our operations in compliance with current applicable federal, state, and
local law and we monitor developments in healthcare law
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so that we can modify our operations from time to time as the business and
regulatory environment changes.
Our inability to obtain certificates of need as well as the application of state
certificate of need regulations could harm our business and financial results.
Some states require a certificate of need ("CON") or similar regulatory approval
prior to the acquisition of high-cost capital items including diagnostic imaging
systems or provision of diagnostic imaging services. Seven of the 12 states in
which we operate require a CON and more states may adopt similar licensure
frameworks in the future. In many cases, a limited number of these certificates
are available in a given state. If we are unable to obtain the applicable CON or
additional certificates or approvals necessary to expand our operations, these
regulations may limit or preclude our operations in the relevant jurisdictions.
From time to time, challenges have been made, and may continue to arise, with
respect to the application of a state's CON laws to our facilities. If we are
unable to succeed against challenges to our CONs (or exemptions therefrom), we
may be limited or precluded from continuing our operations in the relevant
jurisdictions.
Conversely, states in which we have obtained a CON may repeal existing
certificate of need regulations or liberalize exemptions from the regulations.
For example, Missouri has liberalized exemptions from certificate of need
programs. The repeal of CON regulations in states in which we have obtained a
certificate of need or a certificate of need exemption would lower barriers to
entry for competition in those states and could adversely affect our business.
If we fail to successfully implement and integrate our information systems at
our facilities, we could suffer penalties, be required to make significant
changes to our operations and have our cash flows negatively affected.
The Administrative Simplification Provisions of the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") require the Department of Health and
Human Services to adopt standards to protect the security and privacy of health
related information. Although the Department of Health and Human Services issued
proposed rules in 1998 concerning the security standards, final rules have not
yet been adopted. With respect to the privacy standards, the Department of
Health and Human Services published final rules in December of 2000. Although
all healthcare providers are required to be compliant with the new federal
privacy requirements no later than April 2003, on August 14, 2002, the
Department of Health and Human Services published final modifications to the
privacy standards, which eliminated certain requirements and made other
clarifications. Improper use or disclosure of protected health information
covered by the HIPAA privacy regulations could result in the imposition of both
criminal and civil fines.
HIPAA also required the Department of Health and Human Services to adopt
national standards establishing electronic transaction standards that all
healthcare providers must use when submitting or receiving certain healthcare
transactions electronically. Although these standards were to become effective
October 2002, Congress extended the compliance deadline until October 2003 for
organizations, such as ours, that submitted a request for an extension.
For a number of reasons, including compliance with the regulations regarding
electronic data transaction standards, we have contracted with a software
developer to provide two software
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products: (i) a Radiology Information System ("RIS") that will contain radiology
images and patient scheduling, contact and insurance information and
(ii) billing software. The RIS system has been implemented at certain of our
centers, and we anticipate that the RIS system-wide roll out will be completed
by the end of the first quarter of 2003. We anticipate that the billing software
will not be installed system-wide until the third quarter of 2003.
Roll out of the RIS and our billing software is partially dependent on the
performance of third parties over whom we have no control, including vendors and
suppliers of, among other things, bandwidth and the hardware elements of the
systems. If we are unable to successfully implement and integrate this system,
we may experience substantial delays in collection of net revenues and
additional costs could be imposed on our facilities in order to comply with the
electronic transaction standards. These delays would be a result of the fact
that, if our billing system does not comply with these standards, payors could
reject some or all of our claims. We may not be able to resubmit our claims nor
expect to receive payment for those claims until our billing system meets the
electronic transaction standards. Nevertheless, if we experience problems with
the RIS, we have made contingent arrangements to use another vendor's software
in order to avoid these problems post-October 2003.
Risks related to our business
Changes in the rates or methods of third-party reimbursements for diagnostic
imaging and therapeutic services could result in reduced demand for our services
or create downward pricing pressure, which would result in a decline in our
revenue and harm to our financial position.
We derive a majority of our revenue from direct billings to patients and
third-party payors such as Medicare, Medicaid and private health insurance
companies. As a result, any changes in the rates or methods of reimbursement for
the services we provide would have a significant adverse impact on our net
revenue and financial results.
In 2001, the Medicare program announced a reduction in virtually all services
reimbursed under the Medicare physician fee schedule (including diagnostic
imaging services) whereby Medicare payments for most diagnostic imaging services
covered by Medicare were reduced in 2002 by approximately 11.0% for the services
that we render. Without action by Congress or the Medicare program to address
this issue, the Medicare payment levels for future years (2003 and following
years) are expected to experience additional reductions. To the extent that
commercial payors with which we contract base their payments for diagnostic
imaging services on the Medicare reimbursement levels, any reduction in Medicare
reimbursement rates will result in a corresponding reduction in reimbursement
from our commercial payors. Similarly, any change in commercial payor
reimbursement rates may result in a corresponding change in reimbursement rates
with other commercial payors. Future Medicare physician fee schedules may
further reduce the payments we receive for our services. Any change in the rates
of or conditions for reimbursement could substantially reduce the number of
procedures for which we can obtain reimbursement or the amounts reimbursed to us
or our clients for services provided by us.
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Our revenue may fluctuate or be unpredictable and this may harm our financial
results.
The amount and timing of revenue that we may derive from our business will
fluctuate based on:
- variations in the number of days our accounts receivable are outstanding;
and
- changes in the number of days of service we can offer with respect to a
given diagnostic imaging or therapeutic system due to equipment
malfunctions or the seasonal factors discussed below.
In addition, we experience seasonality in the sale of our services. For example,
our sales typically decline from our third fiscal quarter to our fourth fiscal
quarter. Fourth quarter revenue is typically lower than that from the first,
second and third quarters. Fourth quarter revenue is affected primarily by
holiday and client and patient vacation schedules and inclement weather, the
results of which are fewer patient scans during the fourth quarter. As a result,
our revenue may significantly vary from quarter to quarter, and our quarterly
results may be below market expectations. We may not be able to reduce our
expenses, including our debt service obligations, quickly enough to respond to
these declines in revenue, which would make our business difficult to operate
and would harm our financial results.
Our centers depend on physician referrals and contractual arrangements with
insurance carriers for their business.
Our centers are principally dependent on our ability to attract referrals from
physicians and other healthcare providers representing a variety of specialties.
Our eligibility to provide service in response to a referral is often dependent
on the existence of a contractual arrangement with the referred patient's health
plan. We currently have over 160 different contracts with commercial payors for
diagnostic imaging services provided at our centers, primarily on a discounted
fee-for-service basis. Consistent with industry standards, a substantial number
of our payor contracts permit payors to unilaterally change their fee schedules
that are used to determine the amounts we are reimbursed. A significant decline
in referrals through the loss of contracts with commercial payors or otherwise
would have a material adverse effect on our business, financial condition and
results of operations.
A failure to meet our capital expenditure requirements can 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 DE NOVO centers, or new operations, and the
acquisition of additional businesses and new imaging equipment. As the
technology used in diagnostic imaging continues to advance, and as we continue
to open or acquire new centers, our capital expenditures will continue to
increase. We incur capital expenditures to, among other things:
- open DE NOVO centers and acquire centers;
- upgrade our imaging equipment and software;
- make leasehold improvements;
- purchase equipment upon termination of operating leases; and
- purchase new equipment.
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To the extent we are unable to generate sufficient cash from our operations or
funds are no longer available under our senior credit facility, we may be unable
to meet our capital expenditure requirements. Furthermore, we cannot assure you
that we will be able to raise any necessary additional funds through bank
financing or the issuances of equity or debt securities on terms acceptable to
us, if at all.
We may experience competition from other medical diagnostic companies and this
competition could adversely affect our revenue and our business.
The market for diagnostic imaging services and systems is competitive. We
compete principally on the basis of our reputation for delivering high quality
images and reports in a timely manner, the comfort and care we provide to
patients in our centers and price. We compete with other FICs, groups of
radiologists, hospitals, ambulatory surgery centers and non-radiology physician
practices, including equipment manufacturers and leasing companies, that own and
operate imaging equipment. According to SMG, from 1997 to 2001, the number of
FICs grew at a compound annual rate of 11.8%. Additionally, independent FICs are
forming relationships with integrated healthcare networks and establishing
relationships with group purchasing organizations to overcome the competitive
disadvantages these independent FICs have compared with larger associations and
other networks, such as ours. Our major competitors in the FIC market include
HealthSouth Corporation, Radiologix, Inc., Syncor International Corp., InSight
Health Services Corp. and Medical Resources, Inc. Some of our competitors which
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. Finally, we face competition from providers of competing
technologies such as PET and may face competition from providers of new
technologies in the future. If we are unable to successfully compete, our
customer base would decline and our business, financial condition and results of
operations would be harmed.
Certain hospitals, particularly larger hospitals, may directly acquire and
operate on-site imaging and treatment equipment as part of their overall
inpatient servicing capability, subject only to their decision to acquire a
high-cost diagnostic imaging system, assume the associated financial risk,
employ the necessary technologists and satisfy applicable licensure and
certificate of need requirements, if any. Historically, smaller hospitals have
often been reluctant to purchase imaging and treatment equipment. This
reluctance, however, has in the past encouraged the entry of start-up ventures
and more established business operations into the diagnostic and treatment
services business. As a result, there have been periods in the recent past when
there has been significant excess capacity in the diagnostic imaging business in
the United States, which can negatively affect utilization and reimbursement.
In addition, in the past some non-radiologist physician practices have refrained
from establishing their own diagnostic imaging facilities 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 facilities, which may compete with us.
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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 services industry may accelerate
in the future. The effect of technological change could significantly impact our
business. The development of new scanning technology or new diagnostic
applications for existing technology may require us to adapt our existing
technology or acquire new or technologically improved systems in order to
successfully compete. For example, new diagnostic applications in neurology
require higher resolution images associated with high field strength MRIs. In
the future, however, we may not have the financial resources to adequately
upgrade our technology, particularly given our indebtedness. In addition,
advancing technology may enable hospitals, physicians or other diagnostic
service providers to perform tests without the assistance of diagnostic service
providers such as ourselves. The development of new technologies or refinements
of existing ones might make our existing systems technologically or economically
obsolete, or cause a reduction in the value of, or reduce the need for, our
systems.
We may be unable to effectively maintain our equipment or generate revenue when
our systems are not working.
Timely, effective service is essential to maintaining our reputation and high
utilization rates on our imaging systems. Repairs to one of our systems
generally take up to one week and result in a loss of revenue. Our warranties
and maintenance contracts do not fully compensate us for loss of revenue when
our systems are not working. The principal components of our operating costs
include depreciation, salaries paid to technologists, annual system maintenance
costs and insurance costs. Because the majority of these expenses are fixed, a
reduction in the number of scans performed due to out-of-service equipment will
result in lower revenue and margins. Repairs of our equipment are performed for
us by the equipment manufacturers. These manufacturers may not be able to
perform repairs or supply needed parts in a timely manner. Thus, if we
experience greater than anticipated system malfunctions or if we are unable to
promptly obtain the service necessary to keep our systems functioning
effectively, our revenue could decline and our ability to provide services would
be harmed.
We may be subject to professional liability risks which could be costly and
negatively impact our business and financial results.
We may be subject to professional liability claims. Although there currently are
no known hazards associated with diagnostic imaging or our other scanning
technologies when used properly, hazards may be discovered in the future.
Furthermore, there is a risk of harm to a patient during an MRI or CT scan.
Patients are carefully screened to safeguard against this risk, but screening
may nevertheless fail to identify the hazard. We may also be subject to
malpractice claims for the work of our employee radiologists. To protect against
possible professional liability, we maintain professional liability insurance.
However, if we are unable to maintain insurance in the future at an acceptable
cost or at all or if our insurance does not fully cover us, and a successful
claim was made against us, we could be exposed. While we require our
non-employee radiologists to obtain their own malpractice insurance policies, we
may be subject to malpractice claims for the work of our non-employee
radiologists. Any claim made against us not fully covered by our insurance
policies could be costly to defend against,
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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.
Loss of key executives and failure to attract qualified managers, technologists,
radiologists and sales persons could limit our growth and negatively impact our
operations.
We depend upon our management team to a substantial extent. As we grow, we will
experience an increasing demand for center managers and sales persons with
experience in our industry, skilled technologists to operate our diagnostic
equipment and qualified radiologists to serve our patients. It is impossible to
predict the availability of qualified center managers, sales persons and
technologists or the compensation levels that will be required to hire them. In
particular, there is a very high demand for qualified technologists who are
necessary to operate our systems. It is equally difficult to predict the
availability of qualified radiologists who are essential to reading images and
writing the related reports for the referring physicians. We may not be able to
retain a sufficient number of technologists and radiologists, and we may be
required to pay them bonuses and higher compensation, which would increase our
expenses. While the number of qualified radiologists and technologists has
declined and this decline is expected to continue in the near future, the demand
and compensation for their services has increased. The loss of the services of
any member of our senior management or our inability to hire qualified field
managers, sales persons, skilled technologists and qualified radiologists at
economically reasonable compensation levels would adversely affect our ability
to operate and grow our business.
Some of our imaging services involve the handling of hazardous materials and
wastes, including the use and disposal of radioactive materials, which could
subject us to regulation, related costs and delays and potential liabilities or
violations of environmental, health and safety laws.
We are subject to federal, state and local regulations governing storage, use
and disposal of hazardous materials and medical radioactive and other waste
products. Our diagnostic centers generate small amounts of medical wastes or
other hazardous materials, and some of our imaging and therapeutic services
involve the use of radioactive materials. Although we believe that our
procedures for storing, handling and disposing of these hazardous materials
comply with the standards prescribed by law and adequately provide for the
safety of our patients, employees and the environment, we cannot completely
eliminate the risk of accidental releases, contamination or injury associated
with such materials. In the event of an accident, we could be held liable for
any damages that result, and any liability could exceed the limits 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 not be able to achieve the expected benefits from any past or future
acquisitions which would adversely affect our financial condition and results.
We have historically relied on acquisitions as a method of expanding our
business. To date, we have completed 38 acquisitions of diagnostic imaging
centers. In addition, if we do not successfully integrate acquisitions, we may
not realize anticipated operating advantages and
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cost savings. The integration of companies that have previously operated
separately involves a number of risks, including:
- demands on management related to the increase in our size after an
acquisition;
- the diversion of our management's attention from the management of daily
operations to the integration of operations;
- difficulties in the assimilation and retention of employees; and
- potential adverse effects on operating results.
We may not be able to maintain the levels of operating efficiency acquired
companies will have achieved or might achieve separately. Successful integration
of each of their operations will depend upon our ability to manage those
operations and to eliminate redundant and excess costs. Because of difficulties
in combining operations, we may not be able to achieve the cost savings and
other size related benefits that we hoped to achieve after these acquisitions
which would harm our financial condition and results.
We are continuously evaluating acquisition opportunities, and, at any given
time, may be in various stages of due diligence or preliminary discussions with
respect to a number of potential transactions. From time to time we may enter
into non-binding letters of intent, but we are not currently subject to any
definitive agreement with respect to any transactions or otherwise so far
advanced in any discussions as to make a transaction material to our operations
reasonably certain. Nevertheless, some of these potential transactions, if we
were to complete our business and legal due diligence and enter into a
definitive agreement, could, if consummated, be material to our operations and
to our financial condition.
Our business may be harmed by terrorist activities or anti-terrorism measures.
Our business and future operating results are subject to uncertainties arising
out of past, ongoing and future foreign and domestic terrorist activities and
the threat of terrorist activities occurring in the United States, as well as
related United States responses to these terrorist activities. The fear of
terrorist activities and restrictions on travel which may be imposed from time
to time in response to terrorist activities or the threat of terrorist
activities may deter or prevent our patients and our employees from coming to
our centers. Any resulting inability of our patients or our employees to come to
our centers would have a material adverse effect on our business and results of
operations.
We are controlled by J.P. Morgan Partners, LLC and its interests as an equity
holder may conflict with yours as a creditor.
An affiliate of J.P. Morgan Partners, LLC beneficially owns approximately 70.0%
of our parent's total outstanding common stock (on a fully diluted basis).
Subject to certain limitations contained in the stockholders' agreement among
us, an affiliate of J.P. Morgan Partners, LLC, and our other stockholders, J.P.
Morgan Partners, LLC, controls us through an affiliate. The interests of J.P.
Morgan Partners, LLC may not in all cases be aligned with your interests as a
holder of the notes.
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The exchange offer
Purpose and effect of this exchange offer
We and the guarantors of the old notes have entered into a registration rights
agreement with the trustee as part of the Transactions in which we agreed to
file a registration statement relating to an offer to exchange the old notes for
exchange notes. The registration statement of which this prospectus forms a part
was filed in compliance with this obligation. We also agreed to use our
commercially reasonable efforts to cause such offer to be consummated within
225 days following the original issue of the old notes. The exchange notes will
have terms substantially identical to the old notes except that the exchange
notes will not contain terms with respect to transfer restrictions, registration
rights and additional interest payable for the failure to have this exchange
offer consummated by March 28, 2003. The old notes were issued on August 15,
2002.
Under the circumstances set forth below, we will use our commercially reasonable
efforts to cause the SEC to declare effective a shelf registration statement
with respect to the resale of the old notes and to keep the shelf registration
statement effective until the earlier of (a) the date on which, in the written
opinion of our counsel, all outstanding old notes held by persons that are not
our affiliates may be resold without registration under the Securities Act
pursuant to Rule 144(k) under the Securities Act or any successor provision
thereto and (b) such time as all of the old notes have been sold thereunder.
These circumstances include:
- because of any change in current law or prevailing interpretations of the
staff of the SEC, we are not permitted to effect this exchange offer;
- this exchange offer is not completed by March 28, 2003; or
- any of the initial purchasers of old notes who is not able to participate
in this exchange offer so requests in writing.
If we fail to comply with our obligations under the registration rights
agreement to have this exchange offer completed by March 28, 2003, we will be
required to pay additional interest to holders of the old notes.
Each holder of old notes that wishes to exchange such old notes for transferable
exchange notes in this exchange offer will be required to make the following
representations:
- that any exchange notes to be received by it will be acquired in the
ordinary course of its business;
- that at the time of the commencement of the registered exchange offer it
had no arrangement or understanding with any person to participate in the
distribution (within the meaning of Securities Act) of exchange notes in
violation of the Securities Act;
- that it is not an "affiliate," as defined in Rule 405 under the
Securities Act, of ours;
- if such holder is not a broker-dealer, that it is not engaged in, and
does not intend to engage in, the distribution of exchange notes; and
- if such holder is a broker-dealer, that it will receive exchange notes
for its own account in exchange for old notes that were acquired as a
result of market-making or other
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trading activities and that it will deliver a prospectus in connection
with any resale of such exchange notes.
Resale of exchange notes
Based on interpretations of the SEC staff set forth in no action letters issued
to unrelated third parties, we believe that exchange notes issued under this
exchange offer in exchange for old notes may be offered for resale, resold and
otherwise transferred by any exchange note holder without compliance with the
registration and prospectus delivery provisions of the Securities Act, if:
- such holder is not an "affiliate" of ours within the meaning of Rule 405
under the Securities Act;
- such exchange notes are acquired in the ordinary course of the holder's
business; and
- the holder does not intend to participate in the distribution of such
exchange notes.
Any holder who tenders in this exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
- cannot rely on the position of the staff of the SEC set forth in "Exxon
Capital Holdings Corporation" or similar interpretive letters; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, for the resale or for other
retransfer of exchange notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the old notes
as a result of market-making activities or other trading activities may
participate in this exchange offer. Each broker-dealer that receives exchange
notes for its own account in exchange for old notes, where such old notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. Please read the section
captioned "Plan of distribution" for more details regarding these procedures for
the transfer of exchange notes.
Terms of this exchange offer
Upon the terms and subject to the conditions set forth in this prospectus and in
the letter of transmittal, we will accept for exchange any old notes properly
tendered and not withdrawn prior to the expiration date. We will issue a like
principal amount of exchange notes in exchange for the principal amount of old
notes surrendered under this exchange offer.
The form and terms of the exchange notes will be substantially identical to the
form and terms of the old notes except the exchange notes will be registered
under the Securities Act, will not bear legends restricting their transfer and
will not provide for any additional interest upon our failure to fulfill our
obligations under the registration rights agreement to consummate the exchange
offer of, if required, cause to become effective a shelf registration statement.
The exchange notes will evidence the same debt as the old notes. The exchange
notes will be issued under and entitled to the benefits of the same indenture
that authorized the issuance
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of the old notes. Consequently, both series will be treated as a single class of
debt securities under that indenture.
This exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $180,000,000 aggregate principal amount of
the old notes are outstanding. This prospectus and the letter of transmittal are
being sent to all registered holders of old notes. There will be no fixed record
date for determining registered holders of old notes entitled to participate in
this exchange offer.
We intend to conduct this exchange offer in accordance with the provisions of
the registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC. Old notes that are not tendered for exchange in this
exchange offer will remain outstanding and continue to accrue interest and will
be entitled to the rights and benefits such holders have under the indenture
relating to the old notes.
We will be deemed to have accepted for exchange properly tendered old notes when
we have given oral or written notice of the acceptance to the exchange agent.
The exchange agent will act as agent for the tendering holders for the purposes
of receiving the exchange notes from us and delivering exchange notes to such
holders. Subject to the terms of the registration rights agreement, we expressly
reserve the right to amend or terminate this exchange offer, and not to accept
for exchange any old notes not previously accepted for exchange, upon the
occurrence of any of the conditions specified below under the caption "--Certain
conditions to this exchange offer."
Holders who tender old notes in this exchange offer will not be required to pay
brokerage commissions or fees, or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of old notes. We will
pay all charges and expenses, other than those transfer taxes described below,
in connection with this exchange offer. It is important that you read the
section labeled "--Fees and expenses" below for more details regarding fees and
expenses incurred in this exchange offer.
Expiration date; extensions; amendments
This exchange offer will expire at 5:00 p.m., New York City time on
, 2002, unless in our sole discretion, we extend it.
In order to extend this exchange offer, we will notify the exchange agent orally
or in writing of any extension. We will notify in writing or by public
announcement the registered holders of old notes of the extension no later than
9:00 a.m., New York City time, on the business day after the previously
scheduled expiration date.
We reserve the right, in our sole discretion:
- to delay accepting for exchange any old notes;
- to extend this exchange offer or to terminate this exchange offer and to
refuse to accept old notes not previously accepted if any of the
conditions set forth below under
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"--Certain conditions to this exchange offer" have not been satisfied, by
giving oral or written notice of such deal, extension or termination to
the exchange agent; or
- subject to the terms of the registration rights agreement, to amend the
terms of this exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice or public
announcement thereof to the registered holders of old notes. If we amend this
exchange offer in a manner that we determine to constitute a material change, we
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of old notes of such amendment.
Without limiting the manner in which we may choose to make public announcements
of any delay in acceptance, extension, termination or amendment of this exchange
offer, we shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by issuing a timely press
release to a financial news service.
Certain conditions to this exchange offer
Despite any other term of this exchange offer, we will not be required to accept
for exchange, or exchange any exchange notes for, any old notes, and we may
terminate this exchange offer as provided in this prospectus before accepting
any old notes for exchange if in our reasonable judgment:
- the exchange notes to be received will not be tradable by the holder
without restriction under the Securities Act or the Securities Exchange
Act of 1934, as amended, and without material restrictions under the blue
sky or securities laws of substantially all of the states of the United
States;
- this exchange offer, or the making of any exchange by a holder of old
notes, would violate applicable law or any applicable interpretation of
the staff of the SEC; or
- any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to this exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with this exchange offer.
In addition, we will not be obligated to accept for exchange the old notes of
any holder that has not made:
- the representations described under "--Purpose and effect of this
exchange offer", "--Procedures for tendering" and "Plan of distribution",
and
- such other representations as may be reasonably necessary under
applicable SEC rules, regulations or interpretations to make available to
it an appropriate form for registration of the exchange notes under the
Securities Act.
We expressly reserve the right, at any time or at various times, to extend the
period of time during which this exchange offer is open. Consequently, we may
delay acceptance of any old notes by giving oral or written notice of such
extension to the registered holders of the old notes. During any such
extensions, all old notes previously tendered will remain subject to this
exchange offer, and we may accept them for exchange unless they have been
previously
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withdrawn. We will return any old notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of this exchange offer.
We expressly reserve the right to amend or terminate this exchange offer, and to
reject for exchange any old notes not previously accepted for exchange, upon the
occurrence of any of the conditions of this exchange offer specified above. We
will give oral or written notice or public announcement of any extension,
amendment, non-acceptance or termination to the registered holders of the old
notes as promptly as practicable. In the case of any extension, such notice will
be issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration date.
These conditions are for our sole benefit and we may assert them regardless of
the circumstances that may give rise to them or waive them in whole or in part
at any or at various times in our sole discretion. If we fail at any time to
exercise any of the foregoing rights, that failure will not constitute a waiver
of such right. Each such right will be deemed an ongoing right that we may
assert at any time or at various times.
In addition, we will not accept for exchange any old notes tendered, and will
not issue exchange notes in exchange for any such old notes, if at such time any
stop order will be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939, as amended.
Procedures for tendering
Only a holder of old notes may tender such old notes in this exchange offer. To
tender in this exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to
the expiration date; or
- comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
- the exchange agent must receive old notes along with the letter of
transmittal; or
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such old notes into the exchange
agent's account at DTC according to the procedures for book-entry
transfer described below or a properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange agent" prior to the expiration date.
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<Page>
The tender by a holder that is not withdrawn prior to the expiration date will
constitute an agreement between such holder and us in accordance with the terms
and subject to the conditions set forth in this prospectus 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 holder's election and risk.
Rather than mail these items, we recommend that holders use an overnight or hand
delivery service. In all cases, holders should allow sufficient time to assure
delivery to the exchange agent before the expiration date. Holders should not
send us the letter of transmittal or old notes. Holders may request their
respective brokers, dealers, commercial banks, trust companies or other nominees
to effect the above transactions for them.
Any beneficial owner whose old notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct it to tender on the
owners' behalf. If such beneficial owner wishes to tender on its own behalf, it
must, prior to completing and executing the letter of transmittal and delivering
its old notes, either:
- 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 of old
notes.
The transfer of registered ownership may take considerable time and may not be
completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described below
must be guaranteed by 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 another
"eligible institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, unless the old notes tendered pursuant thereto
are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
- for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed on the old notes, such old notes must be endorsed
or accompanied by a properly completed bond power. The bond power must be signed
by the registered holder as the registered holder's name appears on the old
notes and an eligible institution must guarantee the signature on the bond
power.
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. Unless waived by us, they should also
submit evidence satisfactory to us of their authority to deliver the letter of
transmittal.
The exchange agent and DTC have confirmed that any financial institution that is
a participant in DTC's system may use DTC's Automated Tender Offer program to
tender. Participants in the
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program may, instead of physically completing and signing the letter of
transmittal and delivering it to the exchange agent, transmit their acceptance
of this exchange offer electronically. They may do so by causing DTC to transfer
the old notes to the exchange agent in accordance with its procedures for
transfer. DTC will then send an agent's message to the exchange agent. The term
"agent's message" means a message transmitted by DTC, received by the exchange
agent and forming part of the book-entry confirmation, to the effect that:
- DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering old notes that are the
subject of such book-entry confirmation;
- such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and
- the agreement may be enforced against such participant.
We will determine in our sole discretion all questions as to the validity, form,
eligibility (including time of receipt), acceptance of tendered old notes and
withdrawal of tendered old notes. Our determination will be final and binding.
We reserve the absolute right to reject any old notes not properly tendered or
any old notes the acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of this 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 with respect to tenders of old notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
such notification. Tenders of old notes will not be deemed made until such
defects or irregularities have been cured or waived. Any old notes received by
the exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned to the exchange
agent without cost to the tendering holder, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
In all cases, we will issue exchange notes for old notes that we have accepted
for exchange under this exchange offer only after the exchange agent timely
receives:
- 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 a properly transmitted agent's message.
By signing the letter of transmittal, each tendering holder of old notes will
represent that, among other things:
- any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
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- the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes;
- if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange notes;
- if the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for old notes that were acquired as a result of
market-making activities, that it will deliver a prospectus, as required
by law, in connection with any resale of such exchange notes; and
- the holder is not an "affiliate", as defined in Rule 405 of the
Securities Act, of ours.
Book-entry transfer
The exchange agent will make a request to establish an account with respect to
the old notes at DTC for purposes of this exchange offer promptly after the date
of this prospectus; and any financial institution participating 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. Holders of old notes who are unable to deliver
confirmation of the book-entry tender of their old notes into the exchange
agent's account at DTC or all other documents of transmittal to the exchange
agent on or prior to the expiration date must tender their old notes according
to the guaranteed delivery procedures described below.
Guaranteed delivery procedures
Holders wishing to tender their old notes but whose old notes are not
immediately available or who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent or comply with
the applicable procedures under DTC's Automated Tender Offer Program prior to
the expiration date may tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery by facsimile transmission, mail or hand delivery
or a properly transmitted agent's message and notice of guaranteed
delivery:
--setting forth the name and address of the holder, the registered
number(s) of such old notes and the principal amount of old notes
tendered;
--stating that the tender is being made thereby; and
--guaranteeing that, within three (3) New York Stock Exchange trading
days after the expiration date, the letter of transmittal or facsimile
thereof together with the old notes or a book-entry confirmation, and any
other documents required by the letter of transmittal will be deposited
by the eligible institution with the exchange agent; and
- the exchange agent receives such properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered old notes in
proper form for transfer or a book-entry confirmation, and all other
documents required by the letter
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of transmittal, within three (3) New York Stock Exchange trading days
after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be sent
to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of tenders
Except as otherwise provided in this prospectus, holders of old notes may
withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice, which notice may be by
telegram, telex, facsimile transmission or letter of withdrawal at one of
the addresses set forth below under "--Exchange agent", or
- holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any such notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn;
- identify the old notes to be withdrawn, including the principal amount of
such old notes; and
- where certificates for old notes have been transmitted, specify the name
in which such old notes were registered, if different from that of the
withdrawing holder.
If certificates for old notes have been delivered or otherwise identified to the
exchange agent, then, prior to the release of such certificates, the withdrawing
holder must also submit:
- the serial numbers of the particular certificates to be withdrawn; and
- a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.
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 such facility. We will determine all
questions as to the validity, form and eligibility, including time of receipt,
of such notices, and our determination shall be final and binding on all
parties. We will deem any old notes so withdrawn not to have validity tendered
for exchange for purposes of this exchange offer. Any old notes that have been
tendered for exchange but that are not exchanged for any reason will be returned
to their holder without cost to the holder (or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described above, such old notes will be credited to
an account maintained with DTC for old notes) as soon as practicable after
withdrawal, rejection of tender or termination of this exchange offer. Properly
withdrawn old notes may be retendered by following one of the procedures
described under "--Procedures for tendering" above at any time on or prior to
the expiration date.
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Exchange agent
Wachovia Bank, National Association has been appointed as exchange agent for
this exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or of the letter of
transmittal and requests for the notice of guaranteed delivery to the exchange
agent addressed as follows:
<Table>
For Delivery by Hand, Overnight Delivery, By Facsimile Transmission
Registered or Certified Mail: (for eligible institutions only):
Wachovia Bank, National Association (704) 590-7628
Corporate Trust Group, NC1153 Attn: Marcia Rice
1525 W. W.T. Harris Blvd., 3C3 To Confirm by Telephone
Charlotte, North Carolina 28288 or for Information Call:
Attn: Marcia Rice (704) 590-7413
Corporate Trust Department
</Table>
Delivery of the letter of transmittal to an address other than as set forth
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of such letter of transmittal.
Fees and expenses
We will bear the expenses of soliciting tenders. The principal solicitation is
being made by mail; however, we may make additional solicitations by telegraph,
telephone or in person by our officers and regular employees and those of our
affiliates.
We have not retained any dealer-manager in connection with this exchange offer
and will not make any payments to broker-dealers or others soliciting
acceptances of this exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
Our expenses in connection with this exchange offer include:
- SEC registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
Transfer taxes
We will pay all transfer taxes, if any, applicable to the exchange of old notes
under this exchange offer. The tendering holder, however, will be required to
pay any transfer taxes, whether imposed on the registered holder or any other
person, if:
- certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes
tendered;
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- tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes under this exchange offer.
If satisfactory evidence of payment of such taxes is not submitted with the
letter of transmittal, the amount of such transfer taxes will be billed to that
tendering holder.
Holders who tender their old notes for exchange will not be required to pay any
transfer taxes. However, holders who instruct us to register exchange notes in
the name of, or request that old notes not tendered or not accepted in this
exchange offer be returned to, a person other than the registered tendering
holder will be required to pay any applicable transfer tax.
Consequences of failure to exchange
Holders of old notes who do not exchange their old notes for exchange notes
under this exchange offer will remain subject to the restrictions on transfer of
such old notes:
- as set forth in the legend printed on the notes as a consequence of the
issuance of the old notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
- otherwise as set forth in the offering memorandum distributed in
connection with the Transactions.
In general, you may not offer or sell the old notes unless they are registered
under the Securities Act, or if the offer or sale is exempt from registration
under the Securities Act and applicable state securities laws. Except as
required by the registration rights agreement, we do not intend to register
resales of the old notes under the Securities Act. Based on interpretations of
the SEC staff, exchange notes issued pursuant to this exchange offer may be
offered for resale, resold or otherwise transferred by their holders, other than
any such holder that is our "affiliate" within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the holders acquired the
exchange notes in the ordinary course of the holders' business and the holders
have no arrangement or understanding with respect to the distribution of the
exchange notes to be acquired in this exchange offer. Any holder who tenders in
this exchange offer for the purpose of participating in a distribution of the
exchange notes:
- could not rely on the applicable interpretations of the SEC; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Accounting treatment
We will record the exchange notes in our accounting records at the same carrying
value as the old notes, as reflected in our accounting records on the date of
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes in connection with this exchange offer. We will record the direct
incremental expenses of this exchange offer as debt issuance costs.
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Other
Participation in this exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old notes in the open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plans to acquire any old notes that are not
tendered in this exchange offer or to file a registration statement to permit
resales of any untendered old notes.
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The Transactions
The recapitalization
On August 15, 2002, we consummated a recapitalization pursuant to an agreement
dated July 16, 2002, as amended on August 8, 2002, among our parent, MQ
Associates, Inc., its then existing stockholders and MQ Investment Holdings,
LLC, which was a newly formed Delaware limited liability company and is an
affiliate of J.P. Morgan Partners, LLC. The total consideration paid in the
recapitalization was valued at $365.1 million, including transaction costs. As a
result of the recapitalization, approximately 70.0% of the total capital stock
of MQ Associates, Inc. is owned by MQ Investment Holdings, LLC and approximately
30.0% of the total capital stock of MQ Associates, Inc. is owned by the
management stockholders, in each case, on a fully diluted basis. We are a wholly
owned subsidiary of MQ Associates, Inc., and prior to the closing of the
recapitalization, MQ Associates, Inc. transferred 100% of the ownership
interests in each of its subsidiaries to us. Pursuant to the recapitalization
agreement, the following transactions occurred:
- MQ Investment Holdings, LLC made an equity investment of $107.1 million
in MQ Associates, Inc. and as a result of such investment received
72,100,000 shares of newly issued Class A Common Stock, par value $0.001
per share, and 35,000,000 shares of a new series of Series A Redeemable
Preferred Stock, par value $0.001 per share, of MQ Associates, Inc.;
- Immediately prior to the consummation of the recapitalization, the then
outstanding shares of Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock of MQ Associates, Inc. (all of which were
owned by TA Associates, Inc. and other private investors) were converted
in a series of transactions into 4,105,532 shares of Common Stock,
1,276,000 shares of the old series of Series A Redeemable Preferred Stock
and 680,000 shares of the old series of Series B Redeemable Preferred
Stock. As part of the recapitalization, MQ Associates, Inc. (i) redeemed
approximately 76.4% of the total outstanding shares of Common Stock and
Class B Common Stock, including approximately 58.9% of the stock holdings
of the management stockholders, for an aggregate redemption price of
approximately $148.4 million (with $82.5 million received by TA
Associates, Inc. and other private investors and $65.9 million received
by the management stockholders) and (ii) redeemed 100% of the old series
of Series A Redeemable Preferred Stock and 100% of the old series of
Series B Redeemable Preferred Stock (all of which were held by TA
Associates, Inc. and other private investors) for an aggregate redemption
price of $19.6 million. The remaining 23.6% of outstanding Common Stock
and Class B Common Stock, which equaled 100% of the remaining stock
holdings of the management stockholders, were reclassified as
(i) 28,605,000 shares of Common Stock, par value $0.001 per share
(30,900,000 shares on a fully diluted basis), and (ii) 15,000,000 shares
of a new series of Series B Redeemable Preferred Stock, par value $0.001
per share, which in the aggregate equals approximately 30.0% of the
ownership of MQ Associates, Inc. on a fully diluted basis after the
consummation of the recapitalization; and
- We entered into the senior credit facility and issued the notes to fund a
portion of the Transactions.
44
<Page>
Pursuant to the recapitalization agreement, the management stockholders of MQ
Associates, Inc. agreed to assume and direct the appeal of the InMed litigation
matter. In connection with this litigation, MQ Associates, Inc. has placed
approximately $2.1 million in escrow. If the appeal is resolved adversely to MQ
Associates, Inc., the management stockholders of MQ Associates, Inc. will
indemnify MQ Associates, Inc. for all liabilities or obligations of MQ
Associates, Inc. in excess of the escrowed funds. However, if the appeal is
resolved in favor of MQ Associates, Inc., the management stockholders of MQ
Associates, Inc. will be entitled to receive from MQ Associates, Inc. the amount
of the escrowed funds in excess of any liabilities or obligations of MQ
Associates, Inc. incurred in connection with the litigation, as well as any
additional amounts awarded to MQ Associates, Inc.
Pursuant to the recapitalization agreement, the former stockholders of MQ
Associates, Inc. agreed to indemnify MQ Investment Holdings, LLC, MQ Associates,
Inc. and their affiliates for breaches of representations, warranties and
covenants made by MQ Associates, Inc. and such stockholders, as well as for
other specified matters. Generally, subject to certain limited exceptions, these
indemnification obligations with respect to breaches of representations and
warranties are not effective until the aggregate amount of losses suffered by
any indemnified party exceeds $2.0 million. Additionally, certain of the
aforementioned indemnification obligations are limited to $20.0 million of
recovery by the indemnified party from the indemnifying party. Generally,
subject to several exceptions of greater duration, indemnification obligations
with respect to representations and warranties survive until November 15, 2003.
MQ Associates, Inc. is planning to adopt a stock-based compensation plan
entitling certain key members of our management to acquire, subject to certain
conditions, up to approximately 10.0% of its total common stock outstanding. See
"Management--Stock options and restricted stock."
The senior credit facility
On August 15, 2002, MQ Associates, Inc. and its subsidiaries refinanced
substantially all of their existing loan agreements and we entered into a senior
credit facility in which Wachovia Bank, National Association, JPMorgan Chase
Bank and UBS AG, Stamford Branch, each affiliates of the initial purchasers of
the old notes, were among the lenders. See "Plan of distribution." The senior
credit facility consists of an $80.0 million revolving credit facility. For a
description of the terms of the senior credit facility, see "Description of
senior credit facility."
45
<Page>
Use of proceeds
We will not receive any cash proceeds from the issuance of the exchange notes.
In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange old notes in like principal amount,
which will be cancelled and as such will not result in any increase in our
indebtedness.
The net proceeds from the offering of the old notes, which were $167.5 million
after deducting fees and expenses, were used to fund a portion of the
Transactions. See "The Transactions."
The following table sets forth the sources and uses of funds in connection with
the Transactions:
<Table>
- ----------------------------------------------------------------------
(Dollars in millions) Amount
- ----------------------------------------------------------------------
Sources of funds
Senior credit facility(1)................................... $ 35.9
Old notes (net of discount)................................. 176.2
Management rollover equity(2)............................... 45.9
New equity(3)............................................... 107.1
------
Total..................................................... $365.1
------
</Table>
<Table>
<Caption>
Uses of funds
Redemption of common equity(4).............................. $194.2
Repayment of existing debt(5)............................... 117.7
Redemption of redeemable preferred equity................... 19.6
Seller transaction fees(6).................................. 21.1
Deferred financing costs(7)................................. 12.5
------
Total..................................................... $365.1
- ----------------------------------------------------------------------
</Table>
(1) Represents borrowings made at the closing of the Transactions. Immediately
following the consummation of the Transactions, we had $43.3 million of
available borrowing capacity under the senior credit facility, net of
$0.8 million reserved for letters of credit outstanding.
(2) Consists of $30.9 million common stock investment and $15.0 million
redeemable preferred stock investment.
(3) Consists of purchase of $72.1 million of common stock and $35.0 million of
redeemable preferred stock.
(4) Consists of the redemption of common stock of MQ Associates, Inc. and the
rollover by management stockholders of $45.9 million of equity.
(5) Represents amount of debt repaid at the closing of the Transactions.
(6) Consists of transaction fees (primarily legal and accounting fees), success
fees and prepayment penalties payable by MQ Associates, Inc.
(7) Consists of debt issuance costs of $12.5 million.
46
<Page>
Capitalization
The following table sets forth the capitalization of MQ Associates, Inc. as of
September 30, 2002 on an actual basis. This table should be read in conjunction
with the historical consolidated financial statements of MQ Associates, Inc. and
its subsidiaries and the related notes thereto included elsewhere in this
prospectus.
<Table>
- ---------------------------------------------------------------------------
September 30,
(Dollars in millions) 2002
- ---------------------------------------------------------------------------
(unaudited)
Cash and cash equivalents................................... $ 2.4
======
Long-term debt (including current portion thereof):
Obligations under capital leases.......................... $ 3.8
Senior credit facility.................................... 43.0
11 7/8% Senior Subordinated Notes, Series A, due 2012 (net
of discount)............................................ 176.2
------
Total debt.............................................. 223.0
Redeemable preferred stock:
Series A preferred stock(2)............................... 35.0
Series B preferred stock(2)............................... 15.0
Stockholders' deficit:
Common stock.............................................. 0.1
Other stockholders' deficit............................... (118.3)
------
Total stockholders' deficit............................. (118.2)
------
Total capitalization........................................ $154.8
- ---------------------------------------------------------------------------
</Table>
(1) Upon consummation of the Transactions, we had $43.0 million of available
borrowing capacity under the senior credit facility, net of $0.8 million
reserved for letters of credit outstanding.
(2) The Series A preferred stock and the Series B preferred stock are redeemable
at the option of the holders upon the completion of a public offering
resulting in proceeds of at least $50.0 million.
47
<Page>
Unaudited pro forma financial information
The following unaudited pro forma condensed consolidated financial information
has been prepared by applying pro forma adjustments to the historical
consolidated financial statements of MQ Associates, Inc. included elsewhere in
this prospectus. The unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 2001 gives effect to the Transactions
and the acquisition of the assets of AMI Outpatient Services, Ltd., which we
acquired on September 1, 2001, as if they had occurred on January 1, 2001. The
unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2002 gives effect to the Transactions as if they had
occurred on January 1, 2002.
MQ Associates, Inc. is a guarantor of the notes and of the senior credit
facility and has no material assets or operations other than its ownership of
100% of our capital stock. As a result, the results of operations of MQ
Associates, Inc. are substantially the same as ours.
The pro forma adjustments, as described in the notes to the unaudited pro forma
condensed consolidated financial statements, are based on currently available
information and certain adjustments that management of MQ Associates, Inc.
believes are reasonable. The unaudited pro forma condensed consolidated
financial data are presented for informational purposes only and are not
necessarily indicative of the operating results or financial position that would
have occurred had the Transactions or the AMI Outpatient Services, Ltd.
acquisition been consummated on or as of the dates indicated and such data are
not necessarily indicative of future operating results or financial position.
The unaudited pro forma condensed financial data should be read in conjunction
with "Management's discussion and analysis of financial condition and results of
operations," and the consolidated financial statements of MQ Associates, Inc.
and the notes thereto included elsewhere in this prospectus.
48
<Page>
Unaudited pro forma condensed consolidated statement of operations for the year
ended December 31, 2001
<Table>
- ---------------------------------------------------------------------------------------------
Adjustments Adjustments
for the for AMI
(in thousands) Historical Transactions Acquisition Pro forma
- ---------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Net revenue from services............. $142,322 $ -- $10,533 $152,875
Costs and expenses
Operating expenses, excluding
depreciation...................... 61,014 -- 8,988 70,002
Marketing, general and
administrative expenses........... 55,554 -- (35) 55,589
Depreciation and amortization....... 17,488 -- 1,054(3) 18,542
-----------------------------------------------------
Income from operations............ 8,266 -- 526 8,792
Interest expense, net................. 8,230 16,097 (1) -- 24,327
-----------------------------------------------------
Income before provision for income
taxes........................... 36 (16,097) 526 (15,535)
Provision (benefit) for income
taxes............................... 4,020 (6,439)(2) 210(2) (2,209)
Minority interest in net income of
consolidated subsidiaries........... 110 -- -- 110
-----------------------------------------------------
Net loss.......................... $ (9,658) $ (9,658) 316 $ (13,436)
- ---------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
49
<Page>
Unaudited pro forma condensed consolidated statement of operations for the nine
months ended September 30, 2002
<Table>
- -----------------------------------------------------------------------------------------------
(in thousands) Historical Adjustments Pro forma
- -----------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Net revenue from services......................... $149,120 $ -- $149,120
Costs and expenses
Operating expenses, excluding depreciation...... 64,774 -- 64,774
Marketing, general and administrative expenses.. 45,033 -- 45,033
Depreciation and amortization................... 16,973 -- 16,973
-------------------------------------------
Income from operations........................ 22,340 -- 22,340
Interest expense, net............................. 20,536 (2,385)(1) 18,151
-------------------------------------------
Income before provision for income taxes...... 1,804 (2,385) 4,189
Provision (benefit) for income taxes.............. 706 (954)(2) (248)
Minority interest in net income of consolidated
subsidiaries.................................... 40 -- 40
-------------------------------------------
Net income...................................... $ 1,058 (3,339) $ 4,397
- -----------------------------------------------------------------------------------------------
</Table>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
50
<Page>
Notes to unaudited pro forma condensed consolidated financial statements
(in thousands)
The unaudited pro forma condensed consolidated financial statements reflect the
following pro forma adjustments:
(1) To reflect adjustments to interest expense as follows:
<Table>
- -----------------------------------------------------------------------------
Twelve Nine
months months
ended ended
12/31/01 9/30/02
- -----------------------------------------------------------------------------
Interest on the old notes at 11 7/8%.................. $21,375 $16,031
Effect of interest rate swap(a) on notional amount of
$47,500 at six-month LIBOR plus 6.525%.............. (797) (598)
Interest on senior credit facility(a) at LIBOR plus
250 bps (estimated rate of 4.36% for the twelve
months ended December 31, 2001 and 4.33% for the
nine months ended September 30, 2002)............... 1,875 1,395
Amortization of debt issuance costs of senior credit
facilities and notes................................ 1,491 1,118
Amortization of discount on notes..................... 383 287
Elimination of historical interest expense............ (8,230) (20,618)
---------------------
$16,097 $(2,385)
- -----------------------------------------------------------------------------
</Table>
(a) For every 1/8% increase in the variable rate applicable to the senior
credit
facility and a portion of the notes (notional amount of $47,500 on
interest
rate swap agreement), interest expense will increase by $113.
(2) To reflect the pro forma results of operations at estimated effective
tax rates for each respective period.
(3) Adjusted to reflect amortization of goodwill acquired in AMI
acquisition.
51
<Page>
Selected historical financial data
The following table sets forth the selected historical consolidated financial
data and other data of MQ Associates, Inc. MQ Associates, Inc. is a guarantor of
the notes and of the senior credit facility and has no material assets or
operations other than its ownership of 100% of our capital stock. As a result,
the results of operations of MQ Associates, Inc. are substantially the same as
ours. The summary consolidated historical financial data set forth below should
be read in conjunction with and is qualified in its entirety by reference to
"Management's discussion and analysis of financial condition and results of
operations" and the audited consolidated financial statements, the unaudited
consolidated financial statements and the related notes included elsewhere in
this prospectus. The selected consolidated financial data for the fiscal years
ended December 31, 1999 and December 31, 2000 have been derived from the
financial statements of MQ Associates, Inc., which have been audited by Elliott
Davis, LLC. The selected consolidated financial data for the fiscal year ended
December 31, 2001 have been derived from the financial statements of MQ
Associates, Inc., which have been audited by PricewaterhouseCoopers LLP. The
selected consolidated financial data for the fiscal years ended December 31,
1997 and 1998 and for the nine months ended September 30, 2001 and
September 30, 2002 have been derived from the unaudited consolidated financial
statements of MQ Associates, Inc. In the opinion of management of MQ
Associates, Inc., the unaudited information reflects all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
the results for those periods. Results for the nine months ended September 30,
2002 are not necessarily indicative of the results to be expected for the full
fiscal year.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
Nine months ended
Fiscal year ended December 31, September 30,
---------------------------------------------------- -------------------------
(Dollars in millions) 1997 1998 1999 2000 2001 2001 2002
- -----------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Statement of operations data:
Net revenues from services........... $ 18.4 $ 34.0 $56.7 $85.9 $142.3 $99.5 $149.1
Costs and expenses
Operating expenses, excluding
depreciation and amortization.... 10.1 16.3 25.0 35.6 61.0 41.9 64.8
Marketing, general and
administrative expenses(1)....... (0.1) 10.3 17.3 25.6 55.6 40.0 45.0
Depreciation and amortization(2)... 2.2 5.9 9.2 11.2 17.5 12.2 17.0
--------------------------------------------------------------------------------
Income (loss) from operations........ 6.2 1.5 5.2 13.5 8.2 5.4 22.3
Interest expense, net................ 1.1 2.4 4.1 4.9 8.2 5.8 20.5
--------------------------------------------------------------------------------
Income (loss) before provision for
income taxes....................... 5.1 (0.9) 1.1 8.6 0.0 (0.4) 1.8
Provision (benefit) for income
taxes(3)........................... -- -- (0.3) 3.4 4.0 3.2 0.7
--------------------------------------------------------------------------------
Minority interest in net income of
consolidated subsidiaries.......... -- -- -- 0.1 0.1 0.1 --
Net income (loss).................... 5.1 (0.9) 1.4 5.1 (4.1) (3.7) 1.1
</Table>
52
<Page>
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
Nine months ended
Fiscal year ended December 31, September 30,
---------------------------------------------------- -------------------------
(Dollars in millions) 1997 1998 1999 2000 2001 2001 2002
- -----------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Other financial data (unaudited):
Net cash and cash equivalents
provided by operating activities... $ 12.6 $ 5.9 $ 7.1 $ 12.0 $ 20.3 $ 13.1 $ 8.8
Net cash and cash equivalents used in
investing activities............... (17.1) (23.8) (11.6) (15.0) (60.1) (48.8) (31.7)
Net cash and cash equivalents
provided by financing activities... 5.3 20.1 3.6 3.0 42.9 37.0 19.9
EBITDA(4)............................ 8.4 7.4 14.4 24.7 37.1 26.9 39.9
Capital expenditures:
Maintenance........................ 1.3 0.1 0.6 0.8 1.3 1.0 1.5
Expansion and acquisition of
centers and DE NOVO centers...... 10.6 22.7 11.0 14.2 58.8 46.2 34.3
Ratio of earnings to fixed
charges(5)......................... 4.7x -- 1.2x 2.6x 1.0x -- 1.1x
Balance sheet data (at period end):
Cash and cash equivalents............ $ 0.9 $ 3.1 $ 2.3 $ 2.3 $ 5.4 $ 3.6 $ 2.4
Working capital(6)................... 3.9 2.4 8.7 13.2 20.7 22.5 29.9
Total assets......................... 18.6 42.4 51.4 72.9 137.3 125.1 180.0
Total debt........................... 15.3 37.5 46.1 58.1 115.6 106.2 225.3
Redeemable preferred stock........... -- -- 18.8 79.3 105.3 105.3 50.0
Total stockholders' equity
(deficit)(7)....................... 1.9 (1.1) (20.6) (75.9) (105.4) (105.9) (118.2)
Operating data (unaudited):
Number of centers:
Total at beginning of period....... 7 10 20 33 43 43 66
Additional DE NOVO................. 1 7 12 5 10 6 3
Additional acquired................ 2 3 1 5 13 9 5
--------------------------------------------------------------------------------
Total at end of period............. 10 20 33 43 66 58 74
- -----------------------------------------------------------------------------------------------------------------------
</Table>
(1) For the year ended December 31, 1997, MG&A expenses include a gain of
$5.9 million related to the sale of two centers.
(2) In adopting SFAS 142, effective January 1, 2002, we no longer amortize
goodwill and certificates of need related to these business combinations.
There was no impairment to goodwill and certificates of need as a result of
the impairment test performed. Amortization expense for goodwill and
certificates of need for the years ended December 31, 1997, 1998, 1999, 2000
and 2001 and the nine months ended September 30, 2001 was $0.0 million,
$0.1 million, $0.3 million, $0.6 million, $0.9 million and $0.2 million,
respectively.
(3) During 1999 we were an S-corporation from January 1st through October 7th.
Therefore, no federal income taxes were provided for during this period.
(4) EBITDA is defined in the indenture as net income before interest expense,
income taxes, depreciation, amortization and other non-cash charges
(consisting in 2001 of the $9.4 million non-cash compensation charge) plus
"success fees" of $0.6 million paid to certain executive officers and other
employees in connection with the Transactions plus the $2.1 million
reflected in MG&A expense which was paid in December 2001 in connection with
certain legal proceedings. See "Business -- Legal proceedings."
