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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONSSECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended OctoberFOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission File Number2008
COMMISSION FILE NUMBER 0-19019
RADNET, INC.
(Exact name of registrant as specified in its charter)
NEW YORK(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 13-3326724
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1510 COTNER AVENUE
LOS ANGELES, CALIFORNIA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 478-7808
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONECOMMON
STOCK, $.0001 PAR VALUE SECURITIES REGISTERED PURSUANT TO SECTION
12(G) OF THE ACT: COMMON STOCK, $.0001 PAR VALUE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes _____[ ] No __X__[X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) or the act. Yes _____[ ] No __X__[X]
NOTE--Checking the box above will not relieve any registrant required to
file reports pursuant to section 13 or (15(d) of the exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__[X] No _____[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ][X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See
definitionthe definitions of "large accelerated filer," "accelerated filerfiler" and large accelerated filer""smaller
reporting company" in Rule 12b-2 of the Exchange Act.
(Check
one):
Large Accelerated Filer [ ] Accelerated Filer [X]
Non-Accelerated Filer [ ] Non-Accelerated Filer [X]Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2) Yes _____[ ] No __X__[X]
The aggregate market value of the registrant's voting and nonvoting common
equity held by non-affiliates of the registrant was approximately $52,802,584$171,470,387
on AprilJune 30, 20062008 (the last business day of the registrant's most recently
completed second quarter) based on the closing price for the common stock on the
Nasdaq Over-the-Counter Bulletin BoardNASDAQ Global Market on April 28, 2006.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __X__ No _____June 30, 2008.
The number of shares of the registrant's common stock outstanding on January 17,
2007,March 10,
2009, was 34,158,78535,924,279 shares (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of the Form 10-K, to the extent not set
forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement for the Annual Meeting of Shareholders to be held on
May 28, 2009, to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the close of the registrant's
fiscal year.
RADNET, INC.
TABLE OF CONTENTS
FORM 10-K ITEM PAGE
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PART I.
Item 1. Business 3
Item 1A. Risk Factors 22
Item 1B. Unresolved Staff Comments 29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II.
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 30
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 75
Item 9A. Controls and Procedures 75
Item 9B. Other Information 77
PART III.
Item 10. Directors and Executive Officers of the Registrant 77
Item 11. Executive Compensation 77
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 77
Item 13. Certain Relationships and Related Transactions 77
Item 14. Principal Accountant Fees and Services 77
PART IV.
Item 15. Exhibits, Financial Statement Schedules 77
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements relate to future
events or our future financial performance, and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. These risks and other factors include, among
other things, those listed in Item 1A, "Risk Factors," Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this annual report. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue,"
"assumption" or the negative of these terms or other comparable terminology. The
forward-looking statements contained herein reflect our current views with
respect to future events and are based on our currently available financial,
economic and competitive data and on current business plans. Actual events or
results may differ materially depending on risks and uncertainties that may
affect the Company's operations, markets, services, prices and other factors.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to
statements concerning RadNet's ability to successfully acquire and integrate new
operations, to grow our contract management business, our financial guidance,
our statements regarding cost savings, and our statements regarding increased
business from new equipment or operations.
We do not undertake any responsibility to release publicly any revisions to
these forward-looking statements to take into account events or circumstances
that occur after the date of this annual report. Additionally, we do not
undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this annual
report.
2
PART I
ITEM 1. BUSINESS
RADIOLOGIX ACQUISITION
On November 15, 2006, we completed the acquisition of Radiologix, Inc.
Radiologix, a Delaware corporation, employing approximately 2,200 people,
through its subsidiaries, was a national provider of diagnostic imaging services
through the ownership and operation of freestanding, outpatient diagnostic
imaging centers. Radiologix owned, operated and maintained equipment in 69
locations, with imaging centers in seven states, including primary operations in
the Mid-Atlantic; the Bay-Area, California; the Treasure Coast area, Florida;
Northeast Kansas; and the Finger Lakes (Rochester ) and Hudson Valley areas of
New York state. Under the terms of the acquisition agreement, Radiologix
shareholders received an aggregate consideration of 11,310,961 shares (after
giving effect to the one-for-two reverse stock split effected in November 2006)
of our common stock and $42,950,000 in cash. We financed the transaction and
refinanced substantially all of our outstanding debt with a $405 million senior
secured credit facility with GE Commercial Healthcare Financial Services.
BUSINESS OVERVIEW
Since our acquisition of Radiologix on November 15, 2006, weWe operate a group of regional networks comprised of 129164 diagnostic
imaging facilities located in sevensix states with operations primarily in California,
the Mid
Atlantic,Delaware, Maryland, the Treasure Coast area of Florida, Kansas and the Finger
Lakes (Rochester) and Hudson Valley areas of New York. We believe our group of
regional networks is the largest of its kind in the U.S. Our facilities are
strategically organized into regional networks in markets that have both
high-density and expanding populations, as well as attractive payor diversity.
All of our facilities employ state-of-the-art equipment and technology in
modern, patient-friendly settings. Many of our facilities within a particular
region are interconnected and integrated through our advanced information
technology system. Ninety-three of our facilities are multi-modality sites,
offering various combinations ofYork, providing diagnostic
imaging services including magnetic resonance imaging, or MRI, computed
tomography, or CT, positron emission tomography, or PET, nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray, and fluoroscopy. Thirty-six of our facilities are single-modality sites, offering either X-ray or
MRI. Consistent with our regional network strategy, we locate our
single-modality facilities near multi-modality sites to help accommodate
overflow in targeted demographic areas.The
Company's operations comprise a single segment for financial reporting purposes.
At our facilities, we provide all of the equipment as well as all
non-medical operational, management, financial and administrative services
necessary to provide diagnostic imaging services. We give our facility managers
authority to run our facilities 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 networks. Each of our facility managers is responsible for meeting
our standards of patient service, managing relationships with local physicians
and payors and maintaining profitability.
We also provide administrative, management and information services to
certain radiology practices that provide professional services in connection
with diagnostic imaging centers and to hospitals and radiology practices with
which we operate joint ventures. The services we provide leverage our existing
infrastructure, and we believe the services improve the profitability,
efficiency and effectiveness of the radiology practice or joint venture.
For the year ended October 31, 2006, our combined facilities, including
the facilities acquired as part of our acquisition of Radiologix, performed over
2.3 million diagnostic imaging procedures.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 17%18% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
Beverly Radiology Medical Group III, or BRMG. BRMG provides all of the
professional medical services at 5285 of our facilities located in California
under a management agreement with us, and contracts with various other
independent physicians and physician groups to provide the professional medical
services at most of our other California facilities. We obtain professional
medical services from BRMG in California, rather than provide such services
directly or through subsidiaries, in order to comply with California's
prohibition against the corporate practice of medicine. However, as a result of
our close relationship with Dr. Berger and BRMG, we believe that we are able to
better ensure that medical service is provided at our California facilities in a
manner consistent with our needs and expectations and those of our referring
physicians, patients and payors than if we obtained these services from
unaffiliated physician groups. At eleven former Radiologix centers in California and at all of the former Radiologix
centers which are located outside of California, we have entered into long-term
contracts with prominent radiology groups in the area to provide physician
services at those facilities.
2
We derive substantially all of our revenue, directly or indirectly,
from fees charged for the diagnostic imaging services performed at our
facilities. For the year ended OctoberDecember 31, 2006,2008, we performed 2,336,8143,014,039
diagnostic imaging procedures (including 1,417,472 at Radiologix for its 12 months ended December
31, 2006) and generated net revenue from continuing
operations of $384$502.1 million.
On September 3, 2008 we reincorporated from New York into Delaware and
are now a Delaware corporation.
COMPANY WEBSITE
We maintain a website at WWW.RADNET.COM. Our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports are made available on our website as soon as is
reasonably practicable after the material is electronically filed with the
Securities and Exchange Commission. References to our website addressed in this
report are provided as a convenience and do not constitute, or should be viewed
as, an incorporation by reference of the information contained on, or available
through, the website. Therefore, such information should not be considered part
of this report.
RADIOLOGIX ACQUISITION
On November 15, 2006, we completed the acquisition of Radiologix, Inc.
Radiologix, a Delaware corporation, then employing approximately 2,200 people,
through its subsidiaries, was a national provider of diagnostic imaging services
through the ownership and operation of freestanding, outpatient diagnostic
imaging centers. Radiologix owned, operated and maintained equipment in 69
locations, with imaging centers in seven states, including primary operations in
the Mid-Atlantic; the Bay-Area, California; the Treasure Coast area, Florida;
Northeast Kansas; and the Finger Lakes (Rochester) and Hudson Valley areas of
New York State. Under the terms of the acquisition agreement, Radiologix
shareholders received aggregate consideration of 11,310,950 shares (after giving
effect to the one-for-two reverse stock split effected in November 2006) of our
common stock and $42,950,000 in cash. We financed the transaction and refinanced
substantially all of our outstanding debt with a $405 million (including $223 million bysenior secured
credit facility with GE Commercial Healthcare Financial Services.
3
The results of operations of Radiologix and its wholly owned
subsidiaries have been included in our consolidated financial statements from
the date of acquisition.
In connection with our acquisition of Radiologix, we changed to a
calendar-year basis of reporting financial results. As a requirement of this
change under Rule 13a-10 of the Securities Exchange Act of 1934, we reported
results for the 12 months endedNovember and December 31,
2006).
The following table illustrates our work performed over the five-year2006 as a separate transition ("stub") period
ended October 31, 2006:
YEARS ENDED OCTOBER 31,
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2002 2003 2004 2005 2006**
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Total number of MRI, CT and PET systems (at end of year)* 60 63 68 68 176
Total number of procedures performed* 877,574 947,032 946,928 958,414 2,336,814
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* All procedures. Excludes discontinued operation.
**Includes 102 Radiologix MRI, CT and PET systems at October 31, 2006, and
1,417,472 Radiologix procedures for the 12 months ended December 31, 2006.
on a Form 10-K/T and filed on April 17, 2007.
INDUSTRY OVERVIEW
Diagnostic imaging involves the use of non-invasive procedures to
generate representations of internal anatomy and function that can be recorded
on film or digitized for display on a video monitor. Diagnostic imaging
procedures facilitate the early diagnosis and treatment of diseases and
disorders and may reduce unnecessary invasive procedures, often minimizing the
cost and amount of care for patients. Diagnostic imaging procedures include MRI,
CT, PET, nuclear medicine, ultrasound, mammography, X-ray and fluoroscopy.
While general X-ray remains the most commonly performed diagnostic
imaging procedure, the fastest growing and higher margin procedures are MRI, CT
and PET. The rapid growth in PET scans is attributable to the recent
introduction of reimbursement by payors of PET procedures. The number of MRI 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.
IMV, a provider of database and market information products and services
to the analytical, clinical diagnostic, biotechnology, life science and medical
imaging industries, estimates that over 24.2 million MRI procedures and 50.1
million CT procedures were conducted in the United States in 2003, representing
a 10% increase over the 2002 volume of both the MRI and CT procedures,
respectively. This data is particularly relevant to us, given that revenue from
MRI and CT scans constituted approximately 58% of our net revenue for the year
ended October 31, 2006. In addition, IMV estimates that over 706,100 clinical
PET patient studies were performed in the United States in 2003, representing a
58% increase over the 2002 volume of 447,200 clinical PET patient studies.
Revenue from PET scans constituted approximately 8% of our net revenue for the
year ended October 31, 2006.
INDUSTRY TRENDS
We believe the diagnostic imaging services industry will continue to
grow as a result of a number of factors, including the following:
ESCALATING DEMAND FOR HEALTHCARE SERVICES FROM AN AGING POPULATION
Persons over the age of 65 comprise one of the fastest growing segments
of the population in the United States. According to the United States Census
Bureau, this group is expected to increase as much as 14% from 2000 to 2010.
Because diagnostic imaging use tends to increase as a person ages, we believe
the aging population will generate more demand for diagnostic imaging
procedures.
NEW EFFECTIVE APPLICATIONS FOR DIAGNOSTIC IMAGING TECHNOLOGY
New technological developments are expected to extend the clinical uses
of diagnostic imaging technology and increase the number of scans performed.
Recent technological advancements include:
o MRI spectroscopy, which can differentiate malignant from
benign lesions;
o MRI angiography, which can produce three-dimensional images of
body parts and assess the status of blood vessels;
o Enhancements in teleradiology systems, which permit the
digital transmission of radiological images from one location
to another for interpretation by radiologists at remote
locations; and
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o The development of combined PET/CT scanners, which combine the
technology from PET and CT to create a powerful diagnostic
imaging system.
Additional improvements in imaging technologies, contrast agents and
scan capabilities are leading to new non-invasive methods of diagnosing
blockages in the heart's vital coronary arteries, liver metastases, pelvic
diseases and vascular abnormalities without exploratory surgery. We believe that
the use of the diagnostic capabilities of MRI and other imaging services will
continue to increase because they are cost-effective, time-efficient and
non-invasive, as compared to alternative procedures, including surgery, and that
newer technologies and future technological advancements will continue the
increased use of imaging services. In addition, we believe the growing
popularity of elective full-body scans will further increase the use of imaging
services. At the same time, we believe the industry has increasingly used
upgrades to existing equipment to expand applications, extend the useful life of
existing equipment, improve image quality, reduce image acquisition time and
increase the volume of scans that can be performed. We believe this trend toward
equipment upgrades rather than equipment replacements will continue, as we do
not foresee new imaging technologies on the horizon that will displace MRI, CT
or PET as the principal advanced diagnostic imaging modalities.
WIDER PHYSICIAN AND PAYOR ACCEPTANCE OF THE USE OF IMAGING
During the last 30 years, there has been a major effort undertaken by
the medical and scientific communities to develop higher quality, cost-effective
diagnostic imaging technologies and to minimize the risks associated with the
application of these technologies. The thrust of product development during this
period has largely been to reduce the hazards associated with conventional x-ray
and nuclear medicine techniques and to develop new, harmless imaging
technologies. As a result, the use of advanced diagnostic imaging modalities,
such as MRI, CT and PET, which provide superior image quality compared to other
diagnostic imaging technologies, has increased rapidly in recent years. These
advanced modalities allow physicians to diagnose a wide variety of diseases and
injuries quickly and accurately without exploratory surgery or other surgical or
4
invasive procedures, which are usually more expensive, involve greater risk to
patients and result in longer rehabilitation time. Because advanced imaging
systems are increasingly seen as a tool for reducing long-term healthcare costs,
they are gaining wider acceptance among payors.
GREATER CONSUMER AWARENESS OF AND DEMAND FOR PREVENTIVE DIAGNOSTIC
SCREENING
Diagnostic imaging is increasingly being used as a screening tool for
preventive care such as elective full-body scans. Consumer awareness of and
demand for diagnostic imaging as a less invasive and preventive screening method
has added to the growth in diagnostic imaging procedures. We believe that
further technological advancements will create demand for diagnostic imaging
procedures as less invasive procedures for early diagnosis of diseases and
disorders.
DIAGNOSTIC IMAGING SETTINGS
Diagnostic imaging services are typically provided in one of the
following settings:
FIXED-SITE, FREESTANDING OUTPATIENT DIAGNOSTIC FACILITIES
These facilities range from single-modality to multi-modality
facilities and are not generally owned by hospitals or clinics. These facilities
depend upon physician referrals for their patients and generally do not maintain
dedicated, contractual relationships with hospitals or clinics. In fact, these
facilities may compete with hospitals or clinics that have their own imaging
systems to provide services to these patients. These facilities bill third-party
payors, such as managed care organizations, insurance companies, Medicare or
Medicaid. All of our facilities are in this category.
HOSPITALS OR CLINICS
Many hospitals provide both inpatient and outpatient diagnostic imaging
services, typically on site. These inpatient and outpatient centers are owned
and operated by the hospital or clinic, or jointly by both, and are primarily
used by patients of the hospital or clinic. The hospital or clinic bills
third-party payors, such as managed care organizations, insurance companies,
Medicare or Medicaid.
MOBILE FACILITIES
Using specially designed trailers, imaging service providers transport
imaging equipment and provide services to hospitals and clinics on a part-time
or full-time basis, thus allowing small to mid-size hospitals and clinics that
do not have the patient demand to justify an on-site setting access to advanced
diagnostic imaging technology. Diagnostic imaging providers contract directly
with the hospital or clinic and are typically reimbursed directly by them.
DIAGNOSTIC IMAGING MODALITIES
The principal diagnostic imaging modalities we use at our facilities
are:
4
MRI
MRI has become widely accepted as the standard diagnostic tool for a
wide and fast-growing variety of clinical applications for soft tissue anatomy,
such as those found in the brain, spinal cord and interior ligaments of body
joints such as the knee. MRI uses a strong magnetic field in conjunction with
low energy electromagnetic waves that are processed by a computer to produce
high-resolution, three-dimensional, cross-sectional images of body tissue,
including the brain, spine, abdomen, heart and extremities. A typical MRI
examination takes from 20 to 45 minutes. MRI systems can have either open or
closed designs, routinely have magnetic field strength of 0.2 Tesla to 3.0 Tesla
and are priced in the range of $0.6 million to $2.5 million. We currently have
115 MRI systems in operation.
CT
CT provides higher resolution images than conventional X-rays, but
generally not as well-definedwell defined as those produced by MRI. CT uses a computer to
direct the movement of an X-ray tube to produce multiple cross-sectional images
of a particular organ or area of the body. CT is used to detect tumors and other
conditions affecting bones and internal organs. It is also used to detect the
occurrence of strokes, hemorrhages and infections. A typical CT examination
takes from 15 to 45 minutes. CT systems are priced in the range of $0.3 million
to $1.2 million. We currently have 66 CT systems in operation.
5
PET
PET scanning involves the administration of a radiopharmaceutical agent
with a positron-emitting isotope and the measurement of the distribution of that
isotope to create images for diagnostic purposes. PET scans provide the
capability to determine how metabolic activity impacts other aspects of
physiology in the disease process by correlating the reading for the PET with
other tools such as CT or MRI. PET technology has been found highly effective
and appropriate in certain clinical circumstances for the detection and
assessment of tumors throughout the body, the evaluation of some cardiac
conditions and the assessment of epilepsy seizure sites. The information
provided by PET technology often obviates the need to perform further highly
invasive or diagnostic surgical procedures. PET systems are priced in the range
of $0.8 million to $2.5 million. We provide PET-only services through the use of
mobile equipment services at two of our sites. In addition, we have combined
PET/CT systems that blend the PET and CT imaging modalities into one scanner.
These combined systems are priced in the range of $1.8 million to $2.2 million.
We currently have 26 PET or combination PET/CT systems in operation.
NUCLEAR MEDICINE
Nuclear medicine uses 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.
Nuclear medicine systems are priced in the range of $300,000 to $400,000. We
currently have 24 nuclear medicine systems in operation.
X-RAY
X-rays use roentgen rays to penetrate the body and record images of
organs and structures on film. Digital X-ray systems add computer image
processing capability to traditional X-ray images, which provides faster
transmission of images with a higher resolution and the capability to store
images more cost-effectively. X-ray systems are priced in the range of $50,000
to $250,000. We currently have 189 x-ray systems in operation.
ULTRASOUND
Ultrasound imaging uses sound waves and their echoes to visualize and
locate internal organs. It is particularly useful in viewing soft tissues that
do not X-ray well. Ultrasound is used in pregnancy to avoid X-ray exposure as
well as in gynecological, urologic, vascular, cardiac and breast applications.
Ultrasound systems are priced in the range of $90,000 to $250,000. We currently
have 194 ultrasound systems in operation.
MAMMOGRAPHY
Mammography is a specialized form of radiology using low dosage X-rays
to visualize breast tissue and is the primary screening tool for breast cancer.
Mammography procedures and related services assist in the diagnosis of and
treatment planning for breast cancer. MammographyAnalog mammography systems are priced in
the range of $70,000 to $100,000.$100,000, and digital mammography systems are priced in
the range of $250,000 to $400,000. We currently have 113 mammography systems in
operation.
FLUOROSCOPY
Fluoroscopy uses ionizing radiation combined with a video viewing
system for real time monitoring of organs. Fluoroscopy systems are priced in the
range of $100,000 to $300,000. 5
We currently have 73 fluoroscopy systems in
operation.
COMPETITIVE STRENGTHS
SIGNIFICANT AND KNOWLEDGEABLE PARTICIPANT IN THE NATION'S LARGEST
ECONOMY AND ON A NATIONAL SCALE
We believe our group of regional networks of fixed-site, freestanding
outpatient diagnostic imaging facilities is the largest of its kind in
California, the nation's largest economy and most populous state and with the
Radiologix acquisition the largest
outpatient diagnostic imaging facility owner in the U.S. based on our 165
locations. Our two decades of experience in operating diagnostic imaging
facilities in almost every major population center in California gives us
intimate, first-hand knowledge of these geographic markets, as well as close,
long-term relationships with key payors, radiology groups and referring
physicians within these markets.
The additional Radiologix centers reflect, for
the most part, a similar clustering philosophy which we believe will provide an
opportunity to utilize our California model outside of California.
ADVANTAGES OF REGIONAL NETWORKS WITH BROAD GEOGRAPHIC COVERAGE
The organization of our diagnostic imaging facilities into regional
networks around major population centers offers unique benefits to our patients,
our referring physicians, our payors and us.
o
We are able to increase the convenience of our services to patients by
implementing scheduling systems within geographic regions, where practical. For
example, many of our diagnostic imaging facilities within a particular region
can access the patient appointment calendars of other facilities within the same
6
regional network to efficiently allocate time available and to meet a patient's
appointment, date, time or location preferences.
o
We have found that many third-party payors representing large groups of
patients often prefer to enter into managed care contracts with providers that
offer a broad array of diagnostic imaging services at convenient locations
throughout a geographic area. We believe that our regional network approach and
our utilization management system make us an attractive candidate for selection
as a preferred provider for these third-party payors.
o
Through our advanced information technology systems, we can
electronically exchange information between radiologists in real time, enabling
us to cover larger geographic markets by using the specialized training of other
practitioners in our networks. In addition, many of our facilities digitally
transmit to our headquarters, on a daily basis, comprehensive data concerning
the diagnostic imaging services performed, which our corporate management
closely monitors to evaluate each facility's efficiency. Similarly, BRMG uses
our advanced information technology system to closely monitor radiologists to
ensure they consistently perform at expected levels.
o
The grouping of our facilities within regional networks enables us to
easily move technologists and other personnel, as well as equipment, from
under-utilized to over-utilized facilities on an as-needed basis. This results
in operating efficiencies and better equipment utilization rates and improved
response time for our patients.
COMPREHENSIVE DIAGNOSTIC IMAGING SERVICES
At each of our multi-modality facilities, we offer patients and
referring physicians one location to serve their needs for multiple procedures.
Furthermore, we have complemented many of our multi-modality sites with
single-modality sites to accommodate overflow and to provide a full range of
services within a local area consistent with demand. This can help patients
avoid multiple visits or lengthy journeys between facilities, thereby decreasing
costs and time delays.
STRONG RELATIONSHIPS WITH EXPERIENCED AND HIGHLY REGARDED RADIOLOGISTS
Our contracted radiologists generally have outstanding credentials and
reputations, strong relationships with referring physicians, a broad mix of
sub-specialties and a willingness to embrace our approach for the delivery of
diagnostic imaging services. The collective experience and expertise of these
radiologists translates into more accurate and efficient service to patients.
Moreover, as a result of our close relationship with Dr. Berger and BRMG in
California and our long-term arrangements with radiologists outside of
California, we believe that we are able to better ensure that medical service is
provided at our facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated or short-term practice groups. We
believe that physicians are drawn to BRMG and the other radiologist groups with
whom we contract by the opportunity to work with the state-of-the-art equipment
we make available to them, as well as the opportunity to receive specialized
training through our fellowship programs, and engage in clinical research
programs, which generally are available only in university settings and major
hospitals.
6
DIVERSIFIED PAYOR MIX
Our revenue is derived from a diverse mix of payors, including private
payors, managed care capitated payors and government payors. We believe our
payor diversity mitigates our exposure to possible unfavorable reimbursement
trends within any one payorone-payor class. In addition, our experience with capitation
arrangements over the last several years has provided us with the expertise to
manage utilization and pricing effectively, resulting in a predictable stream of
profitable revenue. With the exception of Blue Cross/Blue Shield and government
payors, no single payor accounted for more than 5% of our net revenue for the
year ended October 31, 2006. Radiologix had two payors, Aetna (5.5%) and United
Health (8.1%) which accounted for more than 5% of its net revenue for its 12
month periodtwelve months ended December 31, 2006.2008.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM
Dr. Howard Berger, our President and Chief Executive Officer, Norman
Hames, our Chief Operating Officer, and Dr. John Crues III, medical director of
our company,Our senior management group, together have close to 75over 100 years of healthcare
management experience. Our executive management team has created our
differentiated approach based on their comprehensive understanding of the
diagnostic imaging industry and the dynamics of our regional markets. Our
management beneficially owns approximately 22%24% of our common stock.
BUSINESS STRATEGY
MAXIMIZING PERFORMANCE AT OUR EXISTING FACILITIES
We intend to enhance our operations and increase scan volume and
revenue at our existing facilities by:
7
o Establishing new referring physician and payor relationships;
o Increasing patient referrals through targeted marketing
efforts to referring physicians;
o Adding modalities and increasing imaging capacity through
equipment upgrades to existing machinery, adding new machinery
and relocating machinery to meet the needs of our regional
markets;
o Leveraging our multi-modality offerings to increase the number
of high-end procedures performed; and
o Building upon our capitation arrangements to obtain
fee-for-service business.
FOCUSING ON PROFITABLE CONTRACTING
We regularly evaluate our contracts with third-party payors and
radiology groups, as well as our equipment and real property leases, to
determine how we may improve the terms to increase our revenues and reduce our
expenses. Because many of our contracts have one-year terms, we can regularly
renegotiate these contracts, if necessary. We believe our position as a leading
provider of diagnostic imaging services in the areas of our concentration, our
experience and knowledge of the various geographic markets in those areas, and
the benefits offered by our regional networks enable us to obtain more favorable
contract terms than would be available to smaller or less experienced
organizations.
EXPANDING MRI, CT AND CTPET APPLICATIONS
We intend to continue to use expanding MRI, CT and CTPET applications as
they become commercially available. Most of these applications can be performed
by our existing MRI, CT and CTPET systems with upgrades to software and hardware.
We intend to introduce applications that will decrease scan and image-reading
time to increase our productivity.
OPTIMIZING OPERATING EFFICIENCIES
We intend to maximize our equipment utilization by adding, upgrading
and re-deploying equipment where we experience excess demand. We will continue
to trim excess operating and general and administrative costs where it is
feasible to do so, including consolidating, divesting or closing
under-performing facilities to reduce operating costs and improve operating
income. We also may continue to use, where appropriate, highly-trainedhighly trained radiology
physician assistants to perform, under appropriate supervision of radiologists,
basic services traditionally performed by radiologists. We will continue to
upgrade our advanced information technology system to create cost reductions for
our facilities in areas such as image storage, support personnel and financial
management.
7
EXPANDING OUR NETWORKS
Following on with our Radiologix acquisition weWe intend to continue to expand our networks of facilities through new
developments and acquisitions, using a disciplined approach for evaluating and
entering new areas, including consideration of whether we have adequate
financial resources to expand. We perform extensive due diligence before
developing a new facility or acquiring an existing facility, 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 generally will only enter new markets where:
o There is sufficient patient demand for outpatient diagnostic
imaging services;
o We believe we can gain significant market share;
o We can build key referral relationships or we have already
established such relationships; and
o Payors are receptive to our entry into the market.
OUR SERVICES
We offer the following services: MRI, CT, PET, nuclear medicine, X-ray,
ultrasound, mammography and fluoroscopy. Our facilities provide standardized
services, regardless of location, to ensure patients, physicians and payors
consistency in service and quality. We monitor our level of service, including
patient satisfaction, timeliness of services to patients and reports to
physicians.
The key features of our services include:
o Patient-friendly, non-clinical environments;
o A 24-hour turnaround on routine examinations;
o Interpretations within one to two hours, if needed;
o Flexible patient scheduling, including same-day appointments;
o Extended operating hours, including weekends;
o Reports delivered via courier, fax or email;
o Availability of second opinions and consultations;
o Availability of sub-specialty interpretations at no additional
charge;
o Standardized fee schedules by region; and
o Fees that are more competitive than hospital fees.
8
RADIOLOGY PROFESSIONALS
In the states in which we provide services, a lay person or any entity
other than a professional corporation or similar professional organization is
not allowed to practice medicine, including by employing professional persons or
by having any ownership interest or profit participation in or control over any
medical professional practice. This doctrine is commonly referred to as the
prohibition on the "corporate practice" of medicine. In order to comply with
this prohibition, we contract directly or through BRMG, with radiologists to provide professional medical
services in our facilities, including the supervision and interpretation of
diagnostic imaging procedures. The radiology practice maintains full control
over the physicians it employs. Pursuant to each management contract, we make
available the imaging facility and all of the furniture and medical equipment at
the facility for use by the radiology practice, and the practice is responsible
for staffing the facility with qualified professional medical personnel. In
addition, we provide management services and administration of the non-medical
functions relating to the professional medical practice at the facility,
including among other functions, provision of clerical and administrative
personnel, bookkeeping and accounting services, billing and collection,
provision of medical and office supplies, secretarial, reception and
transcription services, maintenance of medical records, and advertising,
marketing and promotional activities. As compensation for the services furnished
under contracts with radiologists, we generally receive an agreed percentage of
the medical practice billings for, or collections from, services provided at the
facility, typically varying between 75% to 84% of net revenue or collections.
8
At 52all but eight of our facilities, BRMG is our contracted radiology group. At
October 31, 2006, BRMG employed 61 full-time and seven part-time radiologists.
At the balance of ourCalifornia facilities we contract, directly or
through BRMG, with other radiology groups to provide the professional medical
services. At 18 of our imaging facilities we charge a fee for our services as manager
of anthe entity which owns the center. Our fee is typically 10%80% to 15%90% of the
collected revenue of each company after deduction of the professional fees. In
addition, we generally own a percentage of the equity interests of the entity,
which owns the facility from which we are also entitled to a percentage of
income after a deduction of all expenses, including amounts paid for medical
services and medical supervision commensurate with our ownership percentage.
BRMG
At 85 of our facilities, BRMG is our contracted radiology group. At
December 31, 2008, BRMG employed 72 full-time and eight part-time radiologists.
Under our management agreement with BRMG in California as well as those
with other radiology practices both inside and outside of California we are paid, as compensation for the
use of our facilities and equipment and for our services, a percentage of the
amounts collected for the professional services it
renders.BRMG physicians render which for
the year ended December 31, 2008, was 79%. The percentage may be adjusted, if
necessary, to ensure that the parties receive the fair value for the services
they render. The following are the other principal terms of our management
agreement with BRMG:
|X|o The agreement expires on January 1, 2014. However, the
agreement automatically renews for consecutive 10-year
periods, unless either party delivers a notice of non-renewal
to the other party no later than six months prior to the
scheduled expiration date. In addition, either party may
terminate the agreement if the other party defaults under its
obligations, after notice and an opportunity to cure, and we
may terminate the agreement if Dr. Berger no longer owns at
least 60% of the equity of BRMG. |X|Dr. Berger owns 99% of the
equity of BRMG.
o At its expense, BRMG employs or contracts with an adequate
number of physicians necessary to provide all professional
medical services at all of our California facilities, (except nineexcept
for eight facilities acquired
from Radiologix).
|X|for which we contract with separate
medical groups.
o At our expense, we provide all furniture, furnishings and
medical equipment located at the facilities and we manage and
administer all non-medical functions at, and provide all
nurses and other non-physician personnel required for the
operation of, the facilities.
|X|o If BRMG wants to open a new facility, we have the right of
first refusal to provide the space and services for the
facility under the same terms and conditions set forth in the
management agreement.
|X|o If we want to open a new facility, BRMG must use its best
efforts to provide medical personnel under the same terms and
conditions set forth in the management agreement. If BRMG
cannot provide such personnel, we have the right to contract
with other physicians to provide services at the facility.
|X|o BRMG must maintain medical malpractice insurance for each of
its physicians with coverage limits not less than $1 million
per incident and $3 million in the aggregate per year. BRMG
also has agreed to indemnify us for any losses we suffer that
arise out of the acts or omissions of BRMG and its employees,
contractors and agents.
AT THE RADIOLOGIX LOCATIONS:
The practiceAt the non-California locations and at the Radiologix locations is for a Radiologix subsidiary to
contracteight California locations:
Typically, one of our subsidiaries contracts with radiology practices
to provide professional services, including supervision and interpretation of
diagnostic imaging procedures performed in the
Radiologix diagnostic imaging centers. The contracted
radiology practices generally have outstanding physician and practice
credentials and reputations; strong competitive market positions; a broad
9
sub-specialty mix of physicians; a history of growth and potential for continued
growth; and a willingness to embrace our strategy for the delivery of diagnostic
imaging services.
Radiologix hasWe have two models by which it contractswe contract with radiology practices: a
comprehensive services model and a technical services model. Under Radiologix'sour
comprehensive services model, Radiologix enterswe enter into a long-term agreement with a
radiology practice group (typically 40 years). Under this arrangement, in
addition to obtaining technical fees for the use of Radiologix'sour diagnostic imaging
equipment and the provision of technical services, Radiologix
provideswe provide management
services and receivesreceive a fee based on the practice group's professional revenue,
including revenue derived outside of Radiologix's
diagnosticour imaging centers. Under Radiologix'sour technical
services model, which relates primarily to sixseven of Radiologix'sour subsidiary operations,
Radiologix
enterswe enter into a shorter-term agreement with a radiology practice group
(typically 10 to 15 years) and payspay a fee based onto the radiology group (typically
between 10% to 15% of the cash collections from reimbursement for imaging
procedures.procedures). In both the comprehensive services and technical services models,
Radiologix ownswe own the diagnostic imaging assets and, therefore, receivesreceive 100% of the
technical reimbursements associated with imaging procedures.
Additionally, in most instances, both the comprehensive services and the
technical services models contemplate an incentive technical bonus for the
radiology group if the net technical income exceeds specific thresholds.
9
The agreements with the radiology practices under Radiologix'sour comprehensive
services model contain provisions whereby both parties have agreed to certain
restrictions on accepting or pursuing radiology opportunities within a five to
fifteen-mile radius of any of Radiologix'sour owned, operated or managed diagnostic imaging
centers at which the radiology practice provides professional radiology services
or any hospital at which the radiology practice provides on-site professional
radiology services. Each of these agreements also restricts the applicable
radiology practice from competing with Radiologixus and itsour other contracted radiology
practices within a specified geographic area during the term of the agreement.
In addition, the agreements require the radiology practices to enter into and
enforce agreements with their physician shareholders at each radiology practice
(subject to certain exceptions) that include covenants not to compete with Radiologixus
for a period of two years after termination of employment or ownership, as
applicable.
Under Radiologix'sour comprehensive services model, Radiologix haswe have the right to terminate
each agreement if the radiology practice or a physician of the contracted
radiology practice engages in conduct, or is formally accused of conduct, for
which the physician employee's license to practice medicine reasonably would be
expected to be subject to revocation or suspension or is otherwise disciplined
by any licensing, regulatory or professional entity or institution, the result
of any of which (in the absence of termination of this physician or other action
to monitor or cure this act or conduct) adversely affects or would reasonably be
expected to adversely affect the radiology practice.
Under Radiologix'sour comprehensive services model, upon termination of an
agreement with a radiology practice, depending upon the termination event, Radiologixwe
may have the right to require the radiology practice to purchase and assume, or
the radiology practice may have the right to require Radiologixus to sell, assign and
transfer to it, the assets and related liabilities and obligations associated
with the professional and technical radiology services provided by the radiology
practice immediately prior to the termination. The purchase price for the
assets, liabilities and obligations would be the lesser of their fair market
value or the return of the consideration received in the acquisition. However,
the purchase price may not be less than the net book value of the assets being
purchased.
The agreements with most of the radiology practices under Radiologix'sour technical
services model contain non-compete provisions that are generally less
restrictive than those provisions under Radiologix'sour comprehensive services model. The
geographic scope of and types of services covered by the non-compete provisions
vary from practice to practice. Under Radiologix'sour technical services model, Radiologixwe generally
hashave the right to terminate the agreement if a contracted radiology practice
loses the licenses required to perform the service obligations under the
agreement, violates non-compete provisions relating to the modalities offered or
if income thresholds are not met.
PAYORS
We derive substantially all of our revenue, directly or indirectly, fromThe fees charged for the diagnostic imaging services performed at our
facilities.
These feesfacilities are paid by a diverse mix of payors, as illustrated for the year
ended October 31, 2006 byfollowing
periods presented in the following table:
PERCENTAGE OF NET
PAYOR TYPE REVENUE(1)table below:
% OF NET REVENUE
-------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2007 DECEMBER 31, 2008
------------------ --------------------
Insurance (1) 57% 56%
Managed Care Capitated Payors 15% 15%
Medicare/Medicaid 22% 23%
Other (2) 2% 2%
Workers Compensation/Personal Injury 4% 4%
- ----------
-----------------
Insurance(2) 41%
Managed Care Capitated Payors 27%
Medicare/Medicaid 18%
Other(3) 10%
Workers Compensation/Personal Injury 4%
------------
1 Does not include Radiologix.
2(1) Includes Blue Cross/Blue Shield, which represented 14%19% of our net revenue
for the year ended OctoberDecember 31, 2006.
32007 and 19% of our net revenue for the year
ended December 31, 2008.
(2) Includes co-payments, direct patient payments and payments through contracts
with physician groups and other non-insurance company payors.
With the exception of Blue Cross/Blue Shield and government payors, no
single payor accounted for more than 5% of our net revenue (for Radiologix
payors, Aetna (5.5%) and United Health (8.1%), each accounted for more than 5%
of their net revenue for the year ended October 31, 2006).10
We have described below the types of reimbursement arrangements we have
directly or indirectly, including through BRMG,
with third-party payors.
INSURANCE
Generally, insurance companies reimburse us, directly or indirectly,
including through BRMG in California or through the contracted radiology groups
elsewhere, on the basis of agreed upon rates. These rates are on average
approximately the same as the rates set forth in the Medicare Fee Schedule for
the particular service. The patients are generally not responsible for any
amount above the insurance allowable amount.
10
MANAGED CARE CAPITATION AGREEMENTS
Under these agreements, which are generally between BRMG in California
and outside of California between the contracted radiology group and the payor,
typically an independent physicians group or other medical group, the payor pays
a pre-determined amount per-member per-month in exchange for the radiology group
providing all necessary covered services to the managed care members included in
the agreement. These contracts pass much of the financial risk of providing
outpatient diagnostic imaging services, including the risk of over-use, from the
payor to the radiology group and, as a result of our management agreement with
the radiology group, to us.
We believe that through our comprehensive utilization management, or
UM, program we have become highly skilled at assessing and moderating the risks
associated with the capitation agreements, so that these agreements are
profitable for us. Our UM program is managed by our UM department, which
consists of administrative and nursing staff as well as BRMG medical staff who
are actively involved with the referring physicians and payor management in both
prospective and retrospective review programs. Our UM program includes the
following features, all of which are designed to manage our costs while ensuring
that patients receive appropriate care:
|X| PHYSICIAN EDUCATION
At the inception of a new capitation agreement, we provide the
new referring physicians with binders of educational material
comprised of proprietary information that we have prepared and
third-party information we have compiled, which are designed
to address diagnostic strategies for common diseases. We
distribute additional material according to the referral
practices of the group as determined in the retrospective
analysis described below.
|X| PROSPECTIVE REVIEW
Referring physicians are required to submit authorization
requests for non-emergency high-intensity services: MRI, CT,
special procedures and nuclear medicine studies. The UM
medical staff, according to accepted practice guidelines,
considers the necessity and appropriateness of each request.
Notification is then sent to the imaging facility, referring
physician and medical group. Appeals for cases not approved
are directed to us. The capitated payor has the final
authority to uphold or deny our recommendation.
|X| RETROSPECTIVE REVIEW
We collect and sort encounter activity by payor, place of
service, referring physician, exam type and date of service.
The data is then presented in quantitative and analytical form
to facilitate understanding of utilization activity and to
provide a comparison between fee-for-service and Medicare
equivalents. Our Medical Director prepares a quarterly report
for each payor and referring physician, which we send to them.
When we find that a referring physician is over utilizing
services, we work with the physician to modify referral
patterns.
MEDICARE/MEDICAID
Medicare is the national health insurance program for people age 65 or
older and people under age 65 with certain disabilities. Medicaid is the state
health insurance program for qualifying low incomelow-income persons. Medicare and
Medicaid reimburse us, directly or indirectly, including through the contracted
radiology group, in accordance with the Medicare Fee Schedule, which is a
schedule of rates applicable to particular services and annually adjusted
upwards or downwards, typically, within a 4-8% range. Medicare patients are not
responsible for any amount above the Medicare allowable amount. Medicaid
patients are not responsible for any unreimbursed portion.
11
CONTRACTS WITH PHYSICIAN GROUPS AND OTHER NON-INSURANCE COMPANY PAYORS
These payors reimburse us, directly or indirectly, on the basis of
agreed upon rates. These rates are typically set at 70-80% ofor below the rates set forth in
the current Medicare Fee Schedule for the particular service. However, we often
agree to a specified rate for MRI and CT procedures that is not tied to the
Medicare Fee Schedule. The patients are generally not responsible for the
unreimbursed portion.
FACILITIES
Through our wholly owned subsidiaries, we operate 7993 fixed-site,
freestanding outpatient diagnostic imaging facilities in California, 35 in the
Baltimore-Washington, D.C. area and 1018 in the Rochester and Hudson Valley areas
of New York.York, 15 in Delaware, as well as two individual facilities in Florida and
one in Kansas. We lease the premises at which these facilities are located, with
the exception of two facilities located in buildings we own. We lease the land
on which both of those buildings are located.
11
Our facilities are primarily located in regional networks that we refer
to as regions. EightyThe majority of our facilities (including the Radiologix sites) are multi-modality sites, offering
various combinations of MRI, CT, PET, nuclear medicine, ultrasound, X-ray and
fluoroscopy services. Forty-nineA portion of our facilities (including the Radiologix sites) are single-modality sites,
offering either X-ray or MRI services. Consistent with our regional network
strategy, we locate our single-modality facilities near multi-modality
facilities, to help accommodate overflow in targeted demographic areas.
The following table sets forth the number of our facilities for each
year during the five-year period ended OctoberDecember 31, 2006:2008:
YEAR ENDED OCTOBERDECEMBER 31,
------------------------------------------------
2002 2003--------------------------------------------
2004 2005 2006 -------- -------- -------- -------- --------
2007 2008
---- ---- ---- ---- ----
Total facilities owned or managed (at beginning of year) 46 58 5556 56 57 132 141
Facilities added by:
Acquisition* 1 -- -- -- 7578 12 24
Internal development 11 3 1 4 12 4
Facilities closed or sold -- (6) (3) -- (7) (5) (5)
---- ---- ---- ---- ----
Total facilities owned (at end of year)* 58 55 56 57 129
*Includes132* 141 164
==== ==== ==== ==== ====
* Includes 69 Radiologix facilities acquired on November 15, 2006.
DIAGNOSTIC IMAGING EQUIPMENT
The following table indicates, as of OctoberDecember 31, 2006,2008, the quantity of
principal diagnostic equipment available at our facilities, by region including
the Radiologix facilities acquired on November 15, 2006:region:
OPEN MAMMO- ULTRA- NUCLEAR
MRI Open MRI CT PET/CT GRAPHY SOUND X-RAY MEDICINE TOTAL
----- ------- ---- -------- -------- ------- ------- ---------- -------
CALIFORNIA
- ----------
Beverly Hills 4Mammography Ultra Sound X-ray Medicine Total
--------------------------------------------------------------------------------------------------------------
Kansas 0 0 1 2 1 3 4 3 1 19
Ventura 2 2 1 2 5 9 15 2 38
San Fernando Valley 3 3 3 1 2 6 7 1 26
Antelope Valley 1 1 1 -- 1 1 2 1 8
Central California 3 3 5 -- 5 10 12 2 40
Northern California 13 2 12 3 10 12 1 2 55
Orange 2 1 1 1 3 7 4 1 20
Long Beach 1 1 1 -- 3 4 7 1 18
Northern San Diego -- 1 1 -- -- -- 1 -- 3
Palm Springs 1 1 2 -- 2 7 7 1 21
Inland Empire 5 2 4 1 8 12 12 3 47
MARYLAND
--------
Baltimore/Washington, D.C. 18 5 21 5 22 22 1 12 106
NEW YORK
--------
Rochester 50 0 1 4 1 1 3 -- 1 16
Rockland 4 1 3 2 3 3 -- 2 18
FLORIDA
-------
Treasure Coast0 6
California 46 21 30 17 70 107 74 9 374
Florida 2 1 3 1 3 4 4 2 20
New York 14 1 10 3 -- 313 30 16 MINNESOTA
---------
Duluth --2 89
Maryland 15 7 16 5 23 41 26 10 143
Delaware 7 1 -- -- -- -- -- --6 0 4 11 11 1 COLORADO
--------
Denver 1 2 -- -- -- -- -- -- 341
--------------------------------------------------------------------------------------------------------------
Total 65 29 64 18 71 103 72 33 45584 31 66 26 113 194 135 24 673
==============================================================================================================
The average age of our MRI and CT units is less than six years, and the
average age of our PET units is less than four years. The useful life of our
MRI, CT and PET units is typically ten years.
FACILITY ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On October 31, 2008, we acquired the assets and business of Middletown
Imaging in Middletown, Delaware for $210,000 in cash and the assumption of
capital lease debt of $1.2 million. We made a preliminary purchase price
allocation of the acquired assets and liabilities, and approximately $530,000 of
goodwill was recorded with respect to this transaction.
12
On August 15, 2008, we acquired the women's imaging practice of Parvis
Gamagami, M.D., Inc. in Van Nuys, CA for $600,000. Upon acquisition, we
relocated the practice to a nearby center we recently acquired from InSight
Health in Encino, CA. We rebranded the InSight center as the Encino Breast Care
Center, and focused it on Digital Mammography, Ultrasound, MRI and other
modalities pertaining to women's health. We have allocated the full purchase
price of $600,000 to goodwill.
On July 23, 2008, we acquired the assets and business of NeuroSciences
Imaging Center in Newark, Delaware for $4.5 million in cash. The center, which
performs MRI, CT, Bone Density, X-ray, Fluoroscopy and other specialized
procedures, is located in a highly specialized medical complex called the
Neuroscience and Surgery Institute of Delaware. The acquisition complements our
recent purchase of the Papastavros Associates Imaging centers completed in
March, 2008. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $2.6 million of goodwill was recorded
with respect to this transaction.
On June 18, 2008, we acquired the assets and business of Ellicott Open
MRI for the assumption of approximately $181,000 of capital lease debt. We made
a preliminary purchase price allocation of the acquired assets and liabilities,
and no goodwill was recorded with respect to this transaction.
On June 2, 2008, we acquired the assets and business of Simi Valley
Advanced Medical, a Southern California based multi-modality imaging center, for
the assumption of capital lease debt of $1.7 million. We made a preliminary
purchase price allocation of the acquired assets and liabilities, and
approximately $313,000 of goodwill was recorded with respect to this
transaction.
On April 15, 2008, we acquired the net assets of five Los Angeles area
imaging centers from InSight Health Corp. We completed the purchase of a sixth
center in Van Nuys, CA from Insight Health Corp. on June 2, 2008. The total
purchase price for the six centers was $8.5 million in cash. The centers provide
a combination of imaging modalities, including MRI, CT, X-ray, Ultrasound and
Mammography. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $5.6 million of goodwill was recorded
with respect to this transaction.
On April 1, 2008, we acquired the net assets and business of BreastLink
Medical Group, Inc., a prominent Southern California breast medical oncology
business and a leading breast surgery business, for the assumption of
approximately $4.0 million of accrued liabilities and capital lease obligations.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $2.1 million of goodwill was recorded with
respect to this transaction.
On March 12, 2008, we acquired the net assets and business of
Papastavros Associates Medical Imaging for $9.0 million in cash and the
assumption of capital leases of $337,000. Founded in 1958, Papastavros
Associates Medical Imaging is one of the largest and most well established
outpatient imaging practices in Delaware. The 12 Papastavros centers offer a
combination of MRI, CT, PET, nuclear medicine, mammography, bone densitometry,
fluoroscopy, ultrasound and X-ray. We made a preliminary purchase price
allocation of the acquired assets and liabilities, and approximately $3.6
million of goodwill, and $1.2 million for covenants not to compete, was recorded
with respect to this transaction.
On February 1, 2008, we acquired the net assets and business of The
Rolling Oaks Imaging Group, located in Westlake and Thousand Oaks, California,
for $6.0 million in cash and the assumption of capital leases of $2.7 million.
The practice consists of two centers, one of which is a dedicated women's
center. The centers are multimodality and include a combination of MRI, CT,
PET/CT, mammography, ultrasound and X-ray. The centers are positioned in the
community as high-end, high-quality imaging facilities that employ
state-of-the-art technology, including 3 Tesla MRI and 64 slice CT units. The
facilities have been fixtures in the Westlake/Thousand Oaks market since 2003.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $5.6 million of goodwill was recorded with
respect to this transaction.
On October 9, 2007, we acquired the assets and business of Liberty
Pacific Imaging located in Encino, California for $2.8 million in cash. The
center operates a successful MRI practice utilizing a 3T MRI unit, the strongest
magnet strength commercially available at this time. The center was founded in
2003. The acquisition allows us to consolidate a portion of our Encino/Tarzana
MRI volume onto the existing Liberty Pacific scanner. This consolidation allows
us to move our existing 3T MRI unit in that market to our Squadron facility in
Rockland County, New York. Approximately $1.1 million of goodwill was recorded
with respect to this transaction. Also, $200,000 was recorded for the fair value
of a covenant not to compete contract.