53
<Page>
The following table reconciles the difference between net income (loss), as
determined under United States generally accepted accounting principles, and
EBITDA (in millions):
<Table>
<Caption>
Nine months
ended
Fiscal year ended December 31, September 30,
---------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss)................................. $ 5.1 $(0.9) $ 1.4 $ 5.2 $(4.1) $(3.7) $ 1.1
Interest expense, net............................. 1.1 2.4 4.1 4.9 8.2 5.8 20.5
Provision (benefit) for income taxes.............. -- -- (0.3) 3.4 4.0 3.2 0.7
Depreciation and amortization..................... 2.2 5.9 9.2 11.2 17.5 12.2 17.0
InMed litigation.................................. 2.1
Success fees...................................... 0.6
Non-cash charges.................................. 9.4 9.4
--------------------------------------------------------------------------
EBITDA............................................ $ 8.4 $ 7.4 $14.4 $24.7 $37.1 $26.9 $39.9
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
We believe EBITDA information enhances an investor's understanding of a
company's ability to satisfy principal and interest obligations with respect
to its indebtedness and to utilize cash for other purposes. In addition,
EBITDA is used as a measure in the indenture in determining our compliance
with certain covenants. However, there may be contractual, legal, economic
or other reasons which may prevent us from satisfying principal and interest
obligations with respect to our indebtedness and may require us to allocate
funds for other purposes. EBITDA does not represent and should not be
considered as an alternative to net income or cash flows from operating
activities as determined under United States generally accepted accounting
principles and may not be comparable to other similarly titled measures of
other companies.
(5) Earnings consist of income before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of (i) interest, whether
expensed or capitalized, (ii) amortization of debt issuance costs and
discount on the notes and (iii) an allocation of one-third of the rental
expense from operating leases, which management considers to be a reasonable
approximation of the interest factor of operating lease payments. For fiscal
1998 and the nine months ended September 30, 2001, fixed charges exceeded
earnings by $0.9 million and $0.4 million, respectively. The deficiency in
2001 included a $9.4 million non-cash compensation charge.
(6) Working capital is current assets, excluding cash and cash equivalents,
minus current liabilities, excluding the current portion of long term debt
and line of credit.
(7) On March 30, 2001, TA Associates, Inc. made its second equity purchase and
first subordinated debt loan to us. As of March 31, 2001, none of these
funds had been used to repurchase a portion of the shares from the two
founders. The repurchase took place in April, 2001 and a portion of the
shares held by our co-founders were repurchased for $18.8 million. Such
repurchase was accounted for as a $19.9 million reduction to stockholders'
equity. The increase in 1999 and 2000 reflects accretion to the redemption
value of the redeemable preferred stock of MQ Associates, Inc. .
54
<Page>
Management's discussion and analysis of
financial condition and results of operations
MQ ASSOCIATES, INC. HAS GUARANTEED THE NOTES AND BORROWINGS UNDER THE SENIOR
CREDIT FACILITY AND HAS NO MATERIAL ASSETS OR OPERATIONS OTHER THAN ITS
OWNERSHIP OF ALL OF OUR CAPITAL STOCK. AS A RESULT, THE DISCUSSION BELOW OF THE
HISTORICAL RESULTS OF OPERATIONS AND LIQUIDITY OF MQ ASSOCIATES, INC. IS
SUBSTANTIALLY THE SAME AS OURS.
THE PURPOSE OF THIS SECTION IS TO DISCUSS AND ANALYZE THE CONSOLIDATED FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES AND RESULTS OF OPERATIONS OF MQ
ASSOCIATES, INC. THIS ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES WHICH APPEAR ELSEWHERE IN THIS
PROSPECTUS. THIS SECTION CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF FEDERAL SECURITIES LAWS THAT INVOLVE RISKS AND UNCERTAINTIES,
INCLUDING STATEMENTS REGARDING OUR PLANS, OBJECTIVES, GOALS, STRATEGIES AND
FINANCIAL PERFORMANCE. THE ACTUAL RESULTS ACHIEVED BY MQ ASSOCIATES, INC. COULD
DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF FACTORS SET FORTH UNDER "DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS" AND "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
Overview
We are a leading operator of FICs in the United States. We operate a network of
77 wholly owned centers in 12 states primarily throughout the southeastern and
southwestern United States. From 1999 to 2001, on average, 75.6% of our net
revenue was derived from MRI services and 12.0% of our net revenue was derived
from CT services. The remainder of our revenue was derived from nuclear
medicine, general radiology (fluoroscopy and x-ray), ultrasound, mammography and
bone densitometry services.
Our revenue is generated by providing patient services. Generally, we directly
bill patients or third-party payors (e.g. Medicare, Medicaid, commercial payors
and workers compensation funds) on a fee-for-service basis. For the nine months
ended September 30, 2002, approximately 58.8% of our net revenue came from
commercial payors, 24.8% from government payors, 5.7% from workers compensation
and 10.7% from other sources, including payments made directly by patients.
Additionally, we have entered into purchased service agreements with physicians
through which we provide diagnostic imaging services to a physician's patients
for a set fee which is paid by the physician, who then directly bills payors.
These purchased service agreements represented approximately 5.9% of our net
revenue for the nine months ended September 30, 2002, and were accounted for as
payments by commercial payors, workers compensation and other sources. We have
over 160 different contracts with commercial payors, and no single commercial
payor accounted for more than 5.0% of our net revenue for the nine months ended
September 30, 2002. Each of these contracts is renegotiated on an annual basis.
These contracts describe the negotiated fees to be paid by each payor for the
diagnostic imaging services we provide to their members (our patients).
The principal components of our operating costs, excluding depreciation and
amortization, are compensation paid to radiologists, technologists and
transcriptionists, annual equipment maintenance costs, medical supplies, real
estate rental expenses and equipment rental costs (which include rental costs
for mobile units and operating expenses for certain equipment). Operating costs
excluding depreciation and amortization, as a percentage of net revenue, have
55
<Page>
decreased from 44.1% in 1999 to 43.4% for the nine months ended September 30,
2002. This decrease has occurred primarily as a result of our net revenue growth
relative to our fixed cost base. However, we expect that this ratio will be
stable to slightly increasing in the near term as we continue to expand our
network of centers.
The principal components of our marketing, general and administrative ("MG&A")
expenses are compensation paid to center managers, marketing managers, billers,
collectors and other administrative personnel, marketing costs, business
development expenses, corporate overhead costs and bad debt expense. MG&A costs,
as a percentage of net revenue, have decreased from 30.5% in 1999 to 30.2% for
the nine months ended September 30, 2002.
From 1999 to September 30, 2002, for our centers that were in operation for
24 months or longer preceding the end of the period, we have increased average
daily scan volumes across all of our modalities by 28.5%. Our average daily scan
volume per machine for our MRI machines and CT machines increased at compound
annual growth rates of 21.7% and 19.1%, respectively.
The average fee per scan for MRI and CT declined by 2.3% and 5.2%, respectively,
from 1999 to 2000 and increased slightly by 1.7% and 2.9%, respectively, from
2000 to 2001, in each case due to pricing variations among the geographic
markets we serve and competition. The average fee per scan for MRI for the nine
months ended September 30, 2002 decreased by 5.3% as compared to the same period
in 2001 due primarily to a reduction in Medicare payment rates. Medicare
payments for most diagnostic imaging services covered by Medicare were reduced
in 2002 by approximately 11.0% for the services we render through the
application of a pre-existing standard pricing formula that is applied annually
by the Centers for Medicare and Medicaid Services. To the extent that commercial
payors with which we contract base their payments for diagnostic imaging
services on Medicare reimbursement levels, any change in Medicare reimbursement
rates will result in a corresponding change in reimbursement from our commercial
payors.
Our growth has come from same center revenue, DE NOVO development and strategic
acquisitions. We increase our same center revenue by attracting new referring
physicians, extending hours of operations, managing our scan and payor mix and
adding capacity and modalities to meet local market needs. DE NOVO development
generally comes through expansion within our local markets. Strategic
acquisitions allow us to quickly enter new markets as well as round out our
regional networks of existing centers.
Significant acquisition
On September 1, 2001, one of our subsidiaries purchased the centers owned and
operated by AMI Outpatient Services, Ltd. for a total purchase price of
$18.6 million. In addition, this subsidiary agreed to pay an earn-out to the
extent that the net revenue at two of the centers acquired from AMI, less the
amount of any contractual adjustments, refunds and bad debt expense, exceeds
certain thresholds. Net revenue will be calculated for the twelve month periods
ended August 31, 2002, 2003 and 2004, respectively. The maximum earn-out payable
for each applicable twelve month period is $0.7 million. This earn-out will not
be accounted for on the balance sheet of MQ Associates, Inc. as a liability
unless and until it is earned. We recorded a $0.2 million liability related to
this earn-out at September 30, 2002. The business acquired by us from AMI
constitutes a "significant subsidiary" as that term is used in Regulation S-X
based on the amount of our investment compared to our total assets.
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Results of operations
The following table sets forth operating expenses, MG&A expenses, depreciation
and amortization, net interest expense and other expenses, and these amounts as
a percentage of net revenue for the periods indicated:
<Table>
- -----------------------------------------------------------------------------------------------------------------------------
Nine months ended
Year ended December 31, September 30,
--------------------------------------------------------------- ---------------------------------
(Dollars in millions) 1999 2000 2001 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------
Net revenues from
services........... $56.7 100.0% $85.9 100.0% $142.3 100.0% $99.5 100.0% $149.1
Operating expenses... 25.0 44.1 35.6 41.4 61.0 42.9 41.9 42.1 64.8
MG&A expenses........ 17.3 30.5 25.6 29.8 55.6 39.0 40.0 40.2 45.0
Depreciation and
amortization....... 9.2 16.2 11.2 13.0 17.5 12.3 12.2 12.3 17.0
------------------------------------------------------------------------------------------------------
Income (loss) from
operations......... 5.2 9.2 13.6 15.8 8.3 5.8 5.4 5.4 22.3
Interest expense,
net................ 4.1 7.2 4.9 5.7 8.2 5.8 5.8 5.8 20.5
Minority interest in
net income of
consolidated
subsidiaries....... -- -- 0.1 0.1 0.1 0.1 0.1 0.1 0.0
Provision (benefit)
for income taxes... (0.3) (0.5) 3.4 4.0 4.0 2.8 3.2 3.2 0.7
Net income (loss).... $ 1.4 2.5% $ 5.2 6.1% $ (4.1) (2.9)% $(3.7) (3.7)% $ 1.1
- -----------------------------------------------------------------------------------------------------------------------------
- ---------------------
Nine
months
ended
--------
(Dollars in millions)
- ---------------------
Net revenues from
services........... 100.0%
Operating expenses... 43.4
MG&A expenses........ 30.2
Depreciation and
amortization....... 11.4
--------
Income (loss) from
operations......... 15.0
Interest expense,
net................ 13.8
Minority interest in
net income of
consolidated
subsidiaries....... 0.0
Provision (benefit)
for income taxes... 0.5
Net income (loss).... 0.7%
- ---------------------
</Table>
Nine months ended September 30, 2002 compared to nine months ended
September 30, 2001
Net revenue was $149.1 million for the nine months ended September 30, 2002,
representing an increase of $49.6 million, or 49.8%, from revenue of
$99.5 million for the nine months ended September 30, 2001. An increase in our
number of centers from 61 at September 30, 2001 to 74 at September 30, 2002 was
the primary reason for this increase in revenue. This increase was also a result
of an increase in the number of scans performed in the nine months ended
September 30, 2002, as compared to the nine months ended September 30, 2001,
which was partially offset by a decrease of 19.6% in average price per scan for
the nine months ended September 30, 2002, as compared to the nine months ended
September 30, 2001. This percentage decrease in average price per scan primarily
reflects an increase in the number of multi-modality centers in operation at
September 30, 2002 and a decrease in the average price per scan for MRI and CT.
Multi-modality centers provide technologies in addition to MRI and CT for which
the fee per scan is generally lower than the fee per scan for MRI and CT
services.
Operating expenses, excluding depreciation and amortization, were $64.8 million
for the nine months ended September 30, 2002, representing an increase of
$22.9 million, or 54.5%, as
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compared to $41.9 million for the nine months ended September 30, 2001.
Operating expenses, excluding depreciation and amortization, as a percentage of
net revenue increased to 43.4% for the nine months ended September 30, 2002, as
compared to 42.1% for the nine months ended September 30, 2001. This increase
was primarily the result of an increase in compensation costs for radiologists,
technologists and transcriptionists. We have experienced a general increase in
relative compensation costs due to an increased level of demand in the industry
for these types of professionals. There were also slight increases in building
costs, repairs and maintenance, equipment rentals and other operating expenses
for the nine months ended September 30, 2002, as compared to the nine months
ended September 30, 2001, however, these increases were entirely offset by
slight decreases in other wages and related costs, operating supplies and
utilities for the same comparison periods.
MG&A expenses were $45.0 million for the nine months ended September 30, 2002,
representing an increase of $5.0 million, or 12.5%, as compared to MG&A expenses
of $40.0 million for the nine months ended September 30, 2001. MG&A expenses as
a percentage of net revenue were 30.2% for the nine months ended September 30,
2002, as compared to 40.2% for the nine months ended September 30, 2001. MG&A
expenses, as a percentage of net revenue, were 30.8% for the nine months ended
September 30, 2001 after excluding the $9.4 million one time non-cash
compensation charge related to variable plan accounting treatment of the
purchase of restricted stock by certain executives from our co-founders. MG&A
expenses, as a percentage of net revenue, were 29.8% for the nine months ended
September 30, 2002, after excluding "success fees" of $0.6 million paid to
certain executives in connection with the leveraged recapitalization of MQ
Associates, Inc. in August 2002. MG&A expenses are relatively fixed in nature,
therefore, as net revenue increases, MG&A as a percentage of net revenue
decreases. The decrease from the nine months ended September 30, 2001, after
excluding the one-time non-cash compensation charge, to the nine months ended
September 30, 2002, after excluding "success fees" paid in connection with the
recapitalization transaction, was primarily the result of this effect, as well
as our continued cost containment efforts. There were slight increases in bad
debts expense and business development costs from the nine months ended
September 30, 2001 to the nine months ended September 30, 2002, however, these
increases were substantially offset by decreases in wages and related costs and
marketing expenses for the same comparison periods.
Depreciation and amortization were $17.0 million, or 11.4% of net revenue, for
the nine months ended September 30, 2002, as compared to $12.2 million, or 12.3%
of net revenue, for the nine months ended September 30, 2001. This decrease, as
a percentage of net revenue, was primarily the result of significant increases
in net revenue for the comparison periods and of discontinuing the amortization
of goodwill as a result of adopting SFAS 142 in January 2002. The increase in
depreciation and amortization during the nine months ended September 30, 2002,
as compared to the nine months ended September 30, 2001 was principally due to
the higher amount of depreciable assets associated with the addition of 13 new
centers between September 30, 2001 and September 30, 2002.
Interest expense, net, increased to $20.5 million for the nine months ended
September 30, 2002 from $5.8 million for the nine months ended September 30,
2001. Interest expense, net, increased primarily due to the payment in
August 2002 of prepayment penalties of approximately $10.6 million and an
increased level of indebtedness as a result of the leveraged recapitalization
transaction which was completed in August 2002.
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Income taxes were $0.7 million for the nine months ended September 30, 2002, as
compared to $3.2 million for the nine months ended September 30, 2001. Income
taxes are provided for on an interim basis using a 40% tax rate, which
represents our effective tax rate. There were no Federal net operating loss
carryforwards and approximately $0.1 million in state operating loss
carryforwards at September 30, 2002.
As a result of the foregoing factors, we had net income of $1.1 million for the
nine months ended September 30, 2002, as compared to a net loss of $3.7 million
for the nine months ended September 30, 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Net revenue increased $56.4 million to $142.3 million in 2001 compared to
$85.9 million in 2000 primarily due to higher average daily scan volume, higher
average price per MRI and CT scan and acquisitions. In 2001, we acquired 13
centers, including four centers in the Phoenix area in September 2001, and
opened ten DE NOVO centers, compared to five acquisitions and five DE NOVO
centers during 2000.
Operating expenses, excluding depreciation and amortization, increased
$25.4 million to $61.0 million in 2001 compared to $35.6 million in 2000.
Operating expenses, excluding depreciation and amortization, as a percentage of
net revenue increased from 41.4% in 2000 to 42.9% in 2001 as a result of adding
23 centers during 2001, with 12 centers added during the second half of the year
(four DE NOVO and eight acquisitions). Compensation for radiologists,
technicians and transcriptionists increased $14.9 million, an increase of 0.7
percentage points as a percentage of net revenue, primarily as a result of an
increase in the number of new centers and an increase in radiologist and
technologists' compensation. Supplies costs increased $2.5 million, but as a
percentage of net revenue, decreased 0.3 percentage points due to our continuing
efforts to aggressively negotiate discounts for our volume purchase agreements.
Building costs, primarily real estate lease payments, increased $2.7 million due
to the increase in the number of centers and increase in corporate headquarters
rent.
MG&A expenses increased $30.0 million to $55.6 million in 2001 compared to
$25.6 million in 2000. MG&A expenses as a percentage of net revenue increased
from 29.8% in 2000 to 39.0% in 2001. Payroll and non-operating employees
expenses increased $20.3 million to $33.9 million primarily due to the
$9.4 million one time non-cash compensation charge and to the addition of new
centers. Bad debt expense increased to $4.9 million in 2001 from $2.9 million in
2000 primarily due to the increase in gross revenue. Business development costs,
which consist primarily of travel and related costs for due diligence and
investigating business development opportunities, increased $0.2 million. During
the first quarter of 2001, we incurred a one time non-cash compensation charge
of $9.4 million due to variable plan accounting treatment of the purchase of
restricted stock by certain of our executive officers from our co-founders.
Additionally, during 2001, MQ Associates, Inc. incurred a charge of
$2.1 million and deposited the funds in escrow pending the final outcome of the
InMed action and incurred approximately $0.3 million in related legal fees.
Excluding the $9.4 million one time non-cash compensation charge relating to
variable plan accounting treatment of the purchase of restricted stock by
certain executive officers from our co-founders and the charge of $2.1 million
incurred by MQ Associates, Inc. in the InMed action, MG&A expenses as a
percentage of net revenue increased from 29.8% in 2000 to 30.9% in 2001. See
"Business--Legal proceedings."
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<Page>
Depreciation expense increased to $16.6 million in 2001 compared to
$10.6 million in 2000 principally due to a higher amount of depreciable assets
associated with the addition of 23 new centers. Amortization expense, primarily
related to goodwill, totaled $0.9 million in 2001 and $0.6 million in 2000.
Interest expense, net, increased to $8.2 million in 2001 compared to
$4.9 million in 2000, as a result of higher average outstanding debt balances
during 2001 as compared to 2000. The interest rate on a majority of our
long-term debt was fixed for the years ended December 31, 2001 and 2000.
We recorded $4.0 million in income tax expense in 2001 compared to $3.4 million
in 2000. The calculation of an effective tax rate for 2001 is meaningless since
we reported an operating loss which included the $9.4 million variable plan
accounting charge. We had no federal net operating losses, and $10.0 million in
state net operating loss carry forwards at December 31, 2001.
Year ended December 31, 2000 compared to year ended December 31, 1999
Net revenue increased $29.2 million to $85.9 million in 2000 compared to
$56.7 million in 1999 primarily due to higher average daily scan volume,
partially offset by a decline in the average price of MRI and CT scans and
acquisitions. In 2000, we acquired five centers and opened five DE NOVO centers,
compared to one acquisition and twelve DE NOVO centers in 1999.
Operating expenses, excluding depreciation and amortization, increased
$10.6 million to $35.6 million in 2000 compared to $25.0 million in 1999.
Operating expenses, excluding depreciation and amortization, as a percentage of
net revenue, decreased from 44.1% in 1999 to 41.4% in 2000 as a result of
spreading our fixed costs, including the costs of adding ten centers, over a
larger amount of net revenue. Compensation for radiologists, technicians and
transcriptionists increased $7.1 million, an increase of 0.5 percentage points
as a percentage of net revenue, primarily as a result of staffing a larger
number of centers. Supplies costs increased $1.3 million, but as a percentage of
net revenue, decreased 0.4 percentage points due to our continuing efforts to
aggressively negotiate discounts for our volume purchase agreements. Building
costs, primarily real estate lease payments, increased $0.8 million due to the
increase in the number of centers, but as a percentage of net revenue, decreased
1.3 percentage points.
MG&A expenses increased $8.3 million to $25.6 million in 2000 compared to
$17.3 million in 1999. MG&A expenses as a percentage of net revenue decreased
from 30.5% in 1999 to 29.8% in 2000. Payroll and non-operating employees
expenses increased by $4.9 million to $13.6 million primarily due to the
addition of new centers. Bad debt expense increased to $2.9 million in 2000 from
$1.9 million in 1999 primarily due to our increase in gross revenue. Business
development costs, which consist primarily of travel and related costs for due
diligence and investigating business development opportunities, increased
$0.5 million.
Depreciation expense increased to $10.6 million in 2000 compared to
$8.8 million in 1999 principally due to a higher amount of depreciable assets
associated with the addition of ten new centers. Amortization expense, primarily
related to goodwill, totaled $0.6 million in 2000 and $0.4 million in 1999.
Interest expense, net, increased to $4.9 million in 2000 compared to
$4.1 million in 1999 as a result of higher average outstanding debt balances
during 2001 as compared to 2000. The interest rate on a majority of our
long-term debt is fixed.
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<Page>
We recorded $3.4 million in income tax expense in 2000 compared to an income tax
benefit of $0.3 million in 1999, representing a 40% tax rate. We had
$0.2 million in federal net operating losses, and $4.6 million in state net
operating loss carry forwards. Until October 7, 1999, we were an S-corporation,
therefore, the tax benefit recorded in 1999 was recorded for the period
October 8, 1999 through December 31, 1999.
Liquidity and capital resources
The principal uses of our liquidity are to finance our capital expenditures and
make acquisitions, as well as to fund our operations. We operate in a
capital-intensive, high fixed cost industry that requires significant amounts of
working capital to fund operations, particularly the initial start-up and
development expenses of our DE NOVO centers and the acquisition of additional
centers.
Our primary sources of liquidity to fund our operations and capital expenditures
and satisfy our debt service obligations are cash flow from operating activities
and borrowings under our five-year senior credit facility.
Net cash provided by operating activities was $8.8 million for the nine months
ended September 30, 2002, a decrease of $4.3 million from the comparable period
in 2001. This decrease resulted primarily from the increase in interest expense
as a result of the recapitalization that occurred during the nine months ended
September 30, 2002.
Net cash provided by operating activities was $20.3 million, $12.0 million and
$7.2 million for 2001, 2000 and 1999, respectively. The increases resulted
primarily from increased net income, excluding the effect in 2001 of the
$9.4 million non-cash compensation charge and the $2.1 million charge relating
to the InMed litigation which was not deposited into escrow until January 2002,
and was offset by increased use of working capital.
Net cash used in investing activities was $31.7 million for the nine months
ended September 30, 2002, a decrease from $48.8 million in the comparable period
during 2001. This decreases resulted primarily from the completion of fewer
acquisitions and openings of DE NOVO centers during the nine months ended
September 30, 2002 compared with the nine months ended September 30, 2001.
Net cash used in investing activities was $60.1 million, $15.0 million and
$11.6 million for 2001, 2000 and 1999, respectively. The increase in 2001
compared to 2000 resulted primarily from our acquisitions of 13 centers for a
total purchase price of $34.2 million and increased capital expenditures as
discussed below. The increase in 2000 compared to 1999 resulted primarily from
our acquisitions of five centers for a total purchase price of $7.1 million and
increased capital expenditures as discussed below.
Net cash provided by financing activities was $19.0 million for the nine months
ended September 30, 2002, a decrease from $37.0 million in the comparable period
in 2001. This decrease resulted primarily from a decrease in the amount of
financing used for acquisitions during the nine months ended September 30, 2002,
as compared with the nine months ended September 30, 2001.
Net cash provided by financing activities was $42.9 million, $3.0 million and
$3.6 million for 2001, 2000 and 1999, respectively. In 1999 and 2001, we
received funds from TA Associates, Inc. in exchange for certain equity and
subordinated notes of MQ Associates, Inc. The proceeds of these exchanges were
immediately used to repurchase common equity of MQ Associates, Inc.
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<Page>
We incurred substantial indebtedness in connection with the Transactions. At
September 30, 2002, we had $221.5 million of indebtedness outstanding, as
compared to $106.2 million on at September 30, 2001. In addition, at
September 30, 2002, we had a stockholders' deficit of $118.2 million, as
compared to our stockholders' deficit of $105.0 million at September 30, 2001.
Our indebtedness primarily consists of $180.0 million under the old notes and
$43.0 million under our senior credit facility. Further, we will be able to
borrow an additional $36.2 million (after giving effect to $0.8 million of
outstanding letters of credit) under the senior credit facility to fund our
working capital requirements and future acquisitions. The interest rates
applicable to borrowings under our senior credit facility will bear interest at
a rate per annum equal to a margin over a base rate or eurodollar rate. See
"Description of the senior credit facility."
The senior credit facility and the indenture governing the notes impose certain
restrictions on us, including restrictions on our ability to incur indebtedness,
pay dividends, make investments, grant liens, sell our assets and engage in
certain other activities. In addition, the senior credit facility requires us to
maintain certain financial ratios. Our indebtedness under the senior credit
facility is secured by substantially all of our assets, including our inventory,
accounts receivable, real and personal property, intellectual property and other
intangibles, and guaranteed by our parent and all of our domestic subsidiaries.
See "Description of senior credit facility" and "Description of notes."
The following table sets forth the contractual obligations under our long-term
debt, including capital lease obligations and non-cancelable operating leases as
of September 30, 2002 (in millions):
<Table>
- --------------------------------------------------------------------------------------------------
Payment due by period
-------------------------------------------
5 years
Less than 1-3 4-5 or
(in millions) Total 1 year years years longer
- --------------------------------------------------------------------------------------------------
Long-term debt............................ $219.2 $ -- $ -- $ 43.0 $176.2
Cash interest on notes(a)................. 212.0 5.3 64.1 42.8 99.8
Capital lease obligations................. 3.7 0.8 1.7 1.2 --
Operating leases(b)....................... 36.4 2.6 24.5 9.3 --
Short-term rentals........................ -- -- -- -- --
Long term maintenance agreements.......... 17.0 1.7 14.8 0.5 --
------ ----- ------ ------ ------
Total contractual obligations............. $488.4 $10.5 $105.2 $ 96.7 $276.0
- --------------------------------------------------------------------------------------------------
</Table>
(a) Reflects cash interest payments at the rate of 11 7/8% per annum but does
not include amortization of debt issuance costs.
(b) Primarily consists of real estate leases
The Series A Preferred Stock and Series B Preferred Stock of MQ Associates, Inc.
may be redeemed at the option of the holder upon the consummation of an
underwritten public offering at a redemption price of $35.0 million for all of
the Series A Preferred Stock and $15.0 million for all of the Series B Preferred
Stock. Additionally, in the case of such redemption, the holders of Series B
Preferred Stock will receive 2,295,000 shares of Common Stock. In the event that
(i) MQ Associates, Inc. and its underwriters determine that the redemption of
the Series B Preferred Stock would adversely affect the planned underwritten
public offering or (ii) the holders of shares of Series B Preferred Stock elect
not to redeem shares of Series B Preferred Stock, MQ Associates, Inc. may
convert all shares of Series B Preferred Stock into 17,295,000 shares of Common
Stock. We have not accreted the fair value
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<Page>
of the additional shares of Common Stock to be issued upon redemption of the
Series B Preferred Stock because we do not believe that the redemption trigger
is probable as of September 30, 2002.
Our high level of debt may make it more difficult for us to borrow funds in the
future. Based on our current level of operations and anticipated growth, we
believe that our cash flows from operations, together with future borrowings
under our senior credit facility, will be sufficient over the next year to meet
our liquidity requirements, including our debt service obligations, working
capital needs and capital expenditures. However, there can be no assurance that
this will be the case.
Our expansion and acquisition strategy may require substantial capital, and no
assurance can be given that we will be able to raise any necessary funds in
addition to those currently available to us through bank financing or the
issuance of equity or debt securities on terms acceptable to us, if at all.
Moreover, if we were to engage in one or more significant acquisition
transactions, it may be necessary for us to restructure our existing credit
arrangements.
Our ability to fund our working capital needs, planned capital expenditures and
scheduled debt payments, to implement our expansion plans, to refinance our
indebtedness and to comply with our financial covenants under the senior credit
facility depends on our future operating performance and cash flows from
operations, which in turn are subject to prevailing economic conditions and to
financial, business and other factors, some of which are beyond our control.
Capital expenditures
We incur capital expenditures for the purposes of:
- purchasing new equipment and incurring leasehold improvements for DE NOVO
centers;
- acquiring the assets of existing centers;
- upgrading existing equipment to increase volume and/or quality; and
- replacing less advanced equipment.
Capital expenditures (excluding acquisitions) totaled $25.9 million for the year
ended December 31, 2001, compared to $12.8 million for the year ended
December 31, 2000. In addition, we spent $34.2 million on acquisitions during
2001. Capital expenditures (excluding acquisitions) totaled $25.5 million for
the nine months ended September 30, 2002, as compared to $22.7 million for the
nine months ended September 30, 2001. Capital expenditures related to
acquisitions amounted to $10.3 million for the nine months ended September 30,
2002, as compared to $24.5 million for the nine months ended September 30, 2001.
We anticipate that capital expenditures will amount to $16.0 million for the
fourth quarter of 2002.
We believe that actual capital expenditures will exceed previously budgeted
capital expenditures for the year ended December 31, 2002 by approximately
$21.5 million because, during the latter half of fiscal 2002, we have been
presented with additional growth opportunities that were not anticipated during
the budgeting process for fiscal 2002.
During the first half of 2001 we spent $2.3 million to upgrade our information
systems in anticipation of supporting our anticipated growth. Our capital
expenditures for 2002 include
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<Page>
approximately $1.2 million budgeted for implementation of our Radiology
Information System which has been designed to improve our billing procedures and
to meet our regulatory obligations under the Health Insurance Portability and
Accountability Act of 1996 with respect to privacy standards by April 2003 and
electronic transaction standards by October 2003. We anticipate the RIS roll-out
will be completed by the end of the first quarter of 2003. See
"Business--Regulation."
We continuously evaluate acquisition opportunities, and from time to time we may
enter into non-binding letters of intent, but we are not currently subject to
any definitive agreements or letters of intent with respect to any acquisitions.
Seasonality
We experience seasonality in our revenue. For example, our sales typically
decline from our third fiscal quarter to our fourth fiscal quarter. Fourth
quarter revenue is typically lower than revenue from the first, second and third
quarters. Fourth quarter revenue is affected primarily by holiday and client and
patient vacation schedules and inclement weather, the results of which are fewer
patient scans during the fourth quarter. As a result, our revenue may
significantly vary from quarter to quarter, and our quarterly results may be
below market expectations.
Qualitative and quantitative disclosures about market risk
We sell our services exclusively in the United States and receive payment for
our services exclusively in United States dollars. As a result, our financial
results are unlikely to be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets.
The majority of our indebtedness bears interest at fixed rates. However,
management may in its judgment determine that it is advisable to enter into
interest rate swaps to convert a portion of the fixed interest rate debt to
floating interest rate debt. To the extent management decides to do so, the
interest expense payable or the floating rate portion of our indebtedness will
be sensitive to changes in the general level of interest rates in the United
States. The recorded carrying amount of our long-term debt approximates fair
value as these borrowings have variable rates that reflect currently available
terms and conditions for similar debt.
Our interest income is sensitive to changes in the general level of interest
rates in the United States, particularly because the majority of our investments
are in short-term instruments.
The recorded carrying amounts of cash and cash equivalents approximate fair
value due to their short-term maturities.
In August 2002, we entered into an interest rate swap agreement related to the
fixed interest rate obligations on the notes. The agreement requires us to pay
interest at a variable rate based on six-month LIBOR plus 6.525% on a notional
amount of $47.5 million for a term of ten years. This derivative instrument has
been accounted for as a fair value hedge of the fair market value of the notes
and was 100% effective for the three and nine months ended September 30, 2002.
As a result, the change in fair market value related to this derivative
instrument has been entirely offset by the change in fair market value of the
notes.
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Critical accounting policies and estimates
The preparation of the consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosure of contingencies. We
believe the critical accounting policies that most impact the condensed
consolidated financial statements can be described below. A summary of our
significant accounting policies can be found in Note 2 to the consolidated
financial statements, which are included elsewhere in this prospectus.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We review our patient receivables and
estimates of the allowance for doubtful accounts and contractual adjustments
each period. The amount of the allowance includes management's estimate of the
amounts expected to be written off on specific accounts and for write-offs on
other unidentified accounts. In estimating the write-offs and adjustments on
specific accounts, management relies on a combination of in-house analysis and a
review of contractual payment rates from private health insurance programs or
under the federal Medicare program. In estimating the allowance for unidentified
write-offs and adjustments, management relies on historical experience.
Estimates of uncollectible amounts are revised each period, and changes are
recorded in the period they become known. The amounts we will ultimately realize
could differ materially from the amounts assumed in arriving at the allowance
for doubtful accounts and contractual adjustments in the condensed consolidated
financial statements at September 30, 2002.
CONTRACTUAL ALLOWANCES. Our revenues include net patient service revenues. Net
patient service revenues are reported at estimated net realizable amounts from
patients, insurance companies, third-party payors (primarily Medicare and
Medicaid) and others for services rendered. Revenues from third-party payors
also include estimated adjustments under reimbursement agreements that are
subject to final review and settlement by appropriate authorities. We estimate
contractual adjustments from non-governmental third-party payors based on
historical experience and the terms of payor contracts.
ASSETS IMPAIRMENT. Many of our facilities came to us through acquisitions. We
determine the amortization period of the cost in excess of net asset value of
purchased facilities based on an evaluation of the facts and circumstances of
each individual purchase transaction. The evaluation includes an analysis of
historic and projected financial performance, an evaluation of the estimated
useful life of assets acquired, the indefinite useful life of certificates of
need and licenses acquired, the competition within local markets and lease terms
where applicable. We rely on management expertise in evaluating each of the
factors noted above. With respect to the carrying value of the excess of cost
over net asset value of individual purchased facilities and other intangible
assets, we determine on an annual basis whether an impairment event has occurred
by considering factors such as the market value of the asset, a significant
adverse change in legal factors or in the business climate, adverse action by
regulators, a history of operating losses or cash flow losses or a projection of
continuing losses associated with an operating entity. The carrying value of
excess cost over net asset value of purchased facilities and other intangible
assets will be evaluated if the facts and circumstances suggest that it has been
impaired. If this evaluation indicates that the value of the asset will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, our carrying value of the asset
will be reduced to the estimated fair market value. Fair value is determined
based on the individual facts and circumstances of the impairment event, and the
available information related to it. Such information might include
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quoted market prices, prices for comparable assets, estimated future cash flows
discounted at a rate commensurate with the risks involved and independent
appraisals. For purposes of analyzing impairment, assets are generally grouped
at the individual operational facility level, which is the lowest level for
which there are identifiable cash flows. If we acquired the group of assets
being tested as part of a purchase business combination, any goodwill that arose
as part of the transaction is included as part of the asset grouping.
GOODWILL. In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangibles". SFAS No. 142 requires the periodic testing of goodwill for
impairment rather than a monthly amortization of the balance. This testing takes
place in two steps: (1) the determination of the fair value of a reporting unit
and (2) the determination of the implied fair value of the goodwill. We adopted
SFAS No. 142 on January 1, 2002. We have evaluated goodwill and indefinite lived
intangibles for impairment under SFAS No. 142 and have determined that no
impairment write down is necessary.
Recent accounting pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and related asset
retirement costs. SFAS 143 is effective for financial statements with fiscal
years beginning after June 15, 2002. We adopted SFAS 143 effective January 1,
2002.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and for reporting
of discontinued operations. SFAS 144 is effective for financial statements with
fiscal years beginning after December 15, 2001. We adopted SFAS 144 effective
January 1, 2002, and the application of the provisions of this statement have
not had a material effect on our financial position or results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes Emerging
Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an exit cost, as defined
in EITF 94-3, was recognized at the date of an entity's commitment to an exit
plan. SFAS 146 also establishes that the liability should initially be measured
and recorded at fair value. We will adopt the provisions of SFAS 146 for exit or
disposal activities that are initiated after December 31, 2002. The effects of
adopting SFAS 146 are not expected to have a material impact on our financial
position and results of operations.
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Industry
Diagnostic imaging services are noninvasive procedures that generate
representations of the internal anatomy and convert them to film or digital
media. Diagnostic imaging systems facilitate the early diagnosis of injuries,
diseases and disorders, often reducing the cost, the amount of care required and
the need for costly and invasive diagnostic procedures. Diagnostic imaging
procedures include MRI, CT, positron emission tomography ("PET"), nuclear
medicine, ultrasound, mammography, x-ray and fluoroscopy.
Diagnostic imaging modalities
MAGNETIC RESONANCE IMAGING OR MRI. MRI involves the use of high-strength
magnetic fields to produce computer-processed cross-sectional images of the
body. Due to its superior image quality, MRI is the preferred imaging technology
for evaluating soft tissue and organs, including the brain, spinal cord and
other internal anatomy. With advances in MRI technology, MRI is increasingly
being used for new applications such as imaging of the heart, chest and abdomen.
Conditions that can be detected by MRI include multiple sclerosis, tumors,
strokes, infections and injuries to the spine, joints, ligaments and tendons.
Unlike x-rays and CT, MRI does not expose patients to radiation.
COMPUTED TOMOGRAPHY OR CT. In CT imaging, a computer analyzes the information
received from an x-ray beam to produce multiple cross-sectional images of a
particular organ or area of the body. CT imaging 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 MRI.
NUCLEAR MEDICINE OR GAMMA CAMERA. Nuclear medicine, or gamma camera, 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.
POSITRON EMISSION TOMOGRAPHY OR PET. PET utilizes a scanner to record signals
emitted by compounds with signal-emitting tracers after these 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. PET
provides detection and tracking of cancers, coronary disease and neurological
problems.
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.
GENERAL FLUOROSCOPY. Fluoroscopy utilizes ionizing radiation combined with a
video viewing system for real time monitoring of organs.
GENERAL X-RAY. X-rays utilize high-energy radiation to penetrate the body and
record images of organs and structures on film. X-rays are used in low doses to
treat disease or injury and in high doses to treat cancer.
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The following table sets forth the number of diagnostic imaging procedures
performed in the United States from 1996 to 2001 by modality and the compound
annual growth rates for each modality.
<Table>
- ------------------------------------------------------------------------------------------------------------
Compound
annual
growth
(in thousands) 1996 1997 1998 1999 2000 2001 rate
- ------------------------------------------------------------------------------------------------------------
MRI................................. 9,800 10,100 11,900 13,300 14,600 15,900 10.2%
CT.................................. 25,400 27,200 29,000 30,700 32,500 34,500 6.3%
Nuclear medicine/gamma camera....... 12,500 13,300 14,200 14,600 15,500 15,900 4.9%
PET................................. 62 70 98 216 354 538 54.1%
Ultrasound.......................... 60,600 64,100 68,600 73,800 79,800 83,200 6.5%
Mammography......................... 27,500 28,700 29,900 31,300 32,500 33,700 4.2%
General fluoroscopy................. 12,000 11,900 11,600 11,300 11,000 10,800 (2.1)%
General x-ray....................... 205,300 206,900 208,600 210,700 212,200 214,500 0.9%
- ------------------------------------------------------------------------------------------------------------
</Table>
Source: Frost & Sullivan
While general X-ray remains, by far, the most commonly performed diagnostic
imaging procedure, the fastest growing procedures are PET, MRI, ultrasound and
CT. The rapid growth in PET scans is attributable to the recent introduction of
PET technology. The number of MRI, ultrasound and CT scans continues to grow due
to their wider acceptance by physicians and payors, an increasing number of
applications for their use and a general increase in demand due to the aging
population in the United States.
Diagnostic imaging settings
Diagnostic imaging procedures are typically performed in hospitals, freestanding
centers and mobile/shared-service units.
HOSPITALS AND CLINICS. Hospitals provide both inpatient and outpatient
diagnostic imaging services, typically on site. These inpatient and outpatient
centers are owned and operated by the hospital/clinic and are primarily used by
patients of the hospital or clinic. The hospital or clinic bills third-party
payors, such as health insurers, Medicare or Medicaid.
FICS. Independent, fixed-site, outpatient, diagnostic imaging centers are not
generally owned by hospitals or clinics. These centers depend upon physician
referrals for their patient volume and generally do not maintain dedicated,
contractual relationships with hospitals or clinics. FICs typically perform
their own billing, sales and marketing functions. Freestanding diagnostic
imaging centers are generally located in metropolitan areas with established
demand for MRI and other imaging services.
MOBILE PROVIDERS. In contrast to FICs, mobile imaging operators operate
diagnostic imaging systems in mobile trailers, providing their customers with
shared-service or full-time diagnostic imaging services. Mobile providers target
small to mid-size hospitals in non-urban areas in need of advanced imaging
technologies but without the procedure volume or customer base to justify a
fixed-site location. The mobile provider is paid directly by the hospital or the
clinic.
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Industry overview
Utilization and growth rates in the diagnostic imaging market have increased
significantly. In 2001, there were approximately 400 million total medical
diagnostic imaging procedures performed in the United States. The American
College of Radiology estimates that in 2000 the overall diagnostic imaging
market was in excess of $61.0 billion, the most recent year for which data is
available. For the same period, MRI and CT represented approximately 13.1% and
21.3% of the entire market, respectively. MRI, in particular, has exhibited
strong historical growth in the United States with total scans performed from
1996 to 2001 increasing from 9.8 million to 15.9 million, a 10.2% compound
annual growth rate. The average utilization of MRI scans in the United States
has increased from 1996 to 2001 from 37 scans per 1,000 people to 57 scans per
1,000 people.
We operate in the FIC market, which comprises approximately 27.9%, or
$17.0 billion, of the total market for diagnostic imaging services. From 1997 to
2000, FIC services grew 12.3% per year while overall diagnostic imaging services
grew only 9.9% per year during the same period. From 2002 to 2007, Frost &
Sullivan projects that the number of MRI scans provided by FICS will grow 13.9%
annually, which is significantly higher than the 3.7% annual growth rate for the
same period projected for MRI scans performed in hospitals.
The diagnostic imaging industry is highly fragmented with few strong national or
regional imaging service providers. In 2001, the largest ten competitors,
including ourselves, in the FIC market account for only 16.0% of the industry's
imaging centers. There are approximately 4,200 imaging centers in the United
States with a diffuse ownership mix of private ownership, radiology groups,
partnerships with hospitals and physician partnerships.
Industry trends
WIDER ACCEPTANCE BY PHYSICIANS, PAYORS AND PATIENTS. Imaging modalities, in
particular MRI, continue to gain widespread acceptance from both physicians and
payors because of the enhanced diagnostic applications and reduced cost to the
payor of early diagnosis of an ailment. We believe that favorable managed care
trends, including the elimination of pre-authorization requirements, will
increase utilization of imaging modalities. Patients have begun to demand faster
service and improved access to imaging procedures because of the noninvasive
benefits that imaging procedures provide. With physicians, payors and patients
increasingly focused on high quality, easily accessible and more cost-effective
care, we believe that the role that diagnostic imaging plays in the delivery of
healthcare will continue to increase over the next decade.
INCREASING NUMBER OF APPLICATIONS. The use of imaging modalities such as MRI
and CT has increased rapidly in recent years as these technologies enable
physicians in a wide variety of specialties, including orthopedics, neurology,
cardiology and internal medicine, to diagnose an increasing number of diseases
and injuries quickly and accurately without exploratory surgery or other
invasive procedures. For instance, whereas MRI has traditionally been used
primarily for imaging of the spine, brain and bones, physicians are now
utilizing MRI equipment to examine blockages in coronary arteries, a procedure
that previously required exploratory surgery. Similarly, new CT applications
include advanced chest and abdomen imaging. Accordingly, the market penetration
of MRI scans has increased over the last decade from 37 scans per 1,000 people
in 1996 to 57 scans per 1,000 people in 2001.
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FAVORABLE DEMOGRAPHIC TRENDS. According to the United States Census Bureau, the
number of people in the United States over the age of 65 should more than double
from its current level of 35.1 million to 70.3 million by 2030. Also, in the
next ten years the most dramatic change in the demographic mix by age range
should be in the 55 to 65 year-old age range. Utilization of diagnostic imaging
services increases with age, therefore we believe the aging population and
associated demographic trends should drive increased procedure volume. We
believe that on average an individual in the 55 to 65 year-old range utilizes
approximately 1.5 imaging procedures per year and an individual in the 65 and
older age range utilizes approximately 2.5 imaging procedures per year, compared
to individuals in the 25 to 35 age range who utilize approximately 0.5 imaging
procedures per year.
STABLE TECHNOLOGY ENVIRONMENT. The pace of technological innovation in
diagnostic imaging has stabilized, reducing the risk of equipment obsolescence
and the need for large capital expenditures. As the development of new imaging
technologies has slowed, the diagnostic imaging services industry has
increasingly utilized less expensive software and hardware upgrades to existing
equipment that improve image, reduce image acquisition time and increase the
volume of scans that can be performed. We believe this trend toward equipment
upgrades will continue, as we do not foresee new imaging technologies on the
horizon that will displace MRI or CT.
INCREASED ROLE OF PREVENTIVE MEDICINE. In addition, diagnostic imaging is
increasingly being used as a screening tool for preventive care. 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, brain tumors,
Alzheimer's and other abnormalities affect the brain.
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Business
General
We are a leading operator of independent, fixed-site, outpatient diagnostic
imaging centers (each a "FIC") in the United States. Our centers provide high
quality diagnostic imaging services using a variety of technologies including
magnetic resonance imaging (MRI), computed tomography (CT), nuclear medicine,
general radiology (fluoroscopy and x-ray), ultrasound, mammography and bone
densitometry. We operate a network of 77 wholly-owned centers in 12 states
primarily throughout the southeastern and southwestern United States. Of our
centers, 19 are multi-modality (MRI, CT and other technologies), 27 are dual
modality (MRI and CT) and 31 are MRI only. Based upon available industry data,
we are either the number one or number two FIC provider of MRI, CT and nuclear
medicine services in 20 of the 27 local markets we serve.
We believe that a key driver of our success is providing high quality service to
referring physicians, patients and payors.
- We serve our referring physicians' interests by providing them with
(i) convenient scheduling for their patients, (ii) fast turnaround times
for procedure results, (iii) high quality images and (iv) skilled and
accessible radiologists.
- We focus on providing excellent service to our patients by offering
(i) flexible scheduling with extended operating hours, (ii) convenient
center locations, (iii) short waiting times and (iv) a patient-friendly,
non-clinical environment.
- We provide a high level of service to our payors with (i) geographic
coverage in local markets and (ii) high quality images and radiologist
reports.
Our organization is structured to provide high quality service tailored to each
of our local markets. We empower our center managers to run our centers to meet
the demands of local market conditions, while our corporate structure provides
economies of scale, corporate training programs, standardized policies and
procedures and sharing of best practices across our network. Each of our center
managers is responsible for meeting our standards of patient service, managing
relationships with local physicians and payors and maintaining profitability.
Since 1997, we have grown our operations through a combination of same center
growth, new center ("DE NOVO") openings (38) and acquisitions (29). For the nine
months ended September 30, 2002, we generated total net revenue of
$149.1 million, income from operations of $22.3 million and EBITDA (as defined)
of $39.9 million.
Investment strengths
LEADING LOCAL MARKET POSITIONS. Based upon available industry data, we are
either the number one or number two FIC provider of MRI, CT and nuclear medicine
services in 20 of the 27 local markets we serve. We strive to create strong
networks of centers in all of our geographic markets which, when combined with
our service-driven business model, enables us to build strong relationships with
referring physicians and payors, attract and retain top radiologists and
technicians and achieve economies of scale.
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SUCCESSFUL TRACK RECORD. Since our inception in 1993, we have grown through a
combination of same center growth, DE NOVO development and acquisitions. We grow
our existing centers by expanding referral sources, improving operating
efficiencies and adding modalities. From January 1, 1998 through September 30,
2002 we have successfully added and integrated 65 centers to our network and
have demonstrated our ability to improve their operational performance. We
typically achieve positive cash flow, including corporate overhead, at our DE
NOVO centers within 12 months of opening.
DIVERSIFIED PAYOR MIX. For the nine months ended September 30, 2002,
approximately 58.8% of our net revenue came from commercial payors, 24.8% from
government payors, 5.7% from workers compensation and 10.7% from other sources,
including co-payments and direct payments by patients. We have over 160
different contracts with commercial payors, and no one commercial payor
accounted for more than 5.0% of our net revenue for the nine months ended
September 30, 2002.
MODERN EQUIPMENT BASE. The average age of our MRI machines is 3.0 years as
compared with the estimated useful life of seven years (excluding any upgrades
which may extend the useful life), and the average age of our CT machines is 2.7
years as compared with the estimated useful life of seven years. Additionally,
our rapid growth allows us to improve the effectiveness of our equipment fleet
by placing existing machines in DE NOVO centers (where appropriate) and then
focusing our capital expenditures for new equipment with faster scan times on
established, high volume facilities. Consistent with our strategy of providing a
patient-friendly environment, over 70.0% of our MRI machines are open
architecture, or open MRI.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. Gene Venesky and Ken Luke founded us
in 1993. Mr. Venesky and Mr. Luke together have over 50 years of healthcare and
financial experience. The other members of our executive management team have an
average of over 13 years of healthcare and financial experience. Our executive
management team has a comprehensive understanding of the diagnostic imaging
industry, the dynamics of our local markets and the value of our differentiated
approach. Our management owns approximately 30.0% of our parent's capital stock
(on a fully diluted basis). Both of our co-founders continue to be members of
our executive management team and play an active role in our management.
Business strategy
Our objective is to be the leading provider of outpatient diagnostic imaging
services in the geographic markets we serve by:
PROVIDING HIGH QUALITY SERVICE TO OUR CUSTOMERS. Our business model is geared
towards serving the needs of our three customers: (i) referring physicians;
(ii) patients; and (iii) payors. Our staff is evaluated on customer service
measures which include speed of procedure, accuracy and quality of images,
customer experience "exit" audits and financial performance.
- REFERRING PHYSICIANS: We recognize that by providing convenient
scheduling for patients, fast turnaround times for procedure results,
high quality images and skilled and accessible radiologists, we enable
our referring physicians to improve the quality and efficiency of their
individual medical practices. We focus on developing relationships with
referring physicians to increase patient volume and enable us to
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identify and respond quickly to local market needs. We also provide
extended hours of operation to meet patient volume without significant
delay. Our policy is to provide image turnaround and supporting
radiologist reports within one business day after a procedure is
performed.
- PATIENTS: We strive to make the process of undergoing a diagnostic
imaging procedure convenient and comfortable for our patients. Our
customer service approach includes features that address our patients'
needs, such as flexible scheduling with extended operating hours,
convenient center locations, short waiting times and a patient-friendly,
non-clinical environment.
- PAYORS: We believe that payors value our high quality services, efficient
operations, cost-effectiveness and scale. Our scale is particularly
important to payors as it enables us to satisfy a significant number of
their patients' needs. We seek to improve and expand our relationships
with every significant payor group within the local markets we serve.
ENHANCING OUR LOCAL MARKET PRESENCE. We build concentrated groups of centers in
the local markets we serve in order to build local market share. These groupings
enable us to (i) build a strong referral base, (ii) establish stronger
relationships with commercial payors, (iii) attract and retain highly qualified
radiologists and (iv) provide our patients with convenient locations that offer
a range of imaging services. We look to deepen and expand our network by adding
centers in our existing or neighboring geographic markets through DE NOVO
development and/or acquisitions until we become a leading provider of outpatient
diagnostic imaging services in these markets.
GROWING OUR EXISTING CENTERS. We generate attractive same center growth within
our existing centers. We do so by extending hours of operation, adding
modalities (progressing from MRI only to MRI and CT to multi-modality centers)
and increasing imaging capacity through equipment upgrades and additional
machines to meet the needs of our local markets. We also increase the
performance of our centers through our focus on improving customer service and
by implementing local sales and marketing programs to expand our referral
sources.
EXPANDING OUR NETWORK. We expand our network of centers through DE NOVO
development and acquisitions, using a disciplined approach for evaluating and
entering new geographic markets. We perform extensive due diligence before
developing a DE NOVO center or acquiring an existing center, including surveying
local referral sources and radiologists, as well as examining the demographics,
reimbursement environment, competitive landscape and intrinsic demand of the
geographic market. We only enter markets where (i) there is sufficient patient
demand for outpatient diagnostic imaging services, (ii) we believe we can gain
sufficient market share, (iii) we can build key local referral relationships and
(iv) payors are receptive to our entry into the market. As of September 30,
2002, we operated in 27 local markets and expect to continue our expansion into
select new geographic markets and regions of the United States.
Company history
We were founded in 1993 by Gene Venesky, our Chief Executive Officer, and Ken
Luke, our President, to provide high quality, fixed-site outpatient single and
multi-modality diagnostic imaging services through both developing DE NOVO
centers and acquiring and integrating centers. We grew to ten centers by the end
of 1997 as we implemented and refined our
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business model. Since that time, we have selectively expanded our business,
opening 38 DE NOVO centers and acquiring and integrating 29 centers from 1998 to
date. Our acquisitions have each generally consisted of one to three centers.
Facilities and equipment
We segregate our centers into three categories: (1) 19 centers that provide MRI,
CT and other services ("multi-modality"), (2) 27 centers that provide MRI and CT
services ("dual-modality") and (3) 31 centers that provide MRI services only
("MRI only"). We have the ability to expand service capabilities at each of our
centers by increasing the capacity of our existing machines through upgrades,
adding machines and adding new modalities such as nuclear medicine, ultrasound,
mammography and bone densitometry. Additionally, we have five and one half
full-time equivalent mobile MRI machines which we use to conduct market testing,
justify demand in CON states or to supplement capacity at our centers from time
to time on an as needed basis.
Our centers operate 215 diagnostic imaging machines, of which we own 95.1%. Of
these 215 machines, 76 are MRI machines, 42 are CT machines and 97 are other
types of diagnostic imaging machines, including nuclear medicine, x-ray,
fluoroscopy, ultrasound and mammography. In recent years, we have made a
significant investment in new diagnostic imaging machines and equipment
upgrades. As a result, the average age of our MRI machines is 3.0 years, as
compared with the estimated useful life of seven years (excluding any upgrades
which may extend the useful life), and the average age of our CT machines is 2.7
years as compared with the estimated useful life of seven years. This investment
has enabled us to provide our patients with the latest imaging technology and
invest a low percentage of our capital expenditures to maintain existing
equipment. Of the $60.1 million of our total capital expenditures for the
12 month period ended September 30, 2002, we invested approximately 4.1% in
equipment maintenance, 55.7% in DE NOVO centers and expansions and 40.2% in
acquisitions of centers.
We continue to evaluate the mix of our diagnostic imaging equipment in response
to changes in technology and to demand in the marketplace. We upgrade our
equipment on an ongoing basis as new technologies become available. The
development of new imaging technologies is now more likely to involve software
and hardware upgrades that improve image acquisition time and the number and
types of scans a machine can perform, at a cost that is significantly less than
the cost of buying new equipment. These upgrades usually extend the life of a
machine for at least two to three years.
Personnel
As of September 30, 2002, we had 1,134 employees, approximately 55 of whom are
employed at our headquarters and the remainder of whom are employed at our
diagnostic imaging centers. None of our employees are represented by a labor
organization, and we are not aware of any activity seeking such organization. We
believe that our relationship with our employees is good. Approximately 180
radiologists read scans for our network of centers on either a full or part-time
basis. Of these, 9 are employed by us and the remainder are independent
contractors. Occasionally, in order to meet increased volume growth, vacation
schedules,
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retirements or other unexpected events, we contract with independent radiologist
physician practice groups to provide interim radiology services for our centers.
Systems
In 2001, we implemented a Wide Area Network (WAN) Communications System that
enables the transmission of images and data throughout a proprietary network.
Through the WAN and digital imaging transmission, we are transitioning from a
film-based to a primarily filmless environment for the MRI and CT modalities. We
believe that the implementation of these systems will allow us to benefit from a
variety of operational (local level) and financial (corporate level)
efficiencies.
The new WAN system facilitates the distribution of images to our physicians and
certain of our centers. The ability to transmit images to a referring
physician's office as soon as a procedure has been completed provides us with a
new tool with which to market our services to physicians, thereby increasing the
service levels we provide to local physicians. Moreover, the ability to
electronically exchange information between radiologists in real time enables
networked radiologists to cover larger geographical markets by utilizing the
specialized training of other practitioners in our network. Finally, this
technology creates cost reductions for our centers in areas such as film
storage, support personnel and financial management. As the WAN enables us to
transition to a paperless environment and to access financial data in real time,
we expect to realize further cost efficiencies in areas such as financial
reporting, accounts receivable collection and accounts payable processing.
We are currently implementing a Radiology Information System ("RIS") which was
developed in conjunction with a software company and is specifically tailored to
our business. This system is internet-based and facilitates both the technical
and administrative segments of our business. The RIS system has been implemented
at certain of our centers, and we anticipate that the RIS system-wide roll out
will be completed by the end of the first quarter of 2003. We anticipate that
the billing software will not be installed system-wide until the third quarter
of 2003. The RIS is designed to meet our regulatory obligations regarding
electronic transaction standards. See "Business--Regulation."
Customer service
We provide high quality, diagnostic imaging services to our customers. Our
philosophy of delivering high quality patient care and customer service
permeates our entire organization and all levels of management. Our emphasis on
customer service enables us to develop strong relationships with referral
sources and to attract top radiologists. We focus on conveniently locating our
centers, answering our phones in under three rings and reducing waiting times
through extended and weekend hours. In addition, our policy is to provide the
referring physicians with their patients' scans within one business day after a
procedure is performed. Each quarter, we randomly select a group of centers and
conduct randomized or blind customer service tests. Our center managers are
compensated based on their respective center's performance against our best
practices benchmarks.
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Payors
Our revenue is generated by providing patient services at our diagnostic imaging
centers. Patient services revenue is earned from services billed directly to
patients or third-party payors (generally Medicare, Medicaid, commercial payors
and workers compensation funds) on a fee-for-service basis. The following table
illustrates our payor mix based on net revenue for the nine months ended
September 30, 2002:
<Table>
- -------------------------------------------------------------------------------------------------
Payor type
- -------------------------------------------------------------------------------------------------
Commercial 58.8%
Government: 24.8%
Medicare 18.9%
Medicaid/Other 5.9%
Workers Compensation 5.7%
Other(1) 10.7%
- -------------------------------------------------------------------------------------------------
</Table>
(1) Includes co-payments and direct payments by patients
Our eligibility to provide service in response to a referral is often dependent
on the existence of a contractual arrangement with the referred patient's
insurance carrier (primarily if the insurance is a managed care organization).
We have over 160 different contracts with commercial payors, and no one
commercial payor accounted for more than 5.0% of our net revenue during the
first nine months of 2002. These contracts, which describe the negotiated fees
to be paid by each payor for the diagnostic imaging services we provide, enable
us to serve patients with insurance coverage through their applicable commercial
payors. Each of our center managers is responsible for billing our payors in
accordance with the terms of these contracts and with our corporate policies.
Sales and marketing
Each of our centers typically has a marketing manager who is fully dedicated to
marketing and sales activities. Each center manager also spends a significant
amount of time on marketing activities. We perform sales and marketing
activities at the local level in an effort to attract new patients, expand and
maintain relationships with referring physicians and payors, grow revenue at our
existing centers and maintain contractual relationships. Marketing activities
include participating in health fairs, organizing and presenting educational
programs on new applications and uses of diagnostic imaging technology,
developing and conducting customer service programs and calling managed care
organizations and third-party insurance companies to solicit additional
contracts. Each of our centers also has pamphlets describing the services
offered at that center. Sales activities principally focus on referring
physicians and managed care entities, while general awareness programs are
targeted to patients and referring physicians.
Suppliers
Several substantial companies are presently engaged in the manufacture of MRI
(including Open MRI), CT and other diagnostic imaging equipment, including
Philips Medical Systems, Inc., Siemens Medical Systems, Inc., GE Medical
Systems, Inc., Hitachi Medical Systems America, Inc. and Toshiba American
Medical Credit. We purchase contrast agents, which are used in some of
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our procedures, from Bracco Diagnostics, Inc. and film from Eastman Kodak
Company. Most of our equipment is serviced through equipment servicing contracts
with Philips and Hitachi. We believe that we have good working relationships
with all of our major suppliers.
Competition
The overall diagnostic imaging services market is competitive, with services
being provided in multiple settings and by several different types of providers.
We compete principally on the basis of our reputation for delivering high
quality images and reports in a timely manner, the comfort and care we provide
to patients in our centers and price. We compete with other FICs, groups of
radiologists, hospitals, ambulatory surgery centers and non-radiologist
physician practices, including equipment manufacturers and leasing companies
that own and operate imaging equipment. Our major competitors in the FIC market
include HealthSouth Corporation, Radiologix Inc., Syncor International Corp.,
InSight Health Services Corp. and Medical Resources, Inc. Our competition also
includes hospitals and medical clinics that provide diagnostic imaging services
by leasing mobile diagnostic imaging equipment on a full or part-time basis.
We operate in the FIC market, which is highly fragmented and characterized by a
small group of large competitors and a large number of small competitors. Many
of these small competitors are either sole proprietorships or are part of
radiology medical practices. In 2001, the largest ten competitors in this
market, including ourselves, represented only 16.0% of the total number of FICs
in the United States.
In addition, in the past some non-radiologist physician practices have refrained
from establishing their own diagnostic imaging centers because of federal
physician self-referral legislation. Final regulations issued in January 2001
clarify certain 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.
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. However, adequate liability insurance may not be available to us in
the future at acceptable costs or at all.
We maintain general liability, professional 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. We have not assumed any material
liabilities, known or unknown, of any of the centers we have acquired. However,
claims may be asserted against us for events that occurred prior to our
acquiring these acquisitions.
The radiologists at our centers may from time to time be subject to malpractice
claims. To protect against possible professional liability, we maintain
professional liability insurance. We also require our non-employee radiologists
to obtain their own malpractice insurance policies. Nevertheless, claims, suits
or complaints relating to services provided by the radiologists at our centers
may be asserted against us in the future, including malpractice.
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Facilities
We lease approximately 20,000 square feet of space in Alpharetta, Georgia for
our executive and principal administrative offices. We currently operate 77
centers in 12 states as described in the following table:
<Table>
- ----------------------------------------------------------------------------------------------
Total number
of Number of de novo Number of acquired
State centers centers centers
- ----------------------------------------------------------------------------------------------
Georgia*............................. 19 14 5
South Carolina*...................... 13 7 6
North Carolina*...................... 12 5 7
Arizona.............................. 6 1 5
Florida.............................. 5 3 2
Alabama*............................. 4 3 1
Missouri*............................ 4 2 2
Tennessee*........................... 4 1 3
Virginia*............................ 4 0 4
Texas................................ 4 3 1
New Mexico........................... 1 0 1
Wisconsin............................ 1 0 1
-------------- ----------------- ------------------
77 39 38
- ----------------------------------------------------------------------------------------------
</Table>
* Indicates state where certificate of need is required.
As of September 30, 2002, we owned one and leased 74 of the properties upon
which our 75 centers were located.
Environmental matters
We are subject to federal, state and local regulations governing the storage,
use and disposal of hazardous materials and medical and radioactive waste
products. Our diagnostic centers generate small amounts of medical wastes or
other hazardous materials, and some of our imaging services involve the use of
radioactive materials. Although we believe that our procedures for storing,
handling and disposing of these hazardous materials comply with the standards
prescribed by law and adequately provide for the safety of our patients,
employees and the environment, we cannot completely eliminate the risk of
accidental releases, contamination or injury associated with these materials. In
the event of an accident, we could be held liable for any damages that result,
and any liability could exceed the limits 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 have not had material expenses related to
environmental, health and safety laws or regulations to date.
Legal proceedings
We are engaged from time to time in the defense of lawsuits and administrative
proceedings arising in the ordinary course and conduct of our business and have
insurance policies covering potential insurable losses where this coverage is
cost-effective. Except as described below, we
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believe that the outcome of any of these lawsuits will not have a material
adverse impact on our business, financial condition or results of operations.
On August 18, 1999, InMed Diagnostic Service, L.L.C. brought an action against
MedQuest Siemens Medical Systems, Inc., Palmetto Imaging, Inc. and Open MRI of
Florence, Inc. in the Court of Common Pleas for Richland County, South Carolina.
In this action, InMed sued MQ Associates, Inc. for its alleged violation of the
South Carolina Unfair Trade Practices Act, for allegedly engaging in unfair
competition in violation of the South Carolina common law duty to compete
fairly, for alleged tortious interference with prospective contract and for
alleged civil conspiracy with Siemens Medical Systems, Inc. The case was tried
in December 2001, and the jury returned a verdict for the plaintiff in the
amount of approximately $2.1 million. MQ Associates, Inc. moved for directed
verdicts and for a judgment notwithstanding the verdict or in the alternative
for a new trial. On January 10, 2002, the trial judge denied both post-trial
motions and denied plaintiff's motion for treble damages. The plaintiffs filed a
motion to seek approximately $800,000 in legal fees from MQ Associates, Inc.;
however, the trial judge ruled that if the plaintiff wins on appeal, plaintiff
will be entitled to only $100,000 in legal fees. Both MQ Associates, Inc. and
the plaintiff have appealed to the South Carolina Court of Appeals. MQ
Associates, Inc. has paid $2.1 million for this matter, which is being held in
escrow pending the final outcome. Although there can be no assurance MQ
Associates, Inc. will be successful, MQ Associates, Inc. is contesting this
matter vigorously and believes it will be successful in the appeal.
Regulation
LICENSING AND CERTIFICATION. Healthcare facility construction and operation is
subject to federal, state and local laws relating to the adequacy of medical
care, equipment, personnel, operating policies and procedures, maintenance of
adequate records, compliance with building codes, and environmental protection
laws. Diagnostic imaging centers must meet requirements under these laws in
order to participate in government programs, including the Medicare and Medicaid
programs.
In addition, free-standing diagnostic imaging centers that provide services
independent of a physician's office must be enrolled by Medicare as an
independent diagnostic testing facility (an "IDTF") to bill the Medicare
program. Medicare carriers have discretion in applying the IDTF requirements and
therefore the application of these requirements may vary from jurisdiction to
jurisdiction. Notwithstanding this complexity, we conduct our operations in
compliance with federal, state and local laws and make every effort to satisfy
the IDTF requirements or operate as a qualified physician's office.
CERTIFICATES OF NEED. 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 because these states require a
certificate of need or similar regulatory approval prior to the acquisition of
high-cost capital items including diagnostic imaging systems or provision of
diagnostic imaging services by us or by those parties for whom we manage
facilities. Seven of the 12 states in which we operate require a CON and more
states may adopt similar licensure frameworks in the future. In many cases, a
limited number of these CONs are available in a given state. If we are unable to
obtain the applicable CONs or
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additional certificates or approvals necessary to expand our operations, these
regulations may limit or preclude our operations in the relevant jurisdictions.
Conversely, states in which we have obtained a certificate of need may repeal
existing certificate of need regulations or liberalize exemptions from the
regulations. For example, Missouri has liberalized exemptions from certificate
of need programs. The repeal of certificate of need regulations in states in
which we have obtained a certificate of need or a certificate of need exemption
would lower barriers to entry for competition in those states and could
adversely affect our business.
Our ability to obtain a CON (or exemption therefrom) in a particular state is
not a definitive guarantee that our operations under the applicable CON law will
be unchallenged. One or more parties may challenge our CON (or exemption
therefrom) from time to time. While such challenges could be raised on a number
of issues, they generally would be based upon the application or interpretation
of certain financial formulae contained within the applicable CON statute and
either (i) our adherence to that formulae in the submission of our CON (or
exemption therefrom) application or (ii) the applicable state agency's
interpretation or application of the CON statute in its review of our
application. If we are unable to succeed against challenges to our CONs (or
exemptions therefrom), we may be limited or precluded from continuing our
operations in the relevant jurisdictions.
FEE-SPLITTING; CORPORATE PRACTICE OF MEDICINE. The laws of many states in which
we maintain facilities prohibit unlicensed persons or business entities,
including corporations, from employing physicians or engaging in certain
financial arrangements, such as splitting professional fees between physicians
and non-physicians. These laws and their interpretations vary from state to
state and are enforced by state courts and regulatory authorities, each with
broad discretion. Possible sanctions for violations of these restrictions
include loss of a physician's license, civil and criminal penalties and
rescission of business arrangements that may violate these restrictions. We
structure our relationships with these radiologists in a manner that we believe
does not constitute the practice of medicine by us in the states that prohibit
such practice. Although we exercise care to structure our arrangements with
healthcare providers to comply with the relevant state laws, and believe our
current arrangements substantially comply with applicable laws, we cannot assure
you that government officials charged with responsibility for enforcing these
laws will not assert that we, or transactions in which we are involved, are in
violation of such laws, or that such laws ultimately will be interpreted by the
courts in a manner consistent with our interpretations.
MEDICARE AND MEDICAID REIMBURSEMENT PROGRAMS. Our revenue is derived through
our ownership, operation and management of diagnostic imaging centers and from
service fees paid to us by physicians to whose patients we provide diagnostic
imaging services pursuant to purchased service agreements. During the year ended
December 31, 2001, approximately 24% of our net revenue generated at our
diagnostic imaging centers was derived from government sponsored healthcare
programs (principally Medicare and Medicaid).
Medicare. The Medicare program is a social health insurance program that
provides health care to Americans who either are sixty-five years of age and or
have certain conditions such as end-stage renal disease. There are three
separate "Parts" to the Medicare program, with the services that we provide
being reimbursed under Part B, which covers physician, outpatient ambulatory and
ancillary services, such as diagnostic imaging services.
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Under prior Medicare policy, imaging centers generally participated in the
Medicare program as either medical groups or, subject to the discretion of
individual Medicare carriers, independent physiological laboratories. However,
in 1997, the Centers for Medicare and Medicaid Services ("CMS") created a new
Medicare enrollment category entitled "Independent Diagnostic Treatment
Facilities" ("IDTFs"). CMS has created one exception to IDTF enrollment, which
applies to radiology group practices. While we generally have enrolled our
imaging centers with the Medicare program as IDTFs, some of our centers are
enrolled as radiology group practice groups.
The physician fee schedule is a statutory formula pursuant to which the
Department of Health and Human Services assigns relative values to covered
medical procedures based on the individual procedure's ranking relative to the
other procedures on the scale. The physician fee schedule is subject to annual
updates which adjust the rates payable per procedure for inflation, subject to
an adjustment so that projected spending for the year meets allowed spending for
that year. In 2001, the Medicare program announced a reduction in virtually all
services reimbursed under the Medicare physician fee schedule (including those
services we provide) whereby Medicare payment for most diagnostic imaging
services covered by Medicare was reduced in 2002 by approximately 11.0% for the
services that we render. Without final action by Congress or the Medicare
program to address expected reductions in the 2003 Medicare fee schedule, we
expect to experience additional reductions. Medicare reimbursement represented
18.9% of our net revenue for the nine months ended September 30, 2002.
Medicaid. The Medicaid program is a jointly-funded federal and state program
providing coverage for low-income persons. In addition to federally-mandated
basic services, the services offered and reimbursement methods vary from state
to state although both the federal government and many states are currently
considering significantly reducing Medicaid funding. In most states in which we
operate, Medicaid reimbursement for diagnostic imaging services is lower than
the reimbursement rates paid by other payors (including the Medicare program),
and some states have established or are establishing payment methodologies
intended to provide healthcare services to Medicaid patients through managed
care arrangements. In a couple of states in which we operate, the state Medicaid
agencies have refused to authorize entities organized as free-standing
diagnostic treatment center to enroll in the Medicaid program. Medicaid
represented 5.9% of our net revenue for the nine months ended September 30,
2002.
FEDERAL ANTI-KICKBACK AND STARK LAWS. 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 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 Medicare, Medicaid or other governmental programs.
The Office of Inspector General at the Department of Health and Human Services
has published safe harbor regulations that outline categories of activities that
are deemed protected from prosecution under the anti-kickback statute. We have a
variety of financial relationships with physicians that do not appear to meet a
"safe harbor," though the failure to meet a "safe harbor" does not mean that
agreements violate the anti-kickback statute. Therefore, although we do not
believe that these agreements violate the law, we cannot assure you that
regulatory authorities will not determine otherwise, especially as enforcement
of this law historically has
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been a high priority for the federal government. Noncompliance with the federal
anti-kickback legislation can result in exclusion from Medicare, Medicaid or
other governmental programs as well as civil and criminal penalties, any of
which could have an adverse effect on our business and results of operations.
The Social Security Act also includes a provision commonly known as the "Stark
Law." This law prohibits a physician from referring Medicare (and to some extent
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" as well as civil penalties of twice the dollar value of
each service and exclusion from future participation in the Medicare and
Medicaid programs.
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 Phase I regulations to implement the Stark
Law. Under these final regulations, radiology and certain other imaging services
are 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, if such services are furnished by or under the supervision of such
radiologist or another radiologist in the same group practice pursuant to a
consultation requested by a third party physician, does not constitute a
"referral" by a "referring physician." 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.
In addition, we believe that we have structured our acquisitions of the assets
of existing practices and our service agreements for management and
administrative services so as to not violate the Stark Law and regulations. A
determination of liability under the Stark law could have an adverse effect on
our business, financial condition and results of operations.
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. In addition,
amendments in 1986 to the Federal False Claims Act have made it easier
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for private parties to bring "qui tam" whistleblower lawsuits against companies.
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 are not aware of any government investigations involving any of our
facilities, our executives or managers. However, any future investigations of
us, our executives or managers could result in significant liabilities or
penalties, as well as adverse publicity, for us.
STATE FRAUD AND ABUSE PROVISIONS. Most of the states in which our diagnostic
imaging centers are located have adopted a form of anti-kickback law, almost all
of those states have also adopted a form of Stark Law, and some have adopted
separate false claims provisions. 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.
ADMINISTRATIVE SIMPLIFICATION PROVISIONS OF THE HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT OF 1996. The Administrative Simplification Provisions of the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") require
the Department of Health and Human Services to adopt standards to protect the
security and privacy of health-related information. Although the Department of
Health and Human Services issued proposed rules in 1998 concerning the security
standards, final rules have not yet been adopted. The security standards
contained in the proposed rule do not require the use of specific technologies
(e.g., no specific hardware or software is required), but instead require health
plans, healthcare clearinghouses and healthcare providers to comply with certain
minimum security procedures in order to protect data integrity, confidentiality
and availability.
With respect to the privacy standards, the Department of Health and Human
Services published final rules in December of 2000. However, on August 14, 2002,
the Department of Health and Human Services published final modifications to the
privacy standards. The final modifications eliminate the need for patient
consent when the protected information is disclosed for treatment payment issues
or health care operations. In addition, the final modifications clarified the
requirements related to authorizations, marketing and minimum necessary
disclosures of information. All healthcare providers are required to be
compliant with the new federal privacy requirements no later than April 14,
2003. The HIPAA privacy standards contain detailed requirements regarding the
use and disclosure of individually identifiable health information. Improper use
or disclosure of identifiable health information covered by the HIPAA privacy
regulations can result in the following fines and/or imprisonment: (i) civil
money penalties for HIPAA privacy violations are $100 per incident, up to
$25,000, per person, per year, per standard violated; (ii) a person who
knowingly and in violation of the HIPAA privacy regulations obtains individually
identifiable health information or discloses individually identifiable health
information to another person may be fined up to $50,000 and imprisoned up to
one year, or both; (iii) if the offense is committed under false pretenses, the
fine may be up to $100,000 and imprisonment for up to five years; and (iv) if
the offense is done with the intent to sell, transfer, or use individually
identifiable health information for commercial advantage, personal gain, or
malicious harm, the fine may be up to $250,000 and imprisonment for up to ten
years.
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HIPAA also required the Department of Health and Human Services to adopt
national standards establishing electronic transaction standards that all
healthcare providers must use when submitting or receiving certain healthcare
transactions electronically. Although these standards were to become effective
October 2002, Congress has extended the compliance deadline until October 2003
for organizations, such as ours, that submitted a request for an extension.
For a number of reasons, including compliance with the regulations promulgated
by the Department of Health and Human Services pursuant to the Administrative
Simplification Provisions, we have contracted with a software developer to
provide two software products: (i) a Radiology Information System ("RIS") that
will contain radiology images, and patient scheduling, contact and insurance
information and (ii) billing software. The RIS system has been implemented at
certain of our centers, and we anticipate that the RIS system-wide roll out will
be completed by the end of the first quarter of 2003. We anticipate that the
billing software will not be installed system-wide until the third quarter of
2003. It is our intention that the RIS and the billing software operate on a
WAN, or wide area network, in a "hub and spoke" fashion: electronic
communications and transmissions to or from any of our facilities will be routed
through firewalls and servers located in our Atlanta-based administrative
offices.
Roll out of the RIS and our billing software is partially dependent on the
performance of third parties over whom we have no control, including vendors and
suppliers of, among other things, bandwidth and the hardware elements of the
systems. If we are unable to successfully implement and integrate this system,
we could experience substantial delays in collection of net revenues and
additional costs could be imposed on our facilities in order to comply with the
electronic transaction standards. These delays would be a result of the fact
that if our billing system does not comply with these standards, payors could
reject some or all of our claims. We may not be able to resubmit our claims or
expect to receive payment for those claims until our billing system meets the
electronic transaction standards. Nevertheless, if we experience problems with
the RIS, we have made contingent arrangements to use another vendor's software
in order to avoid these problems post-October 2003.
Each of our facilities must meet HIPAA standards by the deadlines noted above.
The de-centralized nature of our structure could present significant challenges
to us in implementation of the HIPAA standards.
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. An important part of our compliance program consists of
conducting periodic audits of various aspects of our operations. We also conduct
mandatory educational programs designed to familiarize our employees with the
regulatory requirements and specific elements of our compliance program. We
believe that our compliance program has been structured in light of the guidance
provided by the Office of Inspector General of the Department of Health and
Human Services.
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Management
Directors and executive officers
The following table sets forth certain information with respect to persons who
are the executive officers and directors of us and our parent, MQ
Associates, Inc. Pursuant to the stockholders' agreement with MQ Associates,
Inc., the board of directors of MQ Associates, Inc. consists of seven members,
three of whom are designated by MQ Investment Holdings, LLC, one of whom is
designated by a member of MQ Investment Holdings, LLC, one of whom is designated
by a majority (which will not include shares held by Daniel J. Schaefer,
Michael A. Villa and Thomas C. Gentry) of the stockholders of MQ
Associates, Inc. and two of whom are designated by our co-founders, Gene Venesky
and J.K. (Ken) Luke (so long as Messrs. Venesky and Luke are at least 10%
stockholders or are both members of senior management). We expect that one
additional director will be elected by a majority of the stockholders of MQ
Associates, Inc.
<Table>
- -------------------------------------------------------------------------------------------------------
Name Age Position
- -------------------------------------------------------------------------------------------------------
Gene Venesky 52 Chief Executive Officer, Secretary, Treasurer
and Director
J.K. (Ken) Luke 54 President and Director
Thomas C. Gentry 48 Chief Financial Officer, Assistant Secretary
and Assistant Treasurer
Daniel J. Schaefer 56 Co-Chief Operating Officer
Michael A. Villa 33 Co-Chief Operating Officer
Bruce W. Elder 32 Vice President, Development
Evan P. Bakst 35 Director
Mitchell J. Blutt, M.D. 45 Director
Nancy-Ann DeParle 45 Director
Benjamin B. Edmands 31 Director
- -------------------------------------------------------------------------------------------------------
</Table>
Gene Venesky is one of the co-founders of MQ Associates, Inc. and has served as
the Chief Executive Officer of MQ Associates, Inc. since 1993 and as its
Chairman of the Board since 1993. Mr. Venesky has been our Chief Executive
Officer, Secretary and Treasurer and one of our directors since August 2002.
Prior to co-founding MedQuest, Mr. Venesky spent over six years with Price
Waterhouse and over ten years with Hillman Co., a nationally known investment
holding company. Mr. Venesky is a graduate of St. Francis College and University
of Virginia/ Colgate Darden's Executive Management Program. Pursuant to the
stockholders' agreement, Mr. Venesky is one of the co-founders' designees to our
board of directors.
J.K. (Ken) Luke is one of the co-founders of MQ Associates, Inc. and has served
as the President of MQ Associates, Inc. since 1993 and as one of its directors
since 1993. Mr. Luke has been our President and one of our directors since
August 2002. Prior to co-founding MedQuest, Mr. Luke spent six years in
commercial banking with Landmark Banking Corp. and Bankers Trust of South
Carolina, two major southeast banks, and nine years in healthcare in product
development, marketing and sales. Mr. Luke holds a B.A. from the University of
Georgia and an M.B.A. from Clemson/Furman Universities. Pursuant to the
stockholders' agreement, Mr. Luke is one of the co-founders' designees to our
board of directors.
Thomas C. Gentry has served as the Chief Financial Officer of MQ Associates,
Inc. since May 1999. Mr. Gentry has been our Chief Financial Officer, Assistant
Secretary and Assistant
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Treasurer since August 2002. For the five years from 1994 to 1999, Mr. Gentry
was a tax partner with Elliot & Davis Co. in Greenville, South Carolina. During
those five years he was the partner in charge of the MedQuest account
relationship. From 1990 to 1994, Mr. Gentry worked with Coopers & Lybrand as a
tax accountant. Mr. Gentry holds a B.A. and a Masters of Tax from Georgia State
University.
Daniel J. Schaefer has served as a Co-Chief Operating Officer of MQ
Associates, Inc. since January 1998. Mr. Schaefer has been our Co-Chief
Operating Officer since August 2002. Mr. Schaefer has over 20 years of
experience in operations and sales/marketing and was a key executive for Span
America Medical Systems from 1975 to 1987 and Alpha ProTech from 1991 to 1995,
both publicly traded healthcare manufacturers. His responsibilities there
included product development, sales and marketing. He was instrumental in taking
Span America Medical Systems public. Mr. Schaefer is a graduate of Southern
Illinois University.
Michael A. Villa has served as a Co-Chief Operating Officer of MQ
Associates, Inc. since February 1998. Mr. Villa has been our Co-Chief Operating
Officer since August 2002. Mr. Villa's career has focused almost exclusively on
the outpatient medical services industry. From 1990 to 1994, Mr. Villa
syndicated limited partnerships in outpatient diagnostic imaging facilities.
From 1994 to 1998, Mr. Villa provided financial services to healthcare
organizations including public and private companies with diagnostic imaging,
hospital and HMO operations. Mr. Villa is a graduate of the University of
Washington.
Bruce W. Elder has served as the Vice President of Development of MQ
Associates, Inc. since January 2001. Mr. Elder has been our Vice President of
Development since August 2002. From May 1999 to December 2000, he served as a
Strategy Consultant and Healthcare Client Director for iXL, Inc., a publicly
traded internet consulting firm, primarily managing client relationships with
early stage venture financed healthcare firms. Prior to joining iXL, Mr. Elder
was Vice President of Development for Meridian Corporate Healthcare, Inc. from
1996 to 1999 and Coordinator of Business Development for Surgical Care
Affiliates, Inc. from 1993 to 1996. Mr. Elder is a graduate of Vanderbilt
University.
Evan P. Bakst has been one of our directors since August 2002. He is currently a
principal at J.P. Morgan Partners, LLC where he focuses on healthcare and
financial services. Prior to joining J.P. Morgan Partners, LLC, Mr. Bakst was a
Managing Director at the Beacon Group, LLC, a boutique merchant bank, and a
Consultant at Bain & Company. The companies for which Mr. Bakst is a director
are Accordant Health Services, Inc., Cadent Holdings, Inc., FundsXpress, Inc.
and Iasis Healthcare Corp. Mr. Bakst holds a B.A. from the University of
California, Berkeley and an M.B.A. from Harvard University. Pursuant to the
stockholders' agreement, Mr. Bakst is one of MQ Investment Holdings, LLC's
designees to our board of directors.
Mitchell J. Blutt, M.D. has been one of our directors since August 2002. He has
been an Executive Partner of J.P. Morgan Partners, LLC, or its predecessor,
Chase Capital Partners, since 1992 and was a General Partner of Chase Capital
Partners from 1988 to 1992. The companies for which Dr. Blutt is a director are
Fisher Scientific International, Inc., Hanger Orthopedic Group, Inc., DJ
Orthopedics, Inc., Medsite, Inc., LaPetite Academy, Inc. and Ryko, Inc. He also
serves on the Board of the Michael J. Fox Foundation for Parkinson's Research
and is an Adjunct Professor of Medicine at Weill Medical College and Graduate
School of Medical Sciences of Cornell University. Dr. Blutt received his B.A.
and M.D. degrees from the University of Pennsylvania. He received his M.B.A. at
the Wharton School of the University of
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Pennsylvania. He is a member of the Board of Trustees of the University of
Pennsylvania, a member of the Board of Overseers of the University of
Pennsylvania's School of Arts and Sciences, Vice Chair of the University
Committee for Undergraduate Financial Aid and a member of the Executive
Committee and Board of Penn Medicine. He formerly served on the Board of the
National Venture Capital Association. Pursuant to the stockholders' agreement,
Mr. Blutt is one of MQ Investment Holdings, LLC's designees to our board of
directors.
Nancy-Ann DeParle has been one of our directors since August 2002. She is a
health care consultant in Washington, D.C., a Senior Advisor to J.P. Morgan
Partners, LLC and an Adjunct Professor of Health Care Systems at the Wharton
School of the University of Pennsylvania. She is also a member of the Medicare
Payment Advisory Commission (MedPAC). From November 1997 until October 2000,
Ms. DeParle served as Administrator of the Health Care Financing Administration
(HCFA), recently renamed the Centers for Medicare and Medicaid Services (CMS).
She was also a key health policy advisor to the Secretary of Health and Human
Services and the President of the United States. Before joining HHS,
Ms. DeParle served as Associate Director for Health and Personnel at the White
House Office of Management and Budget (OMB), where she oversaw budget and policy
matters relating to all Federal health programs. From 1987 to 1989, Ms. DeParle
served as the Tennessee Commissioner of Human Services under Governor Ned
McWherter. She administered a 6,000-employee agency that provided food stamps,
welfare, rehabilitation and child protective services. The companies for which
Ms. DeParle is a director are Cerner Corporation, DaVita, Inc., Guidant
Corporation, Specialty Laboratories, Inc. and Triad Hospitals, Inc. Ms. DeParle
received a B.A. from the University of Tennessee and a J.D. from Harvard Law
School. She also received an M.A. in Politics and Economics from Balliol College
of Oxford University, which she attended as a Rhodes Scholar. Pursuant to the
stockholders' agreement, Ms. DeParle is the designee of a member of MQ
Investment Holdings, LLC to our board of directors.
Benjamin B. Edmands has been one of our directors since August 2002. He is
currently a principal at J.P. Morgan Partners, LLC where he focuses on
investments in the Healthcare Infrastructure sector. Prior to joining J.P.
Morgan Partners, LLC, Mr. Edmands held positions in Chemical Bank's Acquisition
Finance Group. The companies for which Mr. Edmands is a director are Big Rock
Sports, Inc., U.S. Healthworks, Inc. and VeriCare, Inc. Mr. Edmands holds a B.A.
with Honors from Colgate University and an M.B.A. with Honors from Columbia
Business School. Pursuant to the stockholders' agreement, Mr. Edmands is one of
MQ Investment Holdings, LLC's designees to our board of directors.
Summary compensation table
The following summary compensation table sets forth information about
compensation earned in the fiscal year ended December 31, 2001 by the Chief
Executive Officer and each of the other four most highly compensated executive
officers of MQ Associates, Inc. None of the persons who became our executive
officers upon consummation of the Transactions received
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any compensation directly from us relating to any period prior to the
consummation of the Transactions.
<Table>
- ----------------------------------------------------------------------------------------------
Annual compensation
---------------------
Salary Bonus
Name and principal position Year ($) ($)
- ----------------------------------------------------------------------------------------------
Gene Venesky................................................ 2001 $500,000 $290,000
Chief Executive Officer, Secretary and Treasurer
J.K. (Ken) Luke............................................. 2001 500,000 290,000
President
Thomas C. Gentry............................................ 2001 173,653 145,557
Chief Financial Officer, Assistant Secretary and Assistant
Treasurer
Daniel J. Schaefer.......................................... 2001 246,923 161,830
Co-Chief Operating Officer
Michael A. Villa............................................ 2001 221,885 161,830
Co-Chief Operating Officer
Bruce W. Elder.............................................. 2001 104,923 15,000
Vice President, Development
- ----------------------------------------------------------------------------------------------
</Table>
Stock options and restricted stock
On October 8, 1999, we adopted a stock option and grant plan authorizing the
issuance of options exercisable for up to 870,000 shares of Class B non-voting
common stock. As of March 30, 2001, the number of shares of Class B non-voting
common stock authorized for issuance pursuant to the option and grant plan was
lowered to 750,000 in the aggregate. The option and grant plan provided that
qualified and non-qualified options could be issued. The 1999 stock option and
grant plan was terminated as of the closing of the Transactions. In addition, on
December 31,1999, MQ Associates, Inc. and certain of our executive officers
executed a restricted stock agreement and issued promissory notes payable to us
totaling approximately $1.4 million for the purchase of 750,000 shares of
Class B non-voting common stock. Under the restricted stock agreements, the
shares began vesting December 15, 2000, and vested ratably over a 60 month
period. Total vested shares of restricted Class B non-voting common stock at
December 31, 2001 and 2000 were 220,588 and 44,118, respectively. The shares of
restricted Class B non-voting common stock vested immediately prior to the
consummation of the Transactions.
Employment agreements
We have entered into new employment agreements with each of Messrs. Venesky,
Luke, Gentry, Schaefer, Villa and Elder. The employment agreements provide for
the payment of a base salary plus a bonus, and include a non-compete provision
for up to two years following the executive officer's termination of employment
with us. The base salaries under the new employment agreements for each of
Messrs. Venesky, Luke, Gentry, Schaefer, Villa and Elder are $500,000, $500,000,
$175,000, $250,000, $225,000 and $130,000, respectively. The new employment
agreements provide that if the executive officer is terminated without cause,
such executive officer will be entitled to receive payments of his base salary
for a specified period of time, which could be up to 24 months, depending on the
executive officer.
Compensation of directors
We expect that each of our directors who is not an employee of MedQuest or JPMP
will receive annual compensation in the form of stock options for their
services.
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Security ownership of certain beneficial owners and management
All of our capital stock is owned by MQ Associates, Inc. The following table
sets forth information with respect to the ownership of the Class A common stock
and common stock of our parent, MQ Associates, Inc. as of November 15, 2002 by
- each person known to own beneficially more than 5% of the common stock
and Class A common stock,
- each of our directors,
- each of the executive officers named in the summary compensation table
above, and
- all of our executive officers and directors as a group.
The Class A Common Stock and Common Stock vote together as a single class.
Notwithstanding the beneficial ownership of Class A Common Stock and Common
Stock presented below, the stockholders' agreement with MQ Associates, Inc.
governs the stockholders' exercise of their voting rights with respect to
election of directors and certain other material events. The parties to the
stockholders' agreement have agreed to vote their shares to elect the board of
directors as set forth therein. See "Certain relationships and related
transactions."
The amounts and percentages of shares beneficially owned are reported on the
basis of SEC regulations governing the determination of beneficial ownership of
securities. Under SEC rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares voting power or investment power, which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Securities
that can be so acquired are deemed to be outstanding for purposes of computing
such person's ownership percentage, but not for purposes of computing any other
person's percentage. Under these rules, more than one person may be deemed to be
a beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in these footnotes, each of the beneficial owners
listed has, to our knowledge, sole voting and investment power with respect to
the indicated shares of
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common stock. The amounts set forth below do not include options to be issued
under the new option plan which MQ Associates, Inc. is planning to adopt.
<Table>
- --------------------------------------------------------------------------------------------
Number of shares
of Common Stock
and Class A Common
Stock Percent
Name of beneficial owner beneficially owned of class
- --------------------------------------------------------------------------------------------
MQ Investment Holdings, LLC(1)............................ 72,100,000 71.6%
Gene Venesky.............................................. 10,011,750 9.9%
J.K. (Ken) Luke........................................... 10,011,750 9.9%
Thomas C. Gentry.......................................... 2,860,500 2.8%
Daniel J. Schaefer........................................ 2,860,500 2.8%
Michael A. Villa.......................................... 2,860,500 2.8%
Bruce W. Elder............................................ -- *
Evan P. Bakst(2).......................................... -- *
Mitchell J. Blutt, M.D.(2)................................ -- *
Nancy Ann DeParle......................................... -- *
Benjamin B. Edmands(2).................................... -- *
All directors and executive officers as a group........... 28,605,000 28.4%
- --------------------------------------------------------------------------------------------
</Table>
- ------------------------
* Less than 1%
(1) The address of MQ Investment Holdings, LLC is 1221 Avenue of the Americas,
New York, New York 10020.
(2) Each of Messrs. Blutt, Bakst and Edmands may be deemed the beneficial owner
of the shares of Class A Common Stock owned by MQ Investment Holdings, LLC
due to their status as either an executive partner or principal of J.P.
Morgan Partners, LLC, which controls MQ Investment Holdings, LLC.
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Certain relationships and related transactions
Transactions with stockholders prior to consummation of the Transactions
We rent office space for 21 of our 77 centers and our headquarters through
rental agreements with Image Properties, LLC, a company affiliated with us
through common ownership. The rental agreements provide for rental payments in
amounts ranging from $900 to $57,000 monthly. The rental agreements are
typically for ten years with five year renewal options and expire at various
dates through 2011. We made total rental payments under these agreement of
$1.3 million, $1.6 million and $2.7 million in 1999, 2000 and 2001,
respectively, and $2.6 million for the nine months ended September 30, 2002. MQ
Associates, Inc. guarantees all real estate leases between its subsidiaries and
Image Properties, LLC. See note 11 to the audited consolidated financial
statements of MQ Associates, Inc. for the future minimum payments to be made to
Image Properties, LLC under these leases.
MQ Associates, Inc. had a related party receivable balance of $55,000,
$1.4 million and $1.7 million at December 31, 1999, 2000 and 2001, respectively,
and $0.6 million for the nine months ended September 30, 2002 for transactions
performed on behalf of Image Properties, LLC. We earn interest income on the
balance at a rate of approximately 6% per annum of the outstanding receivable
balance.
On March 30, 2001, we issued $8.8 million aggregate principal amount senior
subordinated convertible notes due 2004 to TA Associates, Inc. and its affiliate
partners. The senior subordinated convertible notes had a fixed 12% per annum
interest rate with interest paid quarterly in arrears. The principal balance
with any outstanding accrued and unpaid interest was due on October 8, 2004. As
part of the Transactions, we repurchased the senior subordinated convertible
notes at a purchase price of approximately $8.9 million.
On July 16, 2002, MQ Associates, Inc. entered into a consulting agreement with
William T. Carlson, Jr., then a director of MQ Associates, Inc. The initial term
of the consulting agreement is four years, and automatically renews on the
anniversary date of each subsequent year thereafter for a one year term.
Mr. Carlson will be paid a fee of $30,000 per month, and will also be eligible
for bonus compensation in the sole discretion of the board of directors of MQ
Associates, Inc. If Mr. Carlson is terminated without cause, such termination
will be effective twelve months after MQ Associates, Inc. gives notice to
Mr. Carlson of his termination. During such twelve month period, Mr. Carlson
will continue to receive the fee of $30,000 per month so long as he continues to
fulfill his duties under such consulting agreement. Prior to the closing of the
Transactions, Mr. Carlson resigned as a director of MQ Associates, Inc.
On July 1, 2001, MQ Associates, Inc. entered into a retainer agreement with one
of its then directors, Mr. Carlson. Pursuant to this retainer agreement,
Mr. Carlson was paid $30,000 per month, and also received an acquisition fee
calculated as a percentage of the acquisition cost each time Mr. Carlson
represented MQ Associates, Inc. in connection with an acquisition. MQ
Associates, Inc. paid Mr. Carlson $391,900 and $345,091 under this agreement in
2001 and during the period from January 1, 2002 through July 16, 2002,
respectively. Effective July 16, 2002, this retainer agreement was terminated.
On December 15, 1999, MQ Associates, Inc. loaned $455,000 to each of Thomas C.
Gentry, Michael A. Villa and Daniel J. Schaefer for the purchase of restricted
stock of MQ Associates, Inc. Such loans were each secured by the pledge of the
newly purchased shares of restricted stock. Each of Messrs. Gentry, Villa and
Schaefer entered into restricted stock purchase
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agreements under the MQ Associates, Inc. 1999 stock option and grant plan
pursuant to which each purchased 250,000 shares of Class B common stock of MQ
Associates, Inc. Each also executed a promissory note for the benefit of MQ
Associates, Inc. Interest payable on each loan accrued at an annual rate of
6.08%. Immediately prior to the consummation of the Transactions, the aggregate
principal amount of the loans outstanding, including accrued but unpaid
interest, was $1.6 million. These loans were repaid in connection with the
Transactions.
In connection with the Transactions, we paid "success fees" to certain of our
executive officers and other employees in the aggregate amount of $2.9 million.
Gene Venesky, our Chief Executive Officer, Secretary and Treasurer, and J.K.
(Ken) Luke, our President, each received success fees of approximately
$1.0 million. Bruce W. Elder, our Vice President of Development, received
success fees of approximately $0.3 million.
In connection with the consummation of the Transactions, we entered into an
indemnification agreement with certain affiliates of TA Associates, Inc. and
agreed to indemnify them against liabilities arising under the purchase
agreement with the initial purchasers of the old notes or otherwise in
connection with the sale of the notes.
Transactions with stockholders following consummation of the Transactions
STOCKHOLDERS' AGREEMENT. MQ Associates, Inc. entered into a stockholders'
agreement with MQ Investment Holdings, LLC, Gene Venesky, J.K. (Ken) Luke,
Thomas C. Gentry, Daniel J. Schaefer and Michael A. Villa. The stockholders'
agreement contains the following provisions:
- CERTAIN TRANSFERS. Pursuant to the stockholders' agreement, each
stockholder agrees not to transfer any shares to any person without the
prior consent of MQ Associates, Inc. and MQ Investment Holdings, LLC
unless that person is already a party to the stockholders' agreement (or
executes a joinder to become a party to the stockholders' agreement).
- CO-SALE RIGHTS. Any stockholder who proposes to transfer shares must
provide a sale notice to all other stockholders offering to the other
holders the option to participate in the transfer with the same terms and
conditions. Any other stockholder may give a tag along notice within
20 days of the receipt of such sale notice stating that he or she wishes
to participate in the proposed transfer. If such notice is given, the
transferring stockholder must use all reasonable efforts to cause the
prospective transferees to acquire all such shares.
- RIGHT OF FIRST REFUSAL. In the event that a stockholder receives a
written offer to purchase all or a portion of his or her shares, such
stockholder will deliver to MQ Associates, Inc. and each other
stockholder a written notice, offering all of the shares proposed to be
transferred first to MQ Associates, Inc. or its designees and then to
other stockholders. In the event that MQ Associates, Inc., its designees
and the stockholders decline the offer, the stockholder who originally
received the offer to purchase his or her shares may transfer to the
proposed transferee the number of shares not accepted for purchase.
- DRAG-ALONG RIGHT. If a sale of MQ Associates, Inc. is approved by the
board of directors of MQ Associates, Inc. and the holders of a majority
of the outstanding common stock of MQ Associates, Inc., each stockholder
will consent and raise no objections against the approved sale and shall
waive any dissenters rights, appraisal rights or similar rights in
connection with such sale and agree to sell his or her shares on the
terms and conditions approved.
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- REPURCHASE RIGHT OF MQ ASSOCIATES, INC. If a management stockholder's
employment is terminated for any reason, MQ Associates, Inc. or its
designee will have the right to repurchase at any time any or all of the
shares owned by such management stockholder.
- RIGHT OF FIRST OFFER. If MQ Investment Holdings, LLC desires to transfer
any of its shares, MQ Investment Holdings, LLC must first inform the
management stockholders in writing of its intent to transfer such shares,
and the management stockholders will have ten business days to inform MQ
Investment Holdings, LLC whether they desire to purchase the shares of MQ
Investment Holdings, LLC proposed to be transferred.
- ELECTION OF DIRECTORS AND OBSERVATION RIGHTS. Pursuant to the
stockholders' agreement, each holder of shares covenants and agrees to
cause seven directors to be on the board of directors of MQ
Associates, Inc., three of whom will be designated by MQ Investment
Holdings, LLC, one of whom will be designated by a member of MQ
Investment Holdings, LLC, one of whom shall be designated by a majority
(which will not include shares held by Daniel J. Schaefer, Michael A.
Villa and Thomas C. Gentry) of the stockholders of MQ Associates, Inc.
and two of whom shall be designated by Gene Venesky and J.K. (Ken) Luke
so long as Messrs. Venesky and Luke collectively hold at least 10% of the
common stock of MQ Associates, Inc. or are both members of its senior
management. If Messrs. Venesky and Luke's aggregate ownership falls below
10%, the number of management designees to the board of directors will be
reduced to one so long as either Mr. Venesky or Mr. Luke is still a
member of senior management or otherwise will be reduced to zero. In
addition, MQ Investment Holdings, LLC will have the right to designate
one person to serve as an observer at all meetings at the board of
directors.
- TERMINATION. The stockholders' agreement will terminate upon the earlier
of (a) the twentieth anniversary of the closing date of the Transactions,
(b) the sale, dissolution or liquidation of MQ Associates, Inc., (c) the
consummation of an underwritten public equity offering that raises gross
proceeds of at least $50.0 million and (d) the mutual agreement of MQ
Associates, Inc. and the majority stockholders of MQ Associates, Inc.
REGISTRATION RIGHTS AGREEMENT. MQ Associates, Inc. entered into a registration
rights agreement with MQ Investment Holdings, LLC, Gene Venesky, J.K. (Ken)
Luke, Thomas C. Gentry, Daniel J. Schaefer and Michael A. Villa. The
registration rights agreement contains the following provisions:
- DEMAND REGISTRATION. Pursuant to the registration rights agreement, at
the request of MQ Investment Holdings, LLC, MQ Associates, Inc. will be
required to use its best efforts to register under the Securities Act
such shares held by MQ Investment Holdings, LLC. MQ Investment Holdings,
LLC will be entitled to request up to two registrations on Form S-1.
- PIGGYBACK REGISTRATION. If MQ Associates, Inc. proposes to register
shares for its own account or otherwise, it must give written notice to
each of its stockholders of its intention to register and upon written
request, MQ Associates, Inc. must use its best efforts to cause all
shares requested to be included in such registration on the same terms
and conditions as the securities otherwise being sold.
- REGISTRATION ON FORM S-3. When MQ Associates, Inc. will have qualified
for the use of Form S-3, MQ Investment Holdings, LLC and the management
stockholders will have the right to request that MQ Associates, Inc.
effect a registration under the Securities
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Act using Form S-3. The management stockholders, collectively, will be
permitted to make up to two requests on Form S-3, except that not more
than one request may be made in any twelve-month period. MQ
Associates, Inc. will not be obligated to effect any such registration if
the anticipated gross offering price of all shares to be registered would
be less than $2,500,000, or MQ Associates, Inc. will have effected four
or more registration statements on Form S-3 during the 12 month period
prior to the date of such request for registration.
Senior credit facility and interim financing commitment
JPMorgan Chase Bank or one of its affiliates is a lender under the senior credit
facility. In addition, JPMorgan Chase Bank or its affiliates in conjunction with
each of the other initial purchasers or their affiliates agreed to provide us
with senior subordinated financing in an aggregate amount of $180.0 million in
the event that the offering of the notes was not consummated. J.P. Morgan
Securities Inc. was an initial purchaser of the old notes and both J.P. Morgan
Securities Inc. and JPMorgan Chase Bank are affiliates of MQ Investment
Holdings, LLC, which owns approximately 70.0% of our parent's outstanding
capital stock (on a fully diluted basis) and has the right under the
stockholders' agreement to appoint at least a majority of our directors. MQ
Investment Holdings, LLC is an affiliate of J.P. Morgan Partners, LLC. Mitchell
J. Blutt, M.D., an executive partner of J.P. Morgan Partners, LLC, and Evan P.
Bakst and Benjamin B. Edmands, principals of J.P. Morgan Partners, LLC, serve as
three of our directors.
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Description of senior credit facility
General
On August 15, 2002 we entered into a senior credit facility with Wachovia Bank,
National Association, as administrative agent, and certain other banks and
financial institutions. The senior credit facility consists of a senior secured
revolving credit facility, comprised of revolving loans in a total principal
amount not to exceed $80.0 million at any one time outstanding. Our senior
credit facility permits us to increase the total principal amount of our
revolving loans by an amount not to exceed $40.0 million without the consent of
the lenders thereunder, so long as no default or event of default under the
senior credit facility has occurred or would occur after giving effect to such
increase. The senior credit facility matures in August 2007.
Security and guarantees
Our obligations under the senior credit facility have been unconditionally and
irrevocably guaranteed jointly and severally by MQ Associates, Inc. and each of
our existing and subsequently acquired or organized subsidiaries, with limited
exceptions for foreign subsidiaries.
Our obligations under the senior credit facility, and the guarantees of those
obligations, are secured by all of the assets of MQ Associates, Inc. and each of
our domestic subsidiaries, including but not limited to:
- a first priority pledge by MQ Associates, Inc., us and our subsidiaries
of all the capital stock of us and each of our existing and subsequently
acquired or organized subsidiaries, in each case, with limited exceptions
for foreign subsidiaries; and
- a perfected first-priority security interest in substantially all
tangible and intangible assets of MQ Associates, Inc., us and each
existing or subsequently acquired or organized domestic subsidiaries,
with limited exceptions.
Interest rates and fees
Borrowings bear interest initially at either (a) in the case of loans where the
rate of interest is based on the ABR rate, an applicable margin of 1.50% per
annum plus the higher of (i) Wachovia Bank's prime rate and (ii) the federal
funds effective rate plus 1/2 of 1.00% or (b) in the case of loans where the
rate of interest is based on the eurodollar rate, the eurodollar rate plus an
applicable margin of 2.50% per annum. The senior credit facility provides for
the payment to the lenders of a commitment fee on any unused commitments under
the senior credit facility initially equal to 1/2 of 1.00% per annum commencing
to accrue on the closing date and payable quarterly in arrears. After an initial
period of about six months, this commitment fee and the interest rates will be
subject to adjustment subject to our attaining certain performance targets.
Mandatory prepayments
The senior credit facility requires us to prepay outstanding revolving loans
with 100% of the net proceeds of asset dispositions (subject to certain
exceptions, including, without limitation, reinvestment) and requires us to
permanently reduce the commitments under the senior credit
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facility with 100% of the net proceeds of debt issuances, other than certain
permitted debt. Additionally, net proceeds of certain asset dispositions that
are not reinvested will be used to permanently reduce the commitments under the
senior credit facility once the aggregate amount of such net proceeds exceeds
$20.0 million.
Voluntary prepayments
The senior credit facility provides for voluntary prepayments of the revolving
loans and voluntary reductions of the unutilized portion of the commitments
under the senior credit facility, without penalty, subject to certain
conditions.
Covenants
Our senior credit facility contains financial and other covenants that we
believe are usual and customary for a secured credit agreement, including
covenants that limit our and our subsidiaries' ability to, among other things:
- declare dividends and make other distributions;
- redeem and repurchase our capital stock;
- prepay, redeem and repurchase certain of our indebtedness (including the
notes);
- make loans and investments;
- incur additional indebtedness;
- grant liens;
- make pledges of our assets;
- enter into sale-leaseback transactions;
- modify the terms of the notes or preferred stock;
- restrict dividends from certain of our subsidiaries;
- enter into new lines of business;
- recapitalize, merge, consolidate or enter into acquisitions;
- sell our assets; and
- enter into transactions with our affiliates.
Our senior credit facility also contains the following financial covenants:
- our consolidated leverage ratio for any period of four consecutive fiscal
quarters must not exceed ratios ranging from 4.75:1.00 for any fiscal
quarter ending in 2002 to 3.75:1.00 for any fiscal quarter ending in
2007;
- our consolidated senior leverage ratio for any period of four consecutive
fiscal quarters must not exceed ratios ranging from 2.50:1.00 for any
fiscal quarter ending in 2002 to 2.00:1.00 for any fiscal quarter ending
in 2004 and thereafter; and
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- our consolidated fixed charge coverage ratio for any period of four
consecutive fiscal quarters must not be less than ratios ranging from
1.25:1.00 for any fiscal quarter of 2002 to 1.55:1.00 for any fiscal
quarter of 2007.
Events of default
Our senior credit facility contains certain customary events of default with
respect to MQ Associates, Inc., us and each of our subsidiaries, including,
among others:
- nonpayment of principal or interest;
- breach of the affirmative or negative covenants;
- material breach of the representations or warranties;
- cross-default and cross-acceleration to other indebtedness;
- bankruptcy or insolvency;
- certain material judgments entered against MQ Associates, Inc., us or any
of our subsidiaries,
- certain ERISA violations;
- actual or asserted invalidity of security documents or guarantees
associated with the senior credit facility;
- a change in control (as defined in the senior credit facility);
- engagement by MQ Associates, Inc. in any activity other than that
associated with being a passive holding company; and
- if the notes cease to be validly subordinated to the senior credit
facility.