In September 2007, we acquired the assets and business of three
facilities comprising Valley Imaging Center, Inc. located in Victorville, CA for
$3.3 million in cash plus the assumption of approximately $866,000 of debt. The
acquired centers offer a combination of MRI, CT, X-ray, Mammography, Fluoroscopy
and Ultrasound. The physician who provided the interpretive radiology services
to these three locations joined BRMG. The leased facilities associated with
these centers includes a total monthly rental of approximately $18,000.
Approximately $3.0 million of goodwill was recorded with respect to this
transaction. Also, $150,000 was recorded for the fair value of a covenant not to
compete contract.
13
In September 2007, we acquired the assets and business of Walnut Creek
Open MRI located in Walnut Creek, CA for $225,000. The center provides MRI
services. The leased facility associated with this center includes a monthly
rental of approximately $6,800 per month. Approximately $50,000 of goodwill was
recorded with respect to this transaction.
In July 2007, we acquired the assets and business of Borg Imaging Group
located in Rochester, NY for $11.6 million in cash plus the assumption of
approximately $2.4 million of debt. Borg was the owner and operator of six
imaging centers, five of which are multimodality, offering a combination of MRI,
CT, X-ray, Mammography, Fluoroscopy and Ultrasound. After combining the Borg
centers with RadNet's existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester. The leased facilities associated with
these centers includes a total monthly rental of approximately $71,000 per
month. Approximately $8.9 million of goodwill was recorded with respect to this
transaction. Also, $1.4 million was recorded for the fair value of covenant not
to compete contracts.
In March 2007, we acquired the assets and business of Rockville Open
MRI, located in Rockville, Maryland, for $540,000 in cash and the assumption of
a capital lease of $1.1 million. The center provides MRI services. The center is
3,500 square feet with a monthly rental of approximately $8,400 per month.
Approximately $365,000 of goodwill was recorded with respect to this
transaction.
DIVESTITURES
In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures for approximately $2.3 million reducing our
ownership to 49%. As a result of this transaction, we no longer consolidate this
joint venture. Accordingly, our consolidated balance sheet at December 31, 2007
includes this 49% interest as a component of our total investment in
non-consolidated joint ventures where it is accounted for under the equity
method. The amounts eliminated from our consolidated balance sheet as a result
of the deconsolidation were not material. Since the deconsolidation occurred at
the end of 2007, no significant amounts were eliminated from our statement of
operations.
In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.
In June 2007 we divested a non-core center in Duluth, Minnesota to a
local multi-center operator for $1.3 million.
INFORMATION TECHNOLOGY
Our corporate headquarters and substantially allmany of our non-Radiologix facilities are
interconnected through a state-of-the-art information technology system. This
system, which is compliant with the Health Insurance Portability and
Accountability Act of 1996, is comprised of a number of integrated applications,
provides a single operating platform for billing and collections, electronic
medical records, practice management and image management.
12
This technology has created cost reductions for our facilities in areas
such as image storage, support personnel and financial management and has
further allowed us to optimize the productivity of all aspects of our business
by enabling us to:
o Capture all necessary patient demographic, history and billing
information at point-of-service;
o Automatically generate bills and electronically file claims
with third-party payors;
o Record and store diagnostic report images in digital format;
o Digitally transmit on a real time basis diagnostic images from
one location to another, thus enabling networked radiologists
to cover larger geographic markets by using the specialized
training of other networked radiologists;
o Perform claims, rejection and collection analysis; and
o Perform sophisticated financial analysis, such as analyzing
cost and profitability, volume, charges, current activity and
patient case mix, with respect to each of our managed care
contracts.
Currently diagnostic reports and images are accessible via the Internet
to our California referring providers. We have worked with some of the larger
medical groups in California with whom we have contracts to provide access to
this content via their web portals. We are in the process of making such
services available outside of California.
PERSONNEL
At OctoberDecember 31, 2006,2008, we had a total of 9702,940 full-time, 52789 part-time
and 215
per-diem employees (additionally Radiologix had 1,196574 per diem employees. These numbers include 72 full-time 219and eight
part-time physicians and 1,073 full-time, 569 part-time and 178 per diem employees). These numbers do not include the 61 full-time and 7
part-time radiologists or the 297 full-time and 147 part-time technologists,
(nor do they include Radiologix technolgists; 316 full-time, 162 part-time and
121 per diem).261 per-diem
technologists.
We employ a site managermanagers who isare responsible for overseeing day-to-day
and routine operations at each of our facilities, including staffing, modality
and schedule coordination, referring physician and patient relations and
purchasing of materials. In turn, our 10these site managers report to regional
managers and directors, who are responsible for oversight of the operations of
all facilities within their region, including sales, marketing and contracting.
14
The regional managers and directors, along with our directors of contracting,
marketing, facilities, management/purchasing and human resources report to our
eastern and western chief operating officer.officers. Our chief financial officer,
director of information services and our medical director report to our chief
executive officer.
None of our employees is subject to a collective bargaining agreement
nor have we experienced any work stoppages. We believe our relationship with our
employees is good.
EXECUTIVE OFFICERS
See PartOur executive officers are:
NAME AGE OFFICER SINCE POSITION
- ---- --- ------------- --------
Howard G. Berger, M.D. 64 1992 President and Chief Executive Officer
John V. Crues, III, M.D. 58 2000 Medical Director
Stephen M. Forthuber 46 2006 Executive Vice President and Chief Operating
Officer-Eastern Operations
Norman R. Hames 51 1996 Executive Vice President, Secretary, Chief Operating
Officer-Western Operations
Jeffrey L. Linden 65 2001 Executive Vice President and General Counsel
Mark D. Stolper 37 2004 Executive Vice President and Chief Financial Officer
Howard G. Berger, M.D. has served as President and Chief Executive
Officer of our company and its predecessor entities since 1987. Dr. Berger is
also the president of the entities that own BRMG. Dr. Berger has over 25 years
of experience in the development and management of healthcare businesses. He
began his career in medicine at the University of Illinois Medical School, is
Board Certified in Nuclear Medicine and trained in an Internal Medicine
residency, as well as in a masters program in medical physics in the University
of California system.
John V. Crues, III, Item 10M.D. is a world-renowned radiologist. Dr. Crues
plays a significant role as a musculoskeletal specialist for many of this reportour
patients as well as a resource for information aboutphysicians providing services at our
executive
officers.facilities. Dr. Crues received his M.D. at Harvard University, completed his
internship at the University of Southern California in Internal Medicine, and
completed a residency at Cedars-Sinai in Internal Medicine and Radiology. Dr.
Crues has authored numerous publications while continuing to actively
participate in radiological societies such as the Radiological Society of North
America, American College of Radiology, California Radiological Society,
International Society for Magnetic Resonance Medicine and the International
Skeletal Society.
Stephen M. Forthuber became our Executive Vice President and Chief
Operating Officer for Eastern Operations subsequent to the Radiologix
acquisition. He joined Radiologix in January 2000 as Regional Director of
Operations, Northeast. From July 2002 until January 2005 he served as Regional
Vice President of Operations, Northeast and from February until December 2005 he
was Senior Vice President and Chief Development Officer for Radiologix. Prior to
working at Radiologix, Mr. Forthuber was employed from 1982 until 1999 by Per-Se
Technologies, Inc. and its predecessor companies, where he had significant
physician practice management and radiology operations responsibilities.
Norman R. Hames has served as our Chief Operating Officer since 1996
and currently as our Executive Vice President and Chief Operating Officer -
Western Operations. Applying his 20 years of experience in the industry, Mr.
Hames oversees all aspects of facility operations. His management team,
comprised of regional directors, managers and sales managers, are responsible
for responding to all of the day-to-day concerns of our facilities, patients,
payors and referring physicians. Prior to joining our company, Mr. Hames was
President and Chief Executive Officer of his own company, Diagnostic Imaging
Services, Inc. (which we acquired), which owned and operated 14 multi-modality
imaging facilities throughout Southern California. Mr. Hames gained his initial
experience in operating imaging centers for American Medical International, or
AMI, and was responsible for the development of AMI's single and multi-modality
imaging centers.
Jeffrey L. Linden joined us in 2001 and currently serves as our
Executive Vice President and General Counsel. Prior to joining us, Mr. Linden
had been engaged in the private practice of law. He has lectured before numerous
organizations on various topics, including the California State Bar, American
Society of Therapeutic Radiation Oncologists, California Radiological
Association, and National Radiology Business Managers Association.
Mark D. Stolper has served as our Chief Financial Officer since 2004
and prior to that was an independent member of our Board of Directors. Prior to
joining us, he had diverse experiences in investment banking, private equity,
venture capital investing and operations prior to joining us. Mr. Stolper began
15
his career as a member of the corporate finance group at Dillon, Read and Co.,
Inc., executing mergers and acquisitions, public and private financings and
private equity investments with Saratoga Partners LLP, an affiliated principal
investment group of Dillon Read. After Dillon Read, Mr. Stolper joined Archon
Capital Partners, backed by the Milken Family and NewsCorp, which made private
equity investments in media and entertainment companies. Mr. Stolper received
his operating experience with Eastman Kodak, where he was responsible for
business development for Kodak's Entertainment Imaging subsidiary ($1.5 billion
in sales). Mr. Stolper was also co-founder of Broadstream Capital Partners, a
Los Angeles-based investment banking firm focused on advising middle market
companies engaged in financing and merger and acquisition transactions.
The officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors.
MARKETING
Our California marketing team which we are in the process of expanding
into our Radiologix facilities, consists of one director of marketing,
fivesix territory sales managers and 1820 customer service representatives. Our
eastern marketing team consists of 27 customer sales representatives and six
sales managers who each report to a district manager. Our marketing team employs
a multi-pronged approach to marketing:marketing.
PHYSICIAN MARKETING
Each customer service representative is responsible for marketing
activity on behalf of one or more facilities. The representatives act as a
liaison between the facility and referring physicians, holding meetings
periodically and on an as-needed basis with them and their staff to present
educational programs on new applications and uses of our systems and to address
particular patient service issues that have arisen. In our experience,
consistent hands-on contact with a referring physician and his or her staff
generates goodwill and increases referrals. The representatives also continually
seek to establish referral relationships with new physicians and physician
groups. In addition to a base salary and a car allowance, each representative
receives a quarterly bonus if the facility or facilities on behalf of which he
or she markets meets specified net revenue goals for the quarter.
PAYOR MARKETING
Our marketing team regularly meets with managed care organizations and
insurance companies to solicit contracts and meet with existing contracting
payors to solidify those relationships. The comprehensiveness of our services,
the geographic location of our facilities and the reputation of the physicians
with whom we contract all serve as tools for obtaining new or repeat business
from payors.
13
SPORTS MARKETING PROGRAM
We have a sports marketing program designed to increase our public
profile. We provide X-ray equipment and a technician for all of the basketball
games of the Lakers, Clippers Kings, Avengers and Sparks held at the Staples Center in Los
Angeles, Ducks hockey games held at the Arrowhead Pond in Anaheim, and
University of Southern California football games held in the Los Angeles.Angeles
Coliseum. In exchange for this service, we receive game tickets and an
advertisement in each team program throughout the season. In addition, we have a
close relationship with the physicians for some of these teams.
SUPPLIERS
Historically, we have acquired almost alla majority of our advanced diagnostic
imaging equipment from GE Medical Systems, Inc., and we purchase medical
supplies from various national vendors. We believe that we have excellent
working relationships with all of our major vendors. However, there are several
comparable vendors for our supplies that would be available to us if one of our
current vendors becomes unavailable.
We primarily acquire our equipment with cash or through various
financing arrangements directly with an affiliate of General Electric Corporation, or GE,equipment venders and third party equipment finance
companies involving the use of capital leases with purchase options at minimal
prices at the end of the lease term. At OctoberDecember 31, 2006,2008, capital lease
obligations, excluding interest, totaled approximately $6.3$39.3 million through
2011,2013, including current installments totaling approximately $2.4 million (see Note 7).$15.1 million. If we
open or acquire additional imaging facilities, we may have to incur material
capital lease obligations.
Timely, effective maintenance is essential for achieving high
utilization rates of our imaging equipment. We have an arrangement with GE
Medical Systems under which it has agreed to be responsible for the maintenance
and repair of a majority of our equipment for a fee that is based upon a
percentage of our revenue, subject to a minimum payment. Net revenue is reduced
by the provision for bad debt,debts, mobile PET revenue and other professional
reading service revenue to obtain adjusted net revenue.
The fiscal 2006 annual service fee was the
higher of 3.62% of our adjusted net revenue, or $5,430,000. For the fiscal years
2007, 2008 and 2009, the annual service fee will be the higher of 3.62% of our
adjusted net revenue, or $5,430,000. We believe this framework of basing service
costs on usage is an effective and unique method for controlling our overall
costs on a facility-by-facility basis. We plan to renegotiate our existing
agreement with GE in early 2007 adding Radiologix to the service plan and
reducing the overall service fee percentages.16
COMPETITION
The market for diagnostic imaging services is highly competitive. We
compete principally on the basis of our reputation, our ability to provide
multiple modalities at many of our facilities, the location of our facilities
and the quality of our diagnostic imaging services. We compete locally with
groups of radiologists, established hospitals, clinics and other independent
organizations that own and operate imaging equipment. Our major national
competitors include Alliance Imaging, Inc., Medical Resources, Inc., Healthsouth
Corporation and InSight
Health Services. Some of our competitors may now or in the future have access to
greater financial resources than we do and may have access to newer, more
advanced equipment. In addition, some physician practices have established their
own diagnostic imaging facilities within their group practices to compete with
us. We experience additional competition as a result of those activities.
Each of the non-BRMG contracted radiology practices under Radiologix'sthe
comprehensive services model has entered into agreements with its physician
shareholders and full-time employed radiologists that generally prohibit those
shareholders and radiologists from competing for a period of two years within
defined geographic regions after they cease to be owners or employees, as
applicable. In most states, a covenant not to compete will be enforced only:
o to the extent it is necessary to protect a legitimate business
interest of the party seeking enforcement;
o if it does not unreasonably restrain the party against whom
enforcement is sought; and
o if it is not contrary to public interest.
Enforceability of a non-compete covenant is determined by a court based
on all of the facts and circumstances of the specific case at the time
enforcement is sought. For this reason, it is not possible to predict whether or
to what extent a court will enforce the contracted radiology practices'
covenants. The inability of the contracted radiology practices or us to enforce
radiologist's non-compete covenants could result in increased competition from
individuals who are knowledgeable about our business strategies and operations.
14
INSURANCE
We maintain insurance policies with coverage we believe is 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
insurance and professional liability insurance in commercially reasonable
amounts. Additionally, we maintain workers' compensation insurance on all of our
employees. Coverage is placed on a statutory basis and responds to individual
state's requirements.
Pursuant to our agreements with physician groups with whom we contract,
including BRMG, each group must maintain medical malpractice insurance for the
group, having coverage limits of not less than $1.0 million per incident and
$3.0 million in the aggregate per year.
California's medical malpractice cap further reduces our exposure.
California places a $250,000 limit on non-economic damages for medical
malpractice cases. Non-economic damages are defined as compensation for pain,
suffering, inconvenience, physical impairment, disfigurement and other
non-pecuniary injury. The cap applies whether the case is for injury or death,
and it allows only one $250,000 recovery in a wrongful death case. No cap
applies to economic damages. Other states in which we now operate do not have
similar limitations and in those states we believe our insurance coverage to be
sufficient.
We maintain a $5.0 million key-man life insurance policy on the life of
Dr. Berger. We are the beneficiary under the policy.
REGULATION
GENERAL
The healthcare industry is highly regulated, and we can give no
assurance that the regulatory environment in which we operate will not change
significantly in the future. Our ability to operate profitably will depend in
part upon us, and the contracted radiology practices and their affiliated
physicians obtaining and maintaining all necessary licenses and other approvals,
and operating in compliance with applicable healthcare regulations. We believe
that healthcare regulations will continue to change. Therefore, we monitor
developments in healthcare law and modify our operations from time to time as
the business and regulatory environment changes. Although we intend to continue
to operate in compliance, we cannot ensure that we will be able to adequately
modify our operations so as to address changes in the regulatory environment.
17
LICENSING AND CERTIFICATION LAWS
Ownership, construction, operation, expansion and acquisition of
diagnostic imaging facilities are subject to various federal and state laws,
regulations and approvals concerning licensing of facilities and personnel. In
addition, free-standing diagnostic imaging facilities that provide services not
performed as part of a physician office must meet Medicare requirements to be
certified as an independent diagnostic testing facility to bill the Medicare
program. We may not be able to receive the required regulatory approvals for any
future acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services. We have experienced a
slowdown in the credentialing of our physicians over he last several years which
has lengthened our billing and collection cycle. Physician credentialing is a
requirement of our payors prior to their commencement of payment.
CORPORATE PRACTICE OF MEDICINE
In the states in which we operate, a lay person or any entity other
than a professional corporation or other similar professional organization is
not allowed to practice medicine, including by employing professional persons or
by having any ownership interest or profit participation in or control over any
medical professional practice. The laws of such states also prohibit a lay
person or a non-professional entity from exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting professional fees with physicians. We structure
our relationships with the radiology practices, including the purchase of
diagnostic imaging facilities, in a manner that we believe keeps us from
engaging in the practice of medicine or exercising control over the medical
judgments or decisions of the radiology practices or their physicians or
violating the prohibitions against fee-splitting. However, because challenges to
these types of arrangements are not required to be reported, we cannot
substantiate our belief. There can be no assurance that our present arrangements
with BRMG or the other physicians providing medical services and medical
supervision at our imaging facilities will not be challenged, and, if
challenged, that they will not be found to violate the corporate practice
prohibition, thus subjecting us to a potential combination of damages,
injunction and civil and criminal penalties or require us to restructure our
arrangements in a way that would affect the control or quality of our services
or change the amounts we receive under our management agreements, or both.
15
MEDICARE AND MEDICAID FRAUD AND ABUSE
Our revenue is derived through our ownership, operation and management
of diagnostic imaging centers and from service fees paid to us by contracted
radiology practices. During the yeartwelve months ended OctoberDecember 31, 2006,2008,
approximately 18%23% of our revenue (and 29% of the Radiologix revenue) generated at our diagnostic imaging centers was
derived from government sponsored healthcare programs (principally Medicare and
Medicaid).
Federal law prohibits the knowing and willful offer, payment,
solicitation or receipt of any form of remuneration in return for, or to induce,
(i) the referral of a person, (ii) the furnishing or arranging for the
furnishing of items or services reimbursable under the Medicare, Medicaid or
other governmental programs or (iii) the purchase, lease or order or arranging
or recommending purchasing, leasing or ordering of any item or service
reimbursable under the Medicare, Medicaid or other governmental programs.
Enforcement of this anti-kickback law is a high priority for the federal
government, which has substantially increased enforcement resources and is
scheduled to continue increasing such resources. The applicability of the
anti-kickback law to many business transactions in the healthcare industry has
not yet been subject to judicial or regulatory interpretation. Noncompliance
with the federal anti-kickback legislation can result in exclusion from the
Medicare, Medicaid or other governmental programs and civil and criminal
penalties.
We receive fees under our service agreements for management and
administrative services, which include contract negotiation and marketing
services. We do not believe we are in a position to make or influence referrals
of patients or services reimbursed under Medicare or other governmental programs
to radiology practices or their affiliated physicians or to receive referrals.
However, we may be considered to be in a position to arrange for items or
services reimbursable under a federal healthcare program. Because the provisions
of the federal anti-kickback statute are broadly worded and have been broadly
interpreted by federal courts, it is possible that the government could take the
position that our arrangements with the contracted radiology practices implicate
the federal anti-kickback statute. Violation of the law can result in monetary
fines, civil and criminal penalties, and exclusion from participation in federal
or state healthcare programs, any of which could have an adverse effect on our
business and results of operations. While our service agreements with the
contracted radiology practices will not meet a safe harbor to the federal
anti-kickback statute, failure to meet a safe harbor does not mean that
agreements violate the anti-kickback statute. We have sought to structure our
agreements to be consistent with fair market value in arms' length transactions
for the nature and amount of management and administrative services rendered.
For these reasons, we do not believe that service fees payable to us should be
viewed as remuneration for referring or influencing referrals of patients or
services covered by such programs as prohibited by statute.
Significant prohibitions against physician referrals have been enacted
by Congress. These prohibitions are commonly known as the Stark Law. The Stark
Law prohibits a physician from referring Medicare patients to an entity
providing designated health services, as defined under the Stark Law, 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 violativeviolation referral and $100,000 for participation in a
18
circumvention scheme. We believe that, although we receive fees under our
service agreements for management and administrative services, we are not in a
position to make or influence referrals of patients.
On January 4, 2001, the Centers for Medicare and Medicaid Services
published final regulations to implement the Stark Law. Under the final
regulations, radiology and certain other imaging services and radiation therapy
services and supplies are services included in the designated health services
subject to the self-referral prohibition. Under the final regulations, such
services include the professional and technical components of any diagnostic
test or procedure using X-rays, ultrasound or other imaging services, CT, 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 ultrasound 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, nonradiologicalnon-radiological 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. Beginning January 1, 2007, PET
and nuclear medicine procedures are included as designated health services under
the Stark Law.
16
The Stark Law provides that a request by a radiologist for diagnostic
radiology services or a request by a radiation oncologist for radiation therapy,
if such services are furnished by or under the supervision of such radiologist
or radiation oncologist pursuant to a consultation requested by another
physician, does not constitute a referral by a referring physician. If such
requirements are met, the Stark Law self-referral prohibition would not apply to
such services. The effect of the Stark Law on the radiology practices,
therefore, will depend on the precise scope of services furnished by each such
practice's radiologists and whether such services derive from consultations or
are self-generated. We believe that, other than self-referred patients, all of
the services covered by the Stark Law provided by the contracted radiology
practices derive from requests for consultation by non-affiliated physicians.
Therefore, we believe that the Stark Law is not implicated by the financial
relationships between our operations and the contracted radiology practices.
In addition, we believe that we have structured our acquisitions of the
assets of existing practices, and we intend to structure any future
acquisitions, so as not to violate the anti-kickback and Stark Law and
regulations. Specifically, we believe the consideration paid by us to physicians
to acquire the tangible and intangible assets associated with their practices is
consistent with fair market value in arms' length transactions and is not
intended to induce the referral of patients. Should any such practice be deemed
to constitute an arrangement designed to induce the referral of Medicare or
Medicaid patients, then our acquisitions could be viewed as possibly violating
anti-kickback and anti-referral laws and regulations. A determination of
liability under any such laws could have ana material adverse effect on our
business, financial condition and results of operations.
The federal government embarked on an initiative to audit all Medicare
carriers, which are the companies that adjudicate and pay Medicare claims. These
audits are expected to intensify governmental scrutiny of individual providers.
An unsatisfactory audit of any of our diagnostic imaging facilities or
contracted radiology practices could result in any or all of the following:
significant repayment obligations, exclusion from the Medicare, Medicaid or
other governmental programs, and civil and criminal penalties.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare, Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern our activities and the activities of the radiology
practices. Our or the radiology practices' activities may be investigated,
claims may be made against us or the radiology practices and these increased
enforcement activities may directly or indirectly have an adverse effect on our
business, financial condition and results of operations.
STATE ANTI-KICKBACK AND PHYSICIAN SELF-REFERRAL LAWS
All of the states in which we now do business have adopted a form of
anti-kickback law and a form of Stark Law. The scope of these laws and the
interpretations of them are enforced by state courts and by regulatory
authorities with broad discretion. Generally, state law covers 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.
FEDERAL FALSE CLAIMS ACT
The Federal False Claims Act provides, in part, that the federal
government may bring a lawsuit against any person who it believes has knowingly
presented, or caused to be presented, a false or fraudulent request for payment
from the federal government, or who has made a false statement or used a false
record to get a claim approved. The Federal False Claims Act further provides
that a lawsuit thereunderthere under may be initiated in the name of the United States by
an individual who is an original source of the allegations. The government has
taken the position that claims presented in violation of the federal
anti-kickback law or Stark Law may be considered a violation of the Federal
False Claims Act. Penalties include civil penalties of not less than $5,500 and
not more than $11,000 for each false claim, plus three times the amount of
damages that the federal government sustained because of the act of that person.
We believe that we are in compliance with the rules and regulations that apply
to the Federal False Claims Act. However, we could be found to have violated
certain rules and regulations resulting in sanctions under the Federal False
Claims Act, and if we are so found in violation, any sanctions imposed could
19
result in fines and penalties and restrictions on and exclusion from
participation in federal and Californiastate healthcare programs that are integral to our
business.
17
HEALTHCARE REFORM INITIATIVES
Healthcare laws and regulations may change significantly in the future.