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Description of notes
The old notes were, and the exchange notes will be, issued under an indenture
dated as of August 15, 2002, by and among us, the note guarantors and Wachovia
Bank, National Association, as trustee. A copy of the indenture has been filed
as an exhibit to the registration statement of which this prospectus forms a
part.
On August 15, 2002, we issued $180,000,000 aggregate principal amount of old
notes under the indenture. The terms of the exchange notes are identical in all
material respects to the old notes, except the exchange notes will not contain
transfer restrictions and holders of exchange notes will no longer have any
registration rights or be entitled to any additional interest. Wachovia Bank,
National Association, as trustee of the notes, will authenticate and deliver
exchange notes for original issue only in exchange for a like principal amount
of old notes. Any old notes that remain outstanding after the consummation of
this exchange offer, together with the exchange notes, will be treated as a
single class of securities under the indenture. Accordingly, all references in
this section to specified percentages in aggregate principal amount of the
outstanding exchange notes shall be deemed to mean, at any time after this
exchange offer is consummated, such percentage in aggregate principal amount of
the old notes and exchange notes then outstanding.
The terms of the Notes include those expressly set forth in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Indenture is unlimited in
aggregate principal amount, and we may issue an unlimited principal amount of
additional notes having identical terms and conditions as the Notes (the
"Additional Notes"). We will only be permitted to issue such Additional Notes if
at the time of such issuance, we were in compliance with the covenants contained
in the Indenture. Any Additional Notes will be part of the same issue as the
Notes and will vote on all matters with the holders of the Notes.
This description of notes is intended to be a useful overview of the material
provisions of the Notes, the Notes Guarantees and the Indenture. Since this
description is only a summary, you should refer to the Indenture for a complete
description of the obligations of the Company, the Guarantors and your rights.
You will find the definitions of capitalized terms used in this description
under the heading "Certain definitions." For purposes of this description,
references to "the Company," "we," "our," and "us" refer only to MedQuest, Inc.
and not to its Subsidiaries, and references to the "Notes" refer collectively to
the old notes and the exchange notes.
General
THE NOTES
The Notes:
- are general unsecured, senior subordinated obligations of the Company;
- are limited to an aggregate principal amount of $180.0 million, subject
to our ability to issue Additional Notes;
- mature on August 15, 2012;
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- will be issued in denominations of $1,000 and integral multiples of
$1,000;
- will be represented by one or more registered Notes in global form, but
in certain circumstances may be represented by Notes in definitive form.
See "Book-entry, delivery and form";
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- rank equally in right of payment to any future Senior Subordinated
Indebtedness of the Company;
- are unconditionally guaranteed on a senior subordinated basis by Holdings
and each Restricted Subsidiary of the Company. See "Notes guarantees";
and
- are eligible for trading in the PORTAL market.
INTEREST
Interest on the Notes compounds semi-annually and:
- accrue at the rate of 11 7/8% per annum;
- accrue from the date of original issuance or, if interest has already
been paid, from the most recent interest payment date;
- be payable in cash semi-annually in arrears on February 15 and
August 15, commencing on February 15, 2003;
- be payable to the holders of record on the February 1 and August 1
immediately preceding the related interest payment dates; and
- be computed on the basis of a 360-day year comprised of twelve 30-day
months.
We will also pay additional interest to holders of the old notes if we fail to
complete the Exchange Offer described in the Registration Rights Agreement
within 225 days after the issuance of the Notes (or the next Business Day if the
225th day is not a Business Day) or if certain other conditions contained in the
Registration Rights Agreement are not satisfied.
PAYMENTS ON THE NOTES; PAYING AGENT AND REGISTRAR
We will pay principal of, premium, if any, and interest on the Notes at the
office or agency designated by the Company in the Borough of Manhattan, The City
of New York, except that we may, at our option, pay interest on the Notes by
check mailed to holders of the Notes at their registered address as it appears
in the Registrar's books. We have initially designated the corporate trust
office of the Trustee in New York, New York to act as our Paying Agent and
Registrar. We may, however, change the Paying Agent or Registrar without prior
notice to the holders of the Notes, and the Company or any of its Restricted
Subsidiaries may act as Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, Notes in global form
registered in the name of or held by The Depository Trust Company or its nominee
in immediately available funds to The Depository Trust Company or its nominee,
as the case may be, as the registered holder of such global Note.
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TRANSFER AND EXCHANGE
A holder of Notes may transfer or exchange Notes at the office of the Registrar
in accordance with the Indenture. The Registrar and the Trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents. No service charge will be imposed by the Company, the Trustee or the
Registrar for any registration of transfer or exchange of Notes, but the Company
may require a holder to pay a sum sufficient to cover any transfer tax or other
similar governmental charge required by law or permitted by the Indenture. The
Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
Optional redemption
OPTIONAL REDEMPTION
Except as described below, the Notes are not redeemable until August 15, 2007.
Thereafter, the Company may redeem all or, from time to time, a part of the
Notes upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as a percentage of principal amount) plus accrued
and unpaid interest on the Notes, if any, to the applicable redemption date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period beginning on August 15 of the years indicated below:
<Table>
<Caption>
Year Percentage
- ---- -----------
2007........................................................ 105.938%
2008........................................................ 103.958%
2009........................................................ 101.979%
2010 and thereafter......................................... 100.000%
</Table>
Prior to August 15, 2005, the Company may on any one or more occasions redeem up
to 35% of the original principal amount of the Notes with the Net Cash Proceeds
of one or more Equity Offerings at a redemption price of 111.875% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
PROVIDED that
(1) at least 65% of the original principal amount of the Notes remains
outstanding after each such redemption; and
(2) the redemption occurs within 120 days after the closing of such Equity
Offering.
If the optional redemption date is on or after an interest record date and on or
before the related interest payment date, the accrued and unpaid interest, if
any, will be paid to the Person in whose name the Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders whose Notes will be subject to redemption by the Company.
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In the case of any partial redemption, the Trustee will select the Notes for
redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not listed, then on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion will deem to be fair and appropriate, although no
Note of $1,000 in original principal amount or less will be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
that Note will state the portion of the principal amount thereof to be redeemed.
A new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original Note.
OPTIONAL REDEMPTION UPON CHANGE OF CONTROL
In addition, at any time prior to August 15, 2007, within 90 days following the
occurrence of a Change of Control, the Company may redeem the Notes, in whole
but not in part, at a redemption price equal to 100% of the principal amount
thereof plus the Applicable Premium plus accrued and unpaid interest, if any, to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
Notice of redemption of the Notes pursuant to this paragraph shall be mailed to
holders of the Notes not more than 60 days following the occurrence of a Change
of Control, which notice shall state the redemption date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed).
Ranking and subordination
The Notes are unsecured Senior Subordinated Indebtedness of the Company, are
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company, will rank equally in right of payment with all future Senior
Subordinated Indebtedness of the Company and will be senior in right of payment
to all future Subordinated Obligations of the Company. The Notes are effectively
subordinated to all secured Indebtedness of the Company to the extent of the
value of the assets securing such Indebtedness. However, payment from the money
or the proceeds of U.S. Government Obligations held in any defeasance trust (as
described under "Defeasance" below) will not be subordinated to any Senior
Indebtedness or subject to these restrictions.
As a result of the subordination provisions described below, holders of the
Notes may recover less than creditors of the Company who are holders of Senior
Indebtedness in the event of an insolvency, bankruptcy, reorganization,
receivership or similar proceedings relating to the Company. Similarly, the
Notes Guarantees will be subordinated to obligations in respect of Guarantor
Senior Indebtedness to the same extent the Notes are subordinated to Senior
Indebtedness. Moreover, the Notes will be structurally subordinated to the
liabilities of non-guarantor Subsidiaries of the Company.
As of September 30, 2002:
- outstanding Senior Indebtedness was $46.8 million, all of which was
secured (exclusive of $36.2 million of unused commitments under the
Senior Credit Agreement, net of $0.8 million reserved for outstanding
letters of credit);
- the Company had no Senior Subordinated Indebtedness other than the Notes;
and
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- Restricted Subsidiaries had $24.2 million of total liabilities.
Although the Indenture limits the amount of indebtedness that the Company and
its Restricted Subsidiaries may incur, such indebtedness may be substantial and
all of it may be Senior Indebtedness or Guarantor Senior Indebtedness, as the
case may be.
Only Indebtedness of the Company that is Senior Indebtedness will rank senior to
the Notes in accordance with the provisions of the Indenture. The Notes will in
all respects rank equally with all other Senior Subordinated Indebtedness of the
Company. Unsecured Indebtedness is not deemed to be subordinate or junior to
secured Indebtedness merely because it is unsecured. As described in "Limitation
on layering," the Company may not incur any indebtedness that is senior in right
of payment to the Notes, but junior in right of payment to Senior Indebtedness.
Unsecured Indebtedness of the Company is not deemed to be subordinate or junior
to secured Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium, if any, or interest on, or other
payment obligations in respect of, the Notes or make any deposit pursuant to the
provisions described under "Defeasance" below and may not otherwise repurchase,
redeem or retire any Notes (collectively, "pay the Notes") if:
(1) any Senior Indebtedness is not paid when due in cash or Cash
Equivalents; or
(2) any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless,
in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid
in full in cash or Cash Equivalents.
However, the Company may pay the Notes if the Company and the Trustee receive
written notice approving such payment from the Representative of the Senior
Indebtedness with respect to which either of the events set forth in clause (1)
or (2) of the immediately preceding sentence has occurred and is continuing.
The Company also will not be permitted to pay the Notes for a Payment Blockage
Period (as defined below) during the continuance of any default, other than a
default described in clause (1) or (2) of the preceding paragraph, on any
Designated Senior Indebtedness that permits the holders of the Designated Senior
Indebtedness to accelerate its maturity immediately without either further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods.
A "Payment Blockage Period" commences on the receipt by the Trustee (with a copy
to the Company) of written notice (a "Blockage Notice") of a default of the kind
described in the immediately preceding paragraph from the Representative of the
holders of such Designated Senior Indebtedness specifying an election to effect
a Payment Blockage Period and ends 179 days after receipt of the notice. The
Payment Blockage Period will end earlier if such Payment Blockage Period is
terminated:
(1) by written notice to the Trustee and the Company from the Person or
Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is no longer
continuing; or
(3) because such Designated Senior Indebtedness has been repaid in full.
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The Company may resume payments on the Notes after the end of the Payment
Blockage Period (including any missed payments), unless the holders of such
Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness. Not more than
one Blockage Notice may be given in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated Senior Indebtedness during
such period. However, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness other than the
Bank Indebtedness, the Representative of the Bank Indebtedness may give another
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any 360 consecutive day period. For purposes of
this paragraph, no default or event of default that existed or was continuing on
the date of the commencement of any Payment Blockage Period with respect to the
Designated Senior Indebtedness initiating such Payment Blockage Period shall be,
or be made, the basis of the commencement of a subsequent Payment Blockage
Period by the Representative of such Designated Senior Indebtedness, whether or
not within a period of 360 consecutive days, unless such default or event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
In the event of:
(1) a total or partial liquidation or a dissolution of the Company;
(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to the Company or its property; or
(3) an assignment for the benefit of creditors or marshaling of the
Company's assets and liabilities, then
the holders of Senior Indebtedness will be entitled to receive payment in full
in cash or Cash Equivalents in respect of Senior Indebtedness (including
interest accruing after, or which would accrue but for, the commencement of any
proceeding at the rate specified in the applicable Senior Indebtedness, whether
or not a claim for such interest would be allowed) before the holders of the
Notes will be entitled to receive any payment or distribution, in the event of
any payment or distribution of the assets or securities of the Company. In
addition, until the Senior Indebtedness is paid in full in cash or Cash
Equivalents, any payment or distribution to which holders of the Notes would be
entitled but for the subordination provisions of the Indenture will be made to
holders of the Senior Indebtedness as their interests may appear, except that
the holders of the Notes may receive (i) Capital Stock (other than Disqualified
Stock) issued by the Company to pay interest on the Notes or issued in exchange
for the Notes, (ii) securities substantially identical to the Notes issued by
the Company in payment of interest thereon or (iii) securities issued by the
Company which are subordinated to Senior Indebtedness at least to the same
extent as the Notes and having an Average Life at least equal to the remaining
Average Life of the Notes. If a payment or distribution is made to holders of
the Notes that, due to the subordination provisions, should not have been made
to them, such holders are required to hold it in trust for the holders of Senior
Indebtedness and pay the payment or distribution over to holders of Senior
Indebtedness as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee will promptly notify the holders of the Designated Senior
Indebtedness or the
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Representative of such holders of the acceleration. The Company may not pay the
Notes until five Business Days after such holders or the Representative of the
Designated Senior Indebtedness receives notice of such acceleration and, after
that five Business Day period, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
Notes guarantees
Each of Holdings and the Subsidiary Guarantors, jointly and severally,
unconditionally guarantees, on a senior subordinated basis, the Company's
obligations under the Notes and all obligations under the Indenture. Such
Guarantors have agreed to pay, in addition to the amount stated above, any and
all costs and expenses (including reasonable counsel fees and expenses) incurred
by the Trustee or the Holders in enforcing any rights under the Notes
Guarantees. Each Notes Guarantee is subordinated to the prior payment in full of
all Guarantor Senior Indebtedness in the same manner and to the same extent that
the Notes are subordinated to Senior Indebtedness. Each Notes Guarantee ranks
equally with all other Guarantor Senior Subordinated Indebtedness of that
Guarantor and senior in right of payment to all future Guarantor Subordinated
Obligations of that Guarantor. The Notes Guarantees are effectively subordinated
to any secured Indebtedness of the applicable Guarantor to the extent of the
value of the assets securing such Indebtedness. The Guarantors are not permitted
to incur indebtedness that is junior in right of payment to Guarantor Senior
Indebtedness but senior in right of payment to the Notes Guarantee. Unsecured
Indebtedness of the Guarantors is not deemed to be subordinate or junior to
secured Indebtedness merely because it is unsecured.
As of September 30, 2002
- outstanding Guarantor Senior Indebtedness was $43.0 million, all of which
was secured (exclusive of $36.2 million of unused commitments under the
Senior Credit Agreement, net of $0.8 million reserved for outstanding
letters of credit); and
- the Guarantors had no Guarantor Senior Subordinated Indebtedness other
than the Notes Guarantees.
Although the Indenture limits the amount of indebtedness that Holdings and the
Restricted Subsidiaries may incur, such indebtedness may be substantial and all
of it may be Guarantor Senior Indebtedness.
The obligations of each Guarantor under its Notes Guarantee are limited as
necessary to prevent that Notes Guarantee from constituting a fraudulent
conveyance or fraudulent transfer under applicable law.
In the event a Subsidiary Guarantor is sold or disposed of (whether by merger,
consolidation, the sale of its Capital Stock or the sale of all or substantially
all of its assets (other than by lease)) and whether or not the Subsidiary
Guarantor is the surviving corporation in such transaction to a Person which is
not the Company or a Restricted Subsidiary of the Company
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(other than a Receivables Entity), such Subsidiary Guarantor will be released
from its obligations under its Notes Guarantee if:
(1) the sale or other disposition is in compliance with the Indenture,
including the covenants "--Limitation on sales of assets and subsidiary
stock" and "--Limitation on sales of capital stock of restricted
subsidiaries;" and
(2) all the obligations of such Subsidiary Guarantor under the Senior Credit
Agreement and related documentation and any other agreements relating to
any other indebtedness of the Company or its Restricted Subsidiaries
terminate upon consummation of such transaction.
In addition, a Subsidiary Guarantor will be released from its obligations under
the Indenture, its respective Notes Guarantee and the Registration Rights
Agreement if the Company designates such Subsidiary as an Unrestricted
Subsidiary and such designation complies with the other applicable provisions of
the Indenture.
Change of control
If a Change of Control occurs, each registered holder of Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such holder's Notes at a purchase price in cash
equal to 101% of the principal amount of the Notes plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); PROVIDED, HOWEVER, that, notwithstanding the foregoing,
the Company shall not be obligated to repurchase the Notes pursuant to this
covenant if prior thereto the Company has exercised its right to redeem all of
the Notes pursuant to the terms of "Optional redemption."
Within 30 days following any Change of Control, the Company will mail a notice
(the "Change of Control Offer") to each registered holder with a copy to the
Trustee stating:
(1) that a Change of Control has occurred and that such holder has the right
to require the Company to purchase such holder's Notes at a purchase
price in cash equal to 101% of the principal amount of such Notes plus
accrued and unpaid interest, if any, to the date of purchase (subject to
the right of holders of record on a record date to receive interest on
the relevant interest payment date) (the "Change of Control Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of Control
Payment Date"); and
(3) the procedures determined by the Company, consistent with the Indenture,
that a holder must follow in order to have its Notes repurchased.
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'
On the Change of Control Payment Date, the Company will, to the extent lawful:
(1) accept for payment all Notes or portions of Notes (in integral multiples
of $1,000) properly tendered under the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all Notes or portions of Notes so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions of Notes being purchased by the Company.
The paying agent will promptly mail to each holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple of $1,000.
If the Change of Control Payment Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest,
if any, will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders who tender pursuant to the Change of Control Offer.
The Change of Control provisions described above will be applicable whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the holders to require that the Company repurchase or
redeem the Notes in the event of a takeover, recapitalization or similar
transaction.
Prior to mailing a Change of Control Offer, and as a condition to such mailing
(i) all Senior Indebtedness must be repaid in full or the Company must offer to
repay all Senior Indebtedness and make payment to the holders that accept such
offer and obtain waivers of any default from the remaining holders of such
Senior Indebtedness or (ii) the requisite holders of each issue of Senior
Indebtedness shall have consented to such Change of Control Offer being made and
waived the default, if any, caused by the Change of Control. The Company
covenants to effect such repayment or obtain such consent and waiver within
30 days following any Change of Control, it being a default of the Change of
Control provision of the Indenture if the Company fails to comply with such
covenant. A default under the Indenture will result in a cross-default under the
Senior Credit Agreement. In the event of a default under the Senior Credit
Agreement, the subordination provisions of the Indenture would likely restrict
payments to the holders of the Notes.
The Company 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 the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
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The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in the Indenture by virtue of the conflict.
The Company's ability to repurchase Notes pursuant to a Change of Control Offer
may be limited by a number of factors. The occurrence of certain of the events
that constitute a Change of Control would constitute a default under the Senior
Credit Agreement. In addition, certain events that may constitute a change of
control under the Senior Credit Agreement and cause a default thereunder may not
constitute a Change of Control under the Indenture. Future Indebtedness of the
Company and its Subsidiaries may also contain prohibitions of certain events
that would constitute a Change of Control or require such Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the holders of
their right to require the Company to repurchase the Notes could cause a default
under such Indebtedness, even if the Change of Control itself does not, due to
the financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
Even if sufficient funds were otherwise available, the terms of the Senior
Credit Agreement will (and other Indebtedness may) prohibit the Company's
prepayment of Notes before their scheduled maturity. Consequently, if the
Company is not able to prepay the Bank Indebtedness and any such other
Indebtedness containing similar restrictions or obtain requisite consents, as
described above, the Company will be unable to fulfill its repurchase
obligations if holders of Notes exercise their repurchase rights following a
Change of Control, resulting in a default under the Indenture. A default under
the Indenture may result in a cross-default under the Senior Credit Agreement.
In the event of a default under the Senior Credit Agreement, the subordination
provisions of the Indenture would likely restrict payments to the holders of the
Notes.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of "Change
of Control" includes a disposition of all or substantially all of the property
and assets of the Company and its Restricted Subsidiaries taken as a whole to
any Person other than a Permitted Holder. Although there is a limited body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, in
certain circumstances there may be a degree of uncertainty as to whether a
particular transaction would involve a disposition of "all or substantially all"
of the property or assets of a Person. As a result, it may be unclear as to
whether a Change of Control has occurred and whether a holder of Notes may
require the Company to make an offer to repurchase the Notes as described above.
The provisions under the Indenture relative to the Company's obligation to make
an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the Holders of a majority in
principal amount of the Notes.
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Certain covenants
LIMITATION ON INDEBTEDNESS
The Company will not, and will not permit any of its Restricted Subsidiaries to,
Incur any Indebtedness (including Acquired Indebtedness); PROVIDED, HOWEVER,
that the Company and the Subsidiary Guarantors may Incur Indebtedness if on the
date thereof:
(1) the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries is at least 2.00 to 1.00; and
(2) no Default or Event of Default will have occurred or be continuing or
would occur as a consequence of Incurring the Indebtedness.
The first paragraph of this covenant will not prohibit the Incurrence of the
following Indebtedness:
(1) Indebtedness of the Company or the Subsidiary Guarantors Incurred
pursuant to the Senior Credit Agreement in an aggregate amount up to
$95.0 million less the aggregate principal amount of permanent commitment
reductions with the proceeds from Asset Dispositions;
(2) the Notes Guarantees and any other Guarantees by the Subsidiary
Guarantors of Indebtedness Incurred in accordance with the provisions of
the Indenture; PROVIDED that in the event such Indebtedness that is being
Guaranteed is (a) Senior Subordinated Indebtedness or Guarantor Senior
Subordinated Indebtedness, then the related Guarantee shall rank equally
in right of payment to the Notes Guarantees hereunder or (b) a
Subordinated Obligation or a Guarantor Subordinated Obligation, then the
related Guarantee shall be subordinated in right of payment to the Notes
Guarantee;
(3) Indebtedness of the Company owing to and held by any Restricted
Subsidiary (other than a Receivables Entity) or Indebtedness of a
Restricted Subsidiary owing to and held by the Company or any Restricted
Subsidiary (other than a Receivables Entity); PROVIDED, HOWEVER,
(a) if the Company is the obligor on such Indebtedness, such Indebtedness
is expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Notes;
(b) if a Subsidiary Guarantor is the obligor on such Indebtedness and the
Company is not the obligee, such Indebtedness is subordinated in
right of payment to the Notes Guarantees of such Subsidiary
Guarantor; and
(c) (i) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being
beneficially held by a Person other than the Company or a
Restricted Subsidiary (other than a Receivables Entity) of the
Company; and
(ii) any sale or other transfer of any such Indebtedness to a Person
other than the Company or a Restricted Subsidiary (other than a
Receivables Entity) of the Company
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shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(4) Indebtedness represented by (a) the Notes issued on the Issue Date and
the exchange notes issued in exchange therefor in a registered exchange
offer pursuant to the Registration Rights Agreement, (b) any Indebtedness
(other than the Indebtedness described in clauses (1), (2), (3), (5),
(7), (8), (9) and (10)) outstanding on the Issue Date and (c) any
Refinancing Indebtedness Incurred in respect of any Indebtedness
described in this clause (4) or Incurred pursuant to the first paragraph
of this covenant;
(5) Indebtedness under Currency Agreements and Interest Rate Agreements;
PROVIDED that in the case of Currency Agreements, such Currency
Agreements are related to business transactions of the Company or its
Restricted Subsidiaries entered into in the ordinary course of business
or in the case of Currency Agreements and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements are entered into for
bona fide hedging purposes of the Company or its Restricted Subsidiaries
(as determined in good faith by the Board of Directors or senior
management of the Company) and substantially correspond in terms of
notional amount, duration, currencies and interest rates, as applicable,
to Indebtedness of the Company or its Restricted Subsidiaries Incurred
without violation of the Indenture;
(6) Indebtedness (including Capitalized Lease Obligations and Acquired
Indebtedness) Incurred by the Company or any of the Subsidiary Guarantors
to finance the acquisition, purchase, lease, construction, development,
maintenance, upgrade or improvement, in each case, to the extent such
expenditures are capitalized on the balance sheet of the Company, of
property (real or personal), equipment or other assets (in each case
whether through the direct purchase of assets or the Capital Stock of any
Person owning such assets) so long as such Indebtedness is created within
six months of the acquisition, purchase, lease, construction,
development, maintenance, upgrade or improvement of the related asset;
PROVIDED that the aggregate principal amount of all Indebtedness Incurred
pursuant to this clause (6) and all Refinancing Indebtedness to refund,
refinance or replace any Indebtedness Incurred pursuant to this
clause (6) does not exceed the greater of (A) $10.0 million and (B) 10%
of Tangible Assets in an aggregate principal amount at any one time
outstanding;
(7) Indebtedness Incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company or a Restricted Subsidiary
in the ordinary course of business;
(8) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred or assumed in connection with
the disposition of any business, assets or Capital Stock of a Restricted
Subsidiary in accordance with the terms of the Indenture, other than
Guarantees by the Company or any Restricted Subsidiary of Indebtedness
Incurred by any Person acquiring all or any portion of such business,
assets or a Subsidiary of the Company for the purpose of financing such
acquisition, PROVIDED that the maximum aggregate liability in respect of
all such Indebtedness shall at no time exceed the gross proceeds,
including the fair market value as determined in good faith by a majority
of the Board of Directors of noncash proceeds (the fair market value of
such noncash proceeds being measured at the time it is received and
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without giving effect to any subsequent changes in value) actually
received by the Company and its Restricted Subsidiaries in connection
with such disposition;
(9) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the case
of daylight overdrafts) drawn against insufficient funds in the ordinary
course of business, PROVIDED, HOWEVER, that such Indebtedness is
extinguished within five Business Days of Incurrence;
(10) the Incurrence by a Receivables Entity of Indebtedness in a Qualified
Receivables Transaction that is not recourse to the Company or any
Restricted Subsidiary of the Company (except for Standard Securitization
Undertakings); and
(11) in addition to the items referred to in clauses (1) through
(10) above, Indebtedness of the Company and its Subsidiary Guarantors in
an aggregate outstanding principal amount which, when taken together with
the principal amount of all other Indebtedness Incurred pursuant to this
clause (11) and then outstanding, will not exceed $25.0 million at any
one time outstanding.
The Company will not Incur any Indebtedness under the preceding paragraph if the
proceeds thereof are used, directly or indirectly, to refinance any Subordinated
Obligations of the Company unless such Indebtedness will be subordinated to the
Notes to at least the same extent as such Subordinated Obligations. No Guarantor
will Incur any indebtedness if the proceeds thereof are used, directly or
indirectly, to refinance any Guarantor Subordinated Obligations of such
Guarantor unless such Indebtedness will be subordinated to the obligations of
such Guarantor under its Notes Guarantee to at least the same extent as such
Guarantor Subordinated Obligations. No Restricted Subsidiary that is not a
Subsidiary Guarantor may Incur any Indebtedness if the proceeds are used to
refinance Indebtedness of the Company.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness Incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the first and second paragraphs of
this covenant, the Company, in its sole discretion, will classify such
item of Indebtedness on the date of Incurrence and only be required to
include the amount and type of such Indebtedness in the clause so
selected, except that, following the date of Incurrence, the Company may
later reclassify all or a portion of such item of Indebtedness in any
manner that complies with this covenant; PROVIDED that the Indebtedness
so reclassified is of the nature referred to in the clause into which all
or a portion of such Indebtedness is reclassified;
(2) all Indebtedness outstanding on the date of the Indenture under the
Senior Credit Agreement shall be deemed initially Incurred on the Issue
Date under clause (1) of the second paragraph of this covenant and not
clause (4) of the second paragraph of this covenant;
(3) Guarantees of, or obligations in respect of letters of credit relating
to, Indebtedness which is otherwise included in the determination of a
particular amount of Indebtedness shall not be included;
(4) if obligations in respect of letters of credit are Incurred pursuant to
the Senior Credit Agreement and are being treated as Incurred pursuant to
clause (1) of the second
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paragraph above and the letters of credit relate to other Indebtedness,
then such other Indebtedness shall not be included;
(5) the principal amount of any Disqualified Stock of the Company or a
Restricted Subsidiary or Preferred Stock of a Restricted Subsidiary that
is not a Guarantor will be equal to the greater of the maximum mandatory
redemption or repurchase price (not including, in either case, any
redemption or repurchase premium) or the liquidation preference thereof;
(6) Indebtedness permitted by this covenant need not be permitted solely by
reference to one provision permitting such Indebtedness but may be
permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness; and
(7) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value, the
payment of interest in the form of additional Indebtedness and the payment of
dividends in the form of additional shares of Preferred Stock or Disqualified
Stock will not be deemed to be an Incurrence of Indebtedness for purposes of
this covenant.
In addition, the Company will not permit any of its Unrestricted Subsidiaries to
Incur any Indebtedness or issue any shares of Disqualified Stock, other than
Non-Recourse Debt. If at any time an Unrestricted Subsidiary becomes a
Restricted Subsidiary, any Indebtedness of such Subsidiary shall be deemed to be
Incurred by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be Incurred as of such date under this
"Limitation on indebtedness" covenant, the Company shall be in Default of this
covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; PROVIDED that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S.
dollar-denominated restriction to be exceeded if calculated at the relevant
currency exchange rate in effect on the date of such refinancing, such U.S.
dollar-denominated restriction shall be deemed not to have been exceeded so long
as the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that the
Company may Incur pursuant to this covenant shall not be deemed to be exceeded
solely as a result of fluctuations in the exchange rate of currencies. The
principal amount of any Indebtedness Incurred to refinance other Indebtedness,
if Incurred in a different currency from the Indebtedness being refinanced,
shall be calculated based on the currency exchange rate applicable to the
currencies in which such Refinancing Indebtedness is denominated that is in
effect on the date of such refinancing.
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LIMITATION ON LAYERING
The Company will not Incur any Indebtedness if such Indebtedness is
contractually subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
a Subordinated Obligation. No Guarantor will Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect to
any Guarantor Senior Indebtedness of such Guarantor unless such Indebtedness is
Guarantor Senior Subordinated Indebtedness of such Guarantor or is a Guarantor
Subordinated Obligation.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving the Company or any of its Restricted
Subsidiaries) except:
(a) dividends or distributions payable in Capital Stock of the Company
(other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock; and
(b) dividends or distributions payable to the Company or a Restricted
Subsidiary of the Company or to other holders of Common Stock of a
Restricted Subsidiary on a pro rata basis;
(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of the Company or any direct or indirect parent of the Company held
by Persons other than the Company or a Restricted Subsidiary of the
Company;
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations or Guarantor
Subordinated Obligations (other than the purchase, repurchase,
redemption, defeasance or other acquisition or retirement of Subordinated
Obligations or Guarantor Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the
date of purchase, repurchase, redemption, defeasance or other acquisition
or retirement); or
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Restricted Investment referred to in clauses
(1) through (4) shall be referred to herein as a "Restricted Payment"), if at
the time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom); or
(b) the Company is not able to Incur an additional $1.00 of Indebtedness
pursuant to the first paragraph under the "Limitation on
indebtedness" covenant after giving effect, on a pro forma basis, to
such Restricted Payment; or
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(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date
would exceed the sum of:
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from July 1, 2002, to the end of the most
recent fiscal quarter ending prior to the date of such
Restricted Payment for which financial statements are publicly
available (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit);
(ii) 100% of the aggregate Net Cash Proceeds (other than in respect
of an Excluded Contribution) received by the Company from the
issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue
Date (other than Net Cash Proceeds received from an issuance or
sale of such Capital Stock to a Subsidiary of the Company or an
employee stock ownership plan, option plan or similar trust to
the extent such sale to an employee stock ownership plan,
option plan or similar trust is financed by loans from or
Guaranteed by the Company or any Restricted Subsidiary unless
such loans have been repaid with cash on or prior to the date
of determination);
(iii) 100% of the fair market value (as determined in good faith by
the Board of Directors of the Company) of shares of Qualified
Stock of the Company issued to acquire assets from a third
party;
(iv) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company or its Restricted Subsidiaries
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any
cash, or the fair market value of any other property,
distributed by the Company upon such conversion or exchange);
and
(v) the amount equal to the net reduction in Restricted Investments
made by the Company or any of its Restricted Subsidiaries in any
Person resulting from:
(A) repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such
Restricted Investment (other than to the Company or any of
its Restricted Subsidiaries), repayments of loans or advances
or other transfers of assets (including by way of dividend or
distribution) by such Person to the Company or any Restricted
Subsidiary of the Company; or
(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary,
which amount in each case under this clause (v) was included in
the calculation of the amount of Restricted Payments; PROVIDED,
HOWEVER, that no
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amount will be included under this clause (v) to the extent it is
already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit:
(1) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement of Capital Stock, Disqualified Stock or Subordinated
Obligations of the Company or Guarantor Subordinated Obligations of a
Subsidiary Guarantor made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company or cash
capital contributions to the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary or an employee
stock ownership plan or similar trust to the extent such sale to an
employee stock ownership plan or similar trust is financed by loans from
or Guaranteed by the Company or any Restricted Subsidiary unless such
loans have been repaid with cash on or prior to the date of
determination); PROVIDED, HOWEVER, that (a) such purchase, retirement,
prepayment, defeasance or redemption will be excluded in subsequent
calculations of the amount of Restricted Payments and (b) the Net Cash
Proceeds from such sale or cash capital contributions applied in the
manner set forth in this clause (1) will be excluded from
clause (c)(ii) of the preceding paragraph;
(2) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement of Subordinated Obligations of the Company or Guarantor
Subordinated Obligations of a Subsidiary Guarantor made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
Subordinated Obligations of the Company or Guarantor Subordinated
Obligations of a Subsidiary Guarantor, as the case may be, that is
permitted to be Incurred pursuant to the covenant described under
"Limitation on indebtedness" and that, in each case, constitutes
Refinancing Indebtedness; PROVIDED, HOWEVER, that such purchase,
retirement, prepayment, defeasance or redemption will be excluded in
subsequent calculations of the amount of Restricted Payments;
(3) any purchase, repurchase, redemption, defeasance or other acquisition or
retirement of Disqualified Stock of the Company or a Restricted
Subsidiary made by exchange for or out of the proceeds of the
substantially concurrent sale of Disqualified Stock of the Company or
such Restricted Subsidiary, as the case may be, that, in each case,
constitutes Refinancing Indebtedness; PROVIDED, HOWEVER, that such
purchase, retirement, prepayment, defeasance or redemption will be
excluded in subsequent calculations of the amount of Restricted Payments;
(4) so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations or
Guarantor Subordinated Obligations of a Subsidiary Guarantor from Net
Available Cash to the extent permitted under "--Limitation on sales of
assets and subsidiary stock" below; PROVIDED, HOWEVER, that such purchase
or redemption will be excluded in subsequent calculations of the amount
of Restricted Payments;
(5) dividends paid within 60 days after the date of declaration if at such
date of declaration such dividend would have complied with this
provision; PROVIDED, HOWEVER, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
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(6) Investments that are made with Excluded Contributions; PROVIDED,
HOWEVER, that such Investments will be excluded in subsequent
calculations of the amount of Restricted Payments;
(7) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, redemption or other acquisition, cancellation or
retirement for value from any existing or former employees, officers,
directors or consultants of the Company or Holdings or any Subsidiary
of the Company or their assigns, estates or heirs of Capital Stock,
Subordinated Obligations or options, warrants, equity appreciation
rights or other rights to purchase or acquire Capital Stock of the
Company or any Restricted Subsidiary of the Company or any parent of
the Company; PROVIDED that the amount of such redemptions,
repurchases, acquisitions, cancellations or retirements pursuant to
this clause shall not exceed in any calendar year $5.0 million (with
unused amounts in any calendar year being carried over to succeeding
calendar years subject to a maximum of $10.0 million) (which amount
in any calendar year shall be increased by the amount of any Net Cash
Proceeds to the Company from (i) sales of Capital Stock of the
Company to officers, directors, other employees or Permitted Holders
subsequent to the Issue Date to the extent such amounts are not
included under clause (c)(ii) of the preceding paragraph and
(ii) any "key-man" life insurance policies which are used to make
such repurchases); PROVIDED, FURTHER, that the cancellation of
Indebtedness owing to the Company from such former officers,
directors, consultants or employees of Holdings or the Company or any
of its Restricted Subsidiaries in connection with a repurchase of
Capital Stock of the Company will not be deemed to constitute a
Restricted Payment under the Indenture; PROVIDED, HOWEVER, that the
amount of any such purchase, redemption or other acquisition,
cancellation or retirement for value will be included in subsequent
calculations of the amount of Restricted Payments; and
(b) loans or advances to officers, directors or other employees of the
Company or Holdings or any Subsidiary of the Company the proceeds of
which are used to purchase Capital Stock of the Company or Holdings
(x) from Persons other than the Company or Holdings in an aggregate
amount not to exceed $1.0 million at any one time outstanding and
(y) from the Company or Holdings so long as the Net Cash Proceeds of
any such purchase, either to the extent directly received by the
Company or contributed to the capital of the Company by Holdings, are
not included under clause (c)(ii) of the preceding paragraph;
PROVIDED, HOWEVER, that the amount of such loans and advances under
clause (x) will be included in subsequent calculations of the amount
of Restricted Payments and the amount of such loans and advances
under clause (y) will be excluded in subsequent calculations of the
amount of Restricted Payments;
(8) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of the Company issued in accordance
with the terms of the Indenture to the extent such dividends are included
in the definition of "Consolidated Interest Expense"; PROVIDED, HOWEVER,
that such payment of such dividends will be excluded in subsequent
calculations of the amount of Restricted Payments;
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(9) repurchases of Capital Stock deemed to occur upon the exercise of stock
options, warrants or other convertible securities if such Capital Stock
represents a portion of the exercise price thereof; PROVIDED, HOWEVER,
that such repurchases will be excluded from subsequent calculations of
the amount of Restricted Payments;
(10) cash dividends or loans to Holdings in amounts equal to:
(a) the amounts required for Holdings to pay any Federal, state or local
taxes to the extent that such taxes are directly attributable to the
income, gain, capital or assets of the Company and its Restricted
Subsidiaries;
(b) the amounts required for Holdings to pay franchise taxes and other
fees required to maintain its legal existence and all costs and
expenses (including, without limitation, legal and accounting
expenses and filing fees) Incurred by Holdings with respect to
filings with the SEC;
(c) an amount not to exceed $2.0 million in any fiscal year to permit
Holdings to pay its corporate overhead and other operating expenses
incurred in the ordinary course of business, and to pay salaries or
other compensation of employees who perform services for both
Holdings and the Company;
PROVIDED that such dividends or loans will be excluded from
subsequent calculations of the amount of Restricted Payments;
(11) any payments made in connection with the Transactions pursuant to the
Recapitalization Agreement and any other agreements or documents related
to the Transactions and set forth on a schedule to the Indenture in
effect on the closing date of the Transactions (without giving effect to
subsequent amendments, waivers or other modifications to such agreements
or documents) or as otherwise described in this prospectus, including
payments made by the Company to Holdings to allow Holdings to satisfy its
obligations (including indemnification, purchase price adjustments and
transaction fees and expenses) under such agreements or documents as such
agreements or documents are in effect on the Issue Date; PROVIDED,
HOWEVER, that such amounts will be excluded in the calculation of the
amount of Restricted Payments;
(12) the payment of dividends on the Company's Common Stock (or dividends,
distributions or advances to Holdings to allow Holdings to pay dividends
on Holdings' Common Stock), following the first public offering of the
Company's Common Stock (or of Holdings' Common Stock, as the case may be)
after the Issue Date, of, whichever is earlier, (i) in the case of the
first public offering of the Company's Common Stock, up to 6% per annum
of the Net Cash Proceeds received by the Company in such public offering
or (ii) in the case of the first public offering of Holdings' Common
Stock, up to 6% per annum of the amount contributed by Holdings to the
Company from the Net Cash Proceeds received by Holdings in such public
offering, in each case, other than public offerings of the Company or
Holdings' Common Stock registered on Form S-4 or S-8; PROVIDED, HOWEVER,
that such payments will be included in subsequent calculations of the
amount of Restricted Payments;
(13) the repurchase, redemption or other acquisition or retirement for value
of Subordinated Obligations of the Company pursuant to a "change of
control" covenant set forth in the indenture or other agreement pursuant
to which the same is issued, PROVIDED that (i) such "change of control"
covenant is substantially identical in all
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material respects to the comparable provisions included in the Indenture;
(ii) such repurchase, redemption or other acquisition or retirement for
value shall only be permitted if all the terms and conditions in such
provisions have been complied with and such repurchases, redemptions or
other acquisitions or retirements for value are made in accordance with
such indenture or other agreement pursuant to which the same is issued;
(iii) that the Company has repurchased all Notes required to be
repurchased by the Company pursuant to the terms and conditions described
under the caption "Change of control" prior to the repurchase, redemption
or other acquisition or retirement for value of such Subordinated
Obligations pursuant to the "change of control" covenant included in such
indenture or other agreement; and (iv) that such repurchase, redemption
or other acquisition shall be excluded in subsequent calculations of the
amount of Restricted Payments;
(14) the payment of dividends, distributions or advances to Holdings to
allow Holdings to redeem, repurchase, retire or otherwise acquire or
retire for value Series A Preferred Stock and Series B Preferred Stock of
Holdings in existence on the Issue Date as contemplated in accordance
with the terms thereof upon the occurrence of a Qualified Public Offering
to the extent the proceeds of such Qualified Public Offering are received
by the Company; and
(15) other Restricted Payments not to exceed $5.0 million at any one time
outstanding PROVIDED, HOWEVER, that such amounts will be included in
subsequent calculations of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair market
value on the date of such Restricted Payment of the asset(s) or securities
proposed to be paid, transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair
market value of any cash Restricted Payment shall be its face amount and any
non-cash Restricted Payment shall be determined conclusively by the Board of
Directors of the Company acting in good faith whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value is estimated in good faith
by the Board of Directors of the Company to exceed $25.0 million. Not later than
the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted payments" were computed, together with a copy of any
opinion or appraisal required by the Indenture.
LIMITATION ON LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, Incur or suffer to exist any Lien (other than
Permitted Liens) upon any of its property or assets (including Capital Stock of
Restricted Subsidiaries of the Company), whether owned on the date of the
Indenture or acquired after that date, which Lien is securing any Senior
Subordinated Indebtedness, Subordinated Obligations, Guarantor Senior
Subordinated Indebtedness or Guarantor Subordinated Obligations, unless
contemporaneously with the Incurrence of the Liens effective provision is made
to secure the Indebtedness due under the Indenture and the Notes or, in respect
of Liens on any Restricted Subsidiary's property or assets,
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any Notes Guarantee of such Restricted Subsidiary, equally and ratably with (or
prior to in the case of Liens with respect to Subordinated Obligations or
Guarantor Subordinated Obligations, as the case may be) the Indebtedness secured
by such Lien for so long as such Indebtedness is so secured.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
other Restricted Subsidiary (it being understood that the priority of any
preferred stock in receiving dividends or liquidating distributions prior
to dividends or liquidating distributions being paid on Common Stock
shall not be deemed a restriction on the ability to make distributions on
Capital Stock);
(2) make any loans or advances to the Company or any other Restricted
Subsidiary (it being understood that the subordination of loans or
advances made to the Company or any Restricted Subsidiary to other
Indebtedness Incurred by the Company or any Restricted Subsidiary shall
not be deemed a restriction on the ability to make loans or advances); or
(3) transfer any of its property or assets to the Company or any Restricted
Subsidiary.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Issue Date and identified in an annex to
the Indenture, including, without limitation, the Indenture, the
Notes, the Notes Guarantees and the Senior Credit Agreement in
effect on such date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Capital Stock
or Indebtedness Incurred by a Restricted Subsidiary on or before
the date on which such Restricted Subsidiary was acquired by the
Company (other than Capital Stock or Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or in
contemplation of the transaction) and outstanding on such date;
(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding,
replacement or refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this paragraph or
this clause (iii) or contained in any amendment to an agreement
referred to in clause (i) or (ii) of this paragraph or this
clause (iii); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained
in any such agreement or amendment, taken as a whole, are no less
favorable in any material respect to the holders of the Notes than
the encumbrances and restrictions contained in such agreements
referred to in clauses (i) or (ii) of this
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paragraph on the Issue Date or the date such Restricted Subsidiary
became a Restricted Subsidiary, whichever is applicable;
(iv) in the case of clause (3) of the first paragraph of this covenant,
any encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease,
license or similar contract, or the assignment or transfer of any
such lease, license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of the
Company or a Restricted Subsidiary to the extent such
encumbrances or restrictions restrict the transfer of the
property subject to such mortgages, pledges or other security
agreements; or
(c) pursuant to customary provisions restricting dispositions of real
property interests set forth in any reciprocal easement
agreements of the Company or any Restricted Subsidiary;
(v) (a) purchase money obligations for property acquired in the ordinary
course of business and (b) Capitalized Lease Obligations permitted
under the Indenture, in each case, that impose encumbrances or
restrictions of the nature described in clause (3) of the first
paragraph of this covenant on the property so acquired;
(vi) any Purchase Money Note or other Indebtedness or contractual
requirements Incurred with respect to a Qualified Receivables
Transaction relating exclusively to a Receivables Entity that, in
the good faith determination of the Board of Directors, are
necessary to effect such Qualified Receivables Transaction;
(vii) any restriction with respect to a Restricted Subsidiary (or any of
its property or assets) imposed pursuant to an agreement entered
into for the direct or indirect sale or disposition of the Capital
Stock or assets of such Restricted Subsidiary (or the property or
assets that are subject to such restriction) pending the closing of
such sale or disposition;
(viii) customary provisions in joint venture agreements and other similar
agreements entered into in the ordinary course of business;
(ix) net worth provisions in leases and other agreements entered into by
the Company or any Restricted Subsidiary in the ordinary course of
business; and
(x) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
The Company will not, and will not permit any of its Restricted Subsidiaries to,
make any Asset Disposition UNLESS:
(1) the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of contractually agreeing to such Asset
Disposition at least equal to the fair market value, as determined in
good faith by the Board of Directors (including as
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to the value of all non-cash consideration), of the shares and assets
subject to such Asset Disposition;
(2) at least 75% of the consideration from such Asset Disposition received
by the Company or such Restricted Subsidiary, as the case may be, is in
the form of cash or Cash Equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or such Restricted Subsidiary, as
the case may be:
(a) FIRST, to the extent the Company or any Restricted Subsidiary, as the
case may be, elects (or is required by the terms of any Senior
Indebtedness), to prepay, repay or purchase Senior Indebtedness or
Indebtedness (other than any Disqualified Stock or Guarantor
Subordinated Obligation) of a Restricted Subsidiary that is a
Subsidiary Guarantor (in each case other than Indebtedness owed to
the Company or an Affiliate of the Company) within 365 days from the
later of the date of such Asset Disposition or the receipt of such
Net Available Cash; PROVIDED, HOWEVER, that, in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to this
clause (a), the Company or such Restricted Subsidiary will retire
such Indebtedness and will cause the related commitment (if any) to
be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased; and
(b) SECOND, to the extent of the balance of such Net Available Cash after
application in accordance with clause (a), to the extent the Company
or such Restricted Subsidiary elects, to invest in Additional Assets
within 365 days from the later of the date of such Asset Disposition
or the receipt of such Net Available Cash; PROVIDED that pending the
final application of any such Net Available Cash in accordance with
this clause (b) or clause (a) above, the Company and its Restricted
Subsidiaries may temporarily reduce Indebtedness or otherwise invest
such Net Available Cash in any manner not prohibited by the
Indenture.
Any Net Available Cash from Asset Dispositions that are not applied or invested
as provided in the preceding paragraph will be deemed to constitute "Excess
Proceeds." On the 366th day after an Asset Disposition, if the aggregate amount
of Excess Proceeds exceeds $20.0 million, the Company will be required to make
an offer ("Asset Disposition Offer") to all holders of Notes and to the extent
required by the terms of other Senior Subordinated Indebtedness, to all holders
of other Senior Subordinated Indebtedness outstanding with similar provisions
requiring the Company to make an offer to purchase such Senior Subordinated
Indebtedness with the proceeds from any Asset Disposition ("Pari Passu Notes"),
to purchase, on a ratable basis, the maximum principal amount of Notes and any
such Pari Passu Notes to which the Asset Disposition Offer applies that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount of the Notes and Pari Passu Notes plus
accrued and unpaid interest to the date of purchase, in accordance with the
procedures set forth in the Indenture or the agreements governing the Pari Passu
Notes, as applicable, in each case in integral multiples of $1,000. To the
extent that the aggregate amount of Notes and Pari Passu Notes so validly
tendered and not properly withdrawn pursuant to an Asset Disposition Offer is
less than the Excess Proceeds, the Company may use any remaining Excess Proceeds
for general corporate purposes, subject to the other covenants contained in the
Indenture. If the aggregate principal amount of Notes surrendered by holders
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thereof and other Pari Passu Notes surrendered by holders or lenders,
collectively, exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes and Pari Passu Notes to be purchased on a pro rata basis on the basis
of the aggregate principal amount of tendered Notes and Pari Passu Notes. Upon
completion of such Asset Disposition Offer, the amount of Excess Proceeds shall
be reset at zero.
The Asset Disposition Offer will remain open for a period of 20 Business Days
following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later than
five Business Days after the termination of the Asset Disposition Offer Period
(the "Asset Disposition Purchase Date"), the Company will purchase the principal
amount of Notes and Pari Passu Notes required to be purchased pursuant to this
covenant (the "Asset Disposition Offer Amount") or, if less than the Asset
Disposition Offer Amount has been so validly tendered, all Notes and Pari Passu
Notes validly tendered in response to the Asset Disposition Offer.
If the Asset Disposition Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders of the Notes who tender Notes pursuant to the Asset
Disposition Offer.
On or before the Asset Disposition Purchase Date, the Company will, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Disposition Offer Amount of Notes and Pari Passu Notes or portions of
Notes and Pari Passu Notes so validly tendered and not properly withdrawn
pursuant to the Asset Disposition Offer, or if less than the Asset Disposition
Offer Amount has been validly tendered and not properly withdrawn, all Notes and
Pari Passu Notes so validly tendered and not properly withdrawn, in each case in
integral multiples of $1,000. The Company will deliver to the Trustee an
Officers' Certificate stating that such Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this covenant and, in
addition, the Company will deliver all certificates and notes required, if any,
by the agreements governing the Pari Passu Notes. The Company or the Paying
Agent, as the case may be, will promptly (but in any case not later than five
Business Days after termination of the Asset Disposition Offer Period) mail or
deliver to each tendering holder of Notes or holder or lender of Pari Passu
Notes, as the case may be, an amount equal to the purchase price of the Notes or
Pari Passu Notes so validly tendered and not properly withdrawn by such holder
or lender, as the case may be, and accepted by the Company for purchase, and the
Company will promptly issue a new Note, and the Trustee, upon delivery of an
Officers' Certificate from the Company will authenticate and mail or deliver
such new Note to such holder, in a principal amount equal to any unpurchased
portion of the Note surrendered; PROVIDED that each such new Note will be in a
principal amount of $1,000 or an integral multiple of $1,000. In addition, the
Company will take any and all other actions required by the agreements governing
the Pari Passu Notes. Any Note not so accepted will be promptly mailed or
delivered by the Company to the holder thereof. The Company will publicly
announce the results of the Asset Disposition Offer on or prior to the Asset
Disposition Purchase Date.
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For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness (other than Senior
Subordinated Indebtedness, Subordinated Obligations or Disqualified
Stock) of the Company or Indebtedness (other than Guarantor Senior
Subordinated Indebtedness, Guarantor Subordinated Obligations or
Preferred Stock) of any Restricted Subsidiary of the Company and the
release of the Company or such Restricted Subsidiary from all liability
on such Indebtedness in connection with such Asset Disposition (in which
case the Company will, without further action, be deemed to have applied
such deemed cash to Indebtedness in accordance with clause (a) above);
(2) properties and assets to be owned by the Company or any Restricted
Subsidiary and used in a business that is a Related Business engaged in
business activities of the kind performed by the Company on the Issue
Date (a "Similar Business") or Capital Stock in one or more Persons
engaged in a Similar Business that are or thereby become Restricted
Subsidiaries of the Company (in which case the Company will, without
further action, be deemed to have applied such deemed cash to an
investment in Additional Assets in accordance with clause (b) above); and
(3) securities, notes or other obligations received by the Company or any
Restricted Subsidiary of the Company from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into
cash.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the Indenture. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Indenture by virtue of any conflict. The provisions under
the Indenture relative to the Company's obligation to make an offer to
repurchase the Notes as a result of an Asset Disposition may be waived or
modified with the written consent of the Holders of a majority in principal
amount of the Notes.
LIMITATION ON AFFILIATE TRANSACTIONS
The Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or conduct any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") UNLESS:
(1) the terms of such Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained in a comparable transaction at the time of such
transaction in arm's-length dealings with a Person who is not such an
Affiliate;
(2) in the event such Affiliate Transaction involves aggregate consideration
in excess of $5.0 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the
Company and by a majority of the members of such Board having no personal
stake in such transaction, if any (and such majority
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or majorities, as the case may be, determines that such Affiliate
Transaction satisfies the criteria in clause (1) above); and
(3) in the event such Affiliate Transaction involves aggregate consideration
in excess of $10.0 million, the Company has received a written opinion
from an independent investment banking, accounting or appraisal firm of
nationally recognized standing that such Affiliate Transaction is not
materially less favorable than those that could reasonably have been
obtained in a comparable transaction at such time on an arm's length
basis from a Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) any Restricted Payment (other than a Restricted Investment) permitted to
be made pursuant to the covenant described under "--Limitation on
restricted payments";
(2) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
agreements and arrangements, options to purchase Capital Stock of the
Company and equity ownership, restricted stock plans, long-term incentive
plans, stock appreciation rights plans, participation plans or similar
employee benefits plans approved by the Board of Directors;
(3) the grant of options (and the exercise thereof) to purchase Capital
Stock of the Company or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors;
(4) loans or advances to employees, officers or directors in the ordinary
course of business of the Company or any of its Restricted Subsidiaries
but in any event not to exceed $5.0 million in the aggregate outstanding
at any one time with respect to all loans or advances made since the
Issue Date;
(5) any transaction between the Company and a Restricted Subsidiary (other
than a Receivables Entity) or between Restricted Subsidiaries (other than
a Receivables Entity or Receivables Entities) and Guarantees issued by
the Company or a Restricted Subsidiary for the benefit of the Company or
a Restricted Subsidiary, as the case may be, in accordance with "Certain
covenants--Limitations on indebtedness";
(6) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, officers, directors or employees of the Company or
any Restricted Subsidiary of the Company or the payment of any director's
and officer's insurance premiums;
(7) the performance of obligations of the Company or any of its Restricted
Subsidiaries under the terms of any agreement to which the Company or any
of its Restricted Subsidiaries is a party as of or on the Issue Date
(including the Recapitalization Agreement, the Senior Credit Agreement,
the Stockholders' Agreement and the registration rights agreement to be
entered into on the Issue Date among Holdings and the stockholders of
Holdings parties thereto, but excluding the leases and rental agreements
referred to in clause (11)), in each case, as these agreements may be
amended, modified, supplemented, extended or renewed from time to time;
PROVIDED, HOWEVER, that any future amendment, modification, supplement,
extension or renewal entered into after the Issue Date will be permitted
to the extent that its terms are not more disadvantageous to the holders
of the Notes than the terms of the agreements in effect on the Issue
Date;
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(8) sales or other transfers or dispositions of accounts receivable and
other related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Entity in a
Qualified Receivables Transaction, and acquisitions of Permitted
Investments in connection with a Qualified Receivables Transaction;
(9) transactions with suppliers or other purchasers for the sale or purchase
of goods in the ordinary course of business and otherwise in accordance
with the terms of the Indenture which are fair to the Company and its
Restricted Subsidiaries, in the good faith determination of the Board of
Directors of the Company or the senior management of the Company and are
on terms at least as favorable as might reasonably have been obtained
from an unaffiliated party;
(10) the issuance of Capital Stock (other than Disqualified Stock) of the
Company to any Permitted Holder or any Related Person;
(11) the performance by the Company and its Restricted Subsidiaries of their
obligations under leases and rental agreements with Image Properties, LLC
(a) which leases and rental agreements are in existence on the Issue Date
and any extensions, renewals or replacements thereof which are entered
into from time to time after the Issue Date so long as such extensions,
renewals or replacements are approved by a majority of the disinterested
members of the Board of Directors of the Company and determined to be no
less favorable to the Company or such Restricted Subsidiary than those
that could be obtained in a comparable transaction at the time of such
extension, renewal or replacement in arm's-length dealings with a Person
who is not an Affiliate and (b) which leases and rental agreements are
entered into after the Issue Date, and any extensions, renewals or
replacements thereof, so long as (i) such transactions are approved by a
majority of the disinterested members of the Board of Directors of the
Company, (ii) such transactions are determined to be no less favorable to
the Company or such Restricted Subsidiary than those that could be
obtained in a comparable transaction at the time of such lease or rental
agreement in arm's-length dealings with a Person who is not an Affiliate
and (iii) the rental expense to be paid in the aggregate under all such
leases and rental agreements entered into following the Issue Date shall
not exceed $2.5 million per year; and
(12) the provision by Persons who may be deemed Affiliates or stockholders
of the Company (other than J.P. Morgan Partners, LLC and Persons directly
or indirectly controlled by J.P. Morgan Partners, LLC) of investment
banking, commercial banking, trust, lending or financing, investment,
underwriting, placement agent, financial advisory or similar services to
the Company or its Subsidiaries performed after the Issue Date.
LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any Voting
Stock of any Restricted Subsidiary or to issue any of the Voting Stock of a
Restricted Subsidiary (other than, if necessary, shares of its Voting Stock
constituting directors' qualifying shares or shares of Voting
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Stock required by applicable healthcare laws to be held by Persons other than
the Company) to any Person except:
(1) to the Company or a Wholly Owned Subsidiary (other than a Receivables
Entity); or
(2) in compliance with the covenant described under "--Limitation on sales
of assets and subsidiary stock" and immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would either
(a) continue to be a Restricted Subsidiary or (b) if such Restricted
Subsidiary would no longer be a Restricted Subsidiary, any Investment in
such Person remaining after giving effect to such issuance or sale would
have been permitted to be made under the "Limitation on restricted
payments" covenant if made on the date of such issuance or sale.
Notwithstanding the preceding paragraph, the Company may sell all the Voting
Stock of a Restricted Subsidiary as long as the Company complies with the terms
of the covenant described under "--Limitation on sales of assets and subsidiary
stock."
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent permitted
by the Exchange Act, the Company will file with the SEC, and make available to
the Trustee and the registered holders of the Notes, the annual reports and the
information, documents and other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) that are
specified in Sections 13 and 15(d) of the Exchange Act within the time periods
specified therein. In the event that the Company is not permitted to file such
reports, documents and information with the SEC pursuant to the Exchange Act,
the Company will nevertheless make available such Exchange Act information to
the Trustee and the holders of the Notes as if the Company were subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act within the
time periods specified therein.
If the Unrestricted Subsidiaries of the Company, either individually or in the
aggregate, would constitute a Significant Subsidiary (if such Subsidiaries were
Restricted Subsidiaries), then the quarterly and annual reports referred to in
the preceding paragraph shall include a Management's Discussion and Analysis of
Results of Operations and Financial Condition that describes, for the relevant
period, the financial performance of the Company and its Restricted
Subsidiaries.
Notwithstanding the foregoing, so long as Holdings is a Guarantor, the reports,
documents and information required to be filed and provided as described above
may be those of Holdings, rather than the Company, so long as such filings would
satisfy the requirements of the Exchange Act and regulations promulgated
thereunder.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets to, any Person, UNLESS:
(1) the resulting, surviving or transferee Person (the "Successor Company")
will be a corporation, partnership, trust or limited liability company
organized and existing
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under the laws of the United States of America, any State of the United
States or the District of Columbia and the Successor Company (if not the
Company) will expressly assume, by supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the
time of such transaction), no Default or Event of Default shall have
occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to the first paragraph of the "Limitation on
indebtedness" covenant;
(4) each Guarantor (unless it is the other party to the transactions above,
in which case clause (1) shall apply) shall have by supplemental
indenture confirmed that its Notes Guarantee shall apply to such Person's
obligations in respect of the Indenture and the Notes and its obligations
under the Registration Rights Agreement shall continue to be in effect;
and
(5) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger
or transfer and such supplemental indenture (if any) comply with the
Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture, but, in the case of a
lease of all or substantially all its assets, the predecessor Company will not
be released from the obligation to pay the principal of and interest on the
Notes.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into any Person (other than another Subsidiary Guarantor) unless
either
(A) (i) the resulting, surviving or transferee Person will be a corporation,
partnership, trust or limited liability company organized and existing
under the laws of the United States of America, any State of the United
States or the District of Columbia and such Person (if not such
Subsidiary Guarantor) will expressly assume, by supplemental indenture,
executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the
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obligations of such Subsidiary Guarantor under its Notes Guarantee;
(ii) immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the resulting, surviving
or transferee Person or any Restricted Subsidiary as a result of such
transaction as having been Incurred by such Person or such Restricted
Subsidiary at the time of such transaction), no Default or Event of
Default shall have occurred and be continuing; and (iii) the Company will
have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture; or
(B) such transaction results in the Company receiving cash or other property
(other than Capital Stock representing a controlling interest in the
successor entity), and the transaction is made in compliance with the
covenant described under "--Limitation on sales of assets and subsidiary
stock".
In addition, the Company will not permit Holdings to consolidate with or merge
with or into any Person (other than the Company or another Guarantor) unless the
resulting, surviving or transferee Person will be a corporation, partnership,
trust or limited liability company organized and existing under the laws of the
United States of America, any State of the United States or the District of
Columbia and such Person (if not Holdings) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of Holdings under its Notes
Guarantee.
Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary of the
Company (other than a Receivables Entity) may consolidate with, merge into or
transfer all or part of its properties and assets to the Company or a Subsidiary
that is a Guarantor and (y) the Company may merge with an Affiliate incorporated
solely for the purpose of reincorporating the Company in another jurisdiction to
realize tax benefits; PROVIDED that, in the case of a Restricted Subsidiary that
merges into the Company, the Company will not be required to comply with the
preceding clause (5).
FUTURE SUBSIDIARY GUARANTORS
After the Issue Date, the Company will cause each Domestic Restricted Subsidiary
(other than a Receivables Entity) created or acquired by the Company or one or
more of its Domestic Restricted Subsidiaries to execute and deliver to the
Trustee a supplemental indenture in the form set forth in the Indenture pursuant
to which such Domestic Restricted Subsidiary will unconditionally Guarantee, on
a joint and several basis, the full and prompt payment of the principal of,
premium, if any, and interest on the Notes on a senior subordinated basis.
LIMITATION ON LINES OF BUSINESS
The Company will not, and will not permit any Restricted Subsidiary to, engage
in any business other than a Related Business.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Restricted Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any
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holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or amendment.
Events of default
Each of the following is an Event of Default:
(1) default in any payment of interest or additional interest (as required
by the Registration Rights Agreement) on any Note when due, continued for
30 days, whether or not such payment is prohibited by the provisions
described under "Ranking and subordination";
(2) default in the payment of principal of or premium, if any, on any Note
when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise, whether or not such payment is
prohibited by the provisions described under "Ranking and subordination";
(3) failure by the Company or any Guarantor to comply with its obligations
under "Certain covenants--Merger and consolidation";
(4) failure by the Company to comply for 30 days after notice with any of
its obligations under the covenants described under "Change of control"
above or under the covenants described under "Certain covenants" above
(in each case, other than a failure to purchase Notes which will
constitute an Event of Default under clause (2) above and other than a
failure to comply with "Certain covenants--Merger and consolidation"
which is covered by clause (3) above);
(5) failure by the Company to comply for 60 days after written notice
(specifying the default and demanding that the same be remedied) with its
other agreements contained in the Notes or the Indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), other than Indebtedness owed to the
Company or a Restricted Subsidiary, whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture,
which default:
(a) is caused by a failure to pay principal of, or interest or premium,
if any, on such Indebtedness after final maturity (after giving
effect to any applicable grace period provided in such Indebtedness)
("payment default"); or
(b) results in the acceleration of such Indebtedness prior to its
maturity (the "cross-acceleration provision");
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a payment default or the maturity of which has been so accelerated,
aggregates $10.0 million or more or its foreign currency equivalent at the
time;
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(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary or group of Restricted Subsidiaries
that, taken together (as of the latest audited consolidated financial
statements for the Company and its Restricted Subsidiaries), would
constitute a Significant Subsidiary (the "bankruptcy provisions");
(8) failure by the Company or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together (as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries), would constitute a Significant Subsidiary to pay final
judgments aggregating in excess of $10.0 million or its foreign currency
equivalent at the time (net of any amounts that a reputable and
creditworthy insurance company has acknowledged liability or coverage for
in writing), which judgments are not paid, discharged or stayed for a
period of 60 days (the "judgment default provision"); or
(9) any Notes Guarantee of Holdings, a Significant Subsidiary, or a group of
Subsidiary Guarantors that, taken together (as of the latest audited
consolidated financial statements for Holdings, the Company and its
Restricted Subsidiaries), would collectively represent a Significant
Subsidiary ceases to be in full force and effect (except as contemplated
by the terms of the Indenture) or is declared null and void in a judicial
proceeding or any Guarantor denies or disaffirms its obligations under
the Indenture or its Notes Guarantee.
However, a default under clauses (4) or (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% or more
in principal amount of the outstanding Notes notify the Company of the default
and the Company does not cure such default within the time specified in clauses
(4) or (5) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause (7)
above) occurs and is continuing, the Trustee by notice to the Company, or the
holders of at least 25% in principal amount of the outstanding Notes by notice
to the Company and the Trustee, may, and the Trustee at the request of such
holders shall, declare the principal of, premium, if any, and accrued and unpaid
interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid interest will be due
and payable immediately. In the event of a declaration of acceleration of the
Notes because an Event of Default described in clause (6) under "Events of
default" has occurred and is continuing, the declaration of acceleration of the
Notes shall be automatically annulled if the event of default or payment default
triggering such Event of Default pursuant to clause (6) shall be remedied or
cured by the Company or a Restricted Subsidiary of the Company or waived by the
holders of the relevant Indebtedness within 20 days after the declaration of
acceleration with respect thereto and if (i) the annulment of the acceleration
of the Notes would not conflict with any judgment or decree of a court of
competent jurisdiction and (ii) all existing Events of Default, except
nonpayment of principal, premium or interest on the Notes that became due solely
because of the acceleration of the Notes, have been cured or waived. If an Event
of Default described in clause (7) above occurs and is continuing, the principal
of, premium, if any, and accrued and unpaid interest on all the Notes will
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders. The holders of a majority in
principal amount of the outstanding Notes may waive all past defaults (except
with respect to nonpayment of principal, premium or interest) and rescind any
such acceleration with respect to the Notes and its consequences if
(i) rescission would not conflict
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with any judgment or decree of a court of competent jurisdiction and (ii) all
existing Events of Default, other than the nonpayment of the principal of,
premium, if any, and interest on the Notes that have become due solely by such
declaration of acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes UNLESS:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Indenture provides
that in the event an Event of Default has occurred and is continuing, the
Trustee will be required in the exercise of its powers to use the degree of care
that a prudent person would use in the conduct of its own affairs. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is known
to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium, if any, or interest on any Note, the Trustee may
withhold notice if and so long as a committee of trust officers of the Trustee
in good faith determines that withholding notice is in the interests of the
holders. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any events which would
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constitute certain Defaults, their status and what action the Company is taking
or proposes to take in respect thereof.
Amendments and waivers
Subject to certain exceptions, the Indenture and the Notes may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding (including without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for, Notes)
and, subject to certain exceptions, any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Notes). However, without the consent of each holder of an outstanding
Note, no amendment may, among other things:
(1) reduce the amount of Notes whose holders must consent to an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest or additional interest on any Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the premium payable upon the redemption or repurchase of any Note
or change the time at which any Note may be redeemed or repurchased as
described above under "Optional redemption," whether through an amendment
or waiver of provisions in the covenants, definitions or otherwise;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's Notes;
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions;
(8) make any change to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Notes; or
(9) modify the Notes Guarantees in any manner adverse to the holders of the
Notes.
Notwithstanding the foregoing, without the consent of any holder, the Company,
the Guarantors and the Trustee may amend the Indenture and the Notes to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Company
under the Indenture;
(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (PROVIDED that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in
Section 163(f) (2) (B) of the Code);
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(4) add Guarantees with respect to the Notes or release a Subsidiary
Guarantor in accordance with the Indenture;
(5) secure the Notes;
(6) add to the covenants of the Company and the Guarantors for the benefit
of the holders or surrender any right or power conferred upon the
Company;
(7) make any change that does not adversely affect the rights of any holder;
(8) comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act;
(9) provide for the issuance of exchange securities which shall have terms
substantially identical in all respects to the Notes (except that the
transfer restrictions contained in the Notes shall be modified or
eliminated as appropriate) and which shall be treated, together with any
outstanding Notes, as a single class of securities; or
(10) make any change in the subordination provisions of the Indenture that
would limit or terminate the benefits available to any holder of Senior
Indebtedness of the Company or a holder of Guarantor Senior Indebtedness
(or any Representative thereof) under such subordination provisions.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
then outstanding unless the holders of such Senior Indebtedness (or any group or
Representative thereof authorized to give a consent) consent to such change.
The consent of the holders is not necessary under the Indenture to approve the
particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. A consent to any amendment or
waiver under the Indenture by any holder of Notes given in connection with a
tender of such holder's Notes will not be rendered invalid by such tender. After
an amendment under the Indenture becomes effective, the Company is required to
mail to the holders a notice briefly describing such amendment. However, the
failure to give such notice to all the holders, or any defect in the notice,
will not impair or affect the validity of the amendment.
Defeasance
The Company at any time may terminate all its obligations under the Notes and
the Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes
and to maintain a registrar and paying agent in respect of the Notes. If the
Company exercises its legal defeasance option, the Notes Guarantees in effect at
such time will terminate.
The Company at any time may terminate its obligations under covenants described
under "Change of control" and "Certain covenants" (other than "Merger and
consolidation"), the operation of the cross-default upon a payment default,
cross-acceleration provisions, the bankruptcy provisions with respect to
Significant Subsidiaries, the judgment default provision and the Notes Guarantee
provision described under "Events of default" above and the limitations
contained in clause (3) under "Certain covenants--Merger and consolidation"
above ("covenant defeasance").
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The Company may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If the Company exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect to the Notes. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default specified in clause (4), (5), (6), (7) (with respect only
to Significant Subsidiaries), (8) or (9) under "Events of default" above or
because of the failure of the Company to comply with clause (3) under "Certain
covenants--Merger and consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred. In the case of legal defeasance only, such Opinion of Counsel must
be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law.
No personal liability of directors, officers, employees and stockholders
No director, officer, employee, incorporator or stockholder of Holdings or the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indenture or the Notes Guarantees or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws and
it is the view of the SEC that such a waiver is against public policy.
Concerning the trustee
Wachovia Bank, National Association, is the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
Governing law
The Indenture provides that it and the Notes will be governed by, and construed
in accordance with, the laws of the State of New York.
Certain definitions
"Acquired Indebtedness" means Indebtedness (i) of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
(ii) assumed in connection with the acquisition of assets from such Person, in
each case whether or not Incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such acquisition. Acquired Indebtedness shall be deemed to
have been Incurred, with respect to clause (i) of the preceding sentence, on the
date such Person
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becomes a Restricted Subsidiary and, with respect to clause (ii) of the
preceding sentence, on the date of consummation of such acquisition of assets.
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to be
used by the Company or a Restricted Subsidiary in a Related Business or
any improvement, maintenance, development, upgrade or repair, in each
case, to the extent such improvement, maintenance, development, upgrade
or repair is capitalized on the balance sheet of the Company, to any
property or assets that are used by the Company or a Restricted
Subsidiary in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary of the Company; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of the Company;
PROVIDED, HOWEVER, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain covenants--Limitation on
transactions with affiliates" and "--Certain covenants--Limitation on sales of
assets and subsidiary stock" only, "Affiliate" shall also mean any beneficial
owner of shares representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Voting Stock (whether or not currently exercisable) and any Person
who would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0% of
the then outstanding principal amount of such Note and (ii) (a) the present
value of all remaining required interest and principal payments due on such Note
and all premium payments relating thereto assuming a redemption date of
August 15, 2007, computed using a discount rate equal to the Treasury Rate plus
50 basis points minus (b) the then outstanding principal amount of such Note
minus (c) accrued interest paid on the redemption date.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease entered into in the ordinary course of business), transfer,
issuance or other disposition, or a series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan, of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares or shares
required by applicable healthcare laws to be held by Persons other than the
Company), property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction.
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Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Restricted Subsidiary of the
Company (other than a Receivables Entity);
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory and supplies in the ordinary course of
business;
(4) a disposition of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries and that is disposed of in each case in the
ordinary course of business;
(5) transactions permitted under "Certain covenants--Merger and
consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary of the Company
to the Company or to a Restricted Subsidiary (other than a Receivables
Entity);
(7) for purposes of "Certain covenants--Limitation on sales of assets and
subsidiary stock" only, the making of a Permitted Investment or a
disposition subject to "Certain covenants--Limitation on restricted
payments";
(8) sales of accounts receivable and related assets or an interest therein
of the type specified in the definition of "Qualified Receivables
Transaction" to a Receivables Entity;
(9) dispositions of assets with an aggregate fair market value, as
determined conclusively by senior management of the Company acting in
good faith, in an amount not to exceed $1.0 million in any calendar year
(with unused amounts in any calendar year being carried over to
succeeding calendar years);
(10) dispositions in connection with Permitted Liens;
(11) the licensing or sublicensing of intellectual property or other general
intangibles and licenses, leases or subleases of other property in the
ordinary course of business which do not materially interfere with the
business of the Company and its Restricted Subsidiaries
(12) dispositions of receivables in connection with the compromise,
settlement or collection thereof in the ordinary course of business or in
bankruptcy or similar proceedings and exclusive of factoring or similar
arrangements;
(13) the disposition of any Capital Stock or other ownership interest in or
assets or property of an Unrestricted Subsidiary; and
(14) foreclosure on assets.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
scheduled redemption or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by (2) the sum of all such payments.
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"Bank Indebtedness" means any and all amounts, whether outstanding on the Issue
Date or Incurred after the Issue Date, payable by the Company under or in
respect of the Senior Credit Agreement and any related notes, collateral
documents, letters of credit and guarantees and any Interest Rate Agreement
entered into in connection with the Senior Credit Agreement, including
principal, premium, if any, interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company at the rate specified therein whether or not a claim for post filing
interest is allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Business Day" means each day that is not a Saturday, Sunday or other day on
which banking institutions in New York, New York are authorized or required by
law to close.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease prior to the first date such lease may be
terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality of the United
States (PROVIDED that the full faith and credit of the United States is
pledged in support thereof), having maturities of not more than one year
from the date of acquisition;
(2) marketable general obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition of the United States (PROVIDED that the full faith and credit
of the United States is pledged in support thereof) and, at the time of
acquisition, having a credit rating of "A" or better from either
Standard & Poor's Ratings Services or Moody's Investors Service, Inc.;
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank the long-term debt of which is rated at the time of
acquisition thereof at least "A" or the equivalent thereof by Standard &
Poor's Ratings Services, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having combined capital and surplus in
excess of $500 million;
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(4) repurchase obligations with a term of not more than six months for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified in
clause (3) above;
(5) commercial paper rated at the time of acquisition thereof at least "A-2"
or the equivalent thereof by Standard & Poor's Ratings Services or "P-2"
or the equivalent thereof by Moody's Investors Service, Inc., or carrying
an equivalent rating by a nationally recognized rating agency, if both of
the two named rating agencies cease publishing ratings of investments,
and in any case maturing within one year after the date of acquisition
thereof; and
(6) interests in any investment company or money market fund which invests
95% or more of its assets in instruments of the type specified in clauses
(1) through (5) above.
"Change of Control" means:
(1) prior to the first public offering of Common Stock of the Company or
Holdings, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of
the Voting Stock of the Company or Holdings, whether as a result of the
issuance of securities of the Company or Holdings, any merger,
consolidation, liquidation or dissolution of the Company or Holdings, any
direct or indirect transfer of securities by any Permitted Holder or
otherwise (for purposes of this clause (1) and clause (2) below, the
Permitted Holders shall be deemed to beneficially own any Voting Stock of
an entity (the "specified entity") held by any other entity (the "parent
entity") so long as the Permitted Holders beneficially own (as so
defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent entity); or
(2) on the date of or after the first public offering of Common Stock
referred to in clause (1), (A) any "person" or "group" of related persons
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
other than one or more Permitted Holders, is or becomes the beneficial
owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that such person or group shall be deemed to have "beneficial ownership"
of all shares that any such person or group has the right to acquire,
whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company or Holdings (or a successor to
either of such entities by merger, consolidation or purchase of all or
substantially all of its assets) (for the purposes of this clause, such
person or group shall be deemed to beneficially own any Voting Stock of
the Company or Holdings held by a parent entity, if such person or group
"beneficially owns" (as defined above), directly or indirectly, more than
35% of the voting power of the Voting Stock of such parent entity); and
(B) the Permitted Holders "beneficially own" (as defined in Rules 13d-3
and 13d-5 of the Exchange Act), directly or indirectly, in the aggregate
a lesser percentage of the total voting power of the Voting Stock of the
Company or Holdings, as the case may be, (or a successor to the relevant
entity by merger, consolidation or purchase of all or substantially all
of its assets) than such other person or group and do not have the right
or ability by voting power, contract or otherwise to elect or designate
for election a majority of the Board of Directors of the Company or
Holdings or such successor (for the purposes of this
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clause, such other person or group shall be deemed to beneficially own
any Voting Stock of a specified entity held by a parent entity, if such
other person or group "beneficially owns" directly or indirectly, more
than 35% of the voting power of the Voting Stock of such parent entity
and the Permitted Holders "beneficially own" directly or indirectly, in
the aggregate a lesser percentage of the voting power of the Voting Stock
of such parent entity and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of such parent entity); or
(3) the first day on which a majority of the members of the Board of
Directors of the Company or Holdings are not Continuing Directors; or
(4) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Holdings or
the Company and its Restricted Subsidiaries taken as a whole to any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) other than a Permitted Holder; or
(5) the adoption by the stockholders of the Company or Holdings of a plan or
proposal for the liquidation or dissolution of the Company or Holdings.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means with respect to any Person, any and all shares, interest or
other participations in, and other equivalents (however designated and whether
voting or nonvoting) of such Person's common stock whether or not outstanding on
the Issue Date, and includes, without limitation, all series and classes of such
common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence to (y) Consolidated Interest Expense for such four
fiscal quarters, PROVIDED, HOWEVER, that:
(1) if the Company or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period that
remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness
under any revolving credit facility outstanding on the date of such
calculation will be deemed to be (i) the average daily balance of
such Indebtedness during such four fiscal quarters or such shorter
period for which such facility was outstanding or (ii) if such
facility was created after the end of such four fiscal quarters, the
average daily balance of such Indebtedness during the period from the
date of creation of such facility to the date of such calculation)
and the discharge of any other Indebtedness repaid, repurchased,
defeased or otherwise discharged with
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the proceeds of such new Indebtedness as if such discharge had
occurred on the first day of such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio
involves a discharge of Indebtedness (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and the related commitment
terminated), Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving effect on a pro forma
basis to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred
on the first day of such period;
(2) if since the beginning of such period the Company or any Restricted
Subsidiary will have disposed of any company, division, diagnostic
imaging center, operating unit, segment, business, group of related
assets or line of business or if the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio is such an Asset
Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an amount
equal to the Consolidated EBITDA (if positive) directly attributable
to the assets which are the subject of such Asset Disposition for
such period or increased by an amount equal to the Consolidated
EBITDA (if negative) directly attributable thereto for such period;
and
(b) Consolidated Interest Expense for such period will be reduced by an
amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the
Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company
and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale);
(3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary or is merged with or into the Company) or an acquisition of
assets, including any acquisition of assets occurring in connection with
a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of any company, division, diagnostic
imaging center, operating unit, segment, business, group of related
assets or line of business, Consolidated EBITDA and Consolidated Interest
Expense for such period will be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or
any Restricted
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Subsidiary since the beginning of such period) will have Incurred any
Indebtedness or discharged any Indebtedness, made any Asset Disposition
or any Investment or acquisition of assets that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or
a Restricted Subsidiary during such period, Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated after
giving pro forma effect thereto as if such Incurrence, discharge, Asset
Disposition or Investment or acquisition of assets occurred on the first
day of such period.
For purposes of this definition, whenever pro forma effect is to be given to any
calculation under this definition, the pro forma calculations will be determined
in good faith by a responsible financial or accounting officer of the Company.
Any such pro forma calculations may include operating expense reductions for
such period resulting from the acquisition which is being given pro forma effect
that (a) would be permitted pursuant to Article 11 of Regulation S-X under the
Securities Act or (b) have been realized or for which the steps necessary for
realization have been taken or are reasonably expected to be taken within six
months following any such acquisition, including, but not limited to, the
execution or termination of any contracts, the termination of any personnel or
the closing (or approval by the Board of Directors of any closing) of any
diagnostic imaging center or facility, as applicable, PROVIDED that such
adjustments are set forth in an Officers' Certificate signed by the Company's
Chief Financial Officer and another Officer which states (i) the amount of such
adjustment or adjustments, (ii) that such adjustment or adjustments are based on
the reasonable good faith beliefs of the Officers executing such Officers'
Certificate at the time of such execution and (iii) that any related Incurrence
of Indebtedness is permitted pursuant to the Indenture. In addition, to the
extent not covered by the foregoing, if the Transactions have occurred in the
four quarter period used to determine the Consolidated Coverage Ratio, then the
Consolidated Coverage Ratio shall be determined giving pro forma effect on the
basis given in the offering memorandum dated August 8, 2002 to the Transactions,
with all calculations relating thereto to be made at the date of determination
by the Company's Chief Financial Officer, and set forth in an Officers'
Certificate signed by the Chief Financial Officer and another Officer of the
Company and meeting the requirements for the Officers' Certificate described in
the preceding sentence. If any Indebtedness bears a floating rate of interest
and is being given pro forma effect, the interest expense on such Indebtedness
will be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months). If any Indebtedness that is being
given pro forma effect bears an interest rate at the option of the Company, the
interest rate shall be calculated by applying such optional rate chosen by the
Company.
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated depreciation expense;
(4) consolidated amortization of goodwill and other intangibles;
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(5) impairment charges recorded in connection with the application of
Financial Accounting Standards No. 142 "Goodwill and Other Intangibles";
(6) other non-cash charges reducing Consolidated Net Income (excluding any
such non-cash charge to the extent it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash
expense that was paid in a prior period not included in the calculation);
(7) charges in an aggregate amount not to exceed $2.1 million for litigation
and other related expenses Incurred in connection with INMED DIAGNOSTIC
SERVICE, L.L.C. V. MEDQUEST ASSOCIATES, INC., SIEMENS MEDICAL
SYSTEMS, INC., PALMETTO IMAGING, INC. AND OPEN MRI OF FLORENCE, INC. as
more fully described under "Business--Legal proceedings," PROVIDED that
this clause (7) shall only be included in the definition of "Consolidated
EBITDA" until December 31, 2002; and
(8) charges in an aggregate amount not to exceed $2.9 million for success
fees to be paid to certain executive officers and other employees of the
Company in connection with the Transactions; PROVIDED that this clause
(8) shall only be included in the definition of "Consolidated EBITDA"
until September 30, 2003.
Notwithstanding the preceding sentence, clauses (2) through (6) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated Net
Income to compute Consolidated EBITDA of such Person only to the extent (and in
the same proportion) that the net income (loss) of such Restricted Subsidiary
was included in calculating the Consolidated Net Income of such Person and, to
the extent the amounts set forth in clauses (2) through (6) are in excess of
those necessary to offset a net loss of such Restricted Subsidiary or if such
Restricted Subsidiary has net income for such period included in Consolidated
Net Income, only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any period,
taxes imposed upon such Person or other payments required to be made by such
Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, without duplication, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, whether paid or accrued, plus, to the extent not included in such
interest expense:
(1) interest expense attributable to Capitalized Lease Obligations,
determined as if such lease were a capitalized lease in accordance with
GAAP and the interest component of any deferred payment obligations;
(2) amortization of debt discount and debt issuance cost (PROVIDED that any
amortization of bond premium will be credited to reduce Consolidated
Interest Expense unless,
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pursuant to GAAP, such amortization of bond premium has otherwise reduced
Consolidated Interest Expense);
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(5) the interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries;
(6) net costs associated with Hedging Obligations (including amortization of
fees), PROVIDED, HOWEVER, that if Hedging Obligations result in net
benefits rather than costs, such benefits shall be credited to reduce
Consolidated Interest Expense unless, pursuant to GAAP, such net benefits
are otherwise reflected in Consolidated Net Income;
(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(8) all dividends paid or declared to be paid in cash, Cash Equivalents or
Indebtedness on any series of Disqualified Stock of the Company or on
Preferred Stock of its Restricted Subsidiaries that are not Subsidiary
Guarantors payable to a party other than the Company or a Wholly Owned
Subsidiary;
(9) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust; PROVIDED, HOWEVER, that
there will be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not
Guaranteed or paid by the Company or any Restricted Subsidiary; and
(10) Receivables Fees.
For purposes of the foregoing, total interest expense will be determined after
giving effect to any net payments made or received by the Company and its
Subsidiaries with respect to Interest Rate Agreements. Notwithstanding anything
to the contrary contained herein, commissions, discounts, yield and other fees
and charges Incurred in connection with any transaction pursuant to which the
Company or any Subsidiary of the Company may sell, convey or otherwise transfer
or grant a security interest in any accounts receivable or related assets shall
be included in Consolidated Interest Expense.
"Consolidated Net Income" means, for any period, the net income (loss) of the
Company and its consolidated Restricted Subsidiaries determined in accordance
with GAAP; PROVIDED, HOWEVER, that there will not be included in such
Consolidated Net Income:
(1) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(a) subject to the limitations contained in clauses (3), (4) and
(5) below, the Company's equity in the net income of any such Person
for such period will be included in such Consolidated Net Income up
to the aggregate amount of cash actually
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distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject,
in the case of a dividend or other distribution to a Restricted
Subsidiary, to the limitations contained in clause (2) below); and
(b) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in
determining such Consolidated Net Income to the extent such loss has
been funded with cash from the Company or a Restricted Subsidiary;
(2) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(a) subject to the limitations contained in clauses (3), (4) and
(5) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period will be included in such
Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend
(subject, in the case of a dividend to another Restricted Subsidiary,
to the limitation contained in this clause); and
(b) the Company's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated Net
Income;
(3) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of in the ordinary
course of business and any gain (loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(4) any extraordinary gain or loss; and
(5) the cumulative effect of a change in accounting principles.
"Continuing Directors" means, as of any date of determination, any member of the
Board of Directors of the Company or Holdings, as the case may be, who (1) was a
member of such Board of Directors on the date of the Indenture; (2) was
nominated for election or elected to such Board of Directors with the approval
of a majority of the Continuing Directors who were members of the relevant Board
at the time of such nomination or election; or (3) was elected to such Board of
Directors in accordance with the terms of the Stockholders' Agreement.
"Currency Agreement" means in respect of a Person any foreign exchange contract,
currency swap agreement or other similar agreement as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or both
would be, an Event of Default.
"Designated Senior Indebtedness" means (1) the Bank Indebtedness (to the extent
such Bank Indebtedness constitutes Senior Indebtedness) and (2) any other Senior
Indebtedness which, at the date of determination, has an aggregate principal
amount outstanding of, or under which,
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at the date of determination, the holders thereof are committed to lend up to,
at least $15.0 million and is specifically designated in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely at
the option of the Company or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder of the Capital Stock thereof,
in whole or in part,
in each case on or prior to the date that is 91 days after the earlier of the
date (a) of the Stated Maturity of the Notes or (b) on which there are no Notes
outstanding, PROVIDED that only the portion of Capital Stock which so matures or
is mandatorily redeemable, is so convertible or exchangeable or is so redeemable
at the option of the holder thereof prior to such date will be deemed to be
Disqualified Stock; PROVIDED, FURTHER, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
change of control or asset sale (each defined in a substantially identical
manner to the corresponding definitions in the Indenture) shall not constitute
Disqualified Stock if the terms of such Capital Stock (and all such securities
into which it is convertible or for which it is ratable or exchangeable) provide
that the Company may not repurchase or redeem any such Capital Stock (and all
such securities into which it is convertible or for which it is ratable or
exchangeable) pursuant to such provision prior to compliance by the Company with
the provisions of the Indenture described under the captions "Change of control"
and "Certain covenants--Limitation on sales of assets and subsidiary stock" and
such repurchase or redemption complies with "Certain covenants--Restricted
payments."
"Domestic Restricted Subsidiary" means a Restricted Subsidiary of the Company
organized and existing under the laws of the United States of America, any state
of the United States of America or the District of Columbia.
"Equity Offering" means any public or private offering for cash by the Company
or Holdings, as the case may be, of its common stock, or options, warrants or
rights with respect to its common stock (other than a registered offering on
Form S-4 or S-8).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Contribution" means Net Cash Proceeds received by the Company from
(a) contributions to its common equity capital and (b) the sale (other than to a
Subsidiary of the Company or to any Company or Subsidiary management equity plan
or stock option plan or any other management or employee benefit plan or
agreement) of Capital Stock (other than Disqualified Stock) of the Company, in
each case designated as Excluded Contributions pursuant to an Officers'
Certificate executed on the date such capital contributions are made or
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the date such Capital Stock is sold, as the case may be, which are excluded from
the calculation set forth in clause (4)(c)(ii) of the first paragraph under
"--Certain covenants--Limitation on restricted payments."
"Existing Management Stockholders" means each of Gene Venesky, J.K. (Ken) Luke,
Thomas C. Gentry, Daniel J. Schaefer and Michael A. Villa.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the Issue Date, including those 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.
All ratios and computations based on GAAP contained in the Indenture will be
computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by
virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means each of Holdings and the Subsidiary Guarantors.
"Guarantor Senior Indebtedness" means, with respect to a Guarantor, the
following obligations, whether outstanding on the date of the Indenture or
thereafter issued, created, Incurred or assumed without duplication:
(1) any Guarantee of the Bank Indebtedness by such Guarantor and all other
Guarantees by such Guarantor of Senior Indebtedness of the Company or
Guarantor Senior Indebtedness of any other Guarantor; and
(2) all obligations consisting of principal of and premium, if any, accrued
and unpaid interest on, and fees and other amounts relating to, all other
Indebtedness of the Guarantor. Guarantor Senior Indebtedness includes
interest accruing on or after the filing of any petition in bankruptcy or
for reorganization relating to the Guarantor regardless of whether
postfiling interest is allowed in such proceeding.
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Notwithstanding anything to the contrary in the preceding paragraph, Guarantor
Senior Indebtedness will not include:
(1) any Indebtedness Incurred in violation of the Indenture, unless such
Indebtedness was Incurred based on an Officers' Certificate (delivered in
good faith after reasonable investigation) to the effect that the
Incurrence of such Indebtedness did not violate the provisions of the
Indenture;
(2) any obligations of such Guarantor to another Subsidiary or the Company;
(3) any liability for Federal, state, local, foreign or other taxes owed or
owing by such Guarantor;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of such Guarantor that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of such Guarantor, including,
without limitation, any Guarantor Senior Subordinated Indebtedness and
Guarantor Subordinated Obligations of such Guarantor; or
(6) any Capital Stock.
"Guarantor Senior Subordinated Indebtedness" means, with respect to a Guarantor,
the obligations of such Guarantor under the Notes Guarantee and any other
Indebtedness of such Guarantor (whether outstanding on the Issue Date or
thereafter Incurred) that specifically provides that such Indebtedness is to
rank equally in right of payment with the obligations of such Guarantor under
the Notes Guarantee and is not expressly subordinated by its terms in right of
payment to any Indebtedness of such Guarantor which is not Guarantor Senior
Indebtedness of such Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Guarantor, any
Indebtedness of such Guarantor (whether outstanding on the Issue Date or
thereafter Incurred) which is expressly subordinate in right of payment to the
obligations of such Guarantor under its Notes Guarantee pursuant to a written
agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holdings" means MQ Associates, Inc., a Delaware corporation, and its
successors.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) will be deemed to be Incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary;
and the terms "Incurred" and "Incurrence" have meanings correlative to the
foregoing.
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"Indebtedness" means, with respect to any Person on any date of determination
(without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of such
Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments;
(3) the principal component of all obligations of such Person in respect of
letters of credit, bankers' acceptances or other similar instruments
(including reimbursement obligations with respect thereto except to the
extent such reimbursement obligation relates to a trade payable and such
obligation is satisfied within 30 days of Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property (except trade payables and
healthcare fees owed to physicians), which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto;
(5) Capitalized Lease Obligations of such Person;
(6) the principal component or liquidation preference of all obligations of
such Person with respect to the redemption, repayment or other repurchase
of any Disqualified Stock or, with respect to any Subsidiary that is not
a Subsidiary Guarantor, any Preferred Stock (but excluding, in each case,
any accrued dividends);
(7) the principal component of all Indebtedness of other Persons secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; PROVIDED, HOWEVER, that the amount of such
Indebtedness will be the lesser of (a) the fair market value of such
asset at such date of determination and (b) the amount of such
Indebtedness of such other Persons;
(8) the principal component of Indebtedness of other Persons to the extent
Guaranteed by such Person;
(9) to the extent not otherwise included in this definition, net obligations
of such Person under Currency Agreements and Interest Rate Agreements
(the amount of any such obligations to be equal at any time to the
termination value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time); and
(10) to the extent not otherwise included, the amount then outstanding
(i.e., advanced, and received by, and available for use by such Person)
under any receivables financing (as set forth in the books and records of
such Person and confirmed by the agent, trustee or other representative
of the institution or group providing such receivables financing).
Notwithstanding the foregoing, "Indebtedness" shall not include unsecured
indebtedness of the Company and its Restricted Subsidiaries Incurred to finance
insurance premiums in a principal amount not in excess of the insurance premiums
to be paid by the Company and its Restricted Subsidiaries for a three-year
period beginning on the date of Incurrence of any such Indebtedness.
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The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness described
in the preceding paragraph that would not appear as a liability on the balance
sheet of such Person if:
(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect to the
payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person; and then such Indebtedness shall be
included in an amount not to exceed:
(a) the lesser of (i) the net assets of the General Partner and (ii) the
amount of such obligations to the extent that there is recourse, by
contract or operation of law, to the property or assets of such
Person or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a) immediately
above, the actual amount of such Indebtedness that is recourse to
such Person or a Restricted Subsidiary of such Person, if the
Indebtedness is evidenced by a writing and is for a determinable
amount and the related interest expense shall be included in
Consolidated Interest Expense to the extent actually paid by the
Company or its Restricted Subsidiaries.
"Intangible Assets" means goodwill, patents, trademarks and other intangibles as
determined in accordance with GAAP.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such Person
in other Persons (including Affiliates) in the form of any direct or indirect
advance, loan (other than advances or extensions of credit to customers in the
ordinary course of business) or other extension of credit (including by way of
Guarantee or similar arrangement, but excluding any debt or extension of credit
represented by a bank deposit other than a time deposit) or capital contribution
to (by means of any transfer of cash or other property to others or any payment
for property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; PROVIDED that
none of the following will be deemed to be an Investment:
(1) Hedging Obligations entered into in the ordinary course of business and
in compliance with the Indenture;
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(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by the
Company or a Subsidiary for consideration to the extent such
consideration consists of common equity securities of the Company.
For purposes of "Certain covenants--Limitation on restricted payments",
(1) "Investment" will include the portion (proportionate to the Company's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary; PROVIDED,
HOWEVER, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company will be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (a) the Company's "Investment" in such Subsidiary at the time of
such redesignation less (b) the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets (as conclusively determined by the Board of Directors of the
Company in good faith) of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary will be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of the
Company. If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Voting Stock of any Restricted Subsidiary of
the Company such that, after giving effect to any such sale or
disposition, such entity is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value (as conclusively
determined in good faith by (a) the senior management of the Company if
the amount thereof is less than $2.0 million and (b) the Board of
Directors of the Company if in excess thereof) of the Capital Stock of
such Subsidiary not sold or disposed of.
"Issue Date" means August 15, 2002.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and net proceeds from
the sale or other disposition of any securities received as consideration, but
only as and when received, but excluding any other consideration received in the
form of assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses Incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP (after
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taking into account any available tax credits or deductions and any tax
sharing agreements), as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain
a necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition and retained by the
Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and other fees and charges
actually Incurred in connection with such issuance or sale and net of taxes paid
or payable as a result of such issuance or sale (after taking into account any
available tax credit or deductions and any tax sharing arrangements).
"Non-Recourse Debt" means Indebtedness of a Person:
(1) as to which neither the Company nor any Restricted Subsidiary
(a) provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) 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 Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and
(3) the explicit terms of which provide there is no recourse against any of
the assets of the Company or its Restricted Subsidiaries (other than
recourse against a pledge of the Capital Stock of such Person to the
extent such Capital Stock constitutes an asset of the Company or any of
its Restricted Subsidiaries).
"Notes Guarantee" means, individually, any Guarantee of payment of the Notes by
Holdings or a Subsidiary Guarantor pursuant to the terms of the Indenture and
any supplemental indenture thereto, and, collectively, all such Guarantees. Each
such Notes Guarantee will be in the form prescribed by the Indenture.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer or the
Secretary of the Company. The term Officer of any Guarantor has a correlative
meaning.
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"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means each of J.P. Morgan Partners, LLC, the Existing
Management Stockholders and each of their respective Affiliates and Related
Persons.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary (other than a Receivables Entity) or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary (other than a Receivables Entity); PROVIDED, HOWEVER, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary
(other than a Receivables Entity); PROVIDED, HOWEVER, that such Person's
primary business is a Related Business;
(3) cash and Cash Equivalents;
(4) receivables owing to the Company or any Restricted Subsidiary created or
acquired, and other extensions of trade credit and other advances to
customers and suppliers, in each case, in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms
(including, without limitation, receivables owing to the Company or any
Restricted Subsidiary by physicians on account of prior advances made by
the Company); PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted
Subsidiary deems reasonable under the circumstances;
(5) pledges, deposits and similar arrangements with respect to leases and
utilities in the ordinary course of business;
(6) payroll, travel and similar advances or loans to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business;
(7) loans or advances to officers, directors, consultants and employees made
(a) in the ordinary course of business of the Company or such Restricted
Subsidiary and not exceeding $3.0 million at any one time outstanding and
(b) to fund purchases of stock under the stock option plan of Holdings to
be adopted following the Issue Date and any similar stock ownership plans
or under employment arrangements;
(8) Capital Stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments or pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(9) Investments made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with
"Certain covenants--Limitation on sales of assets and subsidiary stock";
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(10) Investments in existence on the Issue Date;
(11) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in compliance
with "Certain covenants--Limitation on indebtedness";
(12) Investments by the Company or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (12), in an
aggregate amount at the time of such Investment not to exceed
$10.0 million outstanding at any one time;
(13) Guarantees issued in accordance with "Certain covenants--Limitations on
indebtedness";
(14) Investments by the Company or a Restricted Subsidiary in a Receivables
Entity or any Investment by a Receivables Entity in any other Person, in
each case, in connection with a Qualified Receivables Transaction,
PROVIDED, HOWEVER, that any Investment in any such Person is in the form
of a Purchase Money Note, or any equity interest or interests in accounts
receivable and related assets generated by the Company or a Restricted
Subsidiary and transferred to any Person in connection with a Qualified
Receivables Transaction or any such Person owning such accounts
receivable;
(15) Investments of a Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary of the Company or at the time
such Person merges or consolidates with the Company or any of its
Restricted Subsidiaries, in either case in compliance with the Indenture,
PROVIDED that such Investments were not made by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such merger or consolidation;
(16) Investments in Unrestricted Subsidiaries not to exceed $5.0 million
since the Issue Date, plus (a) the aggregate net after-tax amount
returned since the Issue Date to the Company or any Restricted Subsidiary
in cash on or with respect to any Investments made since the Issue Date
in Unrestricted Subsidiaries whether through interest payments, principal
payments, dividends or other distributions or payments (including such
dividends, distributions or payments made concurrently with such
Investment), (b) the net after-tax cash proceeds received since the Issue
Date by the Company or any Restricted Subsidiary from the disposition of
all or any portion of such Investments (other than to the Company or a
Subsidiary of the Company) and (c) upon redesignation since the Issue
Date of an Unrestricted Subsidiary as a Restricted Subsidiary, the
portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets (as conclusively
determined by the Board of Directors of the Company in good faith) of
such Subsidiary at the time that such Subsidiary is so re-designated a
Restricted Subsidiary; and
(17) Investments by the Company or any of its Restricted Subsidiaries in a
Permitted Joint Venture, together with all other Investments pursuant to
this clause (17) in an aggregate amount at the time of such Investment
not to exceed $2.5 million outstanding at any one time, so long as
(a) such Permitted Joint Venture does not have any Indebtedness for
borrowed money at any time on or after the date of such Investment (other
than Indebtedness owing to the equity holders of such Permitted Joint
Venture, the Company or any Restricted Subsidiary of the Company),
(b) the documentation governing such Permitted Joint Venture does not
contain a restriction
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on distributions to the Company or its Restricted Subsidiaries, (c) such
Permitted Joint Venture is engaged only in a Related Business and
(d) after giving pro forma effect to such Investment, the Company would
be permitted to Incur $1.00 of additional Indebtedness under the first
paragraph of "Certain covenants--Limitation on indebtedness."
"Permitted Joint Venture" means, with respect to any Person, (1) any
corporation, association, or other business entity (other than a partnership) of
which 50% or less of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the
Restricted Subsidiaries of that Person or a combination thereof and (2) any
partnership, joint venture, limited liability company or similar entity of which
50% or less of the capital accounts, distribution rights, total equity and
voting interests or general or limited partnership interests, as applicable, are
owned or controlled, directly or indirectly, by such Person or one or more of
the other Restricted Subsidiaries of that Person or a combination thereof
whether in the form of membership, general, special or limited partnership
interests or otherwise.
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations of the Company under
the Senior Credit Agreement and related Interest Rate Agreements and
other Senior Indebtedness and liens on assets of Restricted Subsidiaries
securing Guarantees of Indebtedness and other obligations of the Company
under the Senior Credit Agreement and other Guarantor Senior Indebtedness
permitted to be Incurred under the Indenture;
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import or customs duties or for the payment of rent,
in each case Incurred in the ordinary course of business;
(3) Liens imposed by law, including carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good faith
by appropriate proceedings if a reserve or other appropriate provisions,
if any, as shall be required by GAAP shall have been made in respect
thereof;
(4) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in good
faith by appropriate proceedings PROVIDED that appropriate reserves
required pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of surety or performance bonds or letters of
credit or bankers' acceptances issued pursuant to the request of and for
the account of such Person in the ordinary course of its business;
PROVIDED, HOWEVER, that such letters of credit do not constitute
Indebtedness;
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(6) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other restrictions as to
the use of real properties or liens incidental to the conduct of the
business of such Person or to the ownership of its properties which do
not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the
business of such Person;
(7) Liens securing Hedging Obligations so long as the related Indebtedness
is, and is permitted to be under the Indenture, secured by a Lien on the
same property securing such Hedging Obligation;
(8) leases, licenses, subleases and sublicenses of assets (including,
without limitation, real property and intellectual property rights) which
do not materially interfere with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment have not been
finally terminated or the period within which such proceedings may be
initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of the
purchase price of, or Capitalized Lease Obligations with respect to,
assets or property acquired or constructed in the ordinary course of
business, PROVIDED that:
(a) the aggregate principal amount of Indebtedness secured by such Liens
is otherwise permitted to be Incurred under the Indenture and does
not exceed the cost of the assets or property so acquired or
constructed; and
(b) such Liens are created within six months of construction or
acquisition of such assets or property and do not encumber any other
assets or property of the Company or any Restricted Subsidiary other
than such assets or property and assets affixed or appurtenant
thereto and such other assets financed by, and a Lien permitted
hereunder granted in favor of, the same financing source;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with
a depositary institution; PROVIDED that:
(a) such deposit account is not a dedicated cash collateral account and
is not subject to restrictions against access by the Company in
excess of those set forth by regulations promulgated by the Federal
Reserve Board; and
(b) such deposit account is not intended by the Company or any Restricted
Subsidiary to provide collateral to the depository institution;
(12) Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Company and its Restricted
Subsidiaries in the ordinary course of business;
(13) Liens existing on the Issue Date;
(14) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; PROVIDED, HOWEVER, that such
Liens are not created, Incurred or
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assumed in connection with, or in contemplation of, such other Person
becoming a Restricted Subsidiary; PROVIDED, FURTHER, HOWEVER, that any
such Lien may not extend to any other property owned by the Company or
any Restricted Subsidiary;
(15) Liens on property at the time the Company or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger or
consolidation with or into the Company or any Restricted Subsidiary;
PROVIDED, HOWEVER, that such Liens are not created, Incurred or assumed
in connection with, or in contemplation of, such acquisition; PROVIDED,
FURTHER, HOWEVER, that such Liens may not extend to any other property
owned by the Company or any Restricted Subsidiary except assets financed
by, and a Lien permitted hereunder granted in favor of, the same
financing source;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly Owned Subsidiary (other than
a Receivable Entity);
(17) Liens securing the Notes and Notes Guarantees;
(18) Liens securing Refinancing Indebtedness Incurred to refinance
Indebtedness (including, without limitation, Acquired Indebtedness) that
was previously so secured, PROVIDED that any such Lien is limited to all
or part of the same property or assets (plus improvements, accessions,
proceeds or dividends or distributions in respect thereof) that secured
(or, under the written arrangements under which the original Lien arose,
could secure) the Indebtedness being refinanced or is in respect of
property that is the security for a Permitted Lien hereunder;
(19) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease; and
(20) Liens on assets transferred to a Receivables Entity or on assets of a
Receivables Entity, in either case Incurred in connection with a
Qualified Receivables Transaction.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Purchase Money Note" means a promissory note of a Receivables Entity evidencing
a line of credit, which may be irrevocable, from the Company or any Restricted
Subsidiary of the Company in connection with a Qualified Receivables Transaction
to a Receivables Entity, which note is repayable from cash available to the
Receivables Entity, other than amounts required to be established as reserves
pursuant to agreements, amounts paid to investors in respect of interest,
principal and other amounts owing to such investors and amounts owing to such
investors and amounts paid in connection with the purchase of newly generated
accounts receivable.
"Qualified Public Offering" means the first firm commitment underwritten public
offering pursuant to an effective registration statement filed on Form S-1 (or
its successor form) under the Securities Act underwritten by a
nationally-recognized underwriter satisfactory to the
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holders of a majority of the shares of Holdings' Common Stock, par value $0.001
per share, and Holdings' Class A Common Stock, par value $0.001 per share,
(voting together as a single class) resulting in aggregate proceeds (net of
underwriting discounts and commissions) to Holdings of not less than
$50.0 million.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted Subsidiaries
may sell, convey or otherwise transfer to (1) a Receivables Entity (in the case
of a transfer by the Company or any of its Restricted Subsidiaries) and (2) any
other Person (in the case of a transfer by a Receivables Entity), or may grant a
security interest in, any accounts receivable (whether now existing or arising
in the future) of the Company or any of its Restricted Subsidiaries, and any
assets related thereto including, without limitation, all collateral securing
such accounts receivable, all contracts and all guarantees or other obligations
in respect of such accounts receivable, the proceeds of such receivables and
other assets which are customarily transferred, or in respect of which security
interests are customarily granted in connection with asset securitization
involving accounts receivable.
"Qualified Stock" means any Capital Stock that is not Disqualified Stock.
"Recapitalization Agreement" means the Recapitalization Agreement, dated as of
July 16, 2002, as amended as of August 8, 2002, among MQ Investment Holdings,
LLC, Holdings, the stockholders of Holdings signatory thereto and David Lang and
Gene Venesky, as the stockholders' representatives.
"Receivable" means a right to receive payment arising from a sale or lease of
goods or services by a Person pursuant to an arrangement with another Person
pursuant to which such other Person is obligated to pay for goods or services
under terms that permit the purchase of such goods and services on credit.