We continuously monitor these developments and modify our operations from time
to time as the regulatory environment changes. We cannot assure you, however,
that we will be able to adapt our operations to address new regulations or that
new regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and state
laws, neither our current or anticipated business operations nor the operations
of the contracted radiology practices has been the subject of judicial or
regulatory interpretation. We cannot assure you that a review of our business by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change in a way that restricts our operations.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
In an effort to combat healthcare fraud, Congress enacted the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA, among
other things, amends existing crimes and criminal penalties for Medicare fraud
and enacts new federal healthcare fraud crimes, including actions affecting
non-government payors. Under HIPAA, a healthcare benefit program includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item or service is provided. A person or entity that knowingly and
willfully obtains the money or property of any healthcare benefit program by
means of false or fraudulent representations in connection with the delivery of
healthcare services is subject to a fine or imprisonment, or potentially both.
In addition, HIPAA authorizes the imposition of civil money penalties against
entities that employ or enter into contracts with excluded Medicare or Medicaid
program participants if such entities provide services to federal health program
beneficiaries. A finding of liability under HIPAA could have a material adverse
effect on our business, financial condition and results of operations.
Further, HIPAA requires healthcare providers and their business
associates to maintain the privacy and security of individually identifiable
health information. HIPAA imposes federal standards for electronic transactions
with health plans, the security of electronic health information and for
protecting the privacy of individually identifiable health information.
Organizations such as ours were obligated to be compliant with the initial HIPAA
regulations by April 14, 2003, and with the electronic data interchange mandates
by October 16, 2003. The final security regulations were issued in February 2003
with a compliance date of April 2005. We believe that we are in compliance with
the current requirements, but we anticipate that we may encounter certain costs
associated with future compliance. A finding of liability under HIPAA's privacy
or security provisions may also result in criminal and civil penalties, and
could have a material adverse effect on our business, financial condition, and
results of operations.
Although our electronic systems are HIPAA compatible, consistent with
the HIPAA regulations, we cannot guarantee the enforcement agencies or courts
will not make interpretations of the HIPAA standards that are inconsistent with
ours, or the interpretations of the contracted radiology practices or their
affiliated physicians. A finding of liability under the HIPAA standards may
result in criminal and civil penalties. Noncompliance also may result in
exclusion from participation in government programs, including Medicare and
Medicaid. These actions could have a material adverse effect on our business,
financial condition, and results of operations.
COMPLIANCE PROGRAM
We maintain a program to monitor compliance with federal and state laws
and regulations applicable to healthcare entities. We have 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) a process that specifies how employees, affiliates and
others may report regulatory or ethical concerns to our compliance officer. We
believe that our compliance program meets the relevant standards provided by the
Office of Inspector General of the Department of Health and Human Services.
An important part of our compliance program consists of conducting
periodic audits of various aspects of our operations and that of the contracted
radiology practices. We also conduct mandatory educational programs designed to
familiarize our employees with the regulatory requirements and specific elements
of our compliance program.
U.S. FOOD AND DRUG ADMINISTRATION OR FDA
The FDA has issued the requisite premarketpre-market approval for all of the MRI
and CT systems we use. We do not believe that any further FDA approval is
required in connection with the majority of equipment currently in operation or
proposed to be operated. Except under regulations issued by the FDA pursuant to
the Mammography Quality Standards Act of 1992, where all mammography facilities
are required to be accredited by an approved non-profit organization or state
agency. Pursuant to the accreditation process, each facility providing
mammography services must comply with certain standards including annual
inspection.
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Compliance with these standards is required to obtain payment for
Medicare services and to avoid various sanctions, including monetary penalties,
or suspension of certification. Although the Mammography Accreditation Program
of the American College of Radiology currently accredits all of our facilities,
which provide mammography services, and we anticipate continuing to meet the
requirements for accreditation, the withdrawal of such accreditation could
result in the revocation of certification. Congress has extended Medicare
benefits to include coverage of screening mammography subject to the prescribed
quality standards described above. The regulations apply to diagnostic
mammography and image quality examination as well as screening mammography.
RADIOLOGIST LICENSING
The radiologists providing professional medical services at our
facilities are subject to licensing and related regulations by the states in
which they provide services. As a result, we require BRMG and the other
radiology groups with which we contract to require those radiologists to have
and maintain appropriate licensure. We do not believe that such laws and
regulations will either prohibit or require licensure approval of our business
operations, although no assurances can be made that such laws and regulations
will not be interpreted to extend such prohibitions or requirements to our
operations.
INSURANCE LAWS AND REGULATION
States in which we operate have adopted certain laws and regulations
affecting risk assumption in the healthcare industry, including those that
subject any physician or physician network engaged in risk-based managed care to
applicable insurance laws and regulations. These laws and regulations may
require physicians and physician networks to meet minimum capital requirements
and other safety and soundness requirements. Implementing additional regulations
or compliance requirements could result in substantial costs to the contracted
radiology practices, limiting their ability to enter into capitated or other
risk-sharing managed care arrangements and indirectly affecting our revenue from
the contracted practices.
ENVIRONMENTAL MATTERS
The facilities we operate or manage generate hazardous and medical
waste subject to federal and state requirements regarding handling and disposal.
We believe that the facilities that we operate and manage are currently in
compliance in all material respects with applicable federal, state and local
statutes and ordinances regulating the handling and disposal of such materials.
We do not believe that we will be required to expend any material additional
amounts in order to remain in compliance with these laws and regulations or that
compliance will materially affect our capital expenditures, earnings or
competitive position.
DEFICIT REDUCTION ACT OF 2005
On February 8, 2006, the President signed into law the Deficit
Reduction Act of 2005, referred to as the DRA. The DRA provides that
reimbursement for the technical component for imaging services (excluding
diagnostic and screening mammography) in non-hospital based freestanding
facilities will be capped at the lesser of reimbursement under the Medicare Part
B physician fee schedule or the Hospital Outpatient Prospective Payment System
(HOPPS) schedule.
Prior to January 1, 2007, the technical component of our imaging
services was reimbursed under the Part B physician fee schedule, which, in most
cases, allows for higher reimbursement than under the HOPPS. Under the DRA, as
of January 1, 2007 we will beare reimbursed at the lower of the two schedules, beginning January 1, 2007.schedules.
The DRA also codifies the reduction in reimbursement for multiple
images on contiguous body parts previously announced by the Centers for Medicare
and Medicaid Services (CMS). In November 2005, CMS announced that it will pay
100% of the technical component of the higher priced imaging procedure and 50%
of the technical component of each additional imaging procedure for imaging
procedures involving contiguous body parts within a family of codes when
performed in the same session. Under current methodology, Medicare pays 100% of
the technical component of each procedure. CMS had indicated that it would phase
in this rate reduction over two years, so that the reduction will bewas 25% for each
additional imaging procedure in 2006 and another 25% in 2007. CMS has issued a
rule that eliminateseliminated the 25% reduction in 2007.
We believe the implementationImplementation of the reimbursement reductions contained in the DRA will havehas
had a significant adverse effect on our business, financial condition and
results of operations.
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ITEM 1A. RISK FACTORS
RISKS RELATING TO OUR BUSINESS
CURRENT LEVELS OF MARKET VOLATILITY ARE UNPRECEDENTED AND ADVERSE CAPITAL AND
CREDIT MARKET CONDITIONS MAY AFFECT OUR ABILITY TO ACCESS COST-EFFECTIVE SOURCES
OF FUNDING.
21
The capital and credit markets have been experiencing extreme
volatility and disruption which has led to uncertainty and liquidity issues for
both borrowers and investors. We currently have in place financing arrangements
which we anticipate will be sufficient to meet our needs for the next two years
and we anticipate that our business will generate sufficient cash for us to
service our debt.
In connection with our revolving line of credit we have some exposure
to financial institutions which have come under pressure as a result of the
current credit crisis. For example, GE Commercial Finance Healthcare Financial
Services finances the largest portion of our $55 million revolving credit
facility. While GE has stated its GE Capital business to be sound, nevertheless,
should it be unable to continue to provide funding under the revolving credit
facility, our ability to replace GE at this time, on favorable terms, or at all,
would be difficult, which could have a material adverse effect on our business
and results of operations.
THE CALIFORNIA BUDGET CRISIS, IF NOT SUCCESSFULLY RESOLVED COULD HAVE AN IMPACT
ON OUR REVENUE.
California is experiencing a budget crisis which has resulted in
significant state government cutbacks. 93 of our facilities are located in
California. One to one-and-one-half percent (1% to 1.5%) of our revenues come
from the California Medicaid program ($5 million to $7.5 million). While this is
a relatively minor portion of our overall revenues, nevertheless, to the extent
California is unable to provide these payments on a timely basis, or at all, our
revenues will be negatively impacted.
OUR FAILURE TO INTEGRATE RADIOLOGIXTHE BUSINESSES WE ACQUIRE SUCCESSFULLY AND ON A TIMELY
BASIS INTO OUR OPERATIONS COULD REDUCE OUR PROFITABILITY.
We expect that the acquisition of Radiologixour acquisitions will generally result in some
synergies, business opportunities and growth prospects. We, however, may never
realize these expected synergies, business opportunities and growth prospects.
We may experience increased competition that limits our ability to expand our
business. We may not be able to capitalize on expected business opportunities,
assumptions underlying estimates of expected cost savings may be inaccurate, or
general industry and business conditions may deteriorate. In addition,
integrating operations will require significant efforts and expenses on our
part. Personnel may leave or be terminated because of the merger.an acquisition. Our
management may have its attention diverted while trying to integrate Radiologix.an
acquisition. If these factors limit our ability to integrate the operations of
Radiologixan acquisition successfully or on a timely basis, our expectations of future
results of operations, including certain cost savings and synergies expected to
result from the merger,acquisition, may not be met. In addition, our growth and
operating strategies for Radiologix'sa target's business may be different from the
strategies that Radiologixthe target company pursued prior to our acquisition. If our
strategies are not the proper strategies, for Radiologix, it could have a material adverse
effect on theour business, financial condition and results of operations of the combined company.operations.
WE HAVE EXPERIENCED OPERATING LOSSES AND WE HAVE A SUBSTANTIAL ACCUMULATED
DEFICIT. IF WE ARE UNABLE TO IMPROVE OUR FINANCIAL PERFORMANCE, WE MAY BE UNABLE
TO PAY OUR OBLIGATIONS.
We have incurred net losses of $3.6$12.8 million, $18.1 million, $11.0
million and $6.9 million duringfor the years ended OctoberDecember 31, 20052008 and 2007, the two
months ended December 31, 2006, respectively, and atthe year ended October 31, 2006,
werespectively. We had an accumulateda stockholders' deficit of $78.8 million. Also, in recent
periods, we have suffered liquidity shortfalls which have led us to, among other
things, undertake$81.1 million and complete a "pre-packaged" Chapter 11 plan of
reorganization$69.8 million
at December 31, 2008 and modify the terms of various of our financial obligations.2007, respectively. While we believe that by taking theseour past
actions have been successful in dealing with our liquidity and other actionsthat in the
future we will be able to address these issues and solidify our financial
condition, we cannot give assurances that we will be able to generate sufficient
cash flow from operations to satisfy our debt obligations.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT
SERVICE OBLIGATIONS.
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. Our inability to generate sufficient cash flow to satisfy
our debt and other contractual obligations would adversely impact our business,
financial condition and results of operations.
OUR ABILITY TO GENERATE REVENUE DEPENDS IN LARGE PART ON REFERRALS FROM
PHYSICIANS.
A significant reduction in referrals would have a negative impact on
our business. We derive substantially all of our net revenue, directly or
indirectly, from fees charged for the diagnostic imaging services performed at
our facilities. We depend on referrals of patients from unaffiliated physicians
and other third parties who have no contractual obligations to refer patients to
us for a substantial portion of the services we perform. If a sufficiently large
number of these physicians and other third parties were to discontinue referring
patients to us, our scan volume could decrease, which would reduce our net
revenue and operating margins. Further, commercial third-party payors have
implemented programs that could limit the ability of physicians to refer
patients to us. For example, prepaid healthcare plans, such as health
maintenance organizations, sometimes contract directly with providers and
require their enrollees to obtain these services exclusively from those
providers. Some insurance companies and self-insured employers also limit these
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services to contracted providers. These "closed panel" systems are now common in
the managed care environment. Other systems create an economic disincentive for
referrals to providers outside the system's designated panel of providers. If we
are unable to compete successfully for these managed care contracts, our results
and prospects for growth could be adversely affected.
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CHANGES IN THIRD-PARTY REIMBURSEMENT RATES OR METHODS FOR DIAGNOSTIC IMAGING
SERVICES COULD RESULT IN A DECLINE IN OUR NET REVENUE AND NEGATIVELY IMPACT OUR
BUSINESS.
The fees charged for the diagnostic imaging services performed at our
facilities are paid by insurance companies, Medicare and Medicaid, workers
compensation, private and other payors. Any change in the rates of or conditions
for reimbursement from these sources of payment could substantially reduce the
amounts reimbursed to us or to our contracted radiology practices for services
provided, which could have ana material adverse effect on our net revenue. For
example, recent legislative changes in California's workers compensation rules
had a negative impact on reimbursement rates for diagnostic imaging services,
and federal Medicare changes taking effect beginning January 1, 2007 are expected to
have also
had a negative impact on the rates paid for MRI, CT and PET services.
PRESSURE TO CONTROL HEALTHCARE COSTS COULD HAVE A NEGATIVE IMPACT ON OUR
RESULTS.
One of the principal objectives of health maintenance organizations and
preferred provider organizations is to control the cost of healthcare services.
Managed care contracting has become very competitive, and reimbursement
schedules are at or below Medicare reimbursement levels. The development and
expansion of health maintenance organizations, preferred provider organizations
and other managed care organizations within the geographic areas covered by our
network could have a negative impact on the utilization and pricing of our
services, because these organizations will exert greater control over patients'
access to diagnostic imaging services, the selections of the provider of such
services and reimbursement rates for those services.
IF BRMG OR ANY OF OUR OTHER CONTRACTED RADIOLOGY PRACTICES TERMINATE THEIR
AGREEMENTS WITH US, OUR BUSINESS COULD SUBSTANTIALLY DIMINISH.
Our relationship with BRMG is an integral part of our business. Through
our management agreement, BRMG provides all of the professional medical services
at 5285 of our 7993 California facilities (including the Radiologix facilities
acquired on November 15, 2006) with the balance of our other facilities
through management contracts with other radiology groups. BRMG and these other
radiology groups contract with various other independent physicians and
physician groups to provide all of the professional medical services at most of
our facilities, and must use their best efforts to provide the professional
medical services at any new facilities that we open or acquire in their areas of
operation. In addition, the radiology groups' strong relationships with
referring physicians are largely responsible for the revenue generated at the
facilities they service. Although our management agreement with BRMG runs until
2014, and with the other groups for terms as long, if not longer, BRMG and the
other radiology groups have the right to terminate the agreements if we default
on our obligations and fail to cure the default. Also, the various radiology
groups' ability to continue performing under the management agreements may be
curtailed or eliminated due to the groups' financial difficulties, loss of
physicians or other circumstances. If the radiology groups cannot perform their
obligations to us, we would need to contract with one or more other radiology
groups to provide the professional medical services at the facilities serviced
by the group. We may not be able to locate radiology groups willing to provide
those services on terms acceptable to us, if at all. Even if we were able to do
so, any replacement radiology group's relationships with referring physicians
may not be as extensive as those of the terminated group. In any such event, our
business could be seriously harmed. In addition, the radiology groups are party
to substantially all of the managed care contracts from which we derive revenue.
If we were unable to readily replace these contracts, our revenue would be
negatively affected.
IF OUR CONTRACTED RADIOLOGY PRACTICES, INCLUDING BRMG, LOSE A SIGNIFICANT NUMBER
OF THEIR RADIOLOGISTS, OUR FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED.
Recently,At times, there has been a shortage of qualified radiologists in some
of the regional markets we serve. In addition, competition in recruiting
radiologists may make it difficult for our contracted radiology practices to
maintain adequate levels of radiologists. If a significant number of
radiologists terminate their relationships with our contracted radiology
practices and those radiology practices cannot recruit sufficient qualified
radiologists to fulfill their obligations under our agreements with them, our
ability to maximize the use of our diagnostic imaging facilities and our
financial results could be adversely affected. For example, in fiscal 2002, due
to a shortage of qualified radiologists in the marketplace, BRMG experienced
difficulty in hiring and retaining physicians and thus engaged independent
contractors and part-time fill-in physicians. Their cost was double the salary
of a regular BRMG full-time physician. Increased expenses to BRMG will impact
our financial results because the management fee we receive from BRMG, which is
based on a percentage of BRMG's collections, is adjusted annually to take into
account the expenses of BRMG. Neither we, nor our contracted radiology
practices, maintain insurance on the lives of any affiliated physicians.
WE MAY NOT BE ABLE TO SUCCESSFULLY GROW OUR BUSINESS.
As part of our business strategy, we intend to increase our presence in
the areas we serve through selectively acquiring facilities, developing new
facilities, adding equipment at existing facilities, and directly or indirectly
entering into contractual relationships with high-quality radiology practices.
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However, our ability to successfully expand depends upon many factors,
including our ability to:
o Identify attractive and willing candidates for acquisitions;
o Identify locations in existing or new markets for development
of new facilities;
o Comply with legal requirements affecting our arrangements with
contracted radiology practices, including state prohibitions
on fee-splitting, corporate practice of medicine and
self-referrals;
o Obtain regulatory approvals where necessary and comply with
licensing and certification requirements applicable to our
diagnostic imaging facilities, the contracted radiology
practices and the physicians associated with the contracted
radiology practices;
o Recruit a sufficient number of qualified radiology
technologists and other non-medical personnel;
o Expand our infrastructure and management; and
o Compete for opportunities. We may not be able to compete
effectively for the acquisition of diagnostic imaging
facilities. Our competitors may have more established
operating histories and greater resources than we do.
Competition also may make any acquisitions more expensive.
Acquisitions involve a number of special risks, including the
following:
o ObtainInability to obtain adequate financing.financing;
o Possible adverse effects on our operating results;
o Diversion of management's attention and resources;
o Failure to retain key personnel;
o Difficulties in integrating new operations into our existing
infrastructure; and
o Amortization or write-offs of acquired intangible assets.
WE MAY BECOME SUBJECT TO PROFESSIONAL MALPRACTICE LIABILITY.
Providing medical services subjects us to the risk of professional
malpractice and other similar claims. The physicians that our contracted
radiology practices employ are from time to time subject to malpractice claims.
We structure our relationships with the practices under our management
agreements with them in a manner that we believe does not constitute the
practice of medicine by us or subject us to professional malpractice claims for
acts or omissions of physicians employed by the contracted radiology practices.
Nevertheless, claims, suits or complaints relating to services provided by the
contracted radiology practices have been asserted against us in the past and may
be asserted against us in the future. In addition, we may be subject to
professional liability claims, including, without limitation, for improper use
or malfunction of our diagnostic imaging equipment. We may not be able to
maintain adequate liability insurance to protect us against those claims at
acceptable costs or at all.
Any claim made against us that is not fully covered by insurance could
be costly to defend, result in a substantial damage award against us and divert
the attention of our management from our operations, all of which could have an
adverse effect on our financial performance. In addition, successful claims
against us may adversely affect our business or reputation. Although California
places a $250,000 limit on non-economic damages for medical malpractice cases,
no limit applies to economic damages and no such limits exist in the other
states in which we now provide services. To reduce our exposure to claims
incurred but not reported under the annual policy, the Company purchased an
effective tail policy to cover all claims filed after December 31, 2008 relating
to incidents prior to January 1, 2009, thus eliminating any liability for future
claims made related to December 31, 2008 and prior.
SOME OF OUR IMAGING MODALITIES USE RADIOACTIVE MATERIALS, WHICH GENERATE
REGULATED WASTE AND COULD SUBJECT US TO LIABILITIES FOR INJURIES OR VIOLATIONS
OF ENVIRONMENTAL AND HEALTH AND SAFETY LAWS.
Some of our imaging procedures use radioactive materials, which
generate medical and other regulated wastes. For example, patients are injected
with a radioactive substance before undergoing a PET scan. Storage, use and
disposal of these materials and waste products present the risk of accidental
environmental contamination and physical injury. We are subject to federal,
state and local regulations governing storage, handling and disposal of these
materials. We could incur significant costs and the diversion of our
management's attention in order to comply with current or future environmental
and health and safety laws and regulations. Also, we cannot completely eliminate
the risk of accidental contamination or injury from these hazardous materials.
In the event of an accident, we could be held liable for any resulting damages,
and any liability could exceed the limits of or fall outside the coverage of our
insurance.
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WE EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES AND HOSPITALS.
THIS COMPETITION COULD ADVERSELY AFFECT OUR REVENUE AND BUSINESS.
The market for diagnostic imaging services is highly competitive. We
compete principally on the basis of our reputation, our ability to provide
multiple modalities at many of our facilities, the location of our facilities
and the quality of our diagnostic imaging services. We compete locally with
groups of radiologists, established hospitals, clinics and other independent
organizations that own and operate imaging equipment. Our major national
competitors include Alliance Imaging, Inc., Medical Resources, Inc., Healthsouth
Corporation and InSight
Health Services. Some of our competitors may now or in the future have access to
greater financial resources than we do and may have access to newer, more
advanced equipment. In addition, some physician practices have established their
own diagnostic imaging facilities within their group practices and compete with
us. We are experiencing increased competition as a result of such activities.
STATE AND FEDERAL ANTI-KICKBACK AND ANTI-SELF-REFERRAL LAWS MAY ADVERSELY AFFECT
INCOME.
Various federal and state laws govern financial arrangements among
healthcare providers. The federal anti-kickback law prohibits the knowing and
willful offer, payment, , solicitation or receipt of any form of remuneration in
return for, or to induce, the referral of Medicare, Medicaid, or other federal
healthcare program patients, or in return for, or to induce, the purchase, lease
or order of items or services that are covered by Medicare, Medicaid, or other
federal healthcare programs. Similarly, many state laws prohibit the
solicitation, payment or receipt of remuneration in return for, or to induce the
referral of patients in private as well as government programs. Violation of
these anti-kickback laws may result in substantial civil or criminal penalties
for individuals or entities and/or exclusion from federal or state healthcare
programs. We believe we are operating in compliance with applicable law and
believe that our arrangements with providers would not be found to violate the
anti-kickback laws. However, these laws could be interpreted in a manner
inconsistent with our operations.
Federal law prohibiting physician self-referrals (the "Stark Law")
prohibits a physician from referring Medicare or Medicaid patients to an entity
for certain "designated health services" if the physician has a prohibited
financial relationship with that entity, unless an exception applies. Certain
radiology services are considered "designated health services" under the Stark
Law. Although we believe our operations do not violate the Stark Law, our
activities may be challenged. If a challenge to our activities is successful, it
could have an adverse effect on our operations. In addition, legislation may be
enacted in the future that further addresses Medicare and Medicaid fraud and
abuse or that imposes additional requirements or burdens on us.
All of the states in which our diagnostic imaging centers are located
have adopted a form of anti-kickback law and almost all of those states have
also adopted a form of Stark Law. The scope of these laws and the
interpretations of them vary from state to state and are enforced by state
courts and regulatory authorities, each with broad discretion. A determination
of liability under the laws described in this risk factor could result in fines
and penalties and restrictions on our ability to operate in these jurisdictions.
TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES
AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.
The development of new technologies or refinements of existing
modalities may require us to upgrade and enhance our existing equipment before
we may otherwise intend. Many companies currently manufacture diagnostic imaging
equipment. Competition among manufacturers for a greater share of the diagnostic
imaging equipment market may result in technological advances in the speed and
imaging capacity of new equipment. This may accelerate the obsolescence of our
equipment, and we may not have the financial ability to acquire the new or
improved equipment. In that event, we may be unable to deliver our services in
the efficient and effective manner that payors, physicians and patients expect
and thus our revenue could substantially decrease.
During fiscal 2005, we
traded-in and upgraded our existing MRI at Tarzana Advanced to increase
throughput and patient volume and compete in the marketplace. We incurred a loss
on disposal of equipment of approximately $696,000 for the upgrade.
A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS COULD ADVERSELY AFFECT
OUR BUSINESS.
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expenses of new diagnostic imaging facilities
and the acquisition of additional facilities and new diagnostic imaging
equipment. We incur capital expenditures to, among other things, upgrade and
replace existing equipment for existing facilities and expand within our
existing markets and enter new markets. To the extent we are unable to generate
sufficient cash from our operations, funds are not available from our lenders or
we are unable to structure or obtain financing through operating leases,
long-term installment notes or capital leases, we may be unable to meet our
capital expenditure requirements.
23
BECAUSE WE HAVE HIGH FIXED COSTS, LOWER SCAN VOLUMES PER SYSTEM COULD ADVERSELY
AFFECT OUR BUSINESS.