"Receivables Entity" means a Wholly Owned Subsidiary of the Company (or another
Person in which the Company or any Restricted Subsidiary of the Company makes an
Investment and to which the Company or any Restricted Subsidiary of the Company
transfers accounts receivable and related assets) which engages in no activities
other than in connection with the financing of accounts receivable and which is
designated by the Board of Directors of the Company (as provided below) as a
Receivables Entity:
(1) no portion of the Indebtedness or any other obligations (contingent or
otherwise) of which:
(a) is guaranteed by the Company or any Restricted Subsidiary of the
Company (excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings);
(b) is recourse to or obligates the Company or any Restricted Subsidiary
of the Company in any way other than pursuant to Standard
Securitization Undertakings; or
(c) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
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(2) with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or
understanding (except in connection with a Purchase Money Note or
Qualified Receivables Transaction) other than on terms no less favorable
to the Company or such Restricted Subsidiary than those that might be
obtained at the time from Persons that are not Affiliates of the Company,
other than fees payable in the ordinary course of business in connection
with servicing accounts receivable; and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain levels of
operating results.
Any such designation by the Board of Directors of the Company shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the resolution of
the Board of Directors of the Company giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"Receivables Fees" means any discount from the face amount of Receivables or
participations therein transferred in connection with a Qualified Receivables
Transaction, factoring agreement or other similar arrangement.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, exchange, renew, repay, retire or extend (including pursuant
to any defeasance or discharge mechanism) (collectively, "refinance,"
"refinances," and "refinanced" shall have a correlative meaning) any
Indebtedness existing on the date of the Indenture or Incurred in compliance
with the Indenture (including Indebtedness of the Company that refinances
Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness of another Restricted Subsidiary)
including Indebtedness that refinances Refinancing Indebtedness, PROVIDED,
HOWEVER, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the Notes, the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of
the Indebtedness being refinanced or (b) if the Stated Maturity of the
Indebtedness being refinanced is later than the Stated Maturity of the
Notes, the Refinancing Indebtedness has a Stated Maturity at least
91 days later than the Stated Maturity of the Notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of the aggregate principal
amount (or if issued with original issue discount, the aggregate accreted
value) then outstanding of Indebtedness being refinanced (plus, without
duplication, any additional Indebtedness Incurred to pay interest or
premiums required by the instruments governing such existing Indebtedness
and fees, commissions and other issuance costs Incurred in connection
therewith); and
(4) if the Indebtedness being refinanced is subordinated in right of payment
to the Notes or the Notes Guarantee, such Refinancing Indebtedness is
subordinated in right of
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payment to the Notes or the Notes Guarantee on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Registration Rights Agreement" means that certain registration rights agreement
dated as of the date of the Indenture by and among the Company, the Guarantors
and the initial purchasers set forth therein.
"Related Business" means any business which is the same as or related, ancillary
or complementary to or a reasonable extension of any of the businesses of the
Company and its Restricted Subsidiaries on the date of the Indenture, in each
case, as determined conclusively and in good faith by the Company's Board of
Directors.
"Related Person" with respect to any Permitted Holder means:
(1) any controlling stockholder or a majority (or more) owned Subsidiary of
such Permitted Holder or, in the case of an individual, any spouse or
immediate family member of such Permitted Holder, any trust created for
the benefit of such individual or such individual's estate, executor,
administrator, committee or beneficiaries; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a majority
(or more) controlling interest of which consist of such Permitted Holder
and/or such other Persons referred to in the immediately preceding
clause (1).
"Representative" means any trustee, agent or representative (if any) of an issue
of Senior Indebtedness or Guarantor Senior Indebtedness; PROVIDED that when used
in connection with the Senior Credit Agreement, the term "Representative" shall
refer to the administrative agent under the Senior Credit Agreement.
"Restricted Investment" means any Investment other than a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now owned
or hereafter acquired whereby the Company or a Restricted Subsidiary transfers
such property to a Person and the Company or a Restricted Subsidiary leases it
from such Person, other than leases between the Company and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries.
"SEC" means the United States Securities and Exchange Commission.
"Senior Credit Agreement" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Credit Agreement dated as of
August 15, 2002 among the Company, Holdings, Wachovia Bank, National
Association, as Administrative Agent, and the lenders parties thereto from time
to time) or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time (and whether or not
with the original administrative agent and lenders or
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one or more other representatives or other lenders, investors or other providers
of funds or otherwise and whether provided under the original Senior Secured
Credit Agreement or any other credit or other agreement or indenture).
"Senior Indebtedness" means, whether outstanding on the Issue Date or thereafter
issued, created, Incurred or assumed, the Bank Indebtedness and all amounts
payable by the Company under or in respect of all other Indebtedness of the
Company, including premiums and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company at the rate specified in the
documentation with respect thereto whether or not a claim for post filing
interest is allowed in such proceeding), fees, charges, expenses, reimbursement
obligations and guarantees relating thereto; PROVIDED, HOWEVER, that Senior
Indebtedness will not include:
(1) any Indebtedness Incurred in violation of the Indenture, unless such
Indebtedness was Incurred based on an Officers' Certificate of the
Company (delivered in good faith after reasonable investigation) to the
effect that the Incurrence of such Indebtedness did not violate the
provisions of the Indenture;
(2) any obligation of the Company to any Subsidiary;
(3) any liability for Federal, state, foreign, local or other taxes owed or
owing by the Company;
(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(5) any Indebtedness, Guarantee or obligation of the Company that is
expressly subordinate or junior in right of payment to any other
Indebtedness, Guarantee or obligation of the Company, including, without
limitation, any Senior Subordinated Indebtedness and any Subordinated
Obligations; or
(6) any Capital Stock.
"Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of
the Company that specifically provides that such Indebtedness is to rank equally
with the Notes in right of payment and is not expressly subordinated or junior
by its terms in right of payment to any Indebtedness or other obligation of the
Company which is not Senior Indebtedness of the Company.
"Series A Preferred Stock" means the series of Series A Redeemable Preferred
Stock, par value $0.001 per share, of Holdings issued pursuant to the
Transactions.
"Series B Preferred Stock" means the series of Series B Redeemable Preferred
Stock, par value $0.001 per share, of Holdings issued pursuant to the
Transactions.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary of the Company which are reasonably customary in securitization of
accounts receivable transactions.
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"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem or
repurchase any such principal prior to the date originally scheduled for the
payment thereof.
"Stockholders' Agreement" means the Stockholders' Agreement, dated as of the
Issue Date, among Holdings and each of the stockholders parties thereto, as in
effect on the Issue Date and as further amended and modified from time to time
so long as the Permitted Holders beneficially own a majority of the Capital
Stock of the Company.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is expressly
subordinated or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture, limited liability company or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other interests
(including partnership and joint venture interests) entitled (without regard to
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by (1) such Person, (2) such Person and one or more Subsidiaries of
such Person or (3) one or more Subsidiaries of such Person. Unless otherwise
specified herein, each reference to a Subsidiary will refer to a Subsidiary of
the Company.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on the
Issue Date and any Restricted Subsidiary created or acquired by the Company
after the Issue Date other than a Receivables Entity.
"Tangible Assets" means Total Assets less Intangible Assets.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Transactions" has the meaning specified in the offering memorandum dated
August 8, 2002.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors of the
Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary or a Person
becoming a Subsidiary through merger or consolidation or Investment therein) to
be an Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any
Lien on any property of, any other Subsidiary of the Company which is not
a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary;
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(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall, at
the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt;
(3) such designation and the Investment of the Company in such Subsidiary
complies with "Certain covenants--Limitation on restricted payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly, all
or substantially all of the business of the Company and its Subsidiaries;
(5) such Subsidiary is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or indirect
obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary with terms
substantially less favorable to the Company than those that might have
been obtained from Persons who are not Affiliates of the Company.
Any such designation by the Board of Directors of the Company shall be evidenced
to the Trustee by filing with the Trustee a resolution of the Board of Directors
of the Company giving effect to such designation and an Officers' Certificate
certifying that such designation complies with the foregoing conditions. If, at
any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be Incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; PROVIDED that immediately after giving effect to
such designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could Incur
at least $1.00 of additional Indebtedness under the first paragraph of the
"Limitation on indebtedness" covenant on a pro forma basis taking into account
such designation.
"U.S. Government Obligations" means securities that are (a) direct obligations
of the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such U.S. Government
Obligations or a specific payment of principal of or interest on any such U.S.
Government Obligations held by such custodian for the account of the holder of
such depository receipt; PROVIDED that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the
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U.S. Government Obligations or the specific payment of principal of or interest
on the U.S. Government Obligations evidenced by such depository receipt.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company, all of
the Capital Stock of which (other than directors' qualifying shares or shares
required by applicable healthcare laws to be owned by Persons other than the
Company) is owned by the Company or another Wholly Owned Subsidiary.
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Registration rights
On August 15, 2002, we and the guarantors entered into a registration rights
agreement with the initial purchasers of the old notes as part of the
Transactions. In that agreement, we have agreed for the benefit of the holders
of the notes to use our reasonable best efforts to file with the SEC and cause
to become effective a registration statement relating to an offer to exchange
the old notes for an issue of SEC-registered notes with terms identical to the
old notes (except that the exchange notes will not be subject to restrictions on
transfer or to any increase in annual interest rate as described below).
As soon as possible after the registration statement of which this prospectus
forms a part is declared effective, we will offer the exchange notes in return
for the notes. The exchange offer will remain open for at least 20 business days
after the date we mail notice of the exchange offer to noteholders. For each old
note surrendered to us under the exchange offer, the noteholder will receive an
exchange note of equal principal amount. Interest on each exchange note will
accrue from the last payment date on which interest was paid on the old notes
or, if no interest has been paid on the old notes, from the closing date.
If applicable interpretations of the staff of the SEC do not permit us to effect
the exchange offer, we will use our reasonable best efforts to cause to become
effective a shelf registration statement relating to resales of the old notes
and to keep that shelf registration statement effective until the expiration of
the time period referred to in Rule 144(k) under the Securities Act, or such
shorter period that will terminate when all old notes covered by the shelf
registration statement have been sold. We will, in the event of such a shelf
registration, provide to each holder of old notes copies of a prospectus, notify
each holder of old notes when the shelf registration statement has become
effective and take certain other actions to permit resales of the old notes. A
holder of old notes that sells old notes under the shelf registration statement
generally will be required to make certain representations to us (as described
below), to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with those sales and
will be bound by the provisions of the registration rights agreement that are
applicable to such a holder of old notes (including certain indemnification
obligations). Holders of old notes will also be required to suspend their use of
the prospectus included in the shelf registration statement under specified
circumstances upon receipt of notice from us.
If the exchange offer is not completed (or, if required, the shelf registration
statement is not declared effective) on or before March 25, 2003 (or the next
business day if March 25, 2003 is not a business day), the annual interest rate
borne by the old notes will be increased by 1.0% per annum commencing on
March 26, 2003 and until the exchange offer is completed or the shelf
registration statement is declared effective. If a shelf registration is
required to be filed due to an unsold allotment held by the initial purchasers,
the old notes will accrue additional interest if the shelf registration
statement is not declared effective on the later of (x) February 26, 2003 and
(y) 90 days after the initial purchasers of the old notes inform us of such
unsold allotment.
If we effect the exchange offer, we will be entitled to close the exchange offer
20 business days after its commencement, provided that we have accepted all old
notes validly surrendered
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in accordance with the terms of the exchange offer. Old notes not tendered in
the exchange offer shall bear interest at the rate set forth on the cover page
of this prospectus and be subject to all the terms and conditions specified in
the indenture, including transfer restrictions.
In addition, so long as J.P. Morgan Securities Inc. or any of its affiliates
(each, a "market-maker") owns any of our equity securities or the equity
securities of any of the guarantors or any of our respective affiliates, we will
agree for the benefit of the market-maker that, on the date we file this
exchange offer registration statement, we will use our best efforts to file with
the SEC and cause to become effective a registration statement, which may be the
exchange offer registration statement, so that the market-maker may "make a
market" in the old notes and the exchange notes as part of its business in the
ordinary course. The registration rights agreement provides that the
market-maker will have certain rights and remedies that are independent of the
rights and remedies of the holders of the old notes and shall have separate
indemnification obligations with respect to us and the guarantors.
This summary of the provisions of the registration rights agreement does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the registration rights agreement, a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus forms a part. We filed the registration statement of which this
prospectus forms a part and are making this exchange offer to comply with our
obligations under the registration rights agreement.
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Description of capital stock of MQ Associates, Inc.
The authorized capital stock of MQ Associates, Inc. consists of (a) 195,000,000
shares of Common Stock, par value $0.001 per share, (b) 115,000,000 shares of
Class A Common Stock, par value $0.001 per share and (c) 75,000,000 shares of
Preferred Stock, par value $0.001 per share, of which (i) 35,000,000 shares have
been designated Series A Redeemable Preferred Stock, par value $0.001 per share
and (ii) 15,000,000 shares have been designated Series B Redeemable Preferred
Stock, par value $0.001 per share.
The following summary of the material terms and provisions of the capital stock
of MQ Associates, Inc. is not complete and is subject to the terms included in
the fourth amended and restated certificate of incorporation of MQ
Associates, Inc., the by-laws of MQ Associates, Inc. and Delaware law. Reference
is made to those documents, copies of which have been filed as exhibits to the
registration statement of which this prospectus forms a part, and to Delaware
law for a detailed description of the provisions summarized below.
Common Stock and Class A Common Stock
Each outstanding share of Common Stock and Class A Common Stock entitles its
holder to the rights and privileges described below. Holders of shares of Common
Stock and Class A Common Stock do not have preemptive or other rights to
subscribe for additional shares of common stock or for any other securities of
MQ Associates, Inc.
VOTING RIGHTS. Each holder of Common Stock and Class A Common Stock is entitled
to one vote per share on all matters to be voted on by the stockholders of MQ
Associates, Inc., and the Common Stock and Class A Common Stock vote together as
a single class.
DIVIDENDS. Each holder of Common Stock and Class A Common Stock is entitled to
receive dividends if, when and as declared by the board of directors of MQ
Associates, Inc. out of assets of MQ Associates, Inc. legally available
therefor.
OPTIONAL CONVERSION. Each holder of Class A Common Stock has the right, at such
holder's option, to convert any or all of such shares then outstanding into an
equal number of fully paid and nonassessable shares of Common Stock. MQ
Associates, Inc. will give the holders of Class A Common Stock reasonable prior
notice of a liquidation or sale, including the price and material terms and
conditions thereof, in order to provide the holders of Class A Common Stock
reasonable opportunity to consider whether to convert the shares of Class A
Common Stock held by them into shares of Common Stock upon or prior to such
liquidation or sale.
MANDATORY CONVERSION. Immediately prior to the consummation of a public
offering resulting in aggregate proceeds of not less than $50.0 million and a
per share price of the Common Stock issued in such public offering of not less
than twice the original price of the Common Stock, all shares of Class A Common
Stock then outstanding will, without any action on the part of the holders
thereof, be deemed automatically converted into an equal number of fully paid
and nonassessable shares of Common Stock.
LIQUIDATION. With respect to rights upon a liquidation or sale, the Class A
Common Stock ranks senior to the Common Stock and the Series B Preferred Stock.
Upon the consummation of any liquidation or sale, after payment of the
preference to the holders of Series A Preferred Stock, the holders of Class A
Common Stock will be entitled to receive out of the proceeds of such liquidation
or sale, before any payment will be made to the holders of any capital stock
ranking junior to the Class A Common Stock, an amount per share of Class A
Common Stock
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equal to the original cost of each such share. After payment has been made to
the holders of Class A Common Stock of the full amount set forth in the
preceding sentence, the holders of Common Stock will be entitled to receive out
of the proceeds of such liquidation or sale an amount per share of Common Stock
equal to the original cost of each such share of Common Stock PARI PASSU with
the payment of the preference to the holders of Series B Preferred Stock. After
payment of the amounts set forth above, the holders of Common Stock and the
holders of Class A Common Stock will share ratably in the remaining proceeds, if
any, of such liquidation or sale.
Preferred stock
The board of directors of MQ Associates, Inc. is authorized to cause additional
shares of preferred stock to be issued from time to time for such consideration
as it may fix from time to time, and to cause the shares of preferred stock to
be issued with such rights, preferences and privileges as may be adopted by the
board of directors of MQ Associates, Inc.
Series A Preferred Stock and Series B Preferred Stock
Each outstanding share of Series A Preferred Stock and Series B Preferred Stock
entitles its holder to the rights and privileges described below. Holders of
shares of Series A Preferred Stock and Series B Preferred Stock do not have
preemptive or other rights to subscribe for additional shares of preferred stock
or for any other securites of MQ Associates, Inc. The number of shares of common
stock issuable upon conversion of the preferred stock shall be subject to
adjustment from time to time upon the occurrence of stock splits, combinations,
reclassifications, recapitalizations and other similar events.
RANK. The Series A Preferred Stock will rank senior to the Series B Preferred
Stock in a liquidation or sale. The Series A Preferred Stock will rank senior to
Common Stock and Class A Common Stock with respect to rights on liquidation or
sale, and the Series B Preferred Stock will rank PARI PASSU with the Common
Stock with respect to rights on a liquidation or sale.
VOTING RIGHTS. Except as set forth below or as otherwise required by applicable
law, neither the Series A Preferred Stock nor the Series B Preferred Stock is
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of MQ Associates, Inc. The holders of each series of
preferred stock have the right to vote as a separate series on any amendment of
such voting rights and on any amendment, repeal or modification of any provision
of the fourth amended and restated certificate of incorporation of MQ
Associates, Inc. that adversely affects the powers, preferences, or special
rights of the shares of such series of preferred stock.
DIVIDENDS. The holders of shares of Series A Preferred Stock and Series B
Preferred Stock are not entitled to receive any dividends from MQ
Associates, Inc. with respect to their shares of Series A Preferred Stock or
Series B Preferred Stock. If, however, any dividend is declared and paid on any
share of Common Stock or Class A Common Stock, each holder of shares of
Series A Preferred Stock or Series B Preferred Stock will be entitled to receive
such dividend with respect to each share of Series A Preferred Stock or
Series B Preferred Stock held by such holder.
REDEMPTION UPON A PUBLIC OFFERING. In connection with a public offering
resulting in proceeds of not less than $50.0 million and a per share price of
the common stock issued in such public offering of not less than twice the
original price of the common stock, MQ Associates, Inc. will
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offer to redeem the then outstanding shares of Preferred Stock. A majority of
the holders of Series A Preferred Stock and the Series B Preferred Stock (voting
separately as a class with respect to their respective series of preferred
stock) will have the right to require that MQ Associates, Inc. redeem any or all
of the then outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, respectively, upon the consummation of such public offering.
However, if the managing underwriter in such public offering advises MQ
Associates, Inc. that the redemption of the Series B Preferred Stock would
adversely affect the successful offering and sale of the shares to be sold in
such offering, then all shares of Series B Preferred Stock shall be converted
into Common Stock.
OPTIONAL CONVERSION OF SERIES A PREFERRED STOCK. Each holder of shares of
Series A Preferred Stock will have the right, at such holder's option,
immediately prior to the consummation of either a qualified public offering or a
liquidation or sale, to convert any or all shares of Series A Preferred Stock
held by such holder into that number of fully paid and nonassessable shares of
Class A Common Stock equal to the quotient obtained by dividing (x) the
aggregate original cost of such shares of Series A Preferred Stock to be
converted by (y) the applicable conversion price for the Series A Preferred
Stock. The conversion price per share at which shares of Class A Common Stock
shall be issuable upon conversion of Series A Preferred Stock shall initially be
equal to (1) the qualified initial public offering price, in the case of
conversion immediately prior to such an event, or (2) original cost, in the case
of conversion immediately prior to a liquidation or sale.
OPTIONAL CONVERSION OF SERIES B PREFERRED STOCK. Each holder of Series B
Preferred Stock will have the right, at such holder's option, immediately prior
to the consummation of a liquidation or sale, to convert each share of Series B
Preferred Stock held by such holder into approximately 1.153 fully paid and
nonassessable shares of Common Stock.
MANDATORY CONVERSION OF SERIES B PREFERRED STOCK. Immediately prior to the
consummation of a qualified public offering, all shares of Series B Preferred
Stock then outstanding will, without any action on the part of the holders
thereof, be deemed automatically converted into that number of fully paid and
nonassessable shares of Common Stock equal to the sum of (i) the quotient
obtained by dividing (x) the aggregate original cost of such shares of Series B
Preferred Stock to be converted by (y) the qualified public offering price, plus
(ii) approximately 0.153 shares of Common Stock.
LIQUIDATION. Upon the consummation of any liquidation or sale, prior to payment
to the holders of Class A Common Stock, Series B Preferred Stock and Common
Stock, the holders of Series A Preferred Stock will be entitled to receive, out
of the proceeds of such liquidation or sale, an amount per share of Series A
Preferred Stock equal to the greater of (i) the original cost of such share and
(ii) the amount such holder would have received if such share of Series A
Preferred Stock had been converted to Class A Common Stock immediately prior to
such liquidation or sale.
Upon the consummation of any liquidation or sale, PARI PASSU with the payment of
the preference to the holders of Common Stock, but after payment of the
liquidation preference to the holders of Series A Preferred Stock and Class A
Common Stock, the holders of Series B Preferred Stock will be entitled to
receive, out of the proceeds of such liquidation or sale, an amount per share of
Series B Preferred Stock equal to the greater of (i) the original cost of such
share and (ii) the amount such holder would have received if such share of
Series B Preferred Stock had been converted to Common Stock immediately prior to
such liquidation or sale.
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Book-entry settlement and clearance
The global notes
The exchange notes will be issued in the form of one or more permanent
definitive registered notes in global form, without interest coupons (the
"global notes"). Upon issuance, each of the global notes will be deposited with
the Trustee as custodian for The Depository Trust Company ("DTC") and registered
in the name of Cede & Co., as nominee of DTC.
Ownership of beneficial interests in each global note will be limited to persons
who have accounts with DTC ("DTC participants") or persons who hold interests
through DTC participants. We expect that under procedures established by DTC:
- upon deposit of the global notes with DTC's custodian, DTC will credit
portions of the principal amount of the global notes to the accounts of
the DTC participants that participated in the exchange offer; and
- ownership of beneficial interests in each global note will be shown on,
and transfer of ownership of those interests will be effected only
through, records maintained by DTC (with respect to interests of DTC
participants) and the records of DTC participants (with respect to other
owners of beneficial interests in the global notes).
Beneficial interests in the global notes may not be exchanged for notes in
physical, certificated form except in the limited circumstances described below.
Book-entry procedures for the global notes
All interests in the global notes will be subject to the operations and
procedures of DTC. We provide the following summaries of those operations and
procedures solely for the convenience of investors. The operations and
procedures of each settlement system are controlled by that settlement system
and may be changed at any time. We are not responsible for those operations or
procedures.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York;
- a "banking organization" within the meaning of the New York State Banking
Law;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
- a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.
DTC was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes to the accounts of its participants. DTC's
participants include securities brokers and dealers, including the initial
purchasers of the old notes; banks and trust companies; clearing corporations
and other organizations. Indirect access to DTC's system is also available to
others such as banks, brokers, dealers and trust companies; these indirect
participants clear through or maintain a custodial relationship with a DTC
participant, either directly or indirectly. Investors
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who are not DTC participants may beneficially own securities held by or on
behalf of DTC only through DTC participants or indirect participants in DTC.
So long as DTC's nominee is the registered owner of a global note, that nominee
will be considered the sole owner or holder of the notes represented by that
global note for all purposes under the indenture. Except as provided below,
owners of beneficial interests in a global note:
- will not be entitled to have notes represented by the global note
registered in their names;
- will not receive or be entitled to receive physical, certificated notes;
and
- will not be considered the owners or holders of the notes under the
indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee under the indenture.
As a result, each investor who owns a beneficial interest in a global note must
rely on the procedures of DTC to exercise any rights of a holder of notes under
the indenture (and, if the investor is not a participant or an indirect
participant in DTC, on the procedures of the DTC participant through which the
investor owns its interest).
Payments of principal, premium (if any) and interest with respect to the notes
represented by a global note will be made by the Trustee to DTC's nominee as the
registered holder of the global note. Neither we nor the Trustee will have any
responsibility or liability for the payment of amounts to owners of beneficial
interests in a global note, for any aspect of the records relating to or
payments made on account of those interests by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to those interests.
Payments by participants and indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing instructions
and customary industry practice and will be the responsibility of those
participants or indirect participants and DTC.
Transfers between participants in DTC will be effected under DTC's procedures
and will be settled in same-day funds.
Certificated notes
Notes in physical, certificated form will be issued and delivered to each person
that DTC identifies as a beneficial owner of the related notes only if:
- DTC notifies us at any time that it is unwilling or unable to continue as
depositary for the global notes and a successor depositary is not
appointed within 90 days;
- DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depositary is not appointed within
90 days;
- we, at our option, notify the Trustee that we elect to cause the issuance
of certificated notes; or
- certain other events provided in the indenture should occur.
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Certain United States federal income tax consequences
General
The following is a summary of material United States Federal income tax
consequences of the exchange of old notes for exchange notes pursuant to this
exchange offer, but does not address any other aspects of United States Federal
income tax consequences to holders of old notes or exchange notes. This summary
is based upon the Internal Revenue Code of 1986, as amended, existing and
proposed regulations thereunder, and published rulings and court decisions, all
as in effect and existing on the date hereof and all of which are subject to
change at any time, which change may be retroactive. This summary is not binding
on the Internal Revenue Service or on the courts, and no ruling will be
requested from the Internal Revenue Service on any issues described below. There
can be no assurance that the Internal Revenue Service will not take a different
position concerning the matters discussed below and that such positions of the
Internal Revenue Service would not be sustained.
Except as expressly stated otherwise, this summary applies only to United States
holders that exchange old notes for exchange notes in this exchange offer and
who hold the old notes as capital assets. It does not address the tax
consequences to taxpayers who are subject to special rules (such as financial
institutions, tax-exempt organizations and insurance companies). A "U.S. holder"
means a beneficial owner of a note who purchased the notes pursuant to the
offering and is, for United States Federal income tax purposes
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States Federal income
taxation regardless of its source; or
- a trust if
- a court within the United States is able to exercise primary
supervision over the administration of the trust and
- one or more United States fiduciaries have the authority to control
all substantial decisions of the trust.
Persons considering the exchange of old notes for exchange notes should consult
their own tax advisors concerning the United States Federal income tax
consequences in light of their particular situations as well as any consequences
arising under the laws of any other taxing jurisdiction.
Exchange of an old note for an exchange note pursuant to this exchange offer
The exchange by any holder of an old note for an exchange note will not
constitute a taxable exchange for United States Federal income tax purposes.
Consequently, no gain or loss will be recognized by holders that exchange old
notes for exchange notes pursuant to this exchange offer. For purposes of
determining gain or loss upon the subsequent sale or exchange of exchange notes,
a holder's tax basis in an exchange will be the same as such holder's tax basis
in the old note exchanged therefore. Holders will be considered to have held the
exchange notes from the time of their acquisition of the old notes.
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Plan of distribution
Each broker-dealer that receives exchange notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for old notes
only where such old notes were acquired as a result of market-making activities
or other trading activities. We have agreed that, for a period of 180 days from
the date on which the exchange offer is consummated, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own accounts
pursuant to the exchange offer may be sold 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 exchange notes or a combination of such methods of
resale, at prices related to such prevailing market prices or at 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 broker-dealer or the purchasers of any exchange notes.
Any broker-dealer that resells exchange notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
any by 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 a period of 180 days from the date on which the exchange offer is
consummated, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to pay all expenses
incident to the exchange offer, including the expenses of one counsel for
holders of the notes, other than commissions or concessions of any
broker-dealers and will indemnify the holders of the notes, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
Legal matters
The validity of the exchange notes and the guarantees of the exchange notes will
be passed upon for us by O'Melveny & Myers LLP, New York, New York.
Experts
The consolidated financial statements of MQ Associates, Inc. and subsidiaries
included in this prospectus for the fiscal years ended December 31, 1999 and
2000 have been so included in reliance on the report of Elliott Davis, LLC,
independent public accountants, (which contains an explanatory paragraph related
to a restatement for mandatory redeemable preferred stock and
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for the correction of errors related to the redemption value of preferred stock
and the issuance of certain restricted stock and related notes receivable) given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements as of December 31, 2001 and for the year
then ended included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
The statements of operations and changes in retained earnings and of cash flows
of AMI Outpatient Services, Ltd. for the period from January 1, 2001 to
August 31, 2001 included in this prospectus have been so included in reliance on
the report of Field, Sarvas, King & Coleman, PC, independent public accountants,
given on the authority of said firm as experts in auditing and accounting.
Where you can find more information
We will be required to file annual and quarterly reports and other information
with the Securities and Exchange Commission after the registration statement
described below is declared effective by the SEC. You may read and copy any
reports, statements, and other information we file at the SEC's public reference
room at 450 Fifth Street, N.W., in Washington, D.C. You may request copies of
the documents, upon payment of a duplicating fee, by writing the Public
Reference Section of the SEC. Please call 1-800-SEC-0330 for further information
on the public reference rooms. Our filings will also be available to the public
from commercial document retrieval services and at the web site maintained by
the Commission at http://www.sec.gov.
We have filed a registration statement on Form S-4 to register with the SEC the
exchange notes to be issued in exchange for the old notes and guarantees
thereof. This prospectus is part of that registration statement. As allowed by
the SEC's rules, this prospectus does not contain all of the information you can
find in the registration statement or the exhibits to the registration
statement. You should note that where we summarize in the prospectus the
material terms of any contract, agreement or other document filed as an exhibit
to the registration statement, the summary information provided in the
prospectus is less complete than the actual contract, agreement or document. You
should refer to the exhibits filed to the registration statement for copies of
the actual contract, agreement or document.
We have not authorized anyone to give you any information or to make any
representations about us or the transactions we discuss in this prospectus other
than those contained in this prospectus. If you are given any information or
representations about these matters that is not discussed in this prospectus,
you must not rely on that information. This prospectus is not an offer to sell
or a solicitation of an offer to buy securities anywhere or to anyone where or
to whom we are not permitted to offer or sell securities under applicable law.
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Index to consolidated financial statements
<Table>
<Caption>
MQ Associates, Inc. & Subsidiaries:
As of December 31, 2001 and 2000 and for each of the three
years in the period ended December 31, 2001:
Report of independent accountants--PricewaterhouseCoopers
LLP....................................................... F-2
Report of independent accountants--Elliott Davis, LLC....... F-3
Consolidated balance sheets as of December 31, 2001 and
2000...................................................... F-4
Consolidated statements of operations for each of the years
ended December 31, 2001, 2000 and 1999.................... F-5
Consolidated statements of stockholders' equity (deficit)
for each of the years ended December 31, 2001, 2000 and
1999...................................................... F-6
Consolidated statements of cash flows for each of the three
years ended December 31, 2001, 2000 and 1999.............. F-7
Notes to consolidated financial statements.................. F-8
As of September 30, 2002 and December 31, 2001 and for the
nine months ended September 30, 2002 and 2001 (unaudited):
Consolidated balance sheets as of September 30, 2002 and
December 31, 2001......................................... F-33
Consolidated statements of operations for the nine months
ended
September 30, 2002 and 2001............................... F-34
Consolidated statements of stockholders' deficit for the
nine months ended September 30, 2002...................... F-35
Consolidated statements of cash flows for the nine months
ended
September 30, 2002 and 2001............................... F-36
Notes to consolidated financial statements.................. F-37
AMI Outpatient Services, Ltd.:
For the eight months ended August 31, 2001:
Independent Auditors' Report--Field, Sarvas, King & Coleman,
PC........................................................ F-50
Statement of income and changes in retained earnings........ F-51
Statement of cash flows..................................... F-52
Notes to financial statements............................... F-53
</Table>
F-1
<Page>
Report of independent accountants
To Board of Directors and Stockholders of
MQ Associates, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' deficit and cash flows
present fairly, in all material respects, the financial position of MQ
Associates, Inc. and its subsidiaries at December 31, 2001 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Atlanta, Georgia
June 7, 2002, except for the information in note 18 for which the date is
August 8, 2002
F-2
<Page>
Report of independent accountants
To Board of Directors and Stockholders of
MQ Associates, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of MQ
Associates, Inc. and Subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the two years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as, evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MQ Associates, Inc.
and Subsidiaries as of December 31, 2000 and the results of its operations and
cash flows for the two years then ended in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 17 to the financial statements, the 2000 and 1999 financial
statements have been restated for mandatory redeemable preferred stock and for
the correction of errors related to the redemption value of preferred stock and
the issuance of certain restricted stock and related notes receivable.
Elliott Davis, LLC
January 25, 2001, except
for Note 17 as to which the
date is June 21, 2002
Greenville, South Carolina
F-3
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated balance sheets
<Table>
<Caption>
- ----------------------------------------------------------------------------------
December 31,
(in thousands, except share data) 2001 2000
- ----------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents................................. $ 5,391 $ 2,316
Patient receivables, net of allowance for doubtful
accounts of $987 and $485............................... 30,817 15,275
Related party receivables................................. 1,656 1,396
Other receivables......................................... 1,411 1,314
Prepaid expenses and other................................ 2,167 2,021
Deferred income taxes..................................... 1,654 1,591
--------------------
Total current assets...................................... 43,096 23,913
Property and equipment, net................................. 65,221 43,042
Intangible assets, net...................................... 28,802 5,794
Other....................................................... 229 193
--------------------
Total assets.............................................. $137,348 $ 72,942
--------------------
Liabilities and stockholders' deficit
Current liabilities
Equipment line of credit.................................. $ 6,000 $ --
Accounts payable.......................................... 5,521 3,247
Accrued payroll and related taxes......................... 2,329 910
Other accrued expenses.................................... 9,111 4,209
Current portion of long-term debt......................... 20,002 10,959
Current portion of obligations under capital leases....... 4,780 3,831
--------------------
Total current liabilities................................. 47,743 23,156
Long-term debt.............................................. 75,172 34,153
Obligations under capital leases............................ 9,667 9,168
Deferred income taxes....................................... 4,721 3,009
--------------------
Total liabilities......................................... 137,303 69,486
Minority interest........................................... 159 49
--------------------
Total liabilities and minority interest................... $137,462 $ 69,535
--------------------
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.01 par value; voting; 3,300,000
shares authorized issued and outstanding................ $ 79,321 $ 79,321
Series C Convertible, $.01 par value; voting; 805,532
shares authorized; 805,532 and 0 shares issued and
outstanding at December 31, 2001 and 2000,
respectively............................................ 25,962 --
--------------------
$105,283 $ 79,321
--------------------
Stockholders' deficit
Common Stock; voting; $.01 par value; 15,000,000 and
17,557,692 shares authorized at December 31, 2001 and
2000, respectively; 4,935,999 and 5,830,000 shares
issued and outstanding at December 31, 2001 and 2000,
respectively............................................ 49 58
Class B common stock; nonvoting $.01 par value; 750,000
and 870,000 shares authorized at December 31, 2001 and
2000, respectively, 750,000 shares issued and
outstanding............................................. 8 8
Notes receivable--stockholders.............................. (1,531) (1,448)
Additional paid-in capital.................................. 10,845 1,357
Accumulated deficit......................................... (114,768) (75,889)
--------------------
Total stockholders' deficit............................... (105,397) (75,914)
--------------------
Total liabilities and stockholders' deficit............... $137,348 $ 72,942
- ----------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated statements of operations
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
Fiscal year ended
December 31,
-------------------------------
(in thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Net revenues from services.................................. $142,322 $85,932 $56,684
Costs and expenses
Operating expenses, excluding depreciation................ 61,014 35,626 25,091
Marketing, general and administrative expenses............ 55,554 25,559 17,290
Depreciation and amortization............................. 17,488 11,187 9,152
-------------------------------
Income from operations.................................. 8,266 13,560 5,151
Interest expense............................................ 8,560 4,875 4,118
Interest income............................................. (330) (17) (35)
-------------------------------
Income before provision for income taxes................ 36 8,702 1,068
Provision (benefit) for income taxes........................ 4,020 3,429 (298)
Minority interest in net income of consolidated
subsidiaries.............................................. 110 60 --
-------------------------------
Net income (loss)....................................... $ (4,094) $ 5,213 $ 1,366
- ---------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated statements of stockholders' equity (deficit)
- ------------------------------------------------------------
(in thousands, except share data)
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------------------------- Total
Class A Class B Notes Additional Stockholders'
--------------------- ------------------- Receivable Paid-in Accumulated Equity
Shares Amount Shares Amount Stockholders Capital Deficit (Deficit)
-----------------------------------------------------------------------------------------------------
Balance, December 31,
1998.................... 4,400,000 $ 44 -- $-- $ -- $ 1,981 $ (1,350) $ 675
Common stock split...... 5,600,000 56 (56) --
Common stock purchased
and retired........... (4,170,000) (42) (1,925) (17,887) (19,854)
S-Corp distribution to
stockholders.......... (2,343) (2,343)
Accretion of Series A
convertible redeemable
preferred stock....... (436) (436)
Issuance of common
stock................. 750,000 8 (1,365) 1,357 --
Net income.............. 1,366 1,366
-----------------------------------------------------------------------------------------------------
Balance, December 31,
1999.................... 5,830,000 58 750,000 8 (1,365) 1,357 (20,650) (20,592)
Other................... 69 69
Accretion of Series A
convertible redeemable
preferred stock....... (60,521) (60,521)
Accrued interest on
notes receivable,
stockholders.......... (83) (83)
Net income.............. 5,213 5,213
-----------------------------------------------------------------------------------------------------
Balance, December 31,
2000.................... 5,830,000 58 750,000 8 (1,448) 1,357 (75,889) (75,914)
Common stock purchased
and retired........... (894,001) (9) (18,541) (18,550)
Beneficial conversion
feature on issuance of
Series C convertible
redeemable preferred
stock................. 6,704 6,704
Capital contribution.... 100 100
Stock compensation
expense............... 9,388 9,388
Accretion of Series C
convertible redeemable
preferred stock....... (6,704) (16,244) (22,948)
Accrued interest on
notes
receivable--stockholders... (83) (83)
Net loss................ (4,094) (4,094)
-----------------------------------------------------------------------------------------------------
Balance, December 31,
2001.................... 4,935,999 $ 49 750,000 $8 $(1,531) $10,845 $(114,768) $(105,397)
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated statements of cash flows
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
Fiscal year ended
December 31,
------------------------------
(in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss)......................................... $ (4,094) $ 5,213 $ 1,366
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities
Depreciation and amortization......................... 17,488 11,187 9,152
Stock compensation expense............................ 9,388 -- --
Bad debt expense...................................... 4,866 2,882 1,890
Deferred income taxes................................. 1,649 1,829 (427)
Minority interest in income of consolidated
subsidiaries......................................... 110 60 --
Accrued interest on notes receivable--stockholders.... (83) (83) --
Changes in operating assets and liabilities
Patient receivables................................. (17,038) (9,623) (4,180)
Related party and other receivables................. (357) (1,563) 4
Prepaid expenses and other current assets........... (146) (968) (632)
Other assets........................................ (36) 422 (89)
Accounts payable.................................... 2,274 448 (889)
Accrued payroll and related taxes................... 1,419 343 207
Other accrued expenses.............................. 4,902 1,864 783
------------------------------
Net cash and cash equivalents provided by operating
activities................................................ 20,342 12,011 7,185
------------------------------
Cash flows from investing activities
Purchase of property and equipment........................ (25,900) (12,759) (11,577)
Acquisitions of businesses................................ (34,232) (2,199) --
------------------------------
Net cash and cash equivalents used for investing
activities................................................ (60,132) (14,958) (11,577)
------------------------------
Cash flows from financing activities
Proceeds from notes payable............................... 62,870 14,092 12,148
Proceeds from line of credit.............................. 6,000 -- --
Payments on notes payable................................. (13,421) (8,099) (5,086)
Payments on capital leases................................ (3,853) (3,086) (1,987)
Proceeds from issuance of convertible preferred stock, net
of transaction costs.................................... 9,719 -- 18,364
Purchase of common stock from stockholders................ (18,550) -- (19,854)
Capital contribution...................................... 100 -- --
Repayment of stockholder receivable....................... -- -- 1,029
Repayment of affiliated receivable........................ -- -- 576
S-Corp distributions to stockholders...................... -- -- (1,635)
Other..................................................... -- 69 --
------------------------------
Net cash and cash equivalents provided by financing
activities................................................ 42,865 2,976 3,555
------------------------------
Net increase (decrease) in cash and cash equivalents........ 3,075 29 (837)
Cash and cash equivalents, beginning of year................ 2,316 2,287 3,124
------------------------------
Cash and cash equivalents, end of year...................... $ 5,391 $ 2,316 $ 2,287
------------------------------
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 9,648 $ 4,958 $ 4,119
Cash paid for taxes....................................... 3,017 -- --
Supplemental schedule of noncash investing and financing
activities
Acquisition of businesses
Fair value of assets acquired........................... 34,842 7,308 --
Less liabilities assumed................................ (610) (5,109) --
------------------------------
34,232 2,199 --
Equipment acquired through capital lease.................. 5,303 3,981 3,689
Distribution of real estate to stockholders............... $ -- $ -- $ 708
- --------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Notes to consolidated financial statements
(in thousands, except share data)
1. Business
MQ Associates, Inc. and Subsidiaries (the "Company") operates 66 outpatient
diagnostic imaging centers located throughout the United States. The outpatient
diagnostic imaging centers provide medical imaging services to patients referred
by physicians and extend credit to governmental, national and local insurance
carriers, as well as individual patients who reside in the respective service
areas.
As the parent company, MQ Associates provides administrative, management and
information services to its subsidiaries. The services provided by the Company
leverages its existing infrastructure, allows the centers to provide the
appropriate level of care required for each patient and improves profitability,
efficiency and effectiveness.
On October 7, 1999, the Company converted its tax status from an S-Corporation
to a C-Corporation. In 1999, in connection with the conversion, the Company
distributed $2,343 of assets to the stockholders.
2. Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements of the Company include the assets,
liabilities, revenues and expenses of all majority owned subsidiaries over which
the Company exercises control, and for which control is other than temporary.
All material intercompany transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The Company routinely has deposits
at financial institutions which substantially exceed federal depository
insurance coverage. Management believes any risks associated with these excess
deposits is mitigated by maintaining the deposits at large, reputable banks.
Revenue recognition
Revenue is recognized as services are rendered. Revenues are reported at the
estimated net realizable amounts from patients, third-party payors and others
for services rendered including estimated contractual adjustments under
reimbursement agreements with third-party payors.
F-8
<Page>
Advertising expense
The Company expenses all advertising costs as incurred. Advertising expense for
the years ended December 31, 2001, 2000 and 1999 was $1,707, $1,476 and $1,471,
respectively.
Operating expenses, excluding depreciation
Operating expenses, excluding depreciation, consists of compensation related to
radiologists, technicians and transcriptionists combined with supplies, building
rental, utilities and other expenses directly related to generating service
revenue.
Property and equipment
Property and equipment are carried at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over their estimated
useful lives ranging from five to seven years. Leasehold improvements are
classified as property and equipment and are amortized using the straight-line
method over the shorter of lease terms or the economic useful lives of the
assets. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in operations for the period. The cost of maintenance and
repairs is charged to operations as incurred. Significant renewals and
betterments are capitalized.
Intangible assets
Intangibles, at stated cost less accumulated amortization, consist of goodwill,
non-compete agreements and certificates of need. Goodwill is amortized on a
straight-line basis over fifteen years and all other intangibles are amortized
on a straight-line basis over their estimated useful lives ranging from 3 to
15 years. See Note 3 for application of new accounting policies for intangible
assets.
Long-lived assets
Long-lived assets are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is performed at the lowest level at which
net cash flows can be directly attributable to long-lived assets and is
performed on an undiscounted basis. For any assets identified as impaired, the
Company measures the impairment as the amount by which the carrying value of the
asset exceeds the fair value of the asset. In estimating the fair value of the
asset, management utilizes a valuation technique based on the present value of
expected future cash flows.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Income tax expense
(benefit) is comprised of the tax payable (receivable) for the period and the
change in deferred income tax assets and liabilities during the period.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
F-9
<Page>
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying value of patient receivables, accounts payable and accrued expenses
approximate their fair value based on the short duration of these accounts. The
fair value of the Company's long-term debt is estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The estimated fair value of long-term
debt with fixed rates was $14,892 and $11 above its carrying value at
December 31, 2001 and 2000, respectively.
Concentrations of credit risk
The Company grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payor agreements. The mix of
receivables from patients and third-party payors at December 31, 2001 and
December 31, 2000 was as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------
Medicare.................................................... 20% 11%
Blue Cross/Blue Shield...................................... 19 14
Managed Care................................................ 24 21
HMO......................................................... 9 2
Workers Compensation........................................ 8 6
Medicaid.................................................... 4 6
Commercial.................................................. 6 9
Other third-party payors.................................... 6 19
Patients.................................................... 4 12
---- ----
100% 100%
- ---------------------------------------------------------------------------------
</Table>
Reclassifications
Certain reclassifications have been made to the financial statements for the
year ended December 31, 2000 in order to conform with the December 31, 2001
presentation.
3. New accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued FAS No. 141
"Business Combinations" ("FAS 141") and FAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
FAS 141 also specifies the criteria applicable to intangible assets acquired in
a purchase method business combination to be recognized and reported apart from
goodwill. FAS 142 requires that goodwill and intangible assets with
F-10
<Page>
indefinite useful lives no longer be amortized but instead be tested for
impairment, at least annually. In adopting FAS 142, the Company no longer
amortizes goodwill and certificates of need related to these business
combinations. There was no impairment to goodwill and certificates of need as a
result of the impairment test performed. Amortization expense for goodwill and
certificates of need was $709, $290 and $216 during 2001, 2000 and 1999,
respectively. The adoption of FAS 142 would increase(decrease) the net
income(loss) of the Company by $(425), $174, and $130 for the years ended
December 31, 2001, 2000 and 1999, respectively. FAS 142 also requires that
intangible assets with useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and be reviewed for impairment.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and related asset retirement costs. SFAS 143 is
effective for financial statements with fiscal years beginning after June 15,
2002. This Statement is not expected to have a material impact on the Company's
financial position and results of operations.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and for reporting of discontinued operations. SFAS 144 is
effective for financial statements with fiscal years beginning after
December 15, 2001. The Company adopted this statement on January 1, 2002 and it
did not have a material impact on the Company's financial position and results
of operations.
4. Acquisitions
On September 1, 2001, Phoenix Diagnostic Imaging, Inc., a wholly-owned
subsidiary of MQ Associates, acquired AMI Outpatient Services LTD ("AMI"). The
results of AMI have been included in the consolidated financial statements since
that date under the application of purchase accounting. AMI is a provider of
medical diagnostic imaging services to patients in Phoenix, Arizona. The
aggregate purchase price was $18,683 of cash. In addition, the Company agreed to
pay an earn-out based on net revenue. The maximum earn-out payable for each
applicable twelve month period is $700. No accrual has been made for this
earn-out for fiscal 2001.
The following table summarizes the estimated fair values of the assets acquired
at September 1, 2001, the date of acquisition:
<Table>
- ----------------------------------------------------------------------
Accounts receivable......................................... $ 2,500
Equipment................................................... 4,000
Non-compete agreement....................................... 67
Goodwill.................................................... 12,116
-------
$18,683
- ----------------------------------------------------------------------
</Table>
During 2001, the Company acquired five additional entities which provide medial
diagnostic imaging service to patients. Each of the acquisitions was accounted
for using the purchase method of accounting. Results of each entity has been
included in the consolidated financial
F-11
<Page>
statements since the effective date of the acquisition. The Company paid $15,549
in cash for the five entities acquired.
The following table summarizes the estimated fair values of the assets acquired
in these acquisitions:
<Table>
- ----------------------------------------------------------------------
Accounts receivable......................................... $ 870
Property and equipment...................................... 3,531
Non-compete agreement....................................... 70
Certificate of need......................................... 1,860
Liabilities assumed......................................... (610)
Goodwill.................................................... 9,828
-------
$15,549
- ----------------------------------------------------------------------
</Table>
All of the goodwill associated with the above transactions is expected to be
deducted for tax purposes.
On June 30, 2000, the Company acquired Open MRI and Imaging at Bridgetown and
Kirkwood, Missouri from US Diagnostics for an aggregate purchase price of
$2,101, net of liabilities assumed of $1,073. Goodwill and other intangibles
acquired was approximately $843.
Also during 2000, the Company acquired three other entities for an aggregate
purchase price of $98, net of liabilities assumed of $4,036. Goodwill and other
intangibles acquired was approximately $3,129.
All of the acquisitions during 2001 and 2000 were consummated in order to expand
market share.
The pro forma results listed below are unaudited and reflect results of
operations data for the years ended December 31, 2001 and 2000, as if MQ
Associates, Inc. and the entities described above had been combined as of
January 1, 2000. The financial information for all of the acquisitions except
AMI is prepared on the accrual basis of accounting. The financial information
for AMI is based on unaudited internal financial information prepared on the
cash basis rather than the accrual basis of accounting. Notwithstanding the
differences between cash and accrual bases, management has included AMI's
information because it believes that it is a reasonable approximation of the
results of operations of AMI. The pro forma results include estimates and
assumptions which management believes are reasonable. However, pro forma results
do not include any anticipated cost savings or other effects of the planned
integration of these entities, and are not necessarily indicative of the results
which would have occurred if the business combinations had been in effect on the
dates indicated, or which may result in the future.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
Pro forma
fiscal year ended
December 31,
----------------------------
2001 2000
- ------------------------------------------------------------------------------------------
(unaudited)
Net revenues from services.................................. $169,123 $ 130,844
Net income (loss)........................................... (4,116) 5,342
- ------------------------------------------------------------------------------------------
</Table>
F-12
<Page>
5. Property and equipment
Property and equipment, including assets held under capital leases, consists of
the following at December 31:
<Table>
<Caption>
- ----------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------
Technical equipment......................................... $83,595 $54,406
Leasehold improvements...................................... 17,341 12,306
Computer equipment.......................................... 3,823 1,900
Furniture and fixtures...................................... 2,602 1,687
Office equipment and other.................................. 2,988 1,335
--------------------
110,349 71,634
Less accumulated depreciation............................... 45,128 28,592
--------------------
$65,221 $43,042
- ----------------------------------------------------------------------------------
</Table>
Depreciation expense totaled $16,555, $10,628 and $8,834 for the years ended
December 31, 2001, 2000 and 1999, respectively.
6. Intangible assets
Intangible assets consists of the following as of December 31:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------
Goodwill.................................................... $27,622 $5,677
Non-compete agreements...................................... 1,412 1,275
Certificates of need........................................ 1,860 --
-------------------
30,894 6,952
Less accumulated amortization............................... 2,092 1,158
-------------------
$28,802 $5,794
- ---------------------------------------------------------------------------------
</Table>
Amortization expense totaled $933, $559 and $318 for the years ended
December 31, 2001, 2000 and 1999, respectively.
7. Other accrued expenses
Other accrued expenses consist of the following as of December 31:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------
Accrued radiologist fees and bonuses........................ $3,396 $1,936
Accrued legal claims (Note 11).............................. 2,135 --
Income tax payable.......................................... 1,167 1,600
Accrued operating costs..................................... 1,048 345
Other....................................................... 1,365 328
-------------------
$9,111 $4,209
- ---------------------------------------------------------------------------------
</Table>
F-13
<Page>
8. Equipment line of credit
On March 15, 2001, the Company obtained, from a bank, revolving and term credit
facilities providing up to $7,500 of borrowing capacity in the aggregate (the
"Revolving Loan Commitment"). Borrowings under the Revolving Loan Commitment
bear interest based at LIBOR plus 2%. The Company had outstanding borrowings of
$6,000 under the Revolving Loan Commitment at December 31, 2001 and the
effective interest rate at that date was 3.87%. The Revolving Loan Commitment
expires on June 30, 2002. Management expects to extend the Revolving Loan
Commitment.
Borrowings under the Revolving Loan Commitment are collateralized by certain
accounts receivable, excluding government receivables, at specific outpatient
diagnostic imaging centers.
The Revolving Loan Commitment included certain restrictive covenants including
maximum funding debt to EBITDAR ("Earnings Before Interest, Taxes, Depreciation,
Amortization and Rent") and minimum EBITDA to interest expense. As of
December 31, 2001, the Company was not in compliance with these covenants but
received waivers from the lenders.
9. Long-term debt
Long-term debt consists of the following at December 31:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------
Notes payable to bank(s), various interest rate............. $86,374 $45,112
12% Senior Subordinated Convertible Notes due October 8,
2004...................................................... 8,800 --
-------------------
95,174 45,112
Less current portion of long-term debt...................... 20,002 10,959
-------------------
Long-term debt, net of current portion...................... $75,172 $34,153
- ---------------------------------------------------------------------------------
</Table>
Notes payable
The Company has 209 separate note agreements with various lenders, primarily
banks. These notes are payable in monthly installments ranging from $1 to $64
including interest at rates ranging from 7.0 to 12.0 percent per annum. The
notes are due at various dates from 2002 through 2007 and are collateralized by
equipment and receivables.
These note agreements were incurred in order to provide proceeds to acquire
radiology and imaging centers and to purchase equipment. The weighted average
rate was 10.3% and 10.2% at December 31, 2001 and 2000, respectively.
Senior subordinated convertible notes
On March 30, 2001, the Company entered into an $8,800 Senior Subordinated
Convertible Notes Agreement with an affiliated investment firm. The Senior
Subordinated Convertible Notes ("Convertible Notes") have a fixed 12% per annum
interest rate with interest paid quarterly in arrears. The principal balance
with any outstanding accrued and unpaid interest is due on October 8, 2004. The
Company may redeem the Convertible Notes, together with all accrued and unpaid
interest on the amount so redeemed; provided that the Company redeem at least
25% of the then outstanding aggregate principal of all of the Convertible Notes.
The
F-14
<Page>
redemption price expressed as a percentage of the principal amount to be
redeemed is 105% prior to March 30, 2002, 102.5% after March 30, 2002 but before
March 30, 2003 or 100% after March 30, 2003. The Convertible Notes require
repayment in full in the event of a change of control or if the Company is in
default under the terms of the agreement.
The Convertible Notes included certain restrictive covenants including the
maintenance of a Senior Funded Debt to EBITDAR ratio not to exceed 3.85 to 1.00
and a EBITDA to interest ratio of at least 4.40 to 1.00. The Company violated
these covenants in 2001 but received waivers from the lender.
The Convertible Notes are unsecured obligations which rank senior in right of
payment to all subordinated indebtedness and rank equal in right of payment with
all other senior indebtedness of the Company. The Convertible Notes are
unconditionally guaranteed on a senior unsecured basis by certain existing
subsidiaries and will be unconditionally guaranteed by all future subsidiaries.