The principal components of our expenses, excluding depreciation,
consist of compensation paid to technologists, salaries, real estate lease
expenses and equipment maintenance costs. Because a majority of these expenses
are fixed, a relatively small change in our revenue could have a
25
disproportionate effect on our operating and financial results depending on the
source of our revenue. Thus, decreased revenue as a result of lower scan volumes
per system could result in lower margins, which wouldcould materially adversely
affect our business.
OUR SUCCESS DEPENDS IN PART ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO
RETAIN SUFFICIENT QUALIFIED PERSONNEL. IN ADDITION, FORMER EMPLOYEES COULD USE
THE EXPERIENCE AND RELATIONSHIPS DEVELOPED WHILE EMPLOYED WITH US TO COMPETE
WITH US.
Our success depends in part on our ability to attract and retain
qualified senior and executive management, managerial and technical personnel.
Competition in recruiting these personnel may make it difficult for us to
continue our growth and success. The loss of their services or our inability in
the future to attract and retain management and other key personnel could hinder
the implementation of our business strategy. The loss of the services of Dr.
Howard G. Berger, our President and Chief Executive Officer, orand Norman R. Hames
or Stephen M. Forthuber, our Chief Operating Officer,Officers, west and east coast,
respectively, could have a significant negative impact on our operations. We
believe that they could not easily be replaced with executives of equal
experience and capabilities. We do not maintain key person insurance on the life
of any of our executive officers with the exception of a $5.0 million policy on
the life of Dr. Berger. Also, if we lose the services of Dr. Berger, our
relationship with BRMG could deteriorate, which would adversely affect our
business.
Many of the states in which we operate do not enforce agreements that
prohibit a former employee from competing with a former employer. As a result,
many of our employees whose employment is terminated are free to compete with
us, subject to prohibitions on the use of confidential information and,
depending on the terms of the employee's employment agreement, on solicitation
of existing employees and customers. A former executive, manager or other key
employee who joins one of our competitors could use the relationships he or she
established with third party payors, radiologists or referring physicians while
our employee and the industry knowledge he or she acquired during that tenure to
enhance the new employer's ability to compete with us.
CAPITATION FEE ARRANGEMENTS COULD REDUCE OUR OPERATING MARGINS.
For fiscal 2006,2008 we derived approximately 27%15% of our net revenue from
capitation arrangements, and we intend to increase the revenue we derive from
capitation arrangements in the future. Under capitation arrangements, the payor
pays a pre-determined amount per-patient per-month in exchange for us providing
all necessary covered services to the patients covered under the arrangement.
These contracts pass much of the financial risk of providing diagnostic imaging
services, including the risk of over-use, from the payor to the provider. Our
success depends in part on our ability to negotiate effectively, on behalf of
the contracted radiology practices and our diagnostic imaging facilities,
contracts with health maintenance organizations, employer groups and other
third-party payors for services to be provided on a capitated basis and to
efficiently manage the utilization of those services. If we are not successful
in managing the utilization of services under these capitation arrangements or
if patients or enrollees covered by these contracts require more frequent or
extensive care than anticipated, we would incur unanticipated costs not offset
by additional revenue, which would reduce operating margins.
WE MAY BE UNABLE TO EFFECTIVELY MAINTAIN OUR EQUIPMENT OR GENERATE REVENUE WHEN
OUR EQUIPMENT IS NOT OPERATIONAL.
Timely, effective service is essential to maintaining our reputation
and high use rates on our imaging equipment. Although we have an agreement with
GE Medical Systems pursuant to which it maintains and repairs the majority of
our imaging equipment, this agreement does not compensate us for loss of revenue
when our systems are not fully operational and our business interruption
insurance may not provide sufficient coverage for the loss of revenue. Also, GE
Medical Systems may not be able to perform repairs or supply needed parts in a
timely manner. Therefore, if we experience more equipment malfunctions than
anticipated or if we are unable to promptly obtain the service necessary to keep
our equipment functioning effectively, our ability to provide services would be
adversely affected and our revenue could decline.
DISRUPTION OR MALFUNCTION IN OUR INFORMATION SYSTEMS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our information technology system is vulnerable to damage or
interruption from:
o Earthquakes, fires, floods and other natural disasters;
o Power losses, computer systems failures, internet and
telecommunications or data network failures, operator
negligence, improper operation by or supervision of employees,
physical and electronic losses of data and similar events; and
24
o Computer viruses, penetration by hackers seeking to disrupt
operations or misappropriate information and other breaches of
security.
We rely on this systemour information systems to perform functions critical to our
ability to operate, including patient scheduling, billing, collections, image
storage and image transmission. Accordingly, an extended interruption in the
system's function could significantly curtail, directly and indirectly, our
ability to conduct our business and generate revenue.
OUR ACTUAL FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM THE PROJECTIONS
WE FILED WITH THE BANKRUPTCY COURT.
In connection with our "pre-packaged" Chapter 11 plan of reorganization
that was confirmed by the Bankruptcy Court on October 20, 2003, we were required
to prepare projected financial information to demonstrate to the Bankruptcy
Court the feasibility of the plan of reorganization and our ability to continue
operations upon our emergence from bankruptcy. As indicated in the disclosure
statement with respect to the plan of reorganization and the exhibits thereto,
the projected financial information and various estimates of value discussed
therein should not be regarded as representations or warranties by us or any
other person as to the accuracy of that information or that those projections or
valuations will be realized. We, and our advisors, prepared the information in
the disclosure statement, including the projected financial information and
estimates of value. This information was not audited or reviewed by our
independent accountants. The significant assumptions used in preparation of the
information and estimates of value were included as an exhibit to the disclosure
statement.
Those projections are not included in this report and you should not rely
upon them in any way or manner. We have not updated, nor will we update, those
projections. At the time we prepared the projections, they reflected numerous
assumptions concerning our anticipated future performance with respect to
prevailing and anticipated market and economic conditions which were and remain
beyond our control and which may not materialize. Projections are inherently
subject to significant and numerous uncertainties and to a wide variety of
significant business, economic and competitive risks and the assumptions
underlying the projections may be wrong in many material respects. Our actual
results may vary significantly from those contemplated by the projections. As a
result, we caution you not to rely upon those projections.26
WE ARE VULNERABLE TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our headquarters and 7993 of our facilities are located in California, an
area prone to earthquakes and other natural disasters. Three of our facilities
are located in an area of Florida, which has suffered from hurricanes. An
earthquake or other natural disaster could seriously impair our operations, and
our insurance may not be sufficient to cover us for the resulting losses.
COMPLYING WITH FEDERAL AND STATE REGULATIONS IS AN EXPENSIVE AND TIME-CONSUMING
PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL PENALTIES.
We are directly or indirectly through the radiology practices with
which we contract subject to extensive regulation by both the federal government
and the state governments in which we provide services, including:
o The federal False Claims Act;
o The federal Medicare and Medicaid anti-kickback laws, and
state anti-kickback prohibitions;
o Federal and state billing and claims submission laws and
regulations;
o The federal Health Insurance Portability and Accountability
Act of 1996;
o The federal physician self-referral prohibition commonly known
as the Stark Law and the state equivalent of the Stark Law;
o State laws that prohibit the practice of medicine by
non-physicians and prohibit fee-splitting arrangements
involving physicians;
o Federal and state laws governing the diagnostic imaging and
therapeutic equipment we use in our business concerning
patient safety, equipment operating specifications and
radiation exposure levels; and
o State laws governing reimbursement for diagnostic services
related to services compensable under workers compensation
rules.
25
If our operations are found to be in violation of any of the laws and
regulations to which we or the radiology practices with which we contract are
subject, 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 penalties, damages, fines or curtailment of
our operations, individually or in the aggregate, could adversely affect our
ability to operate our business and our financial results. The risks 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 brought 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. For a more detailed discussion of the various federal and state laws
and regulations to which we are subject, see "Business - Government Regulation."
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 our
diagnostic imaging facilities are subject to various federal and state laws,
regulations and approvals concerning licensing of personnel, other required
certificates for certain types of healthcare facilities and certain medical
equipment. In addition, freestanding diagnostic imaging facilities 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. Medicare
carriers have discretion in applying the independent diagnostic testing facility
requirements and therefore the application of these requirements may vary from
jurisdiction to jurisdiction. 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. For the year
ended OctoberDecember 31, 2006,2008, approximately 18%23% of our net revenue (and 29% of
Radiologix net revenue for the 12 months ended December 31, 2006) came from the
Medicare and Medicaid programs. A change in the applicable certification status
of one of our facilities could adversely affect our other facilities and in turn
us as a whole. We have experienced a slowdown in the credentialing of our
physicians over the last several years which has lengthened our billing and
collection cycle, and could negatively impact our ability to collect revenue
from patients covered by Medicare. Credentialing of physicians is required by
our payors prior to commencing payment.
27
OUR AGREEMENTS WITH THE CONTRACTED RADIOLOGY PRACTICES MUST BE STRUCTURED TO
AVOID THE CORPORATE PRACTICE OF MEDICINE AND FEE-SPLITTING.
State law prohibits us from exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting professional fees with physicians. These laws
are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into management
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee typically based on a percentage of the practice's revenue. We
structure our relationships with the radiology practices, including the purchase
of diagnostic imaging facilities, in a manner that we believe keeps us from
engaging in the practice of medicine or exercising control over the medical
judgments or decisions of the radiology practices or their physicians or
violating the prohibitions against fee-splitting. However, because challenges to
these types of arrangements are not required to be reported, we cannot
substantiate our belief. There can be no assurance that our present arrangements
with BRMG or the physicians providing medical services and medical supervision
at our imaging facilities will not be challenged, and, if challenged, that they
will not be found to violate the corporate practice prohibition, thus subjecting
us to potential damages, injunction and/or civil and criminal penalties or
require us to restructure our arrangements in a way that would affect the
control or quality of our services and/or change the amounts we receive under
our management agreements. Any of these results could jeopardize our business.
FUTURE FEDERAL LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR
SERVICES, WHICH WOULD REDUCE OUR REVENUE AND ADVERSELY AFFECT OUR OPERATING
RESULTS.
In addition to extensive existing government healthcare regulation,
there are numerous initiatives affecting the coverage of and payment for
healthcare services, including proposals that would significantly limit
reimbursement under the Medicare and Medicaid programs. Limitations on
reimbursement amounts and other cost containment pressures have in the past
resulted in a decrease in the revenue we receive for each scan we perform.
26
THE REGULATORY FRAMEWORK IN WHICH WE OPERATE IS UNCERTAIN AND EVOLVING.
Healthcare laws and regulations may change significantly in the future.
We continuously monitor these developments and modify our operations from time
to time as the regulatory environment changes. We cannot assure you however,
that we will be able to adapt our operations to address new regulations or that
new regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and state
laws, neither our current or anticipated business operations nor the operations
of the contracted radiology practices have been the subject of judicial or
regulatory interpretation. We cannot assure you that a review of our business by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change in a way that restricts our operations.
Certain states have enacted statutes or adopted regulations affecting
risk assumption in the healthcare industry, including statutes and regulations
that subject any physician or physician network engaged in risk-based managed
care contracting to applicable insurance laws and regulations. These laws and
regulations, if adopted in the states in which we operate, may require
physicians and physician networks to meet minimum capital requirements and other
safety and soundness requirements. Implementing additional regulations or
compliance requirements could result in substantial costs to us and the
contracted radiology practices and limit our ability to enter into capitation or
other risk sharing managed care arrangements.
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT
US FROM FULFILLING OUR OBLIGATIONS.
Our current substantial indebtedness and any future indebtedness we
incur could have important consequences by adversely affectingaffect our financial condition, which could make it more
difficult for us to satisfy our obligations to our creditors. Our substantial
indebtedness could also:
|X| Require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate
purposes;
|X| Increase our vulnerability to adverse general economic and
industry conditions;
|X| Limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
|X| Place us at a competitive disadvantage compared to our
competitors that have less debt; and
|X| Limit our ability to borrow additional funds on terms that are
satisfactory to us or at all.
WE PREVIOUSLY IDENTIFIED INEFFECTIVE DISCLOSURE CONTROLS AND PROCEDURES
THAT IF UNSUCCESSFULLY REMEDIATED COULD ADVERSELY AFFECT OUR ABILITY TO REPORT
OUR FINANCIAL RESULTS ON A TIMELY AND ACCURATE BASIS.
We determined that our disclosure controls and procedures were ineffective
for the fiscal year ended October 31, 2005 and for the subsequent quarters ended
January 31, 2006, April 30, 2006 and July 31, 2006. With respect to our
ineffective disclosure controls and procedures, we determined that we had
insufficient personnel resources and technical accounting expertise within the
accounting function to resolve the following non-routine accounting matters: the
recording of non-typical cost-based investments and unusual debt-related
transactions and the appropriate analysis of the amortization lives of leasehold
improvements in accordance with GAAP.
In connection with the preparation of this Annual Report on Form 10-K, our
management on February 2, 2007, in consultation with our independent registered
public accounting firm, Moss Adams LLP, determined that we had ineffective
disclosure controls and procedures which would require us to restate certain of
our previously issued financial statements. The adjustments result from
management's historical treatment of depreciation expense related to the
depreciation of leasehold improvements of our facilities. Although, the
adjustments to certain prior period financial statements are all non-cash, and
do not affect our historical reported revenues, cash flows or cash position for
any of the affected fiscal or quarterly periods, the adjustments resulted in:
o a one-time adjustment to decrease retained earnings as of October
31, 2003 by $2,859,595;
o an adjustment to increase fiscal 2004 depreciation expense and
decrease retained earnings by $154,707;
o an adjustment to increase fiscal 2005 depreciation expense and
decrease retained earnings by $434,442; and
o an adjustment to increase depreciation expense and decrease retained
earnings by $33,215 for our first quarter ended January 31, 2006.
27
The restated consolidated financial statements are for the fiscal years
ended October 31, 2005 and 2004, and the quarterly unaudited financial
statements for these years and for the first quarter ended January 31, 2006.
As a result, the consolidated financial statements, as previously filed,
contain errors related to the recording of the depreciation expense of leasehold
improvements and should, therefore, not be relied upon. The related auditor
reports of Moss Adams LLP with respect to these consolidated financial
statements should also no longer be relied upon.
We believe that we have adequately remediated the material weaknesses we
have identified by restating our financial statements for the 2005 and 2004
fiscal years in this report and by entering into a consulting agreement on
August 1, 2006 with Morgan Franklin Corporation to advise us with respect to
non-routine accounting matters. However, if we have not effectively remediated
the material weakness, such material weakness could result in non-timely filing
of periodic reports or accounting deficiencies in our financial reporting.
We may identify additional material weaknesses or other deficiencies in
our internal controls in the future. Any material weaknesses or other
deficiencies in our control systems may affect our ability to comply with SEC
reporting requirements and listing standards or cause our financial statements
to contain material misstatements which could negatively affect market price and
trading liquidity of our common stock. In addition, there are inherent
limitations in all control systems, and misstatements due to error or fraud may
occur and not be detected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Inapplicable.None.
28
ITEM 2. PROPERTIES
Our corporate headquarters is located in adjoining premises at 1508,
1510 and 1516 Cotner Avenue, Los Angeles, California 90025, in approximately
16,50021,500 square feet occupied under leases, which expire (with options to extend)
on June 30, 2017. In addition, we lease 52,941square52,941 square feet of warehouse and
other space under leases, which expire at various dates between February 2006 and January
2018. The Radiologix corporate headquarters are located in 26,000through August 2020. We
also occupy approximately 7,000 square feet in Dallas, Texas pursuant to a
lease, which expires on September 30, 2011. We are in
the process of attempting to sublease this space. Radiologix also hashave a regional office of
approximately 39,000 square feet in Baltimore, Maryland under a lease, which
expires September 30, 2012. Our facility lease terms vary in length from month
to month to 15 years with renewal options upon prior written notice, from 1 year
to 10 years depending upon the agreed upon terms with the local landlord.
Facility lease amounts generally increase from 1% to 6% on an annual basis. We
do not have options to purchase the facilities we rent.
ITEM 3. LEGAL PROCEEDINGS
We are involved in the following litigation:
(a) In Re DVI, Inc. Securities Litigation. UNITED STATES DISTRICT COURT,
EASTERN DISTRICT OF PA, DOCKET NO. 2:03-CV-05336-LDD
This is a class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by shareholders of DVI,
Inc. ("DVI"), one of our former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.
The putative plaintiff class consists of those persons who purchased or
otherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the fact that existing
DVI loans on the centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.
We have answered the complaint. The matter is still in its initial stages
with discovery just beginning in that the court has stayed the proceedings for
many months. We intend to vigorously contest the allegations.
(b) FLEET NAT'L BANK V. BOYLE ET. AL., U.S. DISTRICT COURT FOR THE
EASTERN DISTRICT OF PENNSYLVANIA, DOCKET NO. 04-CV-1277
This case is related to In re DVI Securities Litigation, but was filed by
several of DVI's lenders. It, too, arises from the DVI bankruptcy (referenced in
the matter above) and was brought against DVI officers and directors and a
number of third party defendants, including us. We were named in the First
Amended Complaint filed in this action in September 2004.
28
The plaintiff alleges violations of the Racketeering Influenced and
Corrupt Organizations Act, 18 U.S.C. 1961 et seq., ("RICO"), and common-law
claims, including conspiracy to commit fraud, tortious interference with a
contract, conspiracy to commit tortious interference with a contract, conspiracy
to commit conversion and aiding and abetting fraud. Plaintiffs allege that in
2000, we acquired from a third party one or more unprofitable imaging centers in
order to help DVI conceal the fact that existing DVI loans on the centers were
delinquent.
We filed a motion to dismiss the complaint that was granted as to all
claims except the RICO claim. We have filed an answer to the complaint. The case
is in its initial stages in that the court has stayed the proceedings for many
months. We intend to vigorously contest the remaining claims.
(c) SIEMENS MEDICAL SOLUTIONS USA, INC. V. RADNET, INC., US DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION CASE NO. 3-06CY2316-R.
The action, filed in December 2006, arises out of Radiologix notifying
Siemens of its revocation of certain equipment purchase orders. Siemens contends
there was a breach of contract and seeks damages of approximately $3.5 million.
We responded to the complaint on January 10, 2007. We intend to pursue our
defense vigorously.
GENERAL
We are engaged from time to time in the defense of lawsuits arising out
of the ordinary course and conduct of our business. We believe that the outcome
of our current litigation will not have a material adverse impact on our
business, financial condition and results of operations. However, we could be
subsequently named as a defendant in other lawsuits that could adversely affect
us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth fiscal quarter of fiscal 2006 we submitted the following
matters to security holders which were approved at a special meeting of
stockholders held November 15, 2006 (the below numbers have been adjusted to
reflect the one-for-two reverse stock split effected in November 2006):
1) With respect to the adoption of the Merger Agreement with Radiologix
and approval of the merger and issuance of our common stock pursuant
to the Merger Agreement, 14,075,078 shares voted in favor of the
proposal, 21,112 shares voted against the proposal, and 8,140 shares
abstained. There were 7,523,680 broker non-votes. The shares voted
in favor of the proposal constituted a majority of the outstanding
shares of common stock. The proposal was therefore approved in
accordance with New York law and the procedures set forth in the
proxy statement.
2) With respect to an amendment to our Certificate of Incorporation to
change our corporate name to "RadNet, Inc.", 14,057,094 shares voted
in favor of the proposal, 31,811 shares voted against the proposal,
and 15,925 shares abstained. There were 7,523,180 broker non-votes.
The shares voted in favor of the proposal constituted a majority of
the outstanding shares of common stock. The proposal was therefore
approved in accordance with New York law and the procedures set
forth in the proxy statement.
3) With respect to an amendment to our Certificate of Incorporation to
increase the authorized number of shares from 100,000,000 to
200,000,000 and reduce the par value, 13,630,731 shares voted in
favor of the proposal, 456,914 shares voted against the proposal,
and 17,185 shares abstained. There were 7,523,180 broker non-votes.
The shares voted in favor of the proposal constituted a majority of
the outstanding shares of common stock. The proposal was therefore
approved in accordance with New York law and the procedures set
forth in the proxy statement.
4) With respect to an amendment to our Certificate of Incorporation to
implement transfer restrictions to protect our net operating loss
carry forwards, 14,038,275 shares voted in favor of the proposal,
48,155 shares voted against the proposal, and 17,900 shares
abstained. There were 7,523,680 broker non-votes. The shares voted
in favor of the proposal constituted a majority of the outstanding
shares of common stock. The proposal was therefore approved in
accordance with New York law and the procedures set forth in the
proxy statement.
5) With respect to the approval of the 2006 Stock Incentive Plan,
13,652,512 shares voted in favor of the proposal, 418,918 shares
voted against the proposal, and 62,550 shares abstained. There were
7,525,305 broker non-votes. The shares voted in favor of the
proposal constituted a majority of the outstanding shares of common
stock. The proposal was therefore approved in accordance with New
York law and the procedures set forth in the proxy statement.
29
6) With respect to the election of directors, the five nominees for
director received the number of votes set forth opposite their
respective names:
NAME FOR WITHHELD
Howard G. Berger, M.D. 21,168,272 459,738
John V. Crues, III, M.D. 21,198,885 429,126
Norman R. Hames 21,196,497 431,513
Lawrence L. Levitt 21,612,033 15,978
David L. Swartz 21,609,783 18,228
28
No other persons received any votes. The following nominees received
the highest number of votes cast for their election, and were
therefore elected as directors of the Company in accordance with New
York law and the procedures set forth in the proxy statement: Howard
G. Berger, M.D., John V. Crues, III, M.D., Norman R. Hames, Lawrence
L. Levitt and David L. Swartz.
7) With respect to an amendment to our Certificate of Incorporation to
effect a one-for-two reverse stock split, 21,487,777 shares voted in
favor of the proposal, 126,310 shares voted against the proposal,
and 12,297 shares abstained. There were 1,625 broker non-votes. The
shares voted in favor of the proposal constituted a majority of the
outstanding shares of common stock. The proposal was therefore
approved in accordance with New York law and the procedures set
forth in the proxy statement.
8) With respect to the ratification of Moss Adams LP as the Company's
independent registered public accounting firm, 21,578,763 shares
voted in favor of the proposal, 28,827 shares voted against the
proposal, and 18,795 shares abstained. There were 1,625 broker
non-votes. The shares voted in favor of the proposal constituted a
majority of the votes cast. The proposal was therefore approved in
accordance with New York law and the procedures set forth in the
proxy statement.
30
Inapplicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the Nasdaq Over-the-Counter, or OTC,
Bulletin BoardNASDAQ Global Market under the symbol
"RDNT.OB"."RDNT." The following table indicates the high and low prices for our common
stock for the periods indicated based upon information supplied by the National Quotation Bureau, Inc.NASDAQ
Global Market. Such quotations have been adjusted to reflect our reverse one-for-two stock split effected in
November 2006 and reflect interdealer prices
without adjustment for retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.
LOW HIGH
QUARTER ENDED
LOW HIGH
------------- --- ----
JanuaryDecember 31, 2006 $0.52 $1.12
April2008 1.94 3.84
September 30, 2006 0.74 2.78
July2008 3.53 6.60
June 30, 2008 6.09 7.75
March 31, 2006 2.36 3.80
October2008 $6.23 $9.64
December 31, 2006 3.04 5.66
January2007 8.31 10.39
September 30, 2007 7.81 10.57
June 30, 2007 5.38 9.60
March 31, 2005 0.82 1.20
April 30, 2005 0.48 0.98
July 31, 2005 0.52 0.86
October 31, 2005 0.52 0.862007 $4.50 $6.67
The last low and high prices for our common stock on the OTC Bulletin
Board (subsequent to the one-for-two reverse stock split effected in November
2006)NASDAQ Global
Market on January 16, 2007March 10, 2009 were $4.82$0.97 and $5.07,$1.06, respectively. As of January 16,
2007,March 10,
2009, the number of holders of record of our common stock was 3,917.3,786. However,
Cede & Co., the nominee for The Depository Trust Company, the clearing agency
for most broker-dealers, owned a substantial number of our outstanding shares of
common stock of record on that date. Our management believes that customers of
these broker-dealers beneficially own these shares and that the number of
beneficial owners of our common stock is substantially greater than 3,917.approximately 4,000.
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in cumulative
total stockholder return of the Company's Common Stock during the period from
2003 to 2008 with (i) the cumulative total return of the S&P500 index and (ii)
the cumulative total return of the S&P500 - Healthcare Sector index. The
comparison assumes $100 was invested in October 31, 2003 in the Common Stock and
in each of the foregoing indices and the reinvestment of dividends through
January 1, 2009. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
This graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Form 10-K into any filing under the
Securities Act or under the Exchange Act, except to the extent that RadNet
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
29
We did not pay dividends in fiscal 20052007 or 20062008 and we do not expect to
pay any dividends in the foreseeable future.
CONVERTIBLE SUBORDINATED DEBENTURES
At October 31, 2006, we had $16.1 million convertible subordinated
debentures outstanding which mature June 30, 2008 and bear interest, payable
quarterly, at an annual rate[Comparison of 11.5%. The debentures were convertible into our
common stock at a price of $5.00 per share ($2.50 per share prior to the
one-for-two reverse stock split effected in November 2006). On December 15,
2006, we redeemed these debentures.Cumulative Five Year Total Return Graph appears here]
TOTAL RETURN TO SHAREHOLDERS
(INCLUDES REINVESTMENT OF DIVIDENDS)
ANNUAL RETURN PERCENTAGE
YEARS ENDING
COMPANY / INDEX 10/29/04 10/31/05 10/31/06 12/29/06 12/31/07 12/31/08
- ----------------------------------------------------------------------------------------------------------------------------
RADNET, INC. 14.29 -33.93 594.59 -10.12 119.70 -67.00
S&P 500 INDEX 9.42 8.72 16.34 3.33 5.49 -37.00
S&P HEALTH CARE SECTOR 1.76 9.57 11.36 0.91 7.15 -22.81
INDEXED RETURNS
BASE YEARS ENDING
PERIOD
COMPANY / INDEX 10/31/03 10/29/04 10/31/05 10/31/06 12/29/06 12/31/07 12/31/08
- ----------------------------------------------------------------------------------------------------------------------------
RADNET, INC. 100 114.29 75.51 524.49 471.43 1035.71 341.84
S&P 500 INDEX 100 109.42 118.96 138.40 143.01 150.87 95.05
S&P HEALTH CARE SECTOR 100 101.76 111.49 124.16 125.29 134.25 103.63
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended OctoberDecember 31, 2006,2008, we sold the following
securities (all of which have been adjusted to reflect our reverse one-for-two
stock split effected in November 2006) pursuant to an exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended:
o In November 2005,October 2008, we issued to a party who had loaned us $1,000,000,
who agreed to extend his obligation which was then due and to waive
his right to convert the obligation into our common stock at $1.00
per share, atwo radiologists in order retain
their employment with BRMG, five-year warrantwarrants exercisable at
a price of $1.00$3.24 per share, which was the public market
closing price for our common stock on the transaction date, to
purchase 150,00075,000 shares and 35,000 shares of our common stock.stock,
respectively.
o In February 2006,November 2008, we issued to one of BRMG's radiologistsa radiologist in order to
retain his services,employment with BRMG, a five-year warrant
exercisable at a price of $0.80 per share, which was the public market closing price for
our common stock on the transaction date, to purchase 100,000 shares
of our common stock.
o In March 2006, we issued to each of our two independent directors
five-year warrants exercisable at $1.00 per share, which was the
public market price closing price for our common stock on the
transaction date, for each to purchase 25,000 shares of our common
stock.
o In March 2006, we issued to one of BRMG's radiologists, in order to
retain his services and to another radiologist in order to obtain
her services, a five-year warrant exercisable at a price of $0.80
per share, which was the public market closing price for our common
stock on the transaction date, to purchase 50,000 shares and 100,000
shares, respectively, of our common stock.
o In March 2006, we issued to one of our key employees a seven-year
warrant exercisable at a price of $1.12 per share, which was the
public market closing price for our common stock on the transaction
date, to purchase 1,500,000 shares of our common stock.
31
o In April 2006, we issued to one of our key employees a six-year
warrant exercisable at a price of $2.52$3.29 per share, which was the
public market closing price of our common stock on the
transaction date, to purchase 250,00050,000 shares of our common
stock.
o In June 2006, we issued to one of BRMG's radiologists, in order to
retain his services, a five year warrant exercisable at a price of
$2.68 per share, which was the public market closing price of our
common stock on the transaction date, to purchase 25,000 shares of
our stock.
o In July 2006, we issued to one of our key employees a five-year
warrant exercisable at a price of $3.10 per share, which was the
public market closing price of our common stock on the transaction
date, to purchase 100,000 shares of our common stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information with respect to options, warrants and
other rights under our equity compensation plans at October 31, 2006 (as
adjusted to reflect the reverse one-for-two stock split effected November 2006):
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS OUTSTANDING OPTIONS UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
- ------------------- --------------------- --------------------- ----------------------
Equity compensation plans approved
by security holders 353,750 $ 1.01 792,708
Equity compensation plans not approved
by security holders* 4,628,167 $ 1.20 N/A
--------------------- ----------------------
Total 4,981,917 $ 1.19 792,708
* These represent warrants issued in connection with securing the services of various parties for us. In a few
instances they were issued in connection with obtaining financing.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data. The selected consolidated statements of operations data set
forth below for each of the years inended December 31, 2008 and 2007, the three year period ended
October 31, 2006, the two months ended December 31, 2006, and the consolidated
balance sheet data set forth below as of OctoberDecember 31, 20052008 and 20062007, are derived from our
audited consolidated financial statements and notes thereto included elsewhere
herein, as restated.herein. The selected historical consolidated statements of operations data set
forth below for the years ended October 31, 20022005 and 2003,2004, and the consolidated
balance sheet data set forth below as of December 31, 2006 and October 31, 2002, 20032006,
2005 and 2004 are derived from our audited consolidated financial statements not
included herein, as restated. The selected
historical consolidated financial data set forth below have been restated to
reflect adjustments that are discussed further in Note 2 "Restatement of
Financial Statements" in the Notes to the consolidated financial statements.herein. This data should be read in conjunction with and is qualified
in its entirety by reference to the audited consolidated financial statements
and the related notes included elsewhere in this Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The financial data set forth below and discussed in this Annual Report
are derived from the consolidated financial statements of RadNet, its
subsidiaries and certain affiliates. As a result of the contractual and
operational relationship among BRMG, Dr. Berger and us, we are considered to
have a controlling financial interest in BRMG pursuant to guidance issued by the
Emerging Issues Task Force, or EITF, of the Financial Accounting Standards
Board, or FASB, in EITF's release 97-2. Due to the deemed controlling financial
interest, we are required to include BRMG as a consolidated entity in our
consolidated financial statements. This means, for example, that revenue
generated by BRMG from the provision of professional medical services to our
patients, as well as BRMG's costs of providing those services, are included as
net revenue in our consolidated statement of operations, whereas the management
fee that BRMG pays to us under our management agreement with BRMG is eliminated
as a result of the consolidation of our results with those of BRMG. Also,
because BRMG is a consolidated entity in our financial statements, any
borrowings or advances we have received from or made to BRMG are not reflectedhave been
eliminated in our consolidated balance sheet. If BRMG were not treated as a
consolidated entity in our consolidated financial statements, the presentation
of certain items in our income statement, such as net revenue and costs and
expenses, would change but our net income would not, because in operation and
historically, the annual revenue of BRMG from all sources closely approximates
its expenses, including Dr. Berger's compensation, fees payable to us and
amounts payable to third parties.
3230
YEAR
YEARS ENDED TWO MONTHS ENDED YEARS ENDED
December 31, DECEMBER 31, OCTOBER 31,
-----------------------------------------------------------------------------
2002 2003--------------------------------- --------------------- -------------------------------
2008 2007 2006 2006 2005 2006 2005 2004
2005
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) 2006
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Net revenue $ 134,078502,118 $ 140,259425,470 $ 137,277192,859 $ 57,374 $ 22,520 $ 161,005 $ 145,573 $ 161,005137,277
Operating expenses:
Operating expenses 102,286 106,078384,297 330,550 147,226 46,033 19,149 120,342 109,012 105,828 109,012 120,342
Depreciation and amortization 15,757 16,97953,548 45,281 19,542 5,907 2,759 16,394 17,536 17,917 17,536 16,394
Provision for bad debts 6,892 4,944bebts 30,832 27,467 10,707 3,907 826 7,626 4,929 3,911
4,929 7,626
Loss (gain) on disposal of equipment, net 516 72 335 (38) -- 373 696 --
Gain from sale of joint venture interests -- (1,868) -- -- -- 696 373
Income (loss) from continuing operations (7,182) (5,569) (14,731) (3,570) (6,894)
Income from discontinued operation 884 3,197 -- -- --
Net income (loss) (6,298) (2,372)loss (12,836) (18,131) (17,722) (10,983) (155) (6,894) (3,570) (14,731)
(3,570) (6,894)
BALANCE SHEET DATA:Basic and diluted loss per share (0.36) (0.52) (0.57) (0.35) (0.01) (0.33) (0.17) (0.72)
Balance Sheet Data:
Cash and cash equivalents $ 36-- $ 3018 $ 13,221 $ 3,221 $ 2 $ 2 $ 2 $ 1
Total assets 148,885 139,176495,572 433,620 394,766 394,766 119,112 131,636 117,784 124,437 117,784 131,366
Total long-term liabilities 121,830 122,096469,994 428,743 381,903 381,903 23,586 179,288 23,840 139,980 23,840 179,288
Total liabilities 202,560 195,122and minority interests 576,680 503,450 441,762 441,762 189,725 210,430 191,866 195,006 191,866 210,160
Working capital (deficit) (44,668) (44,615)1,962 23,180 31,230 31,230 (141,586) 2,896 (143,430) (32,172)
(143,430) 1,817
Stockholders' equity (deficit) (53,675) (55,946)deficit (81,108) (69,830) (46,996) (46,996) (70,613) (78,794) (74,082) (70,569) (74,082) (78,794)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since our acquisition of Radiologix on November 15, 2006, weWe operate a group of regional networks comprised of 129164 diagnostic
imaging facilities located in sevensix states with operations primarily in California,
the Mid
Atlantic,Delaware, Maryland, the Treasure Coast area of Florida, Kansas and the Finger
Lakes (Rochester) and Hudson Valley areas of New York. We believe our group of
regional networks is the largest of its kind in the U.S. Our facilities are
strategically organized into regional networks in markets that have both
high-density and expanding populations, as well as attractive payor diversity.
All of our facilities employ state-of-the-art equipment and technology in
modern, patient-friendly settings. Many of our facilities within a particular
region are interconnected and integrated through our advanced information
technology system. Ninety-three of our facilities are multi-modality sites,
offering various combinations ofYork, providing diagnostic
imaging services including magnetic resonance imaging, or MRI, computed
tomography, or CT, positron emission tomography, or PET, nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray, and fluoroscopy. Thirty-six of our facilities are single-modality sites, offering either X-ray or
MRI. Consistent with our regional network strategy, we locate our
single-modality facilities near multi-modality sites to help accommodate
overflow in targeted demographic areas.
At our facilities, we provide all of the equipment as well as all
non-medical operational, management,The
Company's operations comprise a single segment for financial and administrative services
necessary to provide diagnostic imaging services. We give our facility managers
authority to run our facilities 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 networks. Each of our facility managers is responsible for meeting
our standards of patient service, managing relationships with local physicians
and payors and maintaining profitability.
We derive substantially all of our revenue, directly or indirectly, from
fees charged for the diagnostic imaging services performed at our facilities.
For the year ended October 31, 2006, we derived 58% of our net revenue from MRI
and CT scans. Over the past three fiscal years, we have increased net revenue
primarily through improvements in net reimbursement, expansions of existing
facilities, upgrades in equipment and development of new facilities.reporting purposes.
The fees charged for diagnostic imaging services performed at our
facilities are paid by a diverse mix of payors, as illustrated for the year
ended October 31, 2006 (pre-Radiologix acquisition) by the following table:
33
PERCENTAGE
OF NET
PAYOR TYPE REVENUE
------------- -----------
Insurance(1) 41%
Managed Care Capitated Payors 27
Medicare/Medi-Cal 18
Other(2) 10
Workers Compensation/Personal Injury 4
-------------
1 Includes Blue Cross/Blue Shield, which represented 14% of our net
revenue for the year ended October 31, 2006.
2 Includes co-payments, direct patient payments and payments through
contracts with physician groups and other non-insurance company payors.
Our eligibility to provide service in response to a referral often depends
on the existence of a contractual arrangement between the radiologists providing
the professional medical services or us and the referred patient's insurance
carrier or managed care organization. These contracts typically describe the
negotiated fees to be paid by each payor for the diagnostic imaging services we
provide. With the exception of Blue Cross/Blue Shield and government payors, no
single payor accounted for more than 5% of our net revenue for the year ended
October 31, 2006. Under our capitation agreements, we receive from the payor a
pre-determined amount per member, per month. If we do not successfully manage
the utilization of our services under these agreements, we could incur
unanticipated costs not offset by additional revenue, which would reduce our
operating margins.
The principal components of our fixed operating expenses, excluding
depreciation, include professional fees paid to radiologists, except for those
radiologists who are paid based on a percentage of revenue, compensation paid to
technologists and other facility employees, and expenses related to equipment
rental and purchases, real estate leases and insurance, including errors and
omissions, malpractice, general liability, workers' compensation and employee
medical. The principal components of our variable operating expenses include
expenses related to equipment maintenance, medical supplies, marketing, business
development and corporate overhead. Because a majority of our expenses are
fixed, increased revenue as a result of higher scan volumes per system or
improvements in net reimbursement can significantly improve our margins.
BRMG strives to maintain qualified radiologists and technologists while
minimizing turnover and salary increases and avoiding the use of outside
staffing agencies, which are considerably more expensive and less efficient. In
recent years, there has been a shortage of qualified radiologists and
technologists in some of the regional markets we serve. As turnover occurs,
competition in recruiting radiologists and technologists may make it difficult
for our contracted radiology practices to maintain adequate levels of
radiologists and technologists without the use of outside staffing agencies. At
times, this has resulted in increased costs for us.
For a discussion of other factors that may have an impact on our business
and our future results of operations see "Risks Relatedof Radiologix and its wholly-owned
subsidiaries have been included in the consolidated financial statements from
November 15, 2006, the date of the Company's acquisition of Radiologix. The
consolidated financial statements also include the accounts of RadNet
Management, Inc., or RadNet Management, and Beverly Radiology Medical Group III
(BRMG), which is a professional partnership, all collectively referred to our Business."
OUR RELATIONSHIP WITH BRMGas
"us" or "we". The consolidated financial statements also include RadNet Sub,
Inc., RadNet Management I, Inc., RadNet Management II, Inc., SoCal MR Site
Management, Inc., Radiologix, Inc., RadNet Management Imaging Services, Inc.,
Delaware Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all
wholly owned subsidiaries of RadNet Management.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and ownedowns approximately 30%18% of RadNet'sour outstanding
common stock at October 31, 2006.stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
BRMG. BRMG provides all of the professional medical services at 52the majority of
our facilities located in California under a management agreement with us, and
contracts with various other independent physicians and physician groups to
provide all of the professional medical services at most of our other California
facilities. We generally obtain professional medical services from BRMG in
California, rather than providingprovide such services directly or through subsidiaries,
in order to comply with California's prohibition against the corporate practice
of medicine. However, as a result of our close relationship with Dr. Berger and
BRMG, we believe that we are able to better ensure that professional medical services areservice is
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated practicephysician groups. Under ourBRMG is a
partnership of Pronet Imaging Medical Group, Inc. (99%), Breastlink Medical
Group, Inc. (100%) and Beverly Radiology Medical Group, Inc. (99%), each of
which are 99% or 100% owned by Dr. Berger. RadNet provides non-medical,
technical and administrative services to BRMG for which it receives a management
fee, per the management agreement. Through the management agreement and our
relationship with Dr. Berger, we have exclusive authority over all non-medical
decision making related to the ongoing business operations of BRMG. Based on the
provisions of the agreement, we have determined that BRMG is a variable interest
entity, and that we are the primary beneficiary as defined in Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51
(FIN 46(R)), and consequently, we consolidate the revenue and expenses of BRMG.
All intercompany balances and transactions have been eliminated in
consolidation.
31
At a portion of our centers in California and at all of the centers
which expires on January 1,
2014, BRMG pays us, as compensationare located outside of California, we have entered into long-term
contracts with prominent radiology groups in the area to provide physician
services at those facilities. These third party radiology practices provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our diagnostic imaging centers. The radiology practices
maintain full control over the provision of professional services. The
contracted radiology practices generally have outstanding physician and practice
credentials and reputations; strong competitive market positions; a broad
sub-specialty mix of physicians; a history of growth and potential for continued
growth.
In these facilities we enter into long-term agreements with radiology
practice groups (typically 40 years). Under these arrangements, in addition to
obtaining technical fees for the use of our facilities anddiagnostic imaging equipment and forthe
provision of technical services, we provide management services and receive a
fee based on the practice group's professional revenue, including revenue
derived outside of our services, a percentagediagnostic imaging centers. We own the diagnostic imaging
assets and, therefore, receive 100% of the gross amounts collected fortechnical reimbursements associated
with imaging procedures. We have no financial controlling interest in the
professional services it renders. The percentage, which was 79% at October 31,
2006, is adjusted annually, if necessary, to ensure thatcontracted radiology practices, as defined in EITF 97-2; accordingly, we do not
consolidate the parties receive
fair value for the services they render. In operation and historically, the
annual revenuefinancial statements of BRMG from all sources closely approximates its expenses,
including Dr. Berger's compensation, fees payable to us and amounts payable to
third parties. For administrative convenience and in order to avoid
inconveniencing and confusing our payors, a single bill is prepared for both the
professional medical services provided by the radiologists and our non-medical,
or technical, services, generating a receivable for BRMG. Historically, BRMG
financed these receivables under a working capital facility with Bridge
Healthcare Finance LLC and regularly advanced to us the funds that it draws
under this working capital facility, which we used for our own working capital
purposes. We repaid or offset those advances with periodic payments from BRMG to
us under the management agreement. We guaranteed BRMG's obligations under this
working capital facility.
34
As a result of our contractual and operational relationship with BRMG and
Dr. Berger, we are required to include BRMG as a consolidated entitypractices in our consolidated
financial statements.
See "Selected Consolidated Financial Data."
RESTATEMENT OF FINANCIAL STATEMENTS
On February 7, 2005, the Office of the Chief Accountant of the SEC (the
"OCA") issued a letter to the American Institute of Certified Public Accountants
regarding lease accounting which identified lease accounting issues including
amortization of leasehold improvements.
The OCA believes that leasehold improvements in an operating lease should
be amortized by the lessee over the shorter of their economic lives or the lease
term, as defined in paragraph 5 (f) of FASB Statement 13 ("SFAS 13"), Accounting
for Leases, as amended. The OCA believes amortizing leasehold improvements over
a term that includes assumption of lease renewals is appropriate only when the
renewals have been determined to be "reasonably assured," as that term is
contemplated by SFAS 13.
Our Management and the Audit Committee of our Board of Directors in
consultation with Moss Adams LLP determined that our accounting for leases was
not consistent with the accounting principle described in the OCA's letter.
Similar to many other companies with multiple sites including outpatient medical
service companies, retailers and restaurants, we have corrected our error in
accounting for leases.
Generally we have amortized leasehold improvements over the shorter of the
assets' estimated useful lives or the initial lease terms including renewal
options which are reasonably assured. This is consistent with our utilization of
initial lease terms including renewal options in our calculation of straight
line rent expense, however, in some situations the Company depreciated leasehold
improvements over a 15-year period while the straight line rent expense in those
same years was computed over the initial lease terms including renewal options,
which were less than 15 years. Therefore, to ensure compliance with generally
accepted accounting principles, we are correcting our calculation of the
amortization of leasehold improvements to utilize the shorter of the assets'
estimated useful lives or the initial terms including renewal options of the
related leases.
See Note 2: "Restatement of Financial Statements" under Notes to
Consolidated Financial Statements of this Form 10-K for a summary of the effect
of these changes on our consolidated financial statements as of October 31, 2004
and 2005, respectively.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
AtWe had a working capital balance of $2.0 million and $23.2 million at
December 31, 2008 and 2007, respectively. We had net losses of $12.8 million,
$18.1 million, $11.0 million and $6.9 million for the years ended December 31,
2008 and 2007, the two months ended December 31, 2006, and the year ended
October 31, 2006, our working capital was $1.8 million. At Octoberrespectively. We also had a stockholders' deficit of $81.1
million and $69.8 million at December 31, 2005, our working capital deficit was approximately $143.4 million due to the
reclassification of approximately $109 million in notes2008 and capital lease
obligations as current liabilities expected to be refinanced and the
classification of approximately $13.3 million in line of credit liabilities as
current. At October 31, 2005, we were subject to financial covenants under our
debt agreements and believed we may have been unable to continue to be in
compliance with our existing financial covenants during fiscal 2006. As such,
the associated debt was reclassified as a current liability. Previously, our
line of credit was collateralized by accounts receivable and given the majority
of accounts receivable was classified as a current liability so was the related
liability.
On November 15, 2006, we completed our acquisition of Radiologix, Inc.
(AMEX: RGX). Under the terms of the acquisition agreement, Radiologix
shareholders received an aggregate consideration of 11,310,961 shares (or
22,621,922 shares before the one-for-two reverse stock split) of our common
stock and $42,950,000 in cash.
On November 15, 2006, we entered into a $405 million senior secured credit
facility with GE Commercial Finance Healthcare Financial Services. This facility
was used to finance our acquisition of Radiologix, refinance existing
indebtedness, pay transaction costs and expenses relating to our acquisition of
Radiologix, and to provide financing for working capital needs post-acquisition.
Debt issue costs related to the March 2006 refinancing and line of credit of
approximately $5.0 million will be written off and we will recognize a loss on
the extinguishments of debt with the transaction. The facility consists of a
revolving credit facility of up to $45 million, a $225 million term loan and a
$135 million second lien term loan. The revolving credit facility has a term of
five years, the term loan has a term of six years and the second lien term loan
has a term of six and one-half years. Interest is payable on all loans initially
at an Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the "base rate on corporate loans posted by
at least 75% of the nation's largest 30 banks" or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each of the revolving credit
facility and the term loan is 2% and on the second lien term loan is 6%. We may
request that the interest rate instead be based on LIBOR plus the Applicable
LIBOR Margin, which is 3.5% for the revolving credit facility and the term loan
and 7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
35
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
As part of the financing, we were required to swap at least 50% of the
aggregate principal amount of the facilities to a floating rate within 90 days
of the close of the agreement on November 15, 2006. On April 11, 2006, effective
April 28, 2006, we entered into an interest rate swap on $73.0 million fixing
the LIBOR rate of interest at 5.47% for a period of three years. This swap was
made in conjunction with the $161.0 million credit facility closed on March 9,
2006. In addition, on November 15, 2006, we entered into an interest rate swap
on $107.0 million fixing the LIBOR rate of interest at 5.02% for a period of
three years, and on November 28, 2006, we entered into an interest rate swap on
$90.0 million fixing the LIBOR rate of interest at 5.03% for a period of three
years. Previously, the interest rate on the above $270.0 million portion of the
credit facility was based upon a spread over LIBOR which floats with market
conditions.
We document our risk management strategy and hedge effectiveness at the
inception of the hedge, and, unless the instrument qualifies for the short-cut
method of hedge accounting, over the term of each hedging relationship. The
Company's use of derivative financial instruments is limited to interest rate
swaps, the purpose of which is to hedge the cash flows of variable-rate
indebtedness. The Company does not hold or issue derivative financial
instruments for speculative purposes. In accordance with Statement of Financial
Accounting Standards No. 133, derivatives that have been designated and qualify
as cash flow hedging instruments are reported at fair value. The gain or loss on
the effective portion of the hedge (i.e., change in fair value) is initially
reported as a component of other comprehensive income in the Company's
Consolidated Statement of Stockholders' Equity. The remaining gain or loss, if
any, is recognized currently in earnings. At October 31, 2006, there were no
derivatives that were designated as cash flow hedging instruments. Of the
derivatives that were not designated as cash flow hedging instruments, we
recorded interest expense of approximately $920,000 classified as accrued
expenses on the Company's balance sheet at October 31, 2006.
Effective March 2006, we completed the issuance of a $161 million senior
secured credit facility that we used to refinance substantially all of our
existing indebtedness (except for $16.1 million of outstanding subordinated
debentures and approximately $5 million of capital lease obligations). We
incurred fees and expenses for the transaction of approximately $5.6 million.
Debt issue costs are being amortized on a straight-line basis over 65 months and
are classified as deferred financing costs. In addition, we recorded a net loss
on extinguishments of debt of $2.1 million, which includes $1.2 million in
pre-payment penalty fees that were unpaid as of October 31, 2006 and classified
as accrued expenses under current liabilities. The facility provided for a $15
million five-year revolving credit facility, an $86 million term loan due in
five years and a $60 million second lien term loan due in six years. The loans
were subject to acceleration on December 27, 2007, unless we made arrangements
to discharge or extend our outstanding subordinated debentures by that date.
Under the terms and conditions of the Second Lien Term Loan, subject to
achieving certain leverage ratios, we had the right to raise up to $16.1 million
in additional funds as part of the Second Lien Term Loan for the purposes of
redeeming the subordinated debentures. Additionally, under the current
facilities, we have the ability to pursue other funding sources to refinance the
subordinated debentures. The loans were payable interest only monthly except for
the $86 million term loan that required amortization payments of 1.0% per annum,
or $860,000, paid quarterly.
The revolving credit facility and the $86 million term loan bear interest
at a base rate ("base rate" means corporate loans posted by at least 75% of the
nation's 30 largest banks as quoted by the Wall Street Journal) plus 2.5%, or at
our election, the LIBOR rate plus 4.0% per annum, payable monthly. The $60
million second lien term loan bears interest at the base rate plus 7.0%, or at
our election, the LIBOR rate plus 8.5% per annum, payable monthly. The $86
million term loan included amortization payments of 1.0% per annum, payable in
quarterly installments of $215,000. Upon the close of the refinancing on March
9, 2006, we utilized approximately $1.5 million of the new $15 million revolving
credit facility.
Under the new facility, we were subject to various financial covenants
including a limitation on capital expenditures, maximum days sales outstanding,
minimum fixed charge coverage ratio, maximum leverage ratio and maximum senior
leverage ratio. Availability under our $15 million revolving credit facility was
governed by the margins calculated under the maximum senior leverage ratio and
maximum total leverage ratio covenants. As of October 31, 2006, we had
approximately $2.6 million of availability based upon our borrowing base
formula.
Prior to November 2005, we entered into various other financing
arrangements over the periods reported in this Form 10-K in order to improve our
working capital and meet our obligations as they became due (see Note 7).
36
respectively.
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations. In addition to
operations, we require significant amounts of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations. Because our cash flows from
operations have been insufficient to fund all of these capital requirements, we
have depended on the availability of financing under credit arrangements with
third parties.
Historically, our principal sources of liquidityparties or have been funds available for
borrowing under our existing lines of credit, now with General Electric Capital
Corporation. We finance the acquisition of equipment mainly throughentered into capital and
operating leases. As of October 31, 2006 and October 31, 2005, our line of
credit liabilities were $12.4 million and $13.3 million, respectively.
Our business strategy with regard to operations will focusfocuses on the
following:
o|X| Maximizing performance at our existing facilities;
o|X| Focusing on profitable contracting;
o|X| Expanding MRI, CT and CT applications
oPET applications;
|X| Optimizing operating efficiencies; and
o|X| Expanding our networks
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in the next twelve
months.
SOURCES AND USES OF CASH
Cash increased for fiscal 2005 by $1,000. There was no increase or
decrease in cash for fiscal 2006.
Cash provided by operating activities was $45.2 million, $29.2 million,
$440,000 and $10.3 million for the years ended December 31, 2008 and 2007, the
two months ended December 31, 2006 and the year ended October 31, 20052006,
respectively.
Cash used in investing activities was $11.1$56.0 million, compared to $10.3$45.9 million, and
$13.5 million for the same period in 2006. The
primary reason for the fiscalyears ended December 31, 2008, 2007, and October 31, 2006,
decrease in cashrespectively. Cash provided by operating
activities was due to the increase in accounts receivable. Accounts receivable
increased by approximately 7.8% from fiscal 2005 to fiscal 2006 due to an
increase in same store net revenue less provision for bad debts, a build-up in
accounts receivable related to the five new facilities added during fiscal 2006
by approximately $1.1 million, and a Medicare and Medi-Cal provider number delay
for new physicians and sites added during the fiscal period.
Cash used by investing activities for fiscal 2005the two months ended
December 31, 2006 was $4.0 million
compared to $13.5 million for$10.2 million. For the same period in 2006. For fiscal 2005 and 2006,year ended December 31, 2008, we
purchased property and equipment for approximately $4.1$29.2 million and $9.5
million, respectively, and received proceeds from the sale of medical equipment
of $65,000 and $47,000, respectively. In addition, during fiscal 2006, we acquired
the assets and businesses of centers in Fresnoadditional imaging facilities for approximately
$28.9 million (see Note 2 to our consolidated financial statements). We also
generated $3.0 million from the sale of equipment.
Cash provided by financing activities was $10.8 million, $13.5 million
and San Francisco$3.2 million for $1,500,000the years ended December 31, 2008 and $1,650,000, respectively, invested in a PET center in Palm Desert
for $237,500,2007, and paid $704,000 in transaction fees related to the acquisition
of Radiologix effective November 15, 2006.October 31,
2006, respectively. Cash used forin financing activities for fiscal 2005the two months ended
December 31, 2006 was $7.1 million
compared to$7.4 million. The cash provided by financing activities
of $3.2 million for the same
period in 2006. For fiscal 2005 and 2006, we madeyear ended December 31, 2008 was primarily related to our borrowing of
an additional $35 million as part of our second lien term loan with GE
Commercial Healthcare Financial Services offset by principal payments on capitalnotes
and leases notes payable and lines of credit of approximately $14.1 million and
$7.0 million, respectively, and received proceeds from borrowings under existing
lines of credit, refinancing arrangements and related parties of approximately
$6.1 million and $12.2 million, respectively. During fiscal 2005, we also
increased our cash disbursements in transit by $0.9 million compared to a
decrease in cash disbursements of $2.8 million in fiscal 2006. In addition, as
part of the March 2006 debt restructuring, we repaid existing debt of $141.2
million and debt issue costs of $5.6 million with proceeds from borrowings on
notes payable of $146.5 million and cash. Debt issue costs of approximately $0.3
million related to the upcoming Radiologix acquisition were also paid during
fiscal 2006. During the year ended October 31, 2006, we received proceeds from
the issuance of common stock of $1.5$19 million.
3732
CONTRACTUAL COMMITMENTS
Our future obligations for notes payable, equipment under capital
leases, lines of credit, subordinated debentures, equipment and building operating leases and purchase
and other contractual obligations for the next five years and thereafter include
(dollars in thousands):
THERE-
2007 2008
2009 2010 2011 AFTER2012 2013 THEREAFTER TOTAL
-------- -------- -------- -------- -------- -------- --------
Notes payable*payable (1) $ 1,303 $144,93946,444 $ 44338,907 $ 444 408 30 $147,56739,168 $270,009 $177,368 $ -- $571,896
Capital leases* 2,955 2,120 1,753 388 105leases (2) 17,700 13,597 8,288 4,155 615 -- 7,321
Lines of credit -- 12,437 -- -- -- -- 12,437
Subordinated debentures -- 16,031 -- -- -- -- 16,03144,355
Operating leases(1) 9,086 8,453 8,220 8,065 7,747 74,100 115,671
Purchase obligations(2) 1,467 -- -- -- -- -- 1,467leases (3) 38,531 35,441 28,852 24,933 20,827 74,771 223,355
-------- -------- -------- -------- -------- -------- --------
TOTAL(3)Total $102,675 $ 14,811 $183,98087,945 $ 10,41676,308 $299,097 $198,810 $ 8,897 $ 8,260 $ 74,130 $300,494
========74,771 $839,606
======== ======== ======== ======== ======== ======== - -------------
* Includes interest.
1 Includes all existing options to extend lease terms
2 Includes a two-year obligation to purchase imaging film from Fuji. We must
purchase an aggregate of $4.4 million of film at a rate of approximately $2.2
million per year over the term of the agreement which will be completed on
June 30, 2007.
3 Does not include our obligation under our maintenance agreement with GE
Medical Systems described below.========
(1) Includes variable rate debt for which the contractual obligation was
estimated using the applicable rate as of December 31, 2008.
(2) Includes interest component of capital lease obligations.
(3) Includes all existing options to extend lease terms that are reasonably
assured to be exercised.
We have an arrangement with GE Medical Systems under which it has
agreed to be responsible for the maintenance and repair of a majority of our
equipment for a fee that is based upon a percentage of our revenue, subject to a
minimum payment. Net revenue is reduced by the provision for bad debt,debts, mobile
PET revenue and other professional reading service revenue to obtain adjusted
net revenue. The fiscal 2006 annual service fee was the higher of 3.62% of our
adjusted net revenue, or $5,393,800. For the fiscal years 2007, 2008 and 2009,
the annual service fee will be the higher of 3.62% of our adjusted net revenue,
or $5,430,000. We believe this framework of basing service costs on usage is an
effective and unique method for controlling our overall costs on a
facility-by-facility basis. We plan to renegotiate our existing agreement with
GE in early 2007 adding Radiologix to the service plan and reducing the overall
service fee percentage.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based on our consolidated financial statements that were prepared
in accordance with U.S. generally accepted accounting principles, or GAAP.
Management makes estimates and assumptions when preparing financial statements.
These estimates and assumptions affect various matters, including:
o Our reported amounts of assets and liabilities in our
consolidated balance sheets at the dates of the financial
statements;
o Our disclosure of contingent assets and liabilities at the
dates of the financial statements; and
o Our reported amounts of net revenue and expenses in our
consolidated statements of operations during the reporting
periods.
These estimates involve judgments with respect to numerous factors that
are difficult to predict and are beyond management's control. As a result,
actual amounts could differ materially differ from these estimates.
The Securities and Exchange Commission, or SEC, defines critical
accounting estimates as those that are both most important to the portrayal of a
company's financial condition and results of operations and require management's
most difficult, subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. In Note 24 to our consolidated financial
statements, we discuss our significant accounting policies, including those that
do not require management to make difficult, subjective or complex judgments or
estimates. The most significant areas involving management's judgments and
estimates are described below.
38
REVENUE RECOGNITION
RevenueOur consolidated net revenue consists of net patient fee for service
revenue and revenue from capitation arrangements, or capitation revenue. Net
patient service revenue is recognized when diagnostic imagingat the time services are rendered.
Revenue is recordedprovided net of
contractual adjustments based on our evaluation of expected collections
resulting from the analysis of current and past due accounts, past collection
experience in relation to amounts billed and other arrangementsrelevant information. The
amount of expected collection is continually adjusted as more information is
received and such adjustments are recorded in current operations. Contractual
adjustments result from the differences between the rates charged for providing services
at less than established patient billing rates. We estimate
contractual allowances based onperformed and reimbursements by government-sponsored healthcare programs and
insurance companies for such services. Capitation revenue is recognized as
revenue during the patient mix atperiod in which we were obligated to provide services to plan
enrollees under contracts with various health plans. Under these contracts, we
receive a per-enrollee amount each diagnostic imaging
facility,month covering all contracted services needed
by the impact of managed care contract pricing and historical collection
information. We operate 129 facilities, each of which has multiple managed care
contracts and a different patient mix. We review the estimated contractual
allowance rates for each diagnostic imaging facility on a monthly basis. We
adjust the contractual allowance rates, as changes to the factors discussed
above become known. Depending on the changes we make in the contractual
allowance rates, net revenue may increase or decrease.plan enrollees.
ACCOUNTS RECEIVABLE
Substantially all of our accounts receivable are due under
fee-for-service contracts from third party payors, such as insurance companies
and government-sponsored healthcare programs, or directly from patients.
Services are generally provided pursuant to one-year contracts with healthcare
providers. Receivables generally are collected within industry norms for
third-party payors. We continuously monitor collections from our clients and
33
maintain an allowance for bad debts based upon any specific payor collection issues
that we have identified and our historical experience.
For fiscal 2004, 2005 and 2006DEPRECIATION AND AMORTIZATION OF LONG-LIVED ASSETS
We depreciate our provisionlong-lived assets over their estimated economic
useful lives with the exception of leasehold improvements where we use the
shorter of the assets useful lives or the lease term of the facility for bad debts as a percentage of net revenue (pre-Radiologix
acquisition) was 2.8%, 3.4% and 4.7%, respectively.which
these assets are associated.
DEFERRED TAX ASSETS
We evaluate the realizability of the net deferred tax assets and assess
the valuation allowance periodically. If future taxable income or other factors
are not consistent with our expectations, an adjustment to our allowance for net
deferred tax assets may be required. Even though we expect to utilize our net
operating loss carry forwards in the future, the last three fiscal year losses
and available evidence cause the valuation of our net deferred tax assets to be
uncertain in the near term. As of OctoberDecember 31, 2006,2008, we have fully allowed forprovided a full
allowance on our net deferred tax assets.
VALUATION OF GOODWILL AND LONG-LIVED ASSETS
Our net goodwillGoodwill at OctoberDecember 31, 2006 was $23.12008 totaled $105.3 million. Goodwill is
recorded as a result of our acquisition of operating facilities. The operating
facilities are grouped by region into reporting units. We evaluatebusiness combinations. Management evaluates goodwill, at
a minimum, on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets." Impairment of goodwill is tested at the reporting unit
level by comparing the reporting unit's carrying amount, including goodwill, to
the fair value of the reporting unit. The fair valuesvalue of thea reporting units areunit is
estimated using a combination of the income or discounted cash flows approach
and the market approach, which uses comparable market data. If the carrying
amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment
loss, if any. Our long-lived assets atUsing the services of an external valuation expert, we performed
our annual impairment test of goodwill as of October 31, 2006 consist primarily1, 2008. Based on our
analysis, we recorded no impairment loss related to goodwill in 2008. However,
if estimates or the related assumptions change in the future, we may be required
to record impairment charges to reduce the carrying amount of net
property and equipment of $64.6 million.goodwill.
We evaluate long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." An asset is considered impaired if its carrying
amount exceeds the future net cash flow the asset is expected to generate. If
such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value. We assess the recoverability of our long-lived and intangible
assets by determining whether the unamortized balances can be recovered through
undiscounted future net cash flows of the related assets.
For each of the three years in the period ended October 31, 2006, we
recorded no impairment of goodwill or property and equipment. However, if our
estimates or the related assumptions change in the future, we may be required to
record impairment charges to reduce the carrying amount of these assets.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company holds derivative financial instruments for the purpose of
hedging the risks of certain identifiable and anticipated transactions. In
general, the types of risks hedged are those relating to the variability of cash
flows caused by movements in interest rates. The Company documents its risk
management strategy and hedge effectiveness at the inception of the hedge, and,
unless the instrument qualifies for the short-cut method of hedge accounting,
over the term of each hedging relationship. The Company'sOur use of derivative financial
instruments is limited to interest rate swaps, the purpose of which is to hedge
the cash flows of variable-rate indebtedness. The Company doesWe do not hold or issue derivative
financial instruments for speculative purposes.
39
In accordance with Statement of Financial Accounting Standards No. 133,
derivatives that have been designated and qualify as cash flow hedging
instruments are reported at fair value. The gain or loss on the effective
portion of the hedge (i.e., change in fair value) is initially reported as a
component of other comprehensive income in the Company's Consolidated Statement
of Stockholders' Equity. The remaining gain or loss, if any, is recognized
currently in earnings. SIGNIFICANT EVENTS
RADIOLOGIX
On November 15, 2006, we completed our previously announced acquisition of
Radiologix, Inc. (AMEX: RGX). Under the terms of the acquisition agreement,
Radiologix shareholders received an aggregate consideration of 11,310,961 shares
(or 22,621,922 shares before the one-for-two reverse stock split) of our common
stock and $42,950,000Amounts in cash.
On November 15, 2006, we enteredaccumulated other comprehensive income are
reclassified into a $405 million senior secured credit
facility with GE Commercial Finance Healthcare Financial Services. This facility
was used to finance our acquisition of Radiologix, refinance existing
indebtedness, pay transaction costs and expenses relating to our acquisition of
Radiologix, and to provide financing for working capital needs post-acquisition.
Debt issue costs related to the March 2006 refinancing and line of credit of
approximately $5.0 million will be written off and we will recognize a loss on
the extinguishments of debt with the transaction. The facility consists of a
revolving credit facility of up to $45 million, a $225 million term loan and a
$135 million second lien term loan. The revolving credit facility has a term of
five years, the term loan has a term of six years and the second lien term loan
has a term of six and one-half years. Interest is payable on all loans initially
at an Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the "base rate on corporate loans posted by
at least 75% of the nation's largest 30 banks" or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each the revolving credit facility
and the term loan is 2% and on the second lien term loan is 6%. We may request
that the interest rate instead be based on LIBOR plus the Applicable LIBOR
Margin, which is 3.5% for the revolving credit facility and the term loan and
7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
The estimated purchase price and the allocation of the estimated purchase
price discussed below are preliminary based on management's best estimate
because the final valuation has not been completed. The preliminary estimated
total purchase price of the merger is as follows:
(in thousands)
--------------
Value of stock given by RadNet to Radiologix* $ 39,400*
Cash 42,950
Estimated transaction fees and expenses 15,208**
----------
Total Purchase Price $ 97,558
==========
(*) Calculated as 11,310,961 shares multiplied by $3.48 (average closing price
of $1.74 from June 28, 2006 to July 13, 2006 adjusted for the one-for-two
reverse stock split).
Per FAS 141 Paragraph 22, the fair value of securities tradednet income in the market is generally more clearly evident than the fair value of an acquired
entity. Thus, the quoted market price of an equity security issued to effect a
business combination generally should be used to estimate the fair value of an
acquired entity after recognizing possible effects of price fluctuations,
quantities traded, issue costs, and the like. The market price for a reasonablesame period before and after the date that the terms of the acquisition are agreed to
and announced (or in the case of the acquisition of Radiologix, July 6, 2006)
shall be considered in determining the fair value of securities issued (Opinion
16, paragraph 74).
(**) Includes $8,274,000 in assumed liabilities of Radiologix, including
$3,210,000 in merger and acquisition fees and $5,064,000 in bond prepayment
penalties.
40
Under the purchase method of accounting, the total estimated purchase
price as shown above is allocated to Radiologix's net tangible and intangible
assets based on their estimated fair values as of the date of the completion of
the merger. The preliminary allocation of the pro forma purchase price is as
follows:
(in thousands)
--------------
Current assets $ 116,788
Property and equipment, net 76,802
Identifiable intangible assets 58,739
Goodwill 46,178
Investments in joint ventures 9,481
Other assets 585
Current liabilities (24,145)
Accrued restructuring charges (314)
Assumption of Debt (177,358)
Long-term liabilities (7,989)
Minority interests in consolidated subsidiaries (1,209)
-----------
Total purchase price $ 97,558
===========
We have estimated the fair value of tangible assets acquired and
liabilities assumed. Some of these estimates are subject to change, particularly
those estimates relating to the valuation of property and equipment and
identifiable intangible assets. The allocation of the purchase price is
preliminary and based upon management's best estimate because the final
valuation has not been completed. The final allocation of the purchase price
will be based upon Radiologix's assets and liabilities on the closing date and
the allocation of the purchase price will be reviewed by an external valuation
expert.
CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: RadNet valued
cash, marketable securities, investments and other assets at their respective
carrying amounts as RadNet believes that these amounts approximate their current
fair values or the fair values.
IDENTIFIABLE INTANGIBLE ASSETS. RadNet expects identifiable intangible
assets acquired to include management service agreements. Management service
agreements represent the underlying relationships and agreements with certain
professional radiology groups.
Identifiable intangible assets consist of:
ESTIMATED
ESTIMATED AMORTIZATION ANNUAL
(IN THOUSANDS) FAIR VALUE PERIOD AMORTIZATION
- ------------------------------- ---------- ------------ ------------
Management service agreements $ 58,739 25 years $ 2,350
RadNet has determined the preliminary fair value of intangible assets with
limited discussions with Radiologix management and a review of certain
transaction-related documents prepared by Radiologix management.
Estimated useful lives for the intangible assets were based on the average
contract terms, which are greater than the amortization period that will be used
for management contracts. Intangible assets are being amortized using the
straight-line method, considering the pattern in which the economic benefits of
the intangible assetshedged forecasted
transaction affects earnings.
MEDICAL MALPRACTICE INSURANCE
We and our affiliated physicians are consumed.
GOODWILL. Approximately $46,178,000 has been allocated to goodwill.
Goodwill represents the excess of the purchase price over the fair value of the
underlying net tangible and intangible assets. In accordance with SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, goodwill will not be amortized but instead
will be tested for impairment at least annually. In the eventinsured by Fairway Physicians
Insurance Company. Fairway provides claims-made malpractice insurance coverage
that the
management of the combined company determines that the value of goodwill has
become impaired, the combined company will incur an accounting charge for the
amount of impairmentcovers only asserted malpractice claims made during the fiscal quarter in whichpolicy period and
within policy limits. To reduce our exposure to claims incurred but not reported
under the determination is
made.annual policy, the Company purchased an effective tail policy to cover
all claims filed after December 31, 2008 relating to incidents prior to January
1, 2009, thus eliminating any liability for future claims made related to
December 31, 2008 and prior.
34
FACILITY OPENINGS
In September 2006,ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On October 31, 2008, we acquired the assets and business of FresnoMiddletown
Imaging in Middletown, Delaware for $210,000 in cash and the assumption of
capital lease debt of $1.2 million. We made a preliminary purchase price
allocation of the acquired assets and liabilities, and approximately $530,000 of
goodwill was recorded with respect to this transaction.
On August 15, 2008, we acquired the women's imaging practice of Parvis
Gamagami, M.D., Inc. in Van Nuys, CA for $600,000. Upon acquisition, we
relocated the practice to a nearby center we recently acquired from InSight
Health in Encino, CA. We rebranded the InSight center as the Encino Breast Care
Center, and focused it on Digital Mammography, Ultrasound, MRI and other
modalities pertaining to women's health. We allocated the full purchase price of
$600,000 to goodwill.
On July 23, 2008, we acquired the assets and business of NeuroSciences
Imaging Center in Newark, Delaware for $1,500,000$4.5 million in cash. The center, which
performs MRI, CT, Bone Density, X-ray, Fluoroscopy and other specialized
procedures, is located in a highly specialized medical complex called the
Neuroscience and Surgery Institute of Delaware. The acquisition complements our
recent purchase of the Papastavros Associates Imaging centers completed in
March, 2008. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $2.6 million of goodwill was recorded
with respect to this transaction.
On June 18, 2008, we acquired the assets and business of Ellicott Open
MRI for the assumption of approximately $181,000 of capital lease debt. We made
a preliminary purchase price allocation of the acquired assets and liabilities,
and no goodwill was recorded with respect to this transaction.
On June 2, 2008, we acquired the assets and business of Simi Valley
Advanced Medical, a Southern California based multi-modality imaging center, for
the assumption of capital lease debt of $1.7 million. We made a preliminary
purchase price allocation of the acquired assets and liabilities, and
approximately $313,000 of goodwill was recorded with respect to this
transaction.
On April 15, 2008, we acquired the net assets of five Los Angeles area
imaging centers from InSight Health Corp. We completed the purchase of a sixth
center in Van Nuys, CA from Insight Health Corp. on June 2, 2008. The total
purchase price for the six centers was $8.5 million in cash. The centers provide
a combination of imaging modalities, including MRI, CT, X-ray, Ultrasound and
Mammography. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $5.6 million of goodwill was recorded
with respect to this transaction.
On April 1, 2008, we acquired the net assets and business of BreastLink
Medical Group, Inc., a prominent Southern California breast medical oncology
business and a leading breast surgery business, for the assumption of
approximately $4.0 million of accrued liabilities and capital lease obligations.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $2.1 million of goodwill was recorded with
respect to this transaction.
On March 12, 2008, we acquired the net assets and business of
Papastavros Associates Medical Imaging for $9.0 million in cash and the
assumption of capital leases of $337,000. Founded in 1958, Papastavros
Associates Medical Imaging is one of the largest and most established outpatient
imaging practices in Delaware. The 12 Papastavros centers offer a combination of
MRI, CT, PET, nuclear medicine, mammography, bone densitometry, fluoroscopy,
ultrasound and X-ray. We made a preliminary purchase price allocation of the
acquired assets and liabilities, and approximately $3.6 million of goodwill, and
$1.2 million for covenants not to compete, was recorded with respect to this
transaction.
On February 1, 2008, we acquired the net assets and business of The
Rolling Oaks Imaging Group, located in Westlake and Thousand Oaks, California,
for $6.0 million in cash and the assumption of capital leases of $2.7 million.
The practice consists of two centers, one of which is a dedicated women's
center. The centers are multimodality and include a combination of MRI, CT,
PET/CT, mammography, ultrasound and X-ray. The centers are positioned in the
community as high-end, high-quality imaging facilities that employ
state-of-the-art technology, including 3 Tesla MRI and 64 slice CT units. The
facilities have been fixtures in the Westlake/Thousand Oaks market since 2003.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $5.6 million of goodwill was recorded with
respect to this transaction.
On October 9, 2007, we acquired the assets and business of Liberty
Pacific Imaging located in Encino, California for $2.8 million in cash. The
center operates a successful MRI practice utilizing a 3T MRI unit, the strongest
magnet strength commercially available at this time. The center was founded in
2003. The acquisition allows us to consolidate a portion of our Encino/Tarzana
MRI volume onto the existing Liberty Pacific scanner. This consolidation allows
us to move our existing line3T MRI unit in that market to our Squadron facility in
Rockland County, New York. Approximately $1.1 million of credit.goodwill was recorded
with respect to this transaction. Also, $200,000 was recorded for the fair value
of a covenant not to compete contract.
In September 2007, we acquired the assets and business of three
facilities comprising Valley Imaging Center, Inc. located in Victorville, CA for
$3.3 million in cash plus the assumption of approximately $866,000 of debt. The
acquired centers offer a combination of MRI, CT, X-ray, Mammography, Fluoroscopy
and Ultrasound. The physician who provided the interpretive radiology services
to these three locations joined BRMG. The leased facilities associated with
these centers includes a total monthly rental of approximately $18,000.