At the option of the holder, at any time, the Convertible Notes are convertible
into $8,790 Senior Subordinated Notes due October 8, 2004 and warrants to
purchase 88,608 shares of the Company's Class A Common Stock at $.01 per share.
The converted $8,790 Senior Subordinated Notes would rank senior in right of
payment to all subordinated indebtedness and equal in right of payment with all
other senior indebtedness.
Scheduled maturities of the long-term debt are:
<Table>
- ----------------------------------------------------------------------
2002........................................................ $20,002
2003........................................................ 20,441
2004........................................................ 27,349
2005........................................................ 16,510
2006........................................................ 10,198
Thereafter.................................................. 674
--------
$95,174
- ----------------------------------------------------------------------
</Table>
10. Obligations under capital leases
The Company is the lessee of radiology equipment under fifty-five capital lease
agreements expiring at various dates from 2002 through 2006, but may be
cancelled by the Company under certain circumstances. The Company records the
assets and related liabilities at the net present value of the lease payments
using imputed interest rates. The weighted average interest rate for these
leases is 9.1% and 9.7% at December 31, 2001 and 2000, respectively. These
leases contain bargain purchase options that allow the Company to purchase the
leased property for a minimal amount upon the expiration of the leases.
Depreciation of the assets under capital lease is included in depreciation
expense for the period.
F-15
<Page>
The future minimum capital lease payments are:
<Table>
- ----------------------------------------------------------------------
2002........................................................ $5,889
2003........................................................ 5,242
2004........................................................ 4,646
2005........................................................ 1,923
2006........................................................ 870
--------
Total minimum lease payments................................ 18,570
Less interest portion....................................... 4,123
--------
Present value of net minimum lease payments, including
current portion of $4,780................................. $14,447
- ----------------------------------------------------------------------
</Table>
Property and equipment held under capital lease obligations were $22,791 and
$17,592, net of accumulated depreciation of $11,697 and $7,858 at December 31,
2001 and 2000, respectively.
11. Commitments and contingencies
The Company leases office space and radiology equipment under non-cancelable
operating lease agreements and has maintenance arrangements for the various
centers. The leases and agreements expire at various dates through 2011. Certain
leases for office space are with related parties (see Note 12).
The future minimum payments under these agreements are:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------
Related Non-related
Party Party Total
Contractual Contractual Contractual
Commitments Commitments Commitments
- --------------------------------------------------------------------------------------------------------------
2002........................................................ $3,941 $17,862 $21,803
2003........................................................ 3,941 15,947 19,888
2004........................................................ 3,674 11,729 15,403
2005........................................................ 3,503 5,628 9,131
2006........................................................ 3,503 1,584 5,087
Thereafter.................................................. 3,503 780 4,283
------------------------------------------------
$22,065 $53,530 $75,595
- --------------------------------------------------------------------------------------------------------------
</Table>
The Company's total rent expense for all leases, which includes short-term
equipment rentals, for the years ended December 31, 2001, 2000 and 1999 were
$8,940, $5,432 and $4,866, respectively. The Company's maintenance expense
related to the non-cancelable maintenance agreements for the years ended
December 31, 2001, 2000 and 1999 was $4,509, $3,423 and $1,309, respectively.
Rent expense related to the related party leases was $2,687, $1,638 and $1,284
for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company has entered into employment agreements with certain officers with
original terms of one year. All of the agreements provide for a specific amount
of annual base salary and performance bonuses based on certain objectives being
met prior to December 31, 2002. In addition, these employment agreements provide
that in the event that the agreements are renewed for an additional term, and if
the Company terminates the officers without cause during the additional term, or
in the event that the officers resign for good reason during the additional
term, the Company shall pay them amounts equal to their annual salaries. Under
F-16
<Page>
these agreements, if these events had occurred, the Company would have been
committed for approximately $1,650 at December 31, 2001.
InMed Diagnostic Service, LLC ("InMed") v. MQ Associates, Inc. and Subsidiaries.
In 1999, InMed filed a lawsuit against the Company. InMed asserted that the
Company allegedly engaged in unfair competition in violation of the South
Carolina common law duty to compete fairly. On December 13, 2001, a jury
returned a verdict against the Company in the amount of $2,100. The Company has
filed an appeal from the judgment and believes that there are substantial
grounds for complete reversal or reduction of the verdict. The judgment amount
of $2,100 as well as the related attorney fees were fully accrued as of
December 31, 2001. On January 22, 2002, the Company transferred $2,100 into an
escrow account (outside of their control) in order to fully fund this judgment.
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of business. The Company
believes that, as a result of its legal defenses and insurance arrangements,
none of these actions if decided adversely, would have a material effect on the
business, financial condition, results of operations or cash flows of the
Company taken as a whole.
12. Related party transactions
The Company rents office space for 21 of its centers and its headquarters
through rental agreements with Image Properties, L.L.C. ("Image"), a company
owned by the Company's major stockholders who are the President and the Chief
Executive Officer. The rental agreements provide for rental payments in amounts
ranging from $1 to $57 monthly. The rental agreements typically are for ten-year
terms with five-year renewal options. The leases expire at various dates through
2011 (see Note 11).
The Company regularly rents and performs certain transactions for Image. As of
December 31, 2001, MQ Associates had a related party receivable balance of
approximately $1,700 for costs incurred on behalf of Image. The Company earns
interest income on the balance at a rate of approximately 6% per annum of the
outstanding receivable balance.
13. Retirement plan
The Company maintains a defined contribution plan for all eligible employees.
Under this plan, employees who have completed nine months of service and have
met certain other eligibility requirements may make voluntary contributions to
the retirement program in the form of salary reductions. The Company, at the
discretion of the Board of Directors, may make contributions to the retirement
plan equal to a percentage of each employees' wages. Employer contributions for
the year ended December 31, 2001, 2000 and 1999 totaled $110, $72 and $45,
respectively.
F-17
<Page>
14. Redeemable preferred stock
Series A convertible preferred stock
On October 8, 1999, an unaffiliated investment firm ("Preferred Stockholder")
contributed $18,364, net of transaction costs of $436, to the Company in return
for 3,300,000 shares of noncumulative Series A convertible redeemable preferred
stock ("Series A Convertible"). The Series A Convertible has one vote per share
on all matters and carries a liquidation preference of $5.70 per share plus any
declared and unpaid dividends ("Series A Liquidation") ($18,800 at December 31,
2001). At the option of the holder, all or none of the Series A Convertible is
redeemable, on or after October 31, 2004 or upon a qualified public offering as
defined in the articles of incorporation, at the greater of the Series A
Liquidation or fair market value ($79,321 at December 31, 2001 and 2000). All or
none of the Series A Convertible is convertible, at the option of the holder on
or after October 31, 2001, into Series B convertible redeemable preferred stock
("Series B Convertible") on a one for one basis, plus 1,276,000 shares of
Series A redeemable preferred stock ("Series A Redeemable"). The Series A
Convertible ranks equal to all other issuances of redeemable preferred stock and
senior to all issuances of common stock in liquidation.
During 1999, in anticipation of the issuance of the Series A Convertible, the
Board of Directors authorized a 1-for-175.57692 stock split, thereby increasing
the number of authorized Class A Common Stock shares from 10,000,000 to
17,557,692 and decreasing the par value of each share to $.01. As a result of
the split, 5,600 additional shares of Class A Common Stock were issued and
additional paid-in capital was reduced by $56. In 1999, subsequent to the
issuance of the Series A Convertible, the Company repurchased and retired
4,170,000 shares of Class A Common from principal stockholders for $19,854.
Series B convertible preferred stock
The Series B Convertible has one vote per share on all matters if there are no
shares of Series A Convertible issued and outstanding. The Series B Convertible
is noncumulative, par value $.01 per share, and carries a liquidation preference
of $1.83 per share plus any declared and unpaid dividends ("Series B
Liquidation") ($6,040 if issued and oustanding at December 31, 2001). At the
option of the holders, on or after October 8, 2004 or upon a qualified public
offering as defined in the articles of incorporation, all or none of the
Series B Convertible may be redeemed for the greater of the Series B Liquidation
or fair market value. All or none of the Series B Convertible is convertible at
any time, at the option of the holder, on a one for one basis to Class A Common
Stock. At December 31, 2001 and 2000, there were 3,300,000 shares of Series B
Convertible authorized and no shares issued and outstanding. The Series B
Convertible ranks equal to all other issuances of redeemable preferred stock and
senior to all issuances of common stock in liquidation.
Series C convertible preferred stock
On March 30, 2001, the Preferred Stockholder contributed $9,719, net of
transaction costs of $281, to the Company in return for 805,532 shares of
noncumulative Series C convertible redeemable preferred stock (the "Series C
Convertible"). On March 30, 2001, the Company recorded a $6,704 beneficial
conversion feature related to the issuance of these shares. The
F-18
<Page>
Series C Convertible has one vote per share on all matters and carries a
liquidation preference of $12.41 per share plus any declared and unpaid
dividends ("Series C Liquidation") ($10,000 at December 31, 2001). At the option
of the holder, on or after October 31, 2004 or upon a qualified public offering
as defined in the articles of incorporation, all or none of the Series C
Convertible is redeemable at the greater of the Series C Liquidation or fair
market value ($25,962 at December 31, 2001). All or none of the Series C
Convertible is convertible, at the option of the holder on or after October 31,
2001, into Series D convertible redeemable preferred stock ("Series D
Convertible") on a one for one basis, plus 680,000 shares of Series B redeemable
preferred stock ("Series B Redeemable"). The Series C Convertible ranks equal to
all other issuances of redeemable preferred stock and senior to all issuances of
common stock in liquidation.
In 2001, subsequent to the issuance of the Series C Convertible, the Company
repurchased and retired 894,001 shares of Class A Common from the principal
stockholders for $18,550.
Series D convertible preferred stock
The Series D convertible preferred stock ("Series D Convertible") has one vote
per share on all matters if there are no shares of Series C Convertible issued
and outstanding. The Series D Convertible is noncumulative, par value $.01 per
share, and carries a liquidation preference of $3.98 per share plus any declared
and unpaid dividends ("Series D Liquidation")($3,206 if issued and outstanding
at December 31, 2001). At the option of the holder, on or after October 8, 2004
or upon a qualified public offering as defined in the articles of incorporation,
all or none of the Series D Convertible may be redeemed for the greater of the
Series D Liquidation or fair market value. All or none of the Series D
Convertible is convertible at any time, at the option of the holder, on a one
for one basis to Class A Common Stock. At December 31, 2001 and 2000, there were
805,532 shares of Series D Convertible authorized and no shares issued and
outstanding. The Series D Convertible ranks equal to all other issuances of
redeemable preferred stock and senior to all issuances of common stock in
liquidation.
Dividends may be declared and paid on all issuances of the convertible
redeemable preferred stock; however, dividends must also be declared and paid on
the Class A Common Stock (and Class B Common Stock once issued) as if all
issuances of the convertible preferred stock, Class A Common Stock and Class B
Common Stock were one class of stock.
Series A redeemable preferred stock
The Series A Redeemable carries a liquidation preference of $10 per share plus
any accumulated dividends ("Series A Redeemable Liquidation") ($12,760 if issued
and outstanding at December 31, 2001) and can be redeemed (all or none) at the
Series A Redeemable Liquidation plus interest, if applicable, on or after
October 8, 2004 or upon a qualified public offering as defined in the articles
of incorporation. Holders of the Series A Redeemable are entitled to receive
annual cumulative dividends equal to 3% of the Series A Redeemable Liquidation
whether or not they have been declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of such
dividends. The Series A Redeemable ranks equal to all other issuances of
redeemable preferred stock and senior to all issuances of common stock in
liquidation. At December 31, 2001 and 2000, there
F-19
<Page>
were 1,276,000 shares of Series A Redeemable authorized and no shares issued and
outstanding.
Series B redeemable preferred stock
The Series B Redeemable carries a liquidation preference of $10 per share plus
any accumulated dividends ("Series B Redeemable Liquidation") ($6,800 if issued
and outstanding at December 31, 2001) and can be redeemed (all or none) at the
Series B Redeemable Liquidation plus interest, if applicable, on or after
October 8, 2004 or upon a qualified public offering as defined in the articles
of incorporation. Holders of the Series B Redeemable are entitled to receive
annual cumulative dividends equal to 3% of the Series B Redeemable Liquidation
whether or not they have been declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of such
dividends. The Series B Redeemable ranks equal to all other issuances of
redeemable preferred stock and senior to all issuances of common stock in
liquidation. At December 31, 2001 and 2000, there were 680,000 shares of
Series B Redeemable authorized and no shares issued and outstanding.
15. Stockholders' equity
Class A common stock
On March 31, 2001, certain executives of the Company (the "Executives") executed
a Stock Purchase and Voting Agreement ("Stock Purchase Agreement") and issued
promissory notes payable to the principal stockholders totaling $5,400 for the
purchase of 583,800 shares of Class A Common from the principal stockholders of
the Company. Under the provisions of the Stock Purchase Agreement, the principal
stockholders have the option to repurchase all or any portion of the related
Class A Common for a calculated value, as defined in the Stock Purchase
Agreement ($20.47 per share at December 31, 2001). Compensation expense related
to the Stock Purchase Agreement of $9,388 for the year ended December 31, 2001
is reflected in accompanying consolidated income statement as marketing, general
and administrative expenses.
The Class A Common has one vote per share on all matters. Dividends may be
declared and paid on Class A Common subject to the payment of all dividends to
which the holders of the Series A and B Redeemable are entitled. Both the
Class A Common and the Class B Common rank junior to all issuances of preferred
stock and debt in liquidation.
Class B common stock
On October 8, 1999, the Company authorized 870,000 shares of Class B restricted,
non-voting common stock ("Class B Common"). On December 15, 1999, the Executives
executed a Restricted Stock Agreement ("Agreement") and issued promissory notes
payable to the Company totaling $1,365 ("Notes Receivable--Stockholders") for
the purchase of 750,000 shares of Class B Common. Under the Agreement, the
shares begin vesting December 15, 2000, and vest ratably over a 60 month period.
Total vested shares of Class B Common at December 31, 2001 and 2000 were 220,588
and 44,118, respectively.
The Class B Common is convertible, upon a qualified public offering as defined
in the Agreement, into an equal amount of Class A Common. Under the provisions
of the Agreement,
F-20
<Page>
the Company has the option to repurchase all or any portion of the Class B
Common held by the Executives upon their termination of employment with the
Company at $1.83 per share. Upon the bankruptcy of the Executives, the Company
has the option to repurchase all or any portion of the Class B Common held by
the Executives at a price equal to their fair market value ($20.47 per share at
December 31, 2001 and 2000). With respect to the vested shares of Class B
Common, the Company's repurchase option applies only to a termination of
employment or bankruptcy of the Executives prior to a liquidity event.
The Notes Receivable--Stockholders are reflected in the accompanying
consolidated balance sheets in equity as a reduction of stockholders' equity.
The notes mature on December 15, 2005 and interest is payable to the Company at
a rate of 6.08% per year. The principal balance, which is $1,365 at
December 31, 2001 and 2000, is payable upon maturity.
At December 31, 2001 and 2000, accrued interest on these notes totalled $166 and
$83, respectively.
16. Income taxes
On October 7, 1999, the Company terminated its S-Corp election for Federal and
state income tax purposes due to the issuance of preferred stock. Accordingly,
the Company has recorded a Federal and state income tax provision for the period
October 8 through December 31, 1999. The federal and state income tax provision
is:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------
Current tax expense
Federal..................................................... $1,867 $1,273 $64
State..................................................... 504 327 65
------------------------------
2,371 1,600 129
------------------------------
Deferred tax expense (benefit)
Federal..................................................... 1,401 1,892 (328)
State..................................................... 248 (63) (99)
------------------------------
1,649 1,829 (427)
------------------------------
$4,020 $3,429 $(298)
- --------------------------------------------------------------------------------------------
</Table>
Deferred income taxes are primarily the result of reporting depreciation and the
accrual of certain expenses differently for income tax and financial reporting
purposes and the benefit from unused operating loss carryforwards. The net
operating loss carryforwards, which begin to expire in 2016 are approximately
$10,000 for state income tax purposes. Management has recorded a valuation
allowance for a portion of these carryforwards based on expected
F-21
<Page>
utilization. The tax effects of temporary differences that give rise to deferred
tax assets and liabilities are:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2001 2000
- ---------------------------------------------------------------------------------
Deferred tax assets
Loss carryforwards........................................ $481 $358
Other accrued expenses.................................... 1,571 1,233
-------------------
2,052 1,591
Valuation allowance....................................... (79) --
-------------------
1,973 1,591
-------------------
Deferred tax liabilities
Depreciation and amortization............................. $(5,040) $(3,009)
- ---------------------------------------------------------------------------------
</Table>
The tax provision differs from the amount that would be calculated by applying
the federal statutory rate of 34% to income before income taxes as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------
Expected tax provision...................................... $12 $2,959 $464
State income taxes.......................................... 525 327 65
Valuation allowance......................................... 79 -- --
Minority interest in net income of consolidated
subsidiaries.............................................. (37) (49) --
Nondeductible stock compensation............................ 3,191 -- --
Effect of income reported during S-corporation period....... -- -- (464)
Effect of federal net operating loss carryforwards.......... -- -- (264)
Effect of state net operating loss carryforwards............ -- -- (99)
Other, net.................................................. 250 192 --
------------------------------
Provision (benefit) for income taxes........................ $4,020 $3,429 $(298)
- --------------------------------------------------------------------------------------------
</Table>
17. Restatements
The 2000 and 1999 financial statements have been restated for the
reclassification of the mandatorily redeemable Series A convertible preferred
stock as a separate item outside of stockholders' equity (deficit) to comply
with SEC reporting requirements in connection with the transaction discussed in
Note 18.
Additionally, the 2000 and 1999 financial statements have been restated for a
change in the carrying amount of mandatory redeemable preferred stock on the
balance sheet. The redeemable preferred stock is required to be carried as its
estimated redemption value. The stock, with certain restrictions, may be
redeemed at the holder's option at fair market value. In the 2000 and 1999
financial statements, the preferred stock had been carried at its issuance price
of $5.53 per share. On March 31, 2001, in a second preferred stock transaction,
additional stock was issued for $20.74 per share, which indicated a
significantly greater fair market value of the mandatorily redeemable preferred
stock. Management had concluded that the change in fair market value occurred in
2000 and 1999. Therefore, the 2000 and 1999 preferred stock carrying amounts
have been restated to reflect an increase of $60,521 and $436, respectively with
a corresponding reduction in retained earnings.
F-22
<Page>
In December of 1999, the Company issued 750,000 shares of Class B common stock
to certain management stockholders in exchange for notes receivable totaling
$1,365. The Company has recorded the issuance of this series of common and
classified the related notes receivable as a reduction of stockholders' equity
in the accompanying financial statements. This restatement had no impact on
total stockholder's equity or net income during 1999. In 2000, net income and
stockholders' deficit have been adjusted by $83 thousand related to recognizing
interest income on the notes receivable.
18. Subsequent events
The Company is currently in the process of completing a recapitalization
transaction. If completed, the total consideration to be paid in the
recapitalization will be approximately $364,413, including transaction costs.
Approximately 70.0% of the total capital stock of MQ Associates, Inc. then
outstanding will be owned by MQ Investment Holdings, LLC (a newly formed entity
controlled by JP Morgan Partners, LLC) and approximately 30.0% of the total
capital stock of MQ Associates, Inc. will be owned by management, in each case,
on a fully diluted basis. Pursuant to the proposed agreement, the following
transactions will occur:
- - MQ Investment Holdings, LLC will make an equity investment of approximately
$107,100;
- - MQ Associates, Inc. will redeem all its shares of stock held by all
stockholders other than the management stockholders and approximately 58.9% of
its shares of common stock held by the management stockholders;
- - MQ Associates, Inc. will redeem its $8,800 Senior Subordinated Convertible
Notes held by TA Associates and repay all existing bank debt;
- - The management stockholders will exchange approximately 41.1% of their shares
of MQ Associates, Inc. common stock for newly issued shares of MQ Investment
Holdings, LLC;
- - MedQuest, Inc. will enter into the senior credit facility, which will consist
of an $80,000 revolving credit facility (the "Facility"). The Facility will
bear interest at LIBOR plus 2.5% and mature five years after its commencement
date.
- - MedQuest, Inc., a wholly owned subsidiary of MQ Associates, Inc., will issue
$180,000 of senior subordinated notes due in 2012.
19. Consolidating Financial Statements
The following tables present consolidating financial information as required for
the years ended December 31, 1999, 2000 and 2001 for: 1) MQ Associates, Inc.;
2) MedQuest, Inc.; 3) the guarantors (on a combined basis) of MedQuest, Inc.'s
notes (which represent all of MedQuest, Inc.'s subsidiaries) and 4) all
eliminating adjustments. The consolidating financial statements presented
reflect the legal entity compositions at the respective dates. Separate
financial statements of MedQuest, Inc., as issuer of the notes, and the
subsidiary guarantors are not presented because: 1) each subsidiary guarantor is
100% owned by MQ Associates, Inc., 2) all guarantees are full and unconditional,
and 3) all guarantees are joint and several.
F-23
<Page>
The senior credit facility and the indenture governing the notes impose certain
restrictions on the Company, including restrictions on the Company's ability to
incur indebtedness, pay dividends, make investments, grant liens, sell assets
and engage in certain other activities. In addition, the senior credit facility
requires the Company to maintain certain financial ratios. The Company's
indebtedness under the senior credit facility is secured by substantially all of
the Company's assets, including inventory, accounts receivable, real and
personal property, intellectual property and other intangibles, and is
guaranteed by MQ Associates, Inc. and all of MedQuest, Inc.'s domestic
subsidiaries.
F-24
<Page>
MQ ASSOCIATES, INC.
Consolidating balance sheets
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 2000
---------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands, except share data) Inc. Inc. Subsidiaries Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents.................... $ -- 2,316 $ 2,316
Patient receivables, net of allowance for
doubtful accounts of $485.................. 15,275 15,275
Related party receivables.................... 1,396 1,396
Other receivables............................ 1,314 1,314
Prepaid expenses and other................... 2,021 2,021
Deferred income taxes........................ 1,591 1,591
---------------------------------------------------------------------------
Total current assets....................... 23,913 23,913
---------------------------------------------------------------------------
Property and equipment, net.................... 43,042 43,042
Goodwill....................................... 5,794 5,794
Intangible assets, net.........................
Investment in subsidiaries..................... 5,299 (5,299)
Other.......................................... 193 193
---------------------------------------------------------------------------
Total assets............................... 5,299 72,942 (5,299) 72,942
===========================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable............................. 3,247 3,247
Accrued payroll and related taxes............ 910 910
Other accrued expenses....................... 4,209 4,209
Equipment line of credit.....................
Current portion of long-term debt............ 855 10,104 10,959
Current portion of obligations under capital
leases..................................... 3,831 3,831
---------------------------------------------------------------------------
Total current liabilities.................. 855 22,301 23,156
---------------------------------------------------------------------------
Intercompany payable........................... (664) 664
Long-term debt................................. 1,701 32,452 34,153
Obligations under capital leases............... 9,168 9,168
Deferred income taxes.......................... 3,009 3,009
---------------------------------------------------------------------------
Total liabilities.......................... 1,892 67,594 69,486
Minority interest.............................. -- 49 49
---------------------------------------------------------------------------
Total liabilities and minority interest........ 1,892 67,643 69,535
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.01 par value; voting;
3,300,000 shares authorized, issued and
outstanding................................ $79,321 $79,321
Series C Convertible, $.01 par value; voting;
805,532 shares authorized, 0 issued and
outstanding................................
---------------------------------------------------------------------------
79,321 79,321
---------------------------------------------------------------------------
Stockholders' deficit
Common stock, $.01 par value; voting;
17,557,692 shares authorized; 5,830,000
shares issued and outstanding.............. 58 58
Class B common stock; $.01 par value;
nonvoting; 870,000 shares authorized;
750,000 issued and outstanding............. 8 8
Notes receivable from stockholders............. (1,448) (1,448)
Additional paid-in capital..................... 1,357 1,357
Accumulated deficit............................ (75,889) 5,299 (5,299) (75,889)
---------------------------------------------------------------------------
Total stockholders' deficit................ (75,914) 5,299 (5,299) (75,914)
---------------------------------------------------------------------------
Total liabilities and stockholders'
deficit.................................. $ 5,299 72,942 (5,299) $72,942
- ----------------------------------------------------------------------------------------------------------------------------
</Table>
F-25
<Page>
MQ ASSOCIATES, INC.
Consolidating balance sheets
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2001
-------------------------------------------------------------------------------
MQ Associates, Guarantor
(in thousands, except share data) Inc. MedQuest, Inc. Subsidiaries Eliminations Consolidated
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents............ $ -- 5,391 $ 5,391
Patient receivables, net of allowance
for doubtful accounts of $987...... 30,817 30,817
Related party receivables............ 1,656 1,656
Other receivables.................... 1,411 1,411
Prepaid expenses and other........... 2,167 2,167
Deferred income taxes................ 1,654 1,654
-------------------------------------------------------------------------------
Total current assets............... 43,096 43,096
-------------------------------------------------------------------------------
Property and equipment, net............ 65,221 65,221
Goodwill............................... 26,387 26,387
Intangible assets, net................. 2,415 2,415
Investment in subsidiaries............. 1,648 (1,648)
Other.................................. 229 229
-------------------------------------------------------------------------------
Total assets....................... 1,648 137,348 (1,648) 137,348
===============================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable..................... 5,521 5,521
Accrued payroll and related taxes.... 2,329 2,329
Other accrued expenses............... 9,111 9,111
Equipment line of credit............. 6,000 6,000
Current portion of long-term debt.... 1,190 18,812 20,002
Current portion of obligations under
capital leases..................... 4,780 4,780
-------------------------------------------------------------------------------
Total current liabilities.......... 7,190 40,553 47,743
-------------------------------------------------------------------------------
Intercompany payable................... (9,949) 9,949
Long-term debt......................... 4,521 70,651 75,172
Obligations under capital leases....... 9,667 9,667
Deferred income taxes.................. 4,721 4,721
-------------------------------------------------------------------------------
Total liabilities.................. $ 1,762 135,541 $ 137,303
Minority interest...................... $ -- 159 $ 159
-------------------------------------------------------------------------------
Total liabilities and minority
interest............................. 1,762 135,700 137,462
Commitments and contingencies --
Redeemable preferred stock
Series A Convertible, $.01 par value;
voting; 3,300,000 shares
authorized, issued and
outstanding........................ 79,321 79,321
Series C Convertible, $.01 par value;
voting; 805,532 shares authorized,
issued and outstanding............. 25,962 25,962
-------------------------------------------------------------------------------
105,283 105,283
-------------------------------------------------------------------------------
Stockholders' deficit
Common stock, $.01 par value; voting;
15,000,000 shares authorized;
4,935,999 shares issued and
outstanding........................ 49 49
Class B common stock; $.01 par value;
nonvoting; 750,000 shares
authorized; 750,000 issued and
outstanding........................ 8 8
Notes receivable from stockholders..... (1,531) (1,531)
Additional paid-in capital............. 10,845 10,845
Accumulated deficit.................... (114,768) 1,648 (1,648) (114,768)
-------------------------------------------------------------------------------
Total stockholders' deficit........ (105,397) 1,648 (1,648) (105,397)
-------------------------------------------------------------------------------
Total liabilities and stockholders'
deficit.......................... $ 1,648 137,348 (1,648) $ 137,348
- -------------------------------------------------------------------------------------------------------------------------
</Table>
F-26
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of operations
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
-----------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------
Net revenues from services..... $ -- 56,684 $56,684
Costs and expenses
Operating expenses, excluding
depreciation................. 25,091 25,091
Marketing, general and
administrative expenses...... 17,290 17,290
Depreciation and amortization.. 9,152 9,152
-----------------------------------------------------------------------
Income from operations....... 5,151 5,151
Interest expense............... 4,118 4,118
Interest income................ (35) (35)
-----------------------------------------------------------------------
Income (loss) before
provision for income
taxes...................... 1,068 1,068
Provision (benefit) for income
taxes........................ (298) (298)
Minority interest in net income
of consolidated
subsidiaries.................
Equity in earnings of
consolidated subsidiaries.... 1,366 (1,366)
-----------------------------------------------------------------------
Net income (loss)............ $1,366 1,366 (1,366) $ 1,366
- --------------------------------------------------------------------------------------------------------
</Table>
F-27
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of operations
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
-----------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net revenues from services...... $ -- 85,932 $85,932
Costs and expenses
Operating expenses, excluding
depreciation.................. 35,626 35,626
Marketing, general and
administrative expenses....... 25,559 25,559
Depreciation and amortization... 11,187 11,187
-----------------------------------------------------------------------
Income from operations...... 13,560 13,560
Interest expense................ 70 4,805 4,875
Interest income................. (17) (17)
-----------------------------------------------------------------------
Income (loss) before
provision for income
taxes..................... (70) 8,772 8,702
Provision (benefit) for income
taxes......................... 3,429 3,429
Minority interest in net income
of consolidated
subsidiaries.................. 60 60
Equity in earnings of
consolidated subsidiaries..... 5,283 (5,283)
-----------------------------------------------------------------------
Net income (loss)........... $5,213 5,283 (5,283) $ 5,213
- ---------------------------------------------------------------------------------------------------------
</Table>
F-28
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of operations
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
-----------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net revenues from services...... $ -- 142,322 $142,322
Costs and expenses
Operating expenses, excluding
depreciation.................. 61,014 61,014
Marketing, general and
administrative expenses....... 55,554 55,554
Depreciation and amortization... 17,488 17,488
-----------------------------------------------------------------------
Income from operations...... 8,266 8,266
Interest expense.............. 443 8,117 8,560
Interest income............... (330) (330)
-----------------------------------------------------------------------
Income (loss) before
provision for income
taxes..................... (443) 479 36
Provision (benefit) for income
taxes......................... 4,020 4,020
Minority interest in net income
of consolidated
subsidiaries.................. 110 110
Equity in earnings of
consolidated subsidiaries..... (3,651) 3,651
-----------------------------------------------------------------------
Net income (loss)........... $(4,094) (3,651) 3,651 $ (4,094)
- ---------------------------------------------------------------------------------------------------------
</Table>
F-29
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of cash flows
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss).................................... $ 1,366 1,366 (1,366) $ 1,366
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation and amortization.................... 9,152 9,152
Stock compensation expense.......................
Bad debt expense................................. 1,890 1,890
Deferred income taxes............................ (427) (427)
Minority interest in income of consolidated
subsidiaries...................................
Equity in earnings of consolidated
subsidiaries................................... (1,366) 1,366
Accrued interest on notes receivable,
stockholder....................................
Changes in operating assets and liabilities
Patient receivables............................ (4,180) (4,180)
Intercompany payable...........................
Intercompany receivable........................
Related party and other receivables............ 4 4
Prepaid expenses and other current assets...... (632) (632)
Other assets................................... (89) (89)
Accounts payable............................... (889) (889)
Accrued payroll and related taxes.............. 207 207
Other accrued expenses......................... 783 783
------------------------------------------------------------------------
Net cash and cash equivalents provided by operating
activities........................................... 7,185 7,185
------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment.................. (11,577) (11,577)
Acquisitions of businesses, net of cash acquired.....
------------------------------------------------------------------------
Net cash and cash equivalents used in investing
activities........................................... (11,577) (11,577)
------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable.......................... 12,148 12,148
Proceeds from (payments on) line of credit...........
Payments on notes payable............................ (5,086) (5,086)
Payments on capital leases........................... (1,987) (1,987)
Intercompany payable................................. 21,489 19,393 (40,882)
Intercompany receivable.............................. (19,393) (21,489) 40,882
Proceeds from issuance of convertible preferred
stock, net of transaction costs.................... 18,364 18,364
Purchase of common stock from stockholders........... (19,854) (19,854)
Repayment of stockholder receivable.................. $ 1,029 $ 1,029
Repayment of affiliated receivable................... $ -- 576 $ 576
S-Corp distributions to stockholders................. (1,635) (1,635)
------------------------------------------------------------------------
Net cash and cash equivalents provided by financing
activities........................................... 3,555 3,555
------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents... (837) (837)
Cash and cash equivalents, beginning of period......... 3,124 3,124
------------------------------------------------------------------------
Cash and cash equivalents, end of period............... $ -- 2,287 $ 2,287
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-30
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of cash flows
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss).................................... $ 5,213 5,283 (5,283) $ 5,213
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation and amortization.................... 11,187 11,187
Stock compensation expense.......................
Bad debt expense................................. 2,882 2,882
Deferred income taxes............................ 1,829 1,829
Minority interest in income of consolidated
subsidiaries................................... 60 60
Equity in earnings of consolidated
subsidiaries................................... (5,283) 5,283
Accrued interest on notes receivable,
stockholder.................................... (83) (83)
Changes in operating assets and liabilities
Patient receivables............................ (9,623) (9,623)
Intercompany payable........................... 70 (70)
Intercompany receivable........................ (70) 70
Related party and other receivables............ (1,563) (1,563)
Prepaid expenses and other current assets...... (968) (968)
Other assets................................... 422 422
Accounts payable............................... 448 448
Accrued payroll and related taxes.............. 343 343
Other accrued expenses......................... 1,864 1,864
------------------------------------------------------------------------
Net cash and cash equivalents provided by operating
activities........................................... 12,011 12,011
------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment.................. (12,759) (12,759)
Acquisitions of businesses, net of cash acquired..... (2,199) (2,199)
------------------------------------------------------------------------
Net cash and cash equivalents used in investing
activities........................................... (14,958) (14,958)
------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable.......................... 2,632 11,460 14,092
Payments on notes payable............................ (76) (8,023) (8,099)
Payments on capital leases........................... (3,086) (3,086)
Intercompany payable................................. 76 2,632 (2,708)
Intercompany receivable.............................. (2,632) (76) 2,708
Other................................................ $ -- 69 $ 69
------------------------------------------------------------------------
Net cash and cash equivalents provided by financing
activities........................................... $ -- 2,976 $ 2,976
------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents.......................................... 29 29
Cash and cash equivalents, beginning of period......... 2,287 2,287
------------------------------------------------------------------------
Cash and cash equivalents, end of period............... $ -- 2,316 $ 2,316
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-31
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of cash flows
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss).................................... $ (4,094) (3,651) 3,651 $ (4,094)
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation and amortization.................... 17,488 17,488
Stock compensation expense....................... 9,388 9,388
Bad debt expense................................. 4,866 4,866
Deferred income taxes............................ 1,649 1,649
Minority interest in income of consolidated
subsidiaries................................... 110 110
Equity in earnings of consolidated
subsidiaries................................... 3,651 (3,651)
Accrued interest on notes receivable,
stockholder.................................... (83) (83)
Changes in operating assets and liabilities
Patient receivables............................ (17,038) (17,038)
Intercompany payable........................... 443 (443)
Intercompany receivable........................ (443) 443
Related party and other receivables............ (357) (357)
Prepaid expenses and other current assets...... (146) (146)
Other assets................................... (36) (36)
Accounts payable............................... 2,274 2,274
Accrued payroll and related taxes.............. 1,419 1,419
Other accrued expenses......................... 4,902 4,902
------------------------------------------------------------------------
Net cash and cash equivalents provided by operating
activities........................................... 20,342 20,342
------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment.................. (25,900) (25,900)
Acquisitions of businesses, net of cash acquired..... (34,232) (34,232)
------------------------------------------------------------------------
Net cash and cash equivalents used in investing
activities........................................... (60,132) (60,132)
------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable.......................... 4,460 58,410 62,870
Proceeds from (payments on) line of credit........... 6,000 6,000
Payments on notes payable............................ (1,305) (12,116) (13,421)
Payments on capital leases........................... (3,853) (3,853)
Intercompany payable................................. 19,855 20,179 (40,034)
Intercompany receivable.............................. (20,179) (19,855) 40,034
Proceeds from issuance of convertible preferred
stock, net of transaction costs.................... $ 9,719 $ 9,719
Purchase of common stock from stockholders........... $(18,550) $(18,550)
Capital contribution................................. 100 100
------------------------------------------------------------------------
Net cash and cash equivalents provided by financing
activities........................................... 42,865 42,865
------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents... 3,075 3,075
Cash and cash equivalents, beginning of period......... 2,316 2,316
------------------------------------------------------------------------
Cash and cash equivalents, end of period............... $ -- 5,391 $ 5,391
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-32
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated balance sheets
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
September 30, December 31,
(in thousands, except share data) 2002 2001
- --------------------------------------------------------------------------------------------
(unaudited) (derived
from audited
financial
statements)
Assets
Current assets
Cash and cash equivalents................................. $ 2,412 $ 5,391
Patient receivables, net of allowance for doubtful
accounts
of $1,264 and $987...................................... 42,077 30,817
Related party receivables................................. 556 1,656
Other receivables......................................... 1,532 1,411
Prepaid expenses and other................................ 3,146 2,167
Deferred income taxes..................................... 1,654 1,654
------------------------------
Total current assets...................................... 51,377 43,096
Property and equipment, net................................. 78,002 65,221
Goodwill.................................................... 30,493 26,387
Intangible assets, net...................................... 5,094 2,415
Debt Issuance costs, net.................................... 12,375 --
Other....................................................... 2,663 229
------------------------------
Total assets.............................................. $180,004 $137,348
------------------------------
Liabilities and stockholders' deficit
Current liabilities
Accounts payable.......................................... 6,599 5,521
Accrued payroll and related taxes......................... 2,312 2,329
Other accrued expenses.................................... 9,345 9,111
Equipment line of credit.................................. -- 6,000
Current portion of long-term debt......................... -- 20,002
Current portion of obligations under capital leases....... 813 4,780
------------------------------
Total current liabilities................................. 19,069 47,743
Long-term debt.............................................. 221,511 75,172
Obligations under capital leases............................ 2,939 9,667
Deferred income taxes....................................... 4,721 4,721
------------------------------
Total liabilities......................................... 248,240 137,303
Minority interest........................................... -- 159
------------------------------
Total liabilities and minority interest................... 248,240 137,462
Commitments and contingencies
Redeemable preferred stock
Series A, $.001 par value; nonvoting; 35,000,000 shares
authorized, issued and outstanding...................... 35,000 --
Series B, $.001 par value; nonvoting; 15,000,000 shares
authorized, issued and outstanding...................... 15,000 --
Series A Convertible, $.01 par value; voting; 3,300,000
shares authorized issued and outstanding................ -- 79,321
Series C Convertible, $.01 par value; voting; 805,532
shares authorized; issued and outstanding............... -- 25,962
------------------------------
50,000 105,283
Stockholders' deficit
Class A Common Stock, $.001 par value; voting; 115,000,000
shares authorized; 72,100,000 issued and outstanding.... 72 --
Common Stock, $.001 par value; voting; 195,000,000 shares
authorized; 28,605,000 issued and outstanding........... 29 --
Common Stock; voting; $.01 par value; 15,000,000 shares
authorized; 4,935,999 shares issued and outstanding..... -- 49
Class B Common stock; nonvoting; $.01 par value; 750,000
authorized issued and outstanding....................... -- 8
Notes receivable from stockholders.......................... -- (1,531)
Additional paid-in capital.................................. 62,219 10,845
Accumulated deficit......................................... (180,556) (114,768)
------------------------------
Total stockholders' deficit............................... (118,236) (105,397)
------------------------------
Total liabilities and stockholders' deficit............... $180,004 $137,348
- --------------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-33
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated statements of operations
<Table>
- ---------------------------------------------------------------------------------------
Nine months ended
September 30,
-------------------------
(in thousands) 2002 2001
- ---------------------------------------------------------------------------------------
(unaudited) (unaudited)
Net revenues from services.................................. $149,120 $99,549
Costs and expenses
Operating expenses, excluding depreciation................ 64,774 41,915
Marketing, general and administrative expenses............ 45,033 40,045
Depreciation and amortization............................. 16,973 12,218
-------------------------
Income from operations.................................. 22,340 5,371
Interest expense............................................ 20,618 5,950
Interest income............................................. (82) (155)
-------------------------
Income (loss) before provision for income taxes......... 1,804 (424)
Provision for income taxes.................................. 706 3,208
Minority interest in net income of consolidated
subsidiaries.............................................. 40 58
-------------------------
Net income (loss)....................................... $ 1,058 $(3,690)
- ---------------------------------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-34
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, 2002
-----------------------------------------------------------------------
Class A Common Old series of
(in thousands, except share data) (unaudited) Stock Common Stock Common Stock
- ---------------------------------------------------------------------------------------------------------------------------------
Number of Number of Number of
Shares Shares Shares
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001.............................. -- $-- -- $-- 4,935,999 $49
Conversion of shares.................................... 4,105,393 41
Redemption of shares.................................... (7,407,963) (74)
Sale of common stock.................................... 72,100,000 72
Stock issuance fees.....................................
Reclassification of shares.............................. 28,605,000 29 (1,633,429) (16)
Settlement of notes receivable from stockholders........
Net income..............................................
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002............................. 72,100,000 $72 28,605,000 $29 -- $--
=================================================================================================================================
</Table>
<Table>
<Caption>
Notes
receivable Additional Total
Class B Common from paid-in Accumulated stockholders'
Stock stockholders capital deficit deficit
- ---------------------------------------------------------------------------------------------------------------------------------
Number of
Shares
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001....................... 750,000 $ 8 $ (1,531) $ 10,845 $(114,768) $(105,397)
Conversion of shares............................. 85,681 85,722
Redemption of shares............................. (49,959) (1) (96,526) (51,841) (148,442)
Sale of common stock............................. 72,028 72,100
Stock issuance fees.............................. (9,809) (9,809)
Reclassification of shares....................... (700,041) (7) (15,005) (14,999)
Settlement of notes receivable from
stockholders................................... 1,531 1,531
Net income....................................... 1,058 1,058
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002...................... -- $-- $ -- $ 62,219 $(180,556) $(118,236)
=================================================================================================================================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-35
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Consolidated statements of cash flows
<Table>
- -----------------------------------------------------------------------------------------
Nine months ended
September 30,
---------------------------
(in thousands) 2002 2001
- -----------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income (loss)........................................... $ 1,058 $(3,690)
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities
Depreciation and amortization............................. 16,973 12,218
Amortization of bond discount............................. 50 --
Amortization of debt issuance costs....................... 192 --
Stock compensation expense................................ -- 9,388
Bad debt expense.......................................... 5,303 3,381
Deferred income taxes..................................... -- 644
Minority interest in income of consolidated
subsidiaries............................................ 40 58
Accrued interest on notes receivable, stockholders........ -- (62)
Gain on disposal of property and equipment................ (73) --
Changes in operating assets and liabilities
Patient receivables....................................... (15,831) (13,735)
Related party and other receivables....................... 1,104 (916)
Prepaid expenses and other current assets................. (977) (638)
Other assets.............................................. (66) (60)
Accounts payable.......................................... 1,080 1,561
Accrued payroll and related taxes......................... (17) 482
Other accrued expenses.................................... (1) 4,439
---------------------------
Net cash and cash equivalents provided by operating
activities.............................................. 8,835 13,070
---------------------------
Cash flows from investing activities
Purchases of property and equipment....................... (21,174) (20,412)
Acquisitions of businesses, net of cash acquired.......... (12,091) (28,367)
Proceeds from stockholder loan repayments................. 1,531 --
---------------------------
Net cash and cash equivalents used in investing
activities............................................. (31,734) (48,779)
---------------------------
Cash flows from financing activities
Proceeds from notes payable............................... 18,908 50,887
Proceeds from (payments on) line of credit................ (2,350) 7,500
Payments on notes payable................................. (12,081) (9,654)
Payments on capital leases................................ (3,670) (2,919)
Proceeds from issuance of convertible preferred stock, net
of transaction costs.................................... -- 9,719
Purchase of common stock from stockholders................ -- (18,550)
Sale of preferred stock................................... 35,000 --
Sale of common stock...................................... 72,100
Payment of debt issuance costs............................ (12,567)
Proceeds from senior credit facility...................... 43,000 --
Proceeds from senior subordinated debt, net of discount... 176,167 --
Repayment of notes and leases............................. (116,777) --
Redemption of preferred and common stock.................. (168,001) --
Payment of stock issuance fees............................ (9,809) --
---------------------------
Net cash and cash equivalents provided by financing
activities............................................. 19,920 36,983
---------------------------
Net (decrease) increase in cash and cash equivalents.... (2,979) 1,274
---------------------------
Cash and cash equivalents, beginning of period.............. 5,391 2,316
---------------------------
Cash and cash equivalents, end of period.................... 2,412 3,590
===========================
Supplemental schedule of noncash financing activities
Equipment acquired through capital lease.................. $ 4,335 $ 2,326
===========================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-36
<Page>
MQ ASSOCIATES, INC. & SUBSIDIARIES
Notes to consolidated financial statements
(in thousands, except share data)
1. Basis of Presentation, Principles of Consolidation, and Use of Estimates
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
by MQ Associates, Inc. and its subsidiaries (collectively, the "Company") in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the full years ending December 31, 2002 and 2001. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes to the
consolidated financial statements for the year ended December 31, 2001.
Principles of Consolidation
MedQuest, Inc. ("MedQuest") is a wholly-owned subsidiary of MQ Associates, Inc.
MQ Associates, Inc. has no material assets or operations other than its
ownership of 100% of the outstanding capital stock of MedQuest, Inc. As a
result, the consolidated financial position and results of operations of MQ
Associates, Inc. are substantially the same as MedQuest's financial position and
results of operations.
The consolidated financial statements of the Company include the assets,
liabilities, revenues and expenses of all majority owned subsidiaries over which
the Company exercises direct or indirect control, and for which control is other
than temporary. All intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. New Accounting Pronouncement
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which addresses financial accounting
and reporting for costs associated with exit
F-37
<Page>
or disposal activities and supersedes Emerging Issues Task Force Issue 94-3
("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized
at the date of an entity's commitment to an exit plan. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value. The
Company will adopt the provisions of SFAS 146 for exit or disposal activities
that are initiated after December 31, 2002. The effects of adopting SFAS 146 are
not expected to have a material impact on the Company's financial position and
results of operations.
3. Recapitalization Transaction
On August 15, 2002, MQ Associates, Inc. consummated a recapitalization pursuant
to an agreement dated July 16, 2002, as amended on August 8, 2002, among MQ
Associates, Inc., its then existing stockholders and MQ Investment Holdings LLC,
an affiliate of J.P. Morgan Partners, LLC. The total consideration paid in the
recapitalization was approximately $365.1 million.
As a result of the recapitalization, approximately 70.0% of the total capital
stock of MQ Associates, Inc. is owned by MQ Investment Holdings, LLC, with the
remaining approximately 30.0% owned by certain management stockholders, in each
case, on a fully diluted basis.
In connection with the recapitalization the following transactions occurred:
- MQ Investment Holdings, LLC made an equity investment of $107.1 million
in MQ Associates, Inc. and as a result of such investment received
72,100,000 shares of Class A Common Stock, par value $0.001 per share,
and 35,000,000 shares of Series A Redeemable Preferred Stock, par value
$0.001 per share, of MQ Associates, Inc.;
- Immediately prior to the consummation of the recapitalization, the then
outstanding shares of Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock of MQ Associates, Inc. were converted in a
series of transactions into 4,105,393 shares of Common Stock, 1,276,000
shares of the old series Series A Redeemable Preferred Stock and 680,000
shares of the old series of Series B Redeemable Preferred Stock. As part
of the recapitalization, MQ Associates, Inc. (i) redeemed approximately
76.4% of the total outstanding shares of Common Stock and Class B Common
Stock, including approximately 58.9% of the stock holdings of the
management stockholders, for an aggregate redemption price of
approximately $148.4 million and (ii) redeemed 100% of the old series of
Series A Redeemable Preferred Stock and 100% of the old series of
Series B Redeemable Preferred Stock for an aggregate redemption price of
$19.6 million. The remaining 23.6% of the outstanding Common Stock and
the Class B Common Stock, which equaled 100% of the stock holdings of the
management stockholders, was reclassified as (i) 28,605,000 shares of
Common Stock, par value $0.001 per share (30,900,000 shares on a fully
diluted basis) and (ii) 15,000,000 shares of Series B Preferred Stock,
par value $0.001 per share, which in the aggregate equals approximately
30.0% of the ownership (on a fully diluted basis) of MQ
Associates, Inc.;
- Immediately prior to the closing of the recapitalization, MQ
Associates, Inc. transferred 100% of the ownership interests in each of
its subsidiaries to MedQuest, Inc.; and
F-38
<Page>
- MedQuest, Inc., as borrower, entered into an $80.0 million senior credit
facility and issued $180.0 million in 11 7/8% senior subordinated notes
to fund a portion of the recapitalization transaction. MQ
Associates, Inc. and all of the subsidiaries of MedQuest, Inc. are
guarantors under the senior credit facility and the notes.
4. Capital Structure
As a condition of the recapitalization, MQ Associates, Inc. amended its articles
of incorporation to effect a change in its capital structure. The amended
articles of incorporation authorize 385,000,000 shares of capital stock
consisting of (i) 195,000,000 shares of common stock, par value $.001,
(ii) 115,000,000 shares of Class A common stock, $.001 par value, and
(iii) 75,000,000 shares of Preferred Stock, par value $.001, of which
(a) 35,000,000 shares are designated as Series A Redeemable Preferred Stock
("Series A Preferred Stock"), and (b) 15,000,000 shares are designated as
Series B Redeemable Preferred Stock ("Series B Preferred Stock").
The Class A common stock is convertible, on a one-for-one basis, into common
stock at the option of the holder or upon the occurrence of an underwritten
public offering, as defined.
5. Redeemable Preferred Stock
The Series A Preferred Stock is convertible, at the option of the holder,
(i) immediately prior to a liquidation or sale of MQ Associates, Inc., into a
total of 35,000,000 shares of Class A Common Stock or, (ii) immediately prior to
the consummation of an underwritten public offering, into the number of shares
resulting from dividing $35.0 million by the underwritten public offering price
per share. In the event of a liquidation or sale of MQ Associates, Inc., the
Series A Preferred Stock is entitled to an amount equal to the greater of $1.00
per share or the amount to be paid, per share, as if the Series A Preferred
Stock had been converted into Class A Common Stock immediately prior to the
liquidation.
The Series B Preferred Stock (i) is convertible, at the option of the holder,
immediately prior to a liquidation or sale of MQ Associates, Inc., into
17,295,000 shares of Common Stock and (ii) immediately prior to the consummation
of an underwritten public offering, will be deemed automatically converted into
the number of shares resulting from dividing $15.0 million by the underwritten
public offering price per share, plus 2,295,000 shares of Common Stock. In the
event of a liquidation or sale of MQ Associates, Inc., the Series B Preferred
Stock is entitled to an amount equal to the greater of $1.00 per share or the
amount to be paid, per share, as if the Series B Preferred Stock had been
converted into Common Stock immediately prior to the liquidation.
The Series A Preferred Stock and Series B Preferred Stock may be redeemed at the
option of the holder upon the consummation of an underwritten public offering at
a redemption price of $35.0 million for all of the Series A Preferred Stock and
$15.0 million for all of the Series B Preferred Stock. Additionally, in the case
of such redemption, the holders of Series B Preferred Stock will receive
2,295,000 shares of Common Stock. In the event that (i) MQ Associates, Inc. and
its underwriters determine that the redemption of the Series B Preferred Stock
would adversely affect the planned underwritten public offering or (ii) the
holders of shares of Series B Preferred Stock elect not to redeem shares of
Series B Preferred Stock, MQ Associates, Inc. may convert all shares of
Series B Preferred Stock into 17,295,000 shares of
F-39
<Page>
Common Stock. We have not accreted the fair value of the additional shares of
Common Stock to be issued upon redemption of the Series B Preferred Stock
because we do not believe that the redemption trigger is probable as of
September 30, 2002.
The conversion provisions related to the Series A Preferred Stock and Series B
Preferred Stock are subject to adjustments for certain events. Upon the
consummation of any liquidation or sale of MQ Associates, Inc., after payment of
the preference to the holders of Series A Preferred Stock, the holders of
Class A Common Stock will be entitled to receive out of the proceeds of such
liquidation or sale, before any payment will be made to the holders of any
capital stock ranking junior to the Class A Common Stock, an amount per share of
Class A Common Stock equal to the original cost of such share. After payment has
been made to the holders of Class A Common Stock of the full amount set forth in
the preceding sentence, the holders of Common Stock will be entitled to receive
out of the proceeds of such liquidation or sale an amount per share of Common
Stock equal to the original cost of each such share of Common Stock PARI PASSU
with the payment of the preference to the holders of Series B Preferred Stock.
After payment of the amounts set forth above, the holders of Common Stock and
the holders of Class A Common Stock will share ratably in the remaining
proceeds, if any, of such liquidation or sale.
6. Long-term debt
Long-term debt consists of the following:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
September 30, December 31,
2002 2001
- ------------------------------------------------------------------------------------------
Senior credit facility due 2007............................. $43,000 $--
11 7/8% senior subordinated notes due 2012 176,217 --
Notes payable to bank(s), various interest rates............ -- 86,374
12% senior subordinated convertible notes due October 2004 -- 8,800
----------------------------
219,217 95,174
Fair value adjustment related to 11 7/8% senior subordinated
notes..................................................... 2,294 --
Less: current portion of long-term debt..................... -- 20,002
----------------------------
$221,511 $75,172
- ------------------------------------------------------------------------------------------
</Table>
The senior credit facility provides for revolving credit borrowings not to
exceed $80.0 million and is guaranteed by MQ Associates, Inc. and each of
MedQuest's existing and future domestic subsidiaries and certain foreign
subsidiaries. MedQuest's obligations under the senior credit facility and the
guarantors' obligations under the guarantees are collateralized by substantially
all of the assets of MedQuest and the guarantors. Borrowings under the senior
credit facility accrued interest during the three months ended September 30,
2002, at the option of MedQuest, at either (a) the prime rate (4.75% at
September 30, 2002) or the Federal funds effective rate (subject to certain
adjustments) (1.75% at September 30, 2002) plus an applicable margin of 1.5% per
annum or (b) the Eurodollar rate, plus an applicable margin of 2.5% per annum.
Borrowings at September 30, 2002 were based upon the Eurodollar rate (1.75% at
September 30, 2002). The senior credit facility also provides for a commitment
fee equal to 1/2 of 1% per annum. The margins related to the prime rate and
Eurodollar rate borrowings and commitment fee are subject to adjustment based
upon the Company's consolidated leverage ratio, as defined.