35
Approximately $3.0 million of goodwill was recorded with respect to this
transaction. Also, $150,000 was recorded for the fair value of a covenant not to
compete contract.
In September 2007, we acquired the assets and business of Walnut Creek
Open MRI located in Walnut Creek, CA for $225,000. The center provides MRI
services. The leased facility associated with this center includes a monthly
rental of approximately $6,800 per month. Approximately $50,000 of goodwill was
recorded with respect to this transaction.
In July 2007, we acquired the assets and business of Borg Imaging Group
located in Rochester, NY for $11.6 million in cash plus the assumption of
approximately $2.4 million of debt. Borg was the owner and operator of six
imaging centers, five of which are multimodality, offering a combination of MRI,
CT, ultrasoundX-ray, Mammography, Fluoroscopy and x-rayUltrasound. After combining the Borg
centers with RadNet's existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester. The leased facilities associated with
these centers includes a total monthly rental of approximately $71,000 per
month. Approximately $8.9 million of goodwill was recorded with respect to this
transaction. Also, $1.4 million was recorded for the fair value of covenant not
to compete contracts.
In March 2007, we acquired the assets and business of Rockville Open
MRI, located in Rockville, Maryland, for $540,000 in cash and the assumption of
a capital lease of $1.1 million. The center provides MRI services. The center is
14,4703,500 square feet with a monthly rental of approximately $20,000$8,400 per month through December
31, 2013. Nomonth.
Approximately $365,000 of goodwill was recorded with respect to this
transaction.
DIVESTITURES
In December 2007, we sold 24% of a 73% investment in the transaction.
In September 2006, we acquired the assets and businessone of Irvine Imaging
Services for $500,000 in assumed liabilities. The center provides MRI, CT,
ultrasound and x-ray services. The monthly rental is approximately $14,560 per
month. No goodwill was recorded in the transaction.
41
In September 2006, we acquired the net assets and business of San
Francisco Advanced Imaging Center, in San Francisco, California, for $1,650,000
paid from working capital. The center provides MRI, CT and x-ray services. The
center is 7,115 square feet with a monthly rental of approximately $29,000 with
an initial lease term through April 2017. No goodwill was recorded in the
transaction.
On August 25, 2006, we acquired the assets and business of Corona Imaging
Center, in Corona, California, for $1,500,000 financed through a third party
lender over five years at 8.5%. In addition, we financed certain medical
equipmentour
consolidated joint ventures for approximately $243,000$2.3 million reducing our
ownership to 49%. As a result of this transaction, we no longer consolidate this
joint venture. Accordingly, our consolidated balance sheet at December 31, 2007
includes this 49% interest as parta component of the transaction. The center
provides MRI, CT, ultrasound, and x-ray services. The centerour total investment in
non-consolidated joint ventures where it is 2,133 square
feet with a monthly rental of approximately $3,839 per month with an initial
lease term through November 2011. No goodwill was recorded in the transaction.
On May 15, 2006, we opened an additional multi-modality site in
Emeryville, California that provides MRI, CT and x-ray services. Ultrasound
services will be added in the near future. We entered into a new building leaseaccounted for 6,500 square feet with a beginning monthly rental of $9,754 and invested
approximately $1.7 million in leasehold improvements for the new center. The
improvements were paid for from working capital.
Effective February 1, 2006, upon the inception of a new capitation
arrangement, we opened two additional satellite offices in Yucaipa and Moreno
Valley, California that provide x-ray services for our Riverside location. In
addition, in February 2006, we opened one additional satellite office providing
x-ray services in Temecula, California.
Effective February 1, 2006, we invested $237,000 for a 47.5% membership
interest in an entity that operates a PET center in Palm Springs, California. We
account for this investment under the equity
methodmethod. The amounts eliminated from our consolidated balance sheet as a result
of accounting. Income in
earningsthe deconsolidation were not material. Since the deconsolidation occurred at
the end of this equity method investment was approximately $83,000. The center
will provide PET services for2007, no significant amounts were eliminated from our existing facilities in the area replacingstatement of
operations.
In October 2007 we divested a prior arrangement where PET services were provided by a mobile unit for a "per
use" fee. We have an option to purchase the other 52.5% interest subsequent to
November 1, 2006 and prior to February 29, 2008 for $512,500.
Effective February 1, 2006, we entered into a facility use agreement for
an open MRInon-core center in Vallejo, California. The agreement providesGolden, Colorado for
the use of
the equipment and facility$325,000.
In June 2007 we divested a non-core center in Duluth, Minnesota to a
local multi-center operator for a monthly fee.
In December 2005, we entered into a new building lease in Encino,
California for approximately 10,425 square feet to begin the development of a
new center, San Fernando Interventional Radiology and Imaging Center, which is
expected to open by March 2007. The center will offer MRI, CT, ultrasound and
x-ray services as well as biopsy, angiography, shunt, and pain management
procedures. The monthly rent is approximately $19,600 and the first month's rent
was due in August 2006.
In March 2005, we opened a new center with approximately 3,533 square feet
of space in Westlake, California, near Thousand Oaks that offers MRI,
mammography, ultrasound and x-ray services. During fiscal 2005, we used existing
lines of credit for the payment of approximately $873,000 in leasehold
improvements for the new facility.
Effective July 31, 2004, we purchased the 25% minority interest in Rancho
Bernardo Advanced Imaging from two physicians for $200,000 that consisted of an
$80,000 down payment and monthly payments of $10,000 due from September 2004 to
August 2005. All payments were made during fiscal 2005. There was no goodwill
recorded in the transaction.
In January 2004, we entered into a new building lease for approximately
3,963 square feet of space in Murrieta, California, near Temecula. The center
opened in December 2004 and offers MRI, CT, PET, nuclear medicine and x-ray
services. The equipment was financed by GE. During fiscal 2004, we had used
existing lines of credit for the payment of approximately $840,000 in leasehold
improvements for Murrieta.
In addition, during fiscal 2004, we opened an additional three satellite
facilities servicing our Northridge, Rancho Cucamonga and Thousand Oaks centers.
At various times, we may open small x-ray facilities acquired primarily to
service larger capitation arrangements over a specific geographic region.
FACILITY CLOSURES
Upon the acquisition of Fresno Imaging Center in September 2006, we closed
our existing Woodward Park facility and incurred a loss on the disposal of
leasehold improvements in that center of approximately $55,000. All of the
business of the old Fresno site transferred to the new location.
Upon the acquisition of Irvine Imaging Services in September 2006, we
closed our existing Tustin Imaging facility. There was no loss on the disposal
of leasehold improvements in that center. All of the business of the old Tustin
site transferred to the new Irvine location.
42
After the opening of a new site in Emeryville, California, we closed our
existing Emeryville MRI only facility and incurred a loss on the disposal of
leasehold improvements in that center of approximately $143,000. All of the
business of the old Emeryville site transferred to the new location.
In early fiscal 2004, we first downsized and later closed our San Diego
facility. The center's location was no longer productive and business could be
sent to our new facility in Rancho Bernardo. The equipment was moved to other
locations and our leasehold improvements were written off. During the year ended
October 31, 2004, the center generated net revenue of $49,000 and incurred a net
loss of $122,000.
In addition, during fiscal 2004, we closed two satellite facilities
servicing our Antelope Valley and Lancaster regions.
At various times, we may close small x-ray facilities acquired primarily
to service larger capitation arrangements over a specific geographic region.
Over time, patient volume from these contracts may vary, or we may end the
arrangement, resulting in the subsequent closures of these smaller satellite
facilities.
DEBT RESTRUCTURING
During fiscal 2005 and 2006, we continued our focused efforts to improve
our financial position and liquidity by restructuring and reducing our
indebtedness on favorable terms. For a discussion of these efforts, see
"Financial Condition - Liquidity and Capital Resources."
YEAR ENDED OCTOBER 31, 2006 COMPARED TO THE YEAR ENDED OCTOBER 31, 2005$1.3 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
that certain items in the statement of operations bears to net revenue.
36
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
----------------------------------------
2004 2005
(AS RESTATED) (AS RESTATED)--------------- ------------- -----------
2008 2007 2006 ------------- ------------- --------
Net revenue2006
----- ----- ----- -----
NET REVENUE 100.0% 100.0% 100.0% Operating expenses:100.0%
OPERATING EXPENSES
Operating expenses 77.1 74.9 74.776.5% 77.7% 80.2% 74.7%
Depreciation and amortization 13.1 12.0 10.210.7% 10.6% 10.3% 10.2%
Provision for bad debts 2.8 3.4 4.76.1% 6.5% 6.8% 4.7%
Loss (gain) on disposalsale of equipment net -- 0.5 0.2
------------- ------------- --------0.1% 0.0% -0.1% 0.2%
Severance costs 0.1% 0.2% 0.4% 0.0%
Total operating expense 93.0 90.8 89.8
Income from operations 7.0 9.2 10.2
Other expense (income):expenses 93.5% 95.0% 97.6% 89.9%
INCOME FROM OPERATIONS 6.5% 5.0% 2.4% 10.1%
OTHER EXPENSES (INCOME)
Interest expense 12.6 12.0 12.710.3% 10.4% 9.8% 12.6%
Gain from sale of joint venture interest 0.0% -0.4% 0.0% 0.0%
Loss (gain) on debt extinguishments,extinguishment, net -- (0.3) 1.30.0% 0.0% 12.6% 1.3%
Other income (0.1) (0.3) --
Other(income) expense 1.2 0.2 0.5
------------- ------------- --------0.0% 0.0% -0.1% 0.5%
Total other expense 13.7 11.6 14.5
Loss before equity in income of investee,10.3% 10.0% 22.3% 14.4%
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
MINORITY INVESTMENTS -3.8% -5.0% -19.9% -4.3%
Provision for income taxes and minority interest (6.7) (2.4) (4.3)
Equity in income of investee -- -- --
------------- ------------- --------
Loss before income taxes and minority interest (6.7) (2.4) (4.3)
Income tax expense (3.8) -- --
------------- ------------- --------
Loss before minority interest (10.5) (2.4) (4.3)0.0% -0.1% 0.0% 0.0%
Minority interest in (income) loss of subsidiaries 0.0% -0.1% -0.1% 0.0%
Equity in earnings of subsidiaries 0.2 -- --
------------- ------------- --------
Net loss (10.7) (2.4) (4.3)
============= ============= ========joint ventures 1.3% 1.0% 0.9% 0.1%
------ ------ ------ ------
NET LOSS -2.6% -4.3% -19.1% -4.3%
===== ====== ====== =====
During fiscal 2006, we continued our efforts to enhance our operations and
expand our network, while improving our financial position. Our results for
fiscal 2006 were aided by the opening and integration of new facilities,
increases in PET volume, and improvements in reimbursement from managed care
capitated contracts and other payors.
43
During fiscal 2006, we made more progress in solidifying our financial
condition. Effective March 9, 2006, we completed the issuance of a $161 million
senior secured credit facility which we used to refinance substantially all of
our existing indebtedness (except for $16.1 million of outstanding subordinated
debentures and approximately $5 million of capital lease obligations). We
incurred fees and expenses for the transaction of approximately $5.6 million.
Debt issue costs were being amortized on a straight-line basis over 65 months
and were classified as debt issue costs. In addition, we recorded a net loss on
extinguishments of debt of $2.1 million, which included $1.2 million in
pre-payment penalty fees that are unpaid as of OctoberYEAR ENDED DECEMBER 31, 2006 and classified
as accrued expenses under current liabilities. See "Financial Condition -
Liquidity and Capital Resources."
At October2008 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005 and October 31, 2006, we performed an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are not effective
in alerting them prior to the end of a reporting period to all material
information required to be included in our periodic filings with the SEC because
we identified the following material weakness in the design of internal control
over financial reporting: We concluded that we had insufficient personnel
resources and technical accounting expertise within the accounting function to
resolve the following non-routine accounting matters, the recording of
non-typical cost-based investments and unusual debt-related transactions and the
appropriate analysis of the amortization lives of leasehold improvements in
accordance with generally accepted accounting principles. The incorrect
accounting for the foregoing was sufficient to lead management to conclude that
a material weakness in the design of internal control over the accounting for
non-routine transactions existed at October 31, 2005 and October 31, 2006.
Subsequent to October 31, 2005, we determined to change the design of our
internal controls over non-routine accounting matters by the identification of
an outside resource at a recognized professional services company that we can
consult with on non-routine transactions or the employment of qualified
accounting personnel to deal with this issue together with the utilization of
other senior corporate accounting staff, who are responsible for reviewing all
non-routine matters and preparing formal reports on their conclusions, and
conducting quarterly reviews and discussions of all non-routine accounting
matters with our independent public accountants. On August 1, 2006, we entered
into an agreement with MorganFranklin Corporation, a professional service
company we believe capable of providing the necessary consulting services which
we believe address the identified weakness. We engaged MorganFranklin, a
consulting firm with the requisite accounting expertise, to assist us, from time
to time, in the evaluation and application of the appropriate accounting
treatment, to provide support in the form of technical analysis related to
accounting and financial reporting matters that may arise, and to provide
management advice with respect to their preliminary conclusions regarding issues
we wish to bring to their attention. To the extent our Chief Financial Officer
identifies any non-routine accounting matters which require resolution, he will
contact MorganFranklin and work closely with them, our audit committee and our
auditors to resolve any issues. We are continuing to evaluate additional
controls and procedures that we can implement and may add additional accounting
personnel during early fiscal 2007 to enhance our technical accounting
resources. We do not anticipate that the cost of this remediation effort will be
material to our financial statements. We believe that the engagement of
MorganFranklin and use of their services should adequately address the
identified weakness. With the acquisition of Radiologix, we have added
additional technical accounting staff from their organization which we believe
will further reduce any material weakness.
The above identified material weakness in internal control was determined
by management during our year-end audit to be a material change in our internal
control over financial reporting during the quarter ended October 31, 2005.
In connection with the preparation of this Annual Report on Form 10-K, our
management on February 2, 2007, in consultation with our independent registered
public accounting firm, Moss Adams LLP, determined we would restate certain of
our previously issued financial statements. The adjustments result from
management's historical treatment of depreciation expense related to the
depreciation of leasehold improvements of our facilities. Although the
adjustments to certain prior period financial statements are all non-cash, and
do not affect our historical reported revenues, cash flows or cash position for
any of the affected fiscal or quarterly periods, the adjustments resulted in:
o a one-time adjustment to decrease retained earnings as of October
31, 2003 by $2,859,595;
o an adjustment to increase fiscal 2004 depreciation expense and
decrease retained earnings by $154,707;
o an adjustment to increase fiscal 2005 depreciation expense and
decrease retained earnings by $434,442; and
o an adjustment to increase depreciation expense and decrease retained
earnings by $33,215 for our first quarter ended January 31, 2006.
44
The consolidated financial statements have been adjusted for the fiscal
years ended October 31, 2005 and 2004, and are adjusted for the quarterly
unaudited financial statements for these years and for the first quarter ended
January 31, 2006.
As a result, the consolidated financial statements, as previously filed,
contain errors related to the recording of the depreciation expense of leasehold
improvements and should, therefore, not be relied upon. The related auditor
reports of Moss Adams LLP with respect to these consolidated financial
statements should also no longer be relied upon.
We have remediated the matter and included the restated financial
statements for the 2005 and 2004 fiscal years in this report. Our Audit
Committee and management have discussed the matters associated with the
restatements with Moss Adams LLP.
NET REVENUE
Net revenue from continuing operations for fiscal 2006the year ended December 31, 2008 was $161.0$502.1 million
compared to $145.6$425.5 million for fiscal 2005,the year ended December 31, 2007, an increase of
approximately $15.4$76.6 million, or 10.6%18.0%.
The largestNet revenue, including only those centers which were in operation
throughout the full fiscal years of both 2008 and 2007, increased $28.6 million,
or 7.1%. This 7.1% increase is mainly due to an increase in procedure volumes.
This comparison excludes revenue contributions from centers that were acquired
or divested subsequent to January 1, 2007. For the year ended December 31, 2008,
net revenue increasesfrom centers that were atacquired subsequent to January 1, 2007 and
excluded from the following
facilities:
Fiscal 06
Increase %
---------- -----
Temecula (5 sites) $3,433,000 45.2%
Tarzana (2 sites) $2,301,000 25.2%
Palm Springs (6 sites) $1,557,000 17.1%
Palm Springs'above comparison was $70.0 million. For the year ended
December 31, 2007, net revenue increase was primarily duefrom centers that were acquired subsequent to
increased patient
volume, improved contractingJanuary 1, 2007 and increases in reimbursement from its managed
care capitated payors. Temecula's net revenue increase was primarily due to the
return of a managed care capitated contract and the opening and ramp-up in
business of an additional facility in Murrieta providing MRI, CT, PET, nuclear
medicine and x-ray services in December 2004. Tarzana's net revenue increase was
primarily due to increased PET volume with the hiring of a new physician and the
upgrade of one of its MRI machines that increased throughput and patient volume.
In addition, we acquired five new facilities that generated net revenues
of $1.9 million for the fiscal year ended October 31, 2006 with the majority of
new sites added in the fourth quarter.
Managed care capitated payor revenue increased from 26% of net revenue, or
approximately $38 million, to 27% of net revenue, or approximately $43 million,
for the years ended October 31, 2005 and 2006, respectively. We have been
successful in retaining existing contracts while obtaining increases in
reimbursementexcluded from the payors coupled with receiving increases in co-paymentsabove comparison was $10.6 million. Also
excluded was $11.4 million from the individual patients upon service. We anticipate maintaining a similar
mix of managed care capitated payor business in fiscalcenters that were divested subsequent to January
1, 2007.
OPERATING EXPENSES
Operating expenses from continuing operations for fiscal 2006the year ended December 31, 2008 increased
approximately $12.5$53.7 million, or 9.5%16.3%, from $132.2$330.6 million in fiscal 2005for the year ended
December 31, 2007 to $144.7$384.3 million in fiscal 2006.for the year ended December 31, 2008. The
following table sets forth our operating expenses for fiscal 2005the years ended December
31, 2008 and 2006 (dollars in2007 (in thousands):
Year Ended October37
YEARS ENDED
DECEMBER 31,
------------------------
2005
(as restated) 2006
----------------------------------
2008 2007
-------- --------
Salaries and professional reading fees,
$ 66,674 $ 75,522excluding stock compensation $210,450 $178,573
Stock compensation 2,902 3,313
Building and equipment rental 7,919 8,81143,478 41,299
General administrative expenses 34,419 36,009
-------------127,467 107,245
NASDAQ one-time listing fee -- 120
-------- --------
Operating expenses 384,297 330,550
Depreciation and amortization 53,548 45,281
Provision for bad debts 30,832 27,467
Loss on sale of equipment, net 516 72
Severance costs 335 934
-------- --------
Total operating expenses 109,012 120,342
Depreciation and amortization 17,536 16,394
Provision for bad debt 4,929 7,626
Loss on disposal of equipment, net 696 373$469,528 $404,304
======== ========
o SALARIES AND PROFESSIONAL READING FEES, EXCLUDING STOCK COMPENSATION
AND SEVERANCE
Salaries and professional reading fees increased $8.8$31.9 million, or
13.3%17.9%, to $210.5 million for the year ended December 31, 2008 compared
to $178.6 million for the year ended December 31, 2007.
Salaries and professional reading fees, including only those centers
which were in operation throughout the full fiscal years of both 2008
and 2007 increased $12.7 million, or 7.1%. This 7.1% increase is
primarily due to increased salaries and staffing to support the revenue
growth of these existing imaging centers. This comparison excludes
contributions from fiscal 2005centers that were acquired or divested subsequent to
2006. The majorityJanuary 1, 2007. For the year ended December 31, 2008, salaries and
professional reading fees from centers that were acquired subsequent to
January 1, 2007 and excluded from the above comparison was $25.6
million. For the year ended December 31, 2007, salaries and
professional reading fees from centers that were acquired subsequent to
January 1, 2007 and excluded from the above comparison was $3.2
million. Also excluded was $3.2 million from centers that were divested
subsequent to January 1, 2007.
o SHARE-BASED COMPENSATION
Share-based compensation decreased $411,000, or 12.4%, to $2.9 million
for the year ended December 31, 2008 compared to $3.3 million for the
year ended December 31, 2007. Share-based compensation for the year
ended December 31, 2007 included $1.7 million of additional stock based
compensation expense as a result of the increase is due
to the increase in net revenue from $145.6 million to $161.0
million, or 10.6%, in fiscal 2005 and 2006, respectively. In
addition to the hiringacceleration of additional employees to staff new centers,
professional fees increased atvesting of
certain sites due to contracts where
compensation to the professionals is based upon a percentage of net
revenue.
45
warrants.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $0.9$2.2 million, or 5.3%,
to $43.5 million for the year ended December 31, 2008 compared to $41.3
million for the year ended December 31, 2007.
Building and equipment rental expenses, including only those centers
which were in operation throughout the full fiscal years of both 2008
and 2007 decreased $1.7 million, or 4.2%. This 4.2% decrease is
primarily due to the conversion of certain equipment leases contracts
from operating to capital leases. This comparison excludes
contributions from centers that were acquired or divested subsequent to
January 1, 2007. For the year 2006ended December 31, 2008, building and
equipment rental expenses from centers that were acquired subsequent to
January 1, 2007 and excluded from the above comparison was $6.4
million. For the year ended December 31, 2007, building and equipment
rental expenses from centers that were acquired subsequent to January
1, 2007 and excluded from the above comparison was $1.2 million. Also
excluded was $1.3 million from centers that were divested subsequent to
January 1, 2007.
o GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance, business
tax and license, outside services, utilities, marketing, travel and
other expenses. Many of these expenses are variable in nature including
medical supplies and billing fees, which increase with volume and
repairs and maintenance under our GE service agreement as a percentage
of net revenue. Overall, general and administrative expenses increased
38
$20.2 million, or 18.8%, for the year ended December 31, 2008 compared
to the previous period. The increase is consistent with our increase in
procedure volumes at both existing centers as well as newly acquired
centers.
o DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $8.3 million, or 18.3%,
to $53.6 million for the year ended December 31, 2008 when compared to
the same period last year. The increase is primarily due to costproperty
and equipment additions for existing centers and newly acquired
centers.
o PROVISION FOR BAD DEBTS
Provision for bad debts increased $3.3 million, or 12.3%, to $30.8
million, or 6.1% of living rental increases withinnet revenue, for the year ended December 31, 2008
compared to $27.5 million, or 6.4% of net revenue, for the year ended
December 31, 2007. The decrease in our provision for bad debts as a
percentage of revenue is primarily due to an increase in collection
performance and the completion of our billing system implementation
which began in the first quarter of 2007.
o LOSS ON SALE OF EQUIPMENT
Loss on sale of equipment was $516,000 and $72,000 for the years ended
December 31, 2008 and 2007, respectively.
o SEVERANCE COSTS
During the year ended December 31, 2008, we recorded severance costs of
$335,000 compared to $934,000 recorded during the year ended December
31, 2007. In each period, these costs were primarily associated with
the integration of Radiologix and other acquired operations.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2008 increased
approximately $7.5 million, or 16.9%, from the same period in 2007. The increase
is primarily due to the $60 million increase in Term Loans B & C and increased
borrowing on our line of credit. Also included in interest expense for the year
ended December 31, 2008 and 2007 is amortization of deferred loan costs of $2.6
million and $1.6 million, respectively, as well as realized gains of $707,000
and realized losses of $820,000 on our fair value hedges for the years ended
December 31, 2008 and 2007, respectively.
INCOME TAX EXPENSE
For the years ended December 31, 2008 and 2007, we recorded $151,000
and $337,000, respectively, for income tax expense related to taxable income
generated in the state of Maryland.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the year ended December 31, 2008, we recognized equity in earnings
from unconsolidated joint ventures of $6.5 million compared to $4.1 million for
the year ended December 31, 2007. This increase is due to our purchase of
additional equity interests in certain existing building lease agreements,joint ventures as well as the
deconsolidation in the fourth quarter of 2007of a previously consolidated joint
venture.
YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
(UNAUDITED)
During the year ended December 31, 2006, we completed our acquisition of
Radiologix. The results of Radiologix and its wholly owned subsidiaries have
been included in our consolidated financial statements from the date of
acquisition, November 15, 2006.
NET REVENUE
Net revenue from continuing operations for the year ended December 31, 2007
was $425.5 million compared to $192.9 million for the year ended December 31,
2006, an increase of $232.6 million, or 120.6 %. Net revenue from the
acquisition of Radiologix, effective November 15, 2006, was $264.3 million and
$30.5 million for the years ended December 31, 2007 and 2006, respectively. Net
revenue excluding Radiologix increased $7.3 million for the year ended December
31, 2007 when compared to the year ended December 31, 2006. This increase is
mainly due to an increase in procedure volumes from existing centers as well as
from the addition of new centers and is net of the effects of reimbursement
reductions experienced as a result of the government's reduction of certain
Medicare payments (DRA), which became effective