F-40
<Page>
The senior credit facility has certain financial covenants related to the
maintenance of minimum/maximum levels of consolidated leverage, senior leverage
and fixed charge coverage ratios. The Company was in compliance with all
covenants under the senior credit facility at September 30, 2002.
The 11 7/8% senior subordinated notes were issued with registration rights that
provide for additional interest in the event that a registered exchange offer
for the notes is not completed or a shelf registration statement is not declared
effective by the Securities and Exchange Commission by March 28, 2003. The notes
were issued in the aggregate principal amount of $180.0 million, net of a
discount of $3.8 million, which is being amortized as interest expense over the
life of the notes. The notes also provide for an optional early redemption by
MedQuest, Inc. upon a change in control, as defined, prior to August 15, 2007 at
100% of the principal amount, or on or after August 15, 2007 at the redemption
prices expressed as a percentage of principal amount, plus accrued and unpaid
interest as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
Twelve months beginning August 15, Optional Redemption Percentage
- --------------------------------------------------------------------------------------------
2007........................................................ 105.938 %
2008........................................................ 103.958 %
2009........................................................ 101.979 %
2010 and thereafter......................................... 100.00 %
</Table>
Prior to August 15, 2005, MedQuest may also redeem up to 35% of the notes with
the net cash proceeds of one or more equity offerings at a redemption price of
111.875% of the principal amount thereof, plus accrued and unpaid interest,
provided that at least 65% of the original principal amount of the notes remains
outstanding after such redemptions and the redemptions occurs within 120 days of
the closing of the equity offerings.
The notes are guaranteed by MQ Associates, Inc. and each of MedQuest's domestic
subsidiaries. The notes contain certain covenants, including covenants limiting
the Company's ability to incur additional indebtedness and make restricted
payments.
Debt issuance costs amounting to $12.6 million, with respect to the entering
into of the senior credit facility and issuance of the notes, were capitalized
and are being amortized into interest expense over the lives of the related debt
instruments.
Future maturities of long-term debt are as follows (in thousands):
<Table>
<Caption>
- -----------------------------------------------------------------------
Year ended December 31, Amount
- -----------------------------------------------------------------------
2007........................................................ $ 43,000
Thereafter.................................................. 176,217
--------
$219,217
========
</Table>
7. Goodwill and Intangible Assets
In January 2002, the Company adopted Statement of Financial Standards No. 142
("SFAS 142"), which requires the discontinuance of amortization of goodwill and
certain intangible assets with indefinite useful lives. SFAS 142 requires that
goodwill and intangible assets deemed to have an indefinite life be reviewed for
impairment upon the initial adoption of SFAS 142 and annually thereafter. The
Company performed its initial impairment review in January 2002 and
F-41
<Page>
will annually perform its impairment review in the fourth quarter of every year.
Other intangibles with limited lives will continue to be amortized over the
estimated useful lives.
Information related to intangibles subject to amortization and intangibles not
subject to amortization is as follows (in thousands):
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------
Weighted average Gross carrying Accumulated
Intangibles subject to amortization amortization period amount amortization
- ----------------------------------------------------------------------------------------------------
Non-compete agreements........................ 19 months $1,932 $1,037
</Table>
<Table>
<Caption>
- -----------------------------------------------------------------------------
Intangibles not subject to amortization Carrying amount
- -----------------------------------------------------------------------------
Certificates of need........................................ $4,199
</Table>
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
Carrying amount, Impairment Carrying amount,
(in thousands) December 31, 2001 Goodwill acquired losses September 30, 2002
- -------------------------------------------------------------------------------------------------------
Goodwill...................... $26,387 $4,106 -- $30,493
</Table>
The results for the nine months ended September 30, 2001 on a historical basis
do not reflect the provisions of SFAS 142. If the Company had adopted SFAS 142
on January 1, 2001, the historical amounts would have been changed to the
adjusted amounts as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------
Nine months ended
(in thousands) September 30, 2001
- --------------------------------------------------------------------------------
Net income, as reported..................................... $(3,690)
Add: Goodwill amortization, net of tax...................... 300
-------
Net income, as adjusted..................................... $(3,390)
=======
</Table>
Based on the current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding five years is as
follows (in thousands):
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
Year ending December 31, Estimated amortization expense
- --------------------------------------------------------------------------------------------
2003........................................................ $414
2004........................................................ 216
2005........................................................ 96
2006........................................................ 35
2007........................................................ 15
</Table>
Amortization expense amounted to $180 and $668 for the nine months ended
September 30, 2002 and 2001.
8. Derivative Financial Instrument
The Company may, from time to time, use derivative financial instruments to
reduce exposure to adverse fluctuations in interest rates. When entered into,
the Company formally designates and documents the financial instrument as a
hedge of a specific underlying exposure, as well as the risk management
objectives and strategies for undertaking the hedge transactions. The Company
formally considers, both at the inception and at least quarterly thereafter,
whether
F-42
<Page>
the financial instruments that are used in hedging transactions are effective at
offsetting changes in either the fair value or cash flows of the related
underlying exposure. Because of the high degree of effectiveness between the
hedging instrument and the underlying exposure being hedged, fluctuations in the
value of the derivative instruments are generally offset by changes in the fair
value or cash flows of the underlying exposure being hedged. Any ineffective
portion of a financial instrument's change in fair value is immediately
recognized in earnings.
In August 2002, MedQuest entered into an interest rate swap agreement related to
the fixed interest obligations on the notes. The agreement requires MedQuest to
pay interest at a variable rate based on six-month LIBOR plus 6.525% on a
notional amount of $47.5 million for a term of ten years. This derivative
instrument has been accounted for as a fair value hedge of the fair market value
of the notes and was 100% effective for the nine months ended September 30,
2002. As a result, the change in fair market value related to this derivative
instrument has been entirely offset by the change in fair market value of the
notes.
9. Consolidating Financial Statements
The following tables present consolidating financial information as required for
the three and nine months ended September 30, 2002 for: 1) MQ Associates, Inc.,
2) MedQuest, Inc.; 3) the guarantors (on a combined basis) of MedQuest, Inc.'s
notes (which represent all of MedQuest's subsidiaries) and 4) all eliminating
adjustments. The consolidating financial statements presented reflect the legal
entity compositions at the respective dates. Separate financial statements of
MedQuest, Inc., as issuer of the notes, and the subsidiary guarantors are not
presented because: 1) each subsidiary guarantor is 100% owned by MQ
Associates, Inc., 2) all guarantees are full and unconditional, and 3) all
guarantees are joint and several.
The senior credit facility and the indenture governing the notes impose certain
restrictions on the Company, including restrictions on the Company's ability to
incur indebtedness, pay dividends, make investments, grant liens, sell assets
and engage in certain other activities. In addition, the senior credit facility
requires the Company to maintain certain financial ratios. The Company's
indebtedness under the senior credit facility is secured by substantially all of
the Company's assets, including inventory, accounts receivable, real and
personal property, intellectual property and other intangibles, and is
guaranteed by MQ Associates, Inc. and all of MedQuest, Inc.'s domestic
subsidiaries.
F-43
<Page>
MQ ASSOCIATES, INC.
Consolidating balance sheets
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
September 30, 2002
<Caption>
---------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands, except share data) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents......................... $ -- 1,780 632 $ 2,412
Patient receivables, net of allowance for doubtful
accounts of $1,264.............................. 42,077 42,077
Related party receivables......................... 556 556
Other receivables................................. 1,532 1,532
Prepaid expenses and other........................ 3,146 3,146
Deferred income taxes............................. 1,654 1,654
---------------------------------------------------------------------------
Total current assets............................ 1,780 49,597 51,377
---------------------------------------------------------------------------
Property and equipment, net......................... 78,002 78,002
Goodwill............................................ 30,493 30,493
Intangible assets, net.............................. 5,094 5,094
Investment in subsidiaries.......................... 2,259 6,712 (8,971)
Debt issuance costs, net............................ 12,375 12,375
Other............................................... 2,294 369 2,663
---------------------------------------------------------------------------
Total assets.................................... 2,259 23,161 163,555 (8,971) 180,004
===========================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable.................................. 6,599 6,599
Accrued payroll and related taxes................. 2,312 2,312
Other accrued expenses............................ 2,563 6,782 9,345
Current portion of obligations under capital
leases.......................................... 813 813
---------------------------------------------------------------------------
Total current liabilities....................... 2,563 16,506 19,069
---------------------------------------------------------------------------
Intercompany payable................................ 70,495 (203,172) 132,677
Long-term debt...................................... 221,511 221,511
Obligations under capital leases.................... 2,939 2,939
Deferred income taxes............................... 4,721 4,721
---------------------------------------------------------------------------
Total liabilities............................... 70,495 20,902 156,843 248,240
Minority interest................................... $ -- -- $ --
---------------------------------------------------------------------------
Total liabilities and minority interest............. 70,495 20,902 156,843 248,240
===========================================================================
Commitments and contingencies
Redeemable preferred stock
Series A, $.001 par value; nonvoting; 35,000,000
shares authorized, issued and outstanding......... 35,000 35,000
Series B, $.001 par value; nonvoting; 15,000,000
shares authorized, issued and outstanding......... 15,000 15,000
---------------------------------------------------------------------------
50,000 50,000
---------------------------------------------------------------------------
Stockholders' deficit
Class A common stock, $.001 par value; voting;
115,000,000 shares authorized; 72,100,000 issued
and outstanding................................... 72 72
Common stock, $.001 par value; voting; 195,000,000
shares authorized; 28,605,000 issued and
outstanding....................................... 29 29
Additional paid-in capital.......................... 62,219 62,219
Accumulated deficit................................. (180,556) 2,259 6,712 (8,971) (180,556)
---------------------------------------------------------------------------
Total stockholders' deficit......................... (118,236) (2,259) 6,712 (8,971) (118,236)
---------------------------------------------------------------------------
Total liabilities and stockholders' deficit......... $ 2,259 23,161 163,555 (8,971) $ 180,004
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-44
<Page>
MQ ASSOCIATES, INC.
Consolidating balance sheets
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) December 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents......................... $ -- 5,391 $ 5,391
Patient receivables, net of allowance for doubtful
accounts of $987................................ 30,817 30,817
Related party receivables......................... 1,656 1,656
Other receivables................................. 1,411 1,411
Prepaid expenses and other........................ 2,167 2,167
Deferred income taxes............................. 1,654 1,654
---------------------------------------------------------------------------
Total current assets............................ 43,096 43,096
---------------------------------------------------------------------------
Property and equipment, net......................... 65,221 65,221
Goodwill............................................ 26,387 26,387
Intangible assets, net.............................. 2,415 2,415
Investment in subsidiaries.......................... 1,648 (1,648)
Other............................................... 229 229
---------------------------------------------------------------------------
Total assets.................................... 1,648 137,348 $ (1,648) 137,348
---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable.................................. 5,521 5,521
Accrued payroll and related taxes................. 2,329 2,329
Other accrued expenses............................ 9,111 9,111
Equipment line of credit.......................... 6,000 6,000
Current portion of long-term debt................. 1,190 18,812 20,002
Current portion of obligations under capital
leases.......................................... 4,780 4,780
---------------------------------------------------------------------------
Total current liabilities....................... 7,190 40,553 47,743
---------------------------------------------------------------------------
Intercompany payable................................ (9,949) 9,949
Long-term debt...................................... 4,521 70,651 75,172
Obligations under capital leases.................... 9,667 9,667
Deferred income taxes............................... 4,721 4,721
---------------------------------------------------------------------------
Total liabilities............................... 1,762 135,541 137,303
Minority interest................................... $ -- 159 $ 159
---------------------------------------------------------------------------
Total liabilities and minority interest............. 1,762 135,700 137,462
===========================================================================
Commitments and contingencies
Redeemable preferred stock
Series A Convertible, $.01 par value; voting;
3,300,000 shares authorized, issued and
outstanding..................................... 79,321 79,321
Series C Convertible, $.01 par value; voting;
805,532 shares authorized, issued and
outstanding..................................... 25,962 25,962
---------------------------------------------------------------------------
105,283 105,283
---------------------------------------------------------------------------
Stockholders' deficit
Common stock, $.01 par value; voting; 15,000,000
shares authorized; 4,935,999 shares issued and
outstanding..................................... 49 49
Class B common stock; $.01 par value; nonvoting;
750,000 shares authorized; 750,000 issued and
outstanding..................................... 8 8
Notes receivable from stockholders.................. (1,531) (1,531)
Additional paid-in capital.......................... 10,845 10,845
Accumulated deficit................................. (114,768) 1,648 (1,648) (114,768)
---------------------------------------------------------------------------
Total stockholders' deficit..................... (105,397) 1,648 (105,397)
---------------------------------------------------------------------------
Total liabilities and stockholders' deficit..... $ 1,648 137,348 (1,648) $ 137,348
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-45
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of operations
<Table>
<Caption>
Nine months ended September 30, 2001
-----------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) (unaudited) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net revenues from services...... $ -- 99,549 $ 99,549
Costs and expenses
Operating expenses, excluding
depreciation.................. 41,915 41,915
Marketing, general and
administrative expenses....... 40,045 40,045
Depreciation and amortization... 12,218 12,218
-----------------------------------------------------------------------
Income from operations...... 5,371 5,371
Interest expense................ 306 5,644 5,950
Interest income................. (155) (155)
-----------------------------------------------------------------------
Income (loss) before
provision for income
taxes..................... (306) (118) (424)
Provision (benefit) for income
taxes......................... 3,208 3,208
Minority interest in net income
of consolidated
subsidiaries.................. 58 58
Equity in earnings of
consolidated susidiaries...... (3,384) 3,384
-----------------------------------------------------------------------
Net income (loss)........... (3,690) (3,384) 3,384 $ (3,690)
- ---------------------------------------------------------------------------------------------------------
</Table>
F-46
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of operations
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2002
-----------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) (unaudited) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------
Net revenues from services...... $ -- 149,120 $ 149,120
Costs and expenses
Operating expenses, excluding
depreciation.................. 64,774 64,774
Marketing, general and
administrative expenses....... 45,033 45,033
Depreciation and amortization... 16,973 16,973
-----------------------------------------------------------------------
Income from operations...... 22,340 22,340
Interest expense................ 1,201 2,805 16,612 20,618
Interest income................. (82) (82)
-----------------------------------------------------------------------
Income (loss) before
provision for income
taxes..................... (1,201) (2,805) 5,810 1,804
Provision (benefit) for income
taxes......................... 706 706
Minority interest in net income
of consolidated
subsidiaries.................. 40 40
Equity in earnings of
consolidated susidiaries...... 2,259 5,064 (7,323)
-----------------------------------------------------------------------
Net income (loss)........... $ 1,058 2,259 5,064 (7,323) $ 1,058
- ---------------------------------------------------------------------------------------------------------
</Table>
F-47
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of cash flows
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2002
---------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) (unaudited) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss)................................. $ 1,058 2,259 5,064 (7,323) $ 1,058
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation and amortization................. 16,973 16,973
Interest amortization of bond discount........ 50 50
Interest amortization of debt issuance
costs....................................... 192 192
Bad debt expense.............................. 5,303 5,303
Minority interest in income of consolidated
subsidiaries................................ 40 40
Equity in earnings of consolidated
subsidiaries................................ (2,259) (5,064) 7,323
Gain on disposal of property and equipment.... (73) (73)
Changes in operating assets and liabilities
Patient receivables......................... (15,831) (15,831)
Related party and other receivables......... 1,104 1,104
Intercompany receivable..................... (1,201) 1,201
Intercompany payable........................ 1,201 (1,201)
Prepaid expenses and other current assets... (977) (977)
Other assets................................ (66) (66)
Accounts payable............................ 1,080 1,080
Accrued payroll and related taxes........... (17) (17)
Other accrued expenses...................... 2,563 (2,564) (1)
---------------------------------------------------------------------------
Net cash and cash equivalents provided by operating
activities........................................ 8,835 8,835
---------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment............... (21,174) (21,174)
Acquisitions of businesses, net of cash
acquired........................................ (12,091) (12,091)
Proceeds from stockholder loan repayments......... 1,531 1,531
Intercompany receivable........................... 1,531 (1,531)
Intercompany payable.............................. (1,531) 1,531
---------------------------------------------------------------------------
Net cash and cash equivalents used in investing
activities........................................ (31,734) (31,734)
---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable....................... 1,835 17,073 18,908
Proceeds from (payments on) line of credit........ (2,350) (2,350)
Payments on notes payable......................... (953) (11,128) (12,081)
Payments on capital leases........................ (3,670) (3,670)
Intercompany receivable........................... (108,935) (311,920) (181,546) 602,401
Intercompany payable.............................. 191,355 107,100 303,946 (602,401)
Sale of preferred stock........................... 35,000 35,000
Sale of common stock.............................. 72,100 72,100
Payment of debt issuance costs.................... (12,567) (12,567)
Proceeds from senior credit facility.............. 43,000 43,000
Proceeds from senior subordinated debt, net of
bond discount................................... 176,167 176,167
Repayment of notes and leases..................... (10,242) (106,535) (116,777)
Redemption of preferred and common stock.......... (168,001) (168,001)
Payment of stock issuance fees.................... (9,809) (9,809)
---------------------------------------------------------------------------
Net cash and cash equivalents provided by financing
activities........................................ 1,780 18,140 19,920
---------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents....................................... 1,780 (4,759) (2,979)
Cash and cash equivalents, beginning of period...... 5,391 5,391
---------------------------------------------------------------------------
Cash and cash equivalents, end of period............ 1,780 632 2,412
---------------------------------------------------------------------------
Supplemental schedule of noncash financing
activities
Equipment acquired through capital leases......... $ -- 4,335 $ 4,335
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-48
<Page>
MQ ASSOCIATES, INC.
Consolidating statements of cash flows
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2001
------------------------------------------------------------------------
MQ Associates, MedQuest, Guarantor
(in thousands) (unaudited) Inc. Inc. Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss).................................... $ (3,690) (3,384) 3,384 $ (3,690)
Adjustments to reconcile net income (loss) to net
cash and cash equivalents provided by operating
activities:
Depreciation and amortization.................... 12,218 12,218
Stock compensation expense....................... 9,388 9,388
Bad debt expense................................. 3,381 3,381
Deferred income taxes............................ 644 644
Equity in earnings of consolidated
subsidiaries................................... 3,384 (3,384)
Minority interest in income of consolidated
subsidiaries................................... 58 58
Accrued interest on notes receivable from
stockholder.................................... (62) (62)
Changes in operating assets and liabilities
Patient receivables............................ (13,735) (13,735)
Intercompany payable........................... 306 (306)
Intercompany receivable........................ (306) 306
Related party and other receivables............ (916) (916)
Prepaid expenses and other current assets...... (638) (638)
Other assets................................... (60) (60)
Accounts payable............................... 1,561 1,561
Accrued payroll and related taxes.............. 482 482
Other accrued expenses......................... 4,439 4,439
------------------------------------------------------------------------
Net cash and cash equivalents provided by operating
activities........................................... 13,070 13,070
------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment.................. (20,412) (20,412)
Acquisitions of businesses, net of cash acquired..... (28,367) (28,367)
------------------------------------------------------------------------
Net cash and cash equivalents used in investing
activities........................................... (48,779) (48,779)
------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable.......................... 2,461 48,426 50,887
Proceeds from (payments on) line of credit........... 7,500 7,500
Payments on notes payable............................ (1,103) (8,551) (9,654)
Payments on capital leases........................... (2,919) (2,919)
Intercompany payable................................. 19,653 19,680 (39,333)
Intercompany receivable.............................. (19,680) (19,653) 39,333
Proceeds from issuance of convertible preferred
stock, net of transaction costs.................... 9,719 9,719
Purchase of common stock from stockholders........... (18,550) (18,550)
------------------------------------------------------------------------
Net cash and cash equivalents provided by financing
activities........................................... -- 36,983 36,983
------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents... 1,274 1,274
Cash and cash equivalents, beginning of period......... 2,316 2,316
------------------------------------------------------------------------
Cash and cash equivalents, end of period............... 3,590 3,590
------------------------------------------------------------------------
Supplemental schedule of noncash financing activities
Equipment acquired through capital leases............ $ -- 2,326 $ 2,326
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
F-49
<Page>
Independent auditors' report
To the Board of Directors of
AMI Outpatient Services, Ltd.:
We have audited the accompanying statements of income and changes in retained
earnings, and of cash flows for the eight months ended August 31, 2001 of AMI
Outpatient Services, Ltd. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statements of
income and changes in retained earnings, and of cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of income and changes in retained
earnings, and of cash flows. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statements of income and changes in
retained earnings, and of cash flows. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of income and changes in retained earnings, and
of cash flows referred to above present fairly, in all material respects, the
results of operations and cash flows of AMI Outpatient Services, Ltd. for the
eight months ended August 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
Field, Sarvas, King & Coleman, P.C.
Phoenix, Arizona
November 11, 2002
F-50
<Page>
AMI OUTPATIENT SERVICES, LTD.
Statement of income and changes in retained earnings
for the eight months ended August 31, 2001
<Table>
- --------------------------------------------------------------------------
Revenues.................................................... $10,533,241
Operating expenses.......................................... 8,988,489
-----------
Income from operations...................................... 1,544,752
-----------
Other revenue (expense):
Interest income........................................... 28,634
Interest expense.......................................... (243,286)
Depreciation and amortization............................. (449,428)
Loss on disposition of equipment.......................... (9,127)
Miscellaneous............................................. 15,178
-----------
Total other revenue (expense)........................... (658,029)
-----------
Net income.................................................. 886,723
Retained earnings, December 31, 2000........................ 2,230,499
Distributions to shareholders............................... (588,001)
-----------
Retained earnings, August 31, 2001.......................... $ 2,529,221
- --------------------------------------------------------------------------
</Table>
SEE ACCOMPANYING NOTES THAT ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-51
<Page>
AMI OUTPATIENT SERVICES, LTD.
Statement of cash flows
for the eight months ended August 31, 2001
<Table>
- -------------------------------------------------------------------------
Cash flows from operating activities
Net income................................................ $ 886,723
Non-cash items included in net income:
Depreciation and amortization........................... 449,428
Loss on disposition of equipment........................ 9,127
Net (increase) decrease in operating assets:
Accounts receivable..................................... (97,572)
Due from related parties................................ (24,200)
Other current assets.................................... 9,587
Net (decrease) increase in operating liabilities:
Accounts payable........................................ (274,666)
Accrued expenses........................................ 103,589
Due to related parties.................................. (645,529)
----------
Net cash provided by operating activities................... 416,487
----------
Cash flows from investing activities
Purchases of equipment.................................... (641,790)
Increase in equipment deposits............................ 185,340
Escrow deposit............................................ (1,000,000)
----------
Net cash used for investing activities...................... (1,456,450)
----------
Cash flows from financing activities
Proceeds from issuance of long-term debt.................. 1,300,000
Principal repayments on long-term debt and obligations
under capital leases.................................... (693,963)
Issuance of common stock.................................. 100,000
Distributions to shareholders............................. (288,000)
----------
Net cash provided by financing activities................... 418,037
----------
Net decrease in cash and cash equivalents................... (621,926)
Cash and cash equivalents, December 31, 2000................ 1,214,798
----------
Cash and cash equivalents, August 31, 2001.................. $ 592,872
----------
Schedule of non-cash investing and financing activities
Cost of equipment disposed of............................. $ 502,659
Accumulated depreciation on equipment disposed of......... (493,532)
Loss on disposition of equipment.......................... (9,127)
----------
Net proceeds from equipment disposed of..................... $ --
----------
Equipment acquisitions...................................... $ 956,090
Less: equipment acquired through issuance of long-term
debt.................................................... (314,300)
----------
Cash paid for equipment..................................... $ 641,790
----------
Distributions declared...................................... $ 588,001
Decrease in due from shareholders........................... (300,001)
----------
Cash distributions to shareholders.......................... $ 288,000
----------
Issuances of long-term debt................................. $1,614,300
Less: debt issued to purchase equipment................... (314,300)
----------
Proceeds from issuance of long-term debt.................... $1,300,000
----------
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 243,286
- -------------------------------------------------------------------------
</Table>
SEE ACCOMPANYING NOTES THAT ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-52
<Page>
AMI OUTPATIENT SERVICES, LTD.
Notes to financial statements
August 31, 2001
Note 1: The Company and Its Significant Accounting Policies
The Company
AMI Outpatient Services, Ltd. (the "Company") is a professional corporation
organized under the laws of the State of Arizona. This company provided
diagnostic imaging services to the general public through three private
outpatient offices in the metropolitan Phoenix, Arizona area.
Subsequent to August 31, 2001, the Company closed escrow on two transactions.
In the first transaction, the Company purchased substantially all of the assets
of a Company related through common equity ownership for $1.3 million. This
transaction was funded through a $1 million escrow deposit during August 2001,
with the remaining $300,000 paid during September 2001.
In the second transaction, the Company sold, for $18.6 million, substantially
all of the assets purchased in the above transaction and substantially all of
the Company's existing assets to an unrelated third party. In conjunction with
this transaction, the Company received $13.3 million in cash during
September 2001, and the buyer assumed an additional $5.3 million in liabilities.
The buyer also assumed substantially all of the Company's operating lease
obligations.
Subsequent to August 31, 2001, the Company has distributed $13.6 million to its
shareholders.
Significant accounting policies
BASIS OF FINANCIAL STATEMENTS
The Company's financial statements are prepared using the accrual basis of
accounting. Accordingly, all revenues are recognized when earned, and all
expenses are recognized when incurred. Revenues are recognized based on the date
that the services are provided to the patient.
MANAGEMENT ESTIMATES
The preparation of statements of income and changes in retained earnings and of
cash flows in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of revenues, expenses, and cash flows. Management is of the
opinion that the estimates used and assumptions made in connection with the
preparation of the statements of income and changes in retained earnings, and of
cash flows are materially correct, however, actual results may differ.
F-53
<Page>
CASH AND CASH EQUIVALENTS
The Company maintains its available cash at a local financial institution. The
local financial institution is a member of the Federal Deposit Insurance
Corporation. Funds maintained at this institution are insured up to a maximum of
$100,000. In the normal course of business, the Company, at times, may maintain
bank balances in excess of the insured amount.
Cash equivalents consist of investments with a national brokerage institution.
Funds maintained at this brokerage institution are guaranteed by the Securities
Investment Protection Corporation up to a maximum amount of $500,000. In the
normal course of business, the Company, at times, may maintain balances in these
investment accounts in excess of the insured amount. For purposes of the
statement of cash flows, the Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line and accelerated methods over the estimated useful lives of the
assets, which range from five to thirty-nine years.
INCOME TAXES
The Company is taxable under Internal Revenue Code Sub-Chapter S provisions
which provide for items of income and loss to flow through to its shareholders
for purposes of federal and state income taxes. Accordingly, any federal and
state income tax liability or benefit is the sole responsibility of the
Company's shareholders.
Note 2: Long-Term Debt
During the eight months ended August 31, 2001, the Company borrowed $1,614,300,
consisting of two separate borrowings. The first borrowing of $314,300 was used
for the purchase of equipment. The second borrowing of $1,300,000 was used in
the purchase of the assets of the related party as discussed in Note 1.
Note 3: Common Stock
During the eight months ended August 31, 2001, two new shareholders invested in
the Company. Each of the new shareholders paid the Company $50,000 to acquire 17
shares of common stock.
Note 4: Leases
The Company leased office space and equipment under various agreements
classified as operating leases. These leases were set to expire at various dates
through August 2006. Substantially all lease obligations were assumed by the
buyer discussed in Note 1.
Rent expense under all operating leases for the eight months ended August 31,
2001 was $799,884.
F-54
<Page>
During the eight months ended August 31, 2001, a company related through common
equity ownership assigned an operating lease obligation and related sublease for
office space to the Company. No consideration was paid relating to this
assignment. This lease and sublease expired during April 2001. Sublease income
received under this sublease agreement was $13,212 for the eight months ended
August 31, 2001, and is included in miscellaneous income in the statement of
income and changes in retained earnings.
Note 5: Retirement Plan
Effective January 1, 2000, all employees of a company related through common
equity ownership were transferred to the Company. As a result, the
profit-sharing plan previously maintained by the related company is now
maintained by the Company. This plan covers substantially all eligible
employees. An employee is eligible to participate in the plan upon attaining
certain age requirements as defined in the plan. Company contributions under
this plan are elective and are determined by the Company's Board of Directors.
Employer contributions may be made any time during the plan year and through the
date which the employer is required to file its federal income tax return. The
Board of Directors approved contributions to the plan for the eight months ended
August 31, 2001 in the amount of $238,206.
Note 6: Commitments
Through a redemption agreement with its shareholders, the Company is required to
purchase the shares of a shareholder at a cash basis book value within 90 days
following the death, retirement, or resignation of the shareholder, as detailed
in the related redemption agreement.
Note 7: Related Party Transactions
The Company leased office space from a partnership in which one of the Company's
shareholders is a general partner. This lease required monthly lease payments of
$7,112 through August 2004. The amount of rental expense included in the
statement of income and changes in retained earnings for this lease was
approximately $56,896 for the eight months ended August 31, 2001.
The Company leased office space from a related limited liability company. This
lease required 60 monthly payments of $10,725 through February 2005. Rent
expense under this lease for the eight months ended August 31, 2001 was $85,800.
During the eight months ended August 31, 2001, the Company received $135,000
from companies related through common equity ownership representing payment for
accounting and overhead expenses incurred by the Company.
During the eight months ended August 31, 2001, the Company incurred professional
fees of approximately $1,880,000 to a company related through common equity
ownership. These fees represented payment for supervision and interpretation of
diagnostic imaging services rendered at the Company's facilities.
F-55
<Page>
[GRAPHIC]
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the fight of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
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
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the fight of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Certificate of Incorporation of MedQuest, Inc. provides that its directors
shall not be liable to MedQuest, Inc. or its stockholders for monetary damages
for breach of fiduciary duty as a director provided, however, that such
exculpation from liabilities is not permitted with respect to liability arising
from items described in clauses (i) through (iv) in the preceding paragraph. The
By-laws of MedQuest, Inc. further provide that MedQuest, Inc. shall indemnify
its directors to the fullest extent permitted by the DGCL. The certificate of
Incorporation of MedQuest, Inc. provides that if the DGCL is amended after the
date of filing of the Certificate of Incorporation to authorize corporate action
further eliminating or limiting the personal liability of directors,
II-1
<Page>
then the liability of a director of MedQuest, Inc. shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended from time to
time.
The directors and officers of MedQuest, Inc. are covered under directors' and
officers' liability insurance policies maintained by the MedQuest, Inc.
Item 21. Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBITS
- --------------------- ------------------------------------------------------------
2.1 Recapitalization Agreement by and among MQ Investment
Holdings, LLC, MQ Associates, Inc., the Stockholders of MQ
Associates, Inc. and David Lang and Gene Venesky, as
Stockholders' Representatives dated as of July 16, 2002.
2.2 Amendment No. 1, dated as of August 8, 2002, to
Recapitalization Agreement by and among MQ Investment
Holdings, LLC, MQ Associates, Inc., the Stockholders of MQ
Associates, Inc. and David Lang and Gene Venesky, as
Stockholders' Representatives dated as of July 16, 2002.
3.1 Certificate of Incorporation of MedQuest, Inc.
3.2 By-laws of MedQuest, Inc.
3.3 Fourth Amended and Restated Certificate of Incorporation of
MQ Associates, Inc.
3.4 Second Amended and Restated By-laws of MQ Associates, Inc.
4.1 Indenture by and among MedQuest, Inc., MQ Associates, Inc.,
as guarantor, the subsidiary guarantors parties thereto, and
Wachovia Bank, National Association, as Trustee dated as of
August 15, 2002.
4.2 Form of Senior Subordinated Note, Series B, due 2012
(included as exhibit B to the Indenture filed as Exhibit
4.1)
4.3 Registration Rights Agreement by and among MedQuest, Inc.,
the guarantors listed therein, J.P. Morgan Securities Inc.,
UBS Warburg LLC and Wachovia Securities, Inc. dated as of
August 15, 2002.
4.4 First Supplemental Indenture, dated as of November 13, 2002,
by and among MedQuest, Inc., MQ Associates, Inc., as
guarantor, the subsidiary guarantors party to the Indenture,
Town & Country Open MRI, LLC, Clayton Open MRI, LLC,
Wisconsin Diagnostic Imaging, Inc., Vienna Diagnostic
Imaging, Inc., and Wachovia Bank, National Association, as
Trustee.
5.1(*) Opinion of O'Melveny & Myers LLP, special Delaware counsel.
5.2(*) Opinion of William Carlson & Associates, P.C., special
Alabama counsel.
5.3(*) Opinion of Beus Gilbert PLLC, special Arizona counsel.
5.4(*) Opinion of Stradling Yocca Carlson & Rauth PC, special
California counsel.
5.5(*) Opinion of Holland & Knight LLP, special Florida counsel.
5.6(*) Opinion of Ray & Sherman, LLC, special Georgia counsel.
5.7(*) Opinion of Seigfreid, Bingham, Levy, Selzer & Gee, PC,
special Kansas counsel.
5.8(*) Opinion of Gallop, Johnson & Neuman, L.C., special Missouri
counsel.
5.9(*) Opinion of Bode, Call & Stroupe, L.L.P., special North
Carolina counsel.
</Table>
II-2
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBITS
- --------------------- ------------------------------------------------------------
5.10(*) Opinion of McNair Law Firm, P.A., special South Carolina
counsel.
5.11(*) Opinion of The Beasley Law Group, PLLC, special Tennessee
counsel.
5.12(*) Opinion of Scott, Hulse, Marshall, Feuille, Finger &
Thurmond, P.C., special Texas counsel.
5.13(*) Opinion of Williams Mullen, P.C., special Virginia counsel.
5.14(*) Opinion of Beck, Chaet & Bamberger, S.C., special Wisconsin
counsel.
10.1 Credit Agreement by and among MQ Associates, Inc., MedQuest,
Inc., as Borrower, the Several Lenders from time to time
parties thereto and Wachovia Bank, National Association, as
Administrative Agent dated as of August 15, 2002.
10.2 Guarantee and Collateral Agreement by and among MQ
Investment Holdings, LLC, MedQuest, Inc., as Borrower and
certain of its subsidiaries in favor of Wachovia Bank,
National Association, as Administrative Agent dated as of
August 15, 2002.
10.3 Registration Rights Agreement by and among MQ Associates,
Inc. and each of its stockholders dated August 15, 2002.
10.4 Amended and Restated Employment Agreement by and between J.
Kenneth Luke and MedQuest, Inc. dated as of August 15, 2002.
10.5 Amended and Restated Employment Agreement by and between
Gene Venesky and MedQuest, Inc. dated as of August 15, 2002.
10.6 Amended and Restated Employment Agreement by and between
Thomas C. Gentry and MedQuest, Inc. dated as of August 15,
2002.
10.7 Amended and Restated Employment Agreement by and between
Michael Villa and MedQuest, Inc. dated as of August 15,
2002.
10.8 Amended and Restated Employment Agreement by and between
Daniel J. Schaefer and MedQuest, Inc. dated as of August 15,
2002.
10.9 Employment Agreement by and between Bruce W. Elder and
MedQuest, Inc. dated as of August 15, 2002.
10.10 Stockholders' Agreement by and among MQ Associates, Inc. and
each of the stockholders named on Schedule I thereto dated
August 15, 2002.
10.11 Land and Building Lease by and between Image Properties, LLC
and Palmetto Imaging, Inc. dated as of February 17, 1995
including Schedule I, which identifies substantially similar
documents omitted and material differences in omitted
documents from the agreement filed as Exhibit 10.12.
10.12 Personal Guaranty by and between Image Properties, LLC and
Palmetto Imaging, Inc. dated as of February 17, 1995
including Schedule I, which identifies substantially similar
documents omitted and material differences in omitted
documents form the agreement filed as Exhibit 10.13.
12.1 Statement re: computation of ratios of earning to fixed
charges.
21.1 List of subsidiaries of MQ Associates, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Elliott Davis, LLC.
23.3 Consent of Field, Sarvas, King & Coleman, PC.
23.4(*) Consent of O'Melveny & Myers LLP (included in exhibit 5.1).
</Table>
II-3
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBITS
- --------------------- ------------------------------------------------------------
23.5(*) Consent of William Carlson & Associates, P.C. (included in
exhibit 5.2).
23.6(*) Consent of Beus Gilbert PLLC (included in exhibit 5.3).
23.7(*) Consent of Stradling Yocca Carlson & Rauth PC (included in
exhibit 5.4).
23.8(*) Consent of Holland & Knight LLP (included in exhibit 5.5).
23.9(*) Consent of Ray & Sherman, LLC (included in exhibit 5.6).
23.10(*) Consent of Seigfreid, Bingham, Levy, Selzer & Gee, PC
(included in exhibit 5.7).
23.11(*) Consent of Gallop, Johnson & Neuman, L.C. (included in
exhibit 5.8).
23.12(*) Consent of Bode, Call & Stroupe, L.L.P. (included in
exhibit 5.9).
23.13(*) Consent of McNair Law Firm, P.A. (included in
exhibit 5.10).
23.14(*) Consent of The Beasley Law Group, PLLC (included in
exhibit 5.11).
23.15(*) Consent of Scott, Hulse, Marshall, Feuille, Finger &
Thurmond, P.C. (included in exhibit 5.12).
23.16(*) Consent of Williams Mullen, P.C. (included in
exhibit 5.13).
23.17(*) Consent of Beck, Chaet & Bamberger, S.C. (included in
exhibit 5.14).
24.1 Powers of attorney (included on signature pages).
25.1 Form T-1 Statement of Eligibility and Qualifications under
the Trust Indenture Act of 1939 of Wachovia 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 Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99.4 Form of Letter to Clients.
</Table>
- ------------------------
* To be filed by amendment.
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to managers, officers and controlling persons of the Registrants
pursuant to the foregoing provisions, or otherwise, the Registrants have 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 Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
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 Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<Page>
The undersigned Registrants hereby undertake:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(a) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in the volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
2. That, for the purpose of determining any liability under the 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; and
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.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
MEDQUEST, INC.
By: /s/ GENE VENESKY
-----------------------------------------
Gene Venesky
Chief Executive Officer
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
Chief Executive Officer,
/s/ GENE VENESKY Secretary, Treasurer and
-------------------------------------- Director (Principal November 21, 2002
Gene Venesky Executive Officer)
/s/ J.K. (KEN) LUKE
-------------------------------------- President and Director November 21, 2002
J.K. (Ken) Luke
Chief Financial Officer,
/s/ THOMAS C. GENTRY Assistant Secretary and
-------------------------------------- Assistant Treasurer November 21, 2002
Thomas C. Gentry (Principal Financial and
Accounting Officer)
/s/ DANIEL J. SCHAEFER
-------------------------------------- Co-Chief Operating Officer November 21, 2002
Daniel J. Schaefer
</Table>
II-6
<Page>
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ MICHAEL A. VILLA
-------------------------------------- Co-Chief Operating Officer November 21, 2002
Michael A. Villa
/s/ BRUCE W. ELDER
-------------------------------------- Vice President, Development November 21, 2002
Bruce W. Elder
/s/ EVAN P. BAKST
-------------------------------------- Director November 21, 2002
Evan P. Bakst
/s/ MITCHELL J. BLUTT, M.D.
-------------------------------------- Director November 21, 2002
Mitchell J. Blutt, M.D.
/s/ NANCY-ANN DEPARLE
-------------------------------------- Director November 21, 2002
Nancy-Ann DeParle
/s/ BENJAMIN B. EDMANDS
-------------------------------------- Director November 21, 2002
Benjamin B. Edmands
</Table>
II-7
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
MQ ASSOCIATES, INC.
By: /s/ GENE VENESKY
-----------------------------------------
Gene Venesky
Chief Executive Officer
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
Chief Executive Officer,
/s/ GENE VENESKY Secretary, Treasurer and
-------------------------------------- Director (Principal November 21, 2002
Gene Venesky Executive Officer)
/s/ J.K. (KEN) LUKE
-------------------------------------- President and Director November 21, 2002
J.K. (Ken) Luke
Chief Financial Officer,
/s/ THOMAS C. GENTRY Assistant Secretary and
-------------------------------------- Assistant Treasurer November 21, 2002
Thomas C. Gentry (Principal Financial and
Accounting Officer)
/s/ DANIEL J. SCHAEFER
-------------------------------------- Co-Chief Operating Officer November 21, 2002
Daniel J. Schaefer
</Table>
II-8
<Page>
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ MICHAEL A. VILLA
-------------------------------------- Co-Chief Operating Officer November 21, 2002
Michael A. Villa
/s/ BRUCE W. ELDER
-------------------------------------- Vice President, Development November 21, 2002
Bruce W. Elder
/s/ EVAN P. BAKST
-------------------------------------- Director November 21, 2002
Evan P. Bakst
/s/ MITCHELL J. BLUTT, M.D.
-------------------------------------- Director November 21, 2002
Mitchell J. Blutt, M.D.
/s/ NANCY-ANN DEPARLE
-------------------------------------- Director November 21, 2002
Nancy-Ann DeParle
/s/ BENJAMIN B. EDMANDS
-------------------------------------- Director November 21, 2002
Benjamin B. Edmands
</Table>
II-9
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
IMAGING SERVICES OF ALABAMA, INC.
ANDERSON DIAGNOSTIC IMAGING, INC.
ASHEVILLE OPEN MRI, INC.
BIOIMAGING AT CHARLOTTE, INC.
BIOIMAGING AT HARDING, INC.
BIOIMAGING OF COOL SPRINGS, INC.
CABARRUS DIAGNOSTIC IMAGING, INC.
CAPE FEAR DIAGNOSTIC IMAGING, INC.
CAROLINA IMAGING, INC. OF FAYETTEVILLE
CHAPEL HILL DIAGNOSTIC IMAGING, INC.
CHATTANOOGA DIAGNOSTIC IMAGING, INC.
DOTHAN DIAGNOSTIC IMAGING, INC.
FLORIDA DIAGNOSTIC IMAGING CENTER, INC.
OPEN MRI OF GEORGIA, INC.
OPEN MRI & IMAGING OF GEORGIA, INC.
GROVE DIAGNOSTIC IMAGING CENTER, INC.
VIENNA DIAGNOSTIC IMAGING, INC.
WISCONSIN DIAGNOSTIC IMAGING, INC.
By: /s/ GENE VENESKY
-----------------------------------------
Gene Venesky
Chief Executive Officer
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
II-10
<Page>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ J.K. (KEN) LUKE President and Director
-------------------------------------- (Principal Executive November 21, 2002
J.K. (Ken) Luke Officer)
/s/ GENE VENESKY
-------------------------------------- Secretary, Treasurer and November 21, 2002
Gene Venesky Director
Assistant Secretary and
/s/ THOMAS C. GENTRY Assistant Treasurer
-------------------------------------- (Principal Financial and November 21, 2002
Thomas C. Gentry Accounting Officer)
</Table>
II-11
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
KANSAS DIAGNOSTIC IMAGING, INC.
KENOSHA DIAGNOSTIC IMAGING, INC.
LEXINGTON OPEN MRI, INC.
MECKLENBURG OPEN MRI, INC.
MEDQUEST ASSOCIATES, INC.
MISSOURI IMAGING, INC.
MOBILE OPEN MRI, INC.
OCCUPATIONAL SOLUTIONS, INC.
PHOENIX DIAGNOSTIC IMAGING, INC.
PIEDMONT IMAGING, INC. (FORSYTH)
PIEDMONT IMAGING, INC. (SPARTANBURG)
OPEN MRI & IMAGING OF RICHMOND, INC.
SOUTH CAROLINA DIAGNOSTIC IMAGING, INC.
SUN VIEW HOLDINGS, INC.
TEXAS IMAGING SERVICES OF EL PASO, INC.
TRIAD IMAGING, INC.
TYSON'S CORNER DIAGNOSTIC IMAGING, INC.
VIRGINIA DIAGNOSTIC IMAGING, INC.
NORTHEAST COLUMBIA DIAGNOSTIC IMAGING, INC.
OPEN MRI OF THE CAROLINAS, INC.
PALMETTO IMAGING, INC., on behalf of itself and
as sole member of
OPEN MRI & IMAGING OF FLORENCE, LLC and
OPEN MRI OF MYRTLE BEACH, LLC
By: /s/ GENE VENESKY
-----------------------------------------
Gene Venesky
Chief Executive Officer
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
II-12
<Page>
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ J.K. (KEN) LUKE President and Director
-------------------------------------- (Principal Executive November 21, 2002
J.K. (Ken) Luke Officer)
/s/ GENE VENESKY
-------------------------------------- Secretary, Treasurer and November 21, 2002
Gene Venesky Director
Assistant Secretary and
/s/ THOMAS C. GENTRY Assistant Treasurer
-------------------------------------- (Principal Financial and November 21, 2002
Thomas C. Gentry Accounting Officer)
</Table>
II-13
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
MONTGOMERY OPEN MRI, LLC
NORWOOD DIAGNOSTIC IMAGING, LLC
COASTAL IMAGING, LLC
DURHAM DIAGNOSTIC IMAGING, LLC
JACKSONVILLE DIAGNOSTIC IMAGING, LLC
CAPE IMAGING, L.L.C.
BRIDGETON MRI AND IMAGING CENTER, LLC
KIRKWOOD MRI AND IMAGING CENTER, LLC
ST. PETERS MRI & IMAGING CENTER, LLC
OPEN MRI & IMAGING OF RICHMOND, LLC
RICHMOND WEST END DIAGNOSTIC IMAGING, LLC
OPEN MRI & IMAGING OF ALBANY, LLC
OPEN MRI & IMAGING OF ATHENS, LLC
ATHENS MRI, LLC
OPEN MRI OF ATLANTA, LLC
BUCKHEAD DIAGNOSTIC IMAGING, LLC
OPEN MRI OF CENTRAL GEORGIA, LLC
IMAGING CENTER OF CENTRAL GEORGIA, LLC
OPEN MRI & IMAGING OF CONYERS, LLC
CUMMING DIAGNOSTIC IMAGING, LLC
OPEN MRI & IMAGING OF DEKALB, LLC
CLAYTON OPEN MRI, LLC
TOWN & COUNTRY OPEN MRI, LLC
By: /s/ J.K. (KEN) LUKE
-----------------------------------------
J.K. (Ken) Luke
Manager
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
II-14
<Page>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ J.K. (KEN) LUKE
-------------------------------------- Manager (Principal Executive November 21, 2002
J.K. (Ken) Luke Officer)
/s/ GENE VENESKY
-------------------------------------- Manager November 21, 2002
Gene Venesky
/s/ THOMAS C. GENTRY
-------------------------------------- (Principal Financial and November 21, 2002
Thomas C. Gentry Accounting Officer)
</Table>
II-15
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia, on the 21st day of November, 2002.
<Table>
DULUTH DIAGNOSTIC IMAGING, LLC
DULUTH CT CENTER, LLC
DIAGNOSTIC IMAGING OF ATLANTA, LLC
OPEN MRI & IMAGING OF NORTH FULTON, LLC
OPEN MRI & IMAGING OF N.E. GEORGIA, LLC
OPEN MRI AND IMAGING OF SNELLVILLE, LLC
WEST PACES DIAGNOSTIC IMAGING, LLC
WOODSTOCK DIAGNOSTIC IMAGING, LLC
DIAGNOSTIC IMAGING OF HIRAM, LLC
DIAGNOSTIC IMAGING OF MARIETTA, LLC
DIAGNOSTIC IMAGING OF GEORGIA, LLC
OPEN MRI & IMAGING OF DOUGLASVILLE, LLC
HAPEVILLE DIAGNOSTIC IMAGING, LLC
OPEN MRI & IMAGING OF MACON, LLC
MIDTOWN DIAGNOSTIC IMAGING, LLC
CAROLINA MEDICAL IMAGING, LLC
OPEN MRI OF SIMPSONVILLE, LLC
SIMPSONVILLE OPEN MRI, LLC
EAST COOPER DIAGNOSTIC IMAGING, LLC
FARMFIELD DIAGNOSTIC IMAGING, LLC
FORT MILL DIAGNOSTIC IMAGING, LLC
TRICOM DIAGNOSTIC IMAGING, LLC
WEST ASHLEY DIAGNOSTIC IMAGING, LLC
By: /s/ J.K. (KEN) LUKE
-----------------------------------------
J.K. (Ken) Luke
Manager
</Table>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby severally constitutes and appoints GENE VENESKY, THOMAS C. GENTRY,
BENJAMIN B. EDMANDS and EVAN P. BAKST, or each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to the registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming all that
each said attorney-in-fact and agent or any of them or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
II-16
<Page>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ J.K. (KEN) LUKE
-------------------------------------- Manager (Principal Executive November 21, 2002
J.K. (Ken) Luke Officer)
/s/ GENE VENESKY
-------------------------------------- Manager November 21, 2002
Gene Venesky
/s/ THOMAS C. GENTRY
-------------------------------------- (Principal Financial and November 21, 2002
Thomas C. Gentry Accounting Officer)
</Table>
II-17
<Page>
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.
<Page>
Subject to completion, dated November 22, 2002
Prospectus
[GRAPHIC]
MedQuest, Inc.
$180,000,000
11 7/8% SENIOR SUBORDINATED NOTES DUE 2012
WHICH ARE GUARANTEED ON A SENIOR SUBORDINATED BASIS BY OUR PARENT AND ALL OF OUR
DOMESTIC SUBSIDIARIES
INTEREST PAYABLE FEBRUARY 15 AND AUGUST 15
Upon completion of this exchange offer, which we expect to complete in
2002, we will issue up to $180,000,000 aggregate principal amount of 11 7/8%
Senior Subordinated Notes, Series B, due 2012, which have been registered under
the Securities Act of 1933, as amended, in exchange for our 11 7/8% Senior
Subordinated Notes, Series A, due 2012.
The notes will mature on August 15, 2012. Interest will accrue from August 15,
2002 or, if interest has already been paid, from the most recent interest
payment date.
We may redeem some or all of the notes at any time on or after August 15, 2007.
We may also redeem up to 35% of the original principal amount of the notes using
proceeds of certain equity offerings completed on or before August 15, 2005. If
we experience specific kinds of changes of control prior to August 15, 2007, we
may redeem the notes in whole but not in part within 90 days following such
occurrence. The redemption prices are described on pages 102 and 103. If we sell
certain of our assets or experience specific kinds of changes in control, we
must offer to purchase the notes.
The notes are subordinated to all of our existing and future senior debt, rank
equally with any future senior subordinated debt, and rank senior to all of our
existing and future subordinated debt. The notes are guaranteed by our parent,
MQ Associates, Inc., and all of our existing and future domestic subsidiaries.
If we fail to make payments on the notes, MQ Associates, Inc. and our subsidiary
guarantors must make them instead.
We prepared this prospectus for use by J.P. Morgan Securities Inc. in connection
with offers and sales related to market-making transactions in the notes. J.P.
Morgan Securities Inc. may act as principal or agent in these transactions.
These sales will be made at prices related to prevailing market prices at the
time of sale. We will not receive any of the proceeds of these sales.
See "Risk factors" beginning on page 16 for a discussion of certain risks that
you should consider before making an investment decision in the notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
, 2002
<Page>
Alternative section for market-making prospectus
You cannot be sure that an active trading market will develop for the exchange
notes.
Your cannot be sure that an active trading market will develop for the notes. We
do not intend to apply for a listing of the exchange notes on a securities
exchange or any automated dealer quotation system. We have been advised by J.P.
Morgan Securities Inc. that as of the date of this prospectus J.P. Morgan
Securities Inc. intends to make a market in the exchange notes. J.P. Morgan
Securities Inc. is not obligated to do so, however, and any market-making
activities with respect to the exchange notes may be discontinued at any time
without notice. In addition, such market-making activity will be subject to
limits imposed by the Securities Act and the Securities Exchange Act of 1934, as
amended. Because J.P. Morgan Securities Inc. is our affiliate, J.P. Morgan
Securities Inc. is required to deliver a current "market-making" prospectus and
otherwise comply with the registration requirements of the Securities Act in any
secondary market sale of the exchange notes. Accordingly, the ability of J.P.
Morgan Securities Inc. to make a market in the exchange notes may, in part,
depend on our ability to maintain a current market-making prospectus.
In addition, the liquidity of the trading market in the exchange notes, and the
market price quoted for the exchange notes, may be adversely affected by changes
in the overall market for high yield securities and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally.
<Page>
Use of proceeds
This prospectus is delivered in connection with the sale of the exchange notes
by J.P. Morgan Securities Inc. in market-making transactions. We will not
receive any of the proceeds from these transactions.
<Page>
Legal matters
The validity of the notes and the guarantees of the notes have been passed upon
for us by O'Melveny & Meyers LLP, New York, New York.
<Page>
Plan of distribution
This prospectus has been prepared for use by J.P. Morgan Securities Inc. in
connection with offers and sales of the exchange notes in market-making
transactions effected from time to time. J.P. Morgan Securities Inc. may act as
a principal or agent in these transactions. These sales will be made at
prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices. We will not receive any of the proceeds of these sales. We
have agreed to indemnify J.P. Morgan Securities Inc. against certain
liabilities, including liabilities under the Securities Act, and to contribute
payments which J.P. Morgan Securities Inc. might be required to make in respect
thereof.
As of September 30, 2002, MQ Investment Holdings LLC, an affiliate of J.P.
Morgan Securities Inc., beneficially owned approximately 70.0% of our parent's
outstanding capital stock (on a fully diluted basis) and certain of our
directors are employed by an affiliate of J.P. Morgan Securities Inc. See
"Management," "Security ownership of certain beneficial owners and management"
and "Certain relationships and related transactions--Senior credit facility and
interim financing commitment" for a summary of certain relationships between us
and affiliates of J.P. Morgan Securities Inc. J.P. Morgan Securities Inc. has
informed us that it does not intend to confirm sales of the exchange notes to
any accounts over which it exercises discretionary authority without the prior
specific written approval of these transactions by the customer.
We have been advised by J.P. Morgan Securities Inc. that, subject to applicable
laws and regulations, J.P. Morgan Securities Inc. currently intends to make a
market in the exchange notes following completion of the exchange offer.
However, J.P. Morgan Securities Inc. is not obligated to do so and J.P. Morgan
Securities Inc. may discontinue its market-making activities at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act. There can be no assurance
that an active trading market will develop or be sustained. See "Risk
factors--You cannot be sure that an active trading market will develop for the
exchange notes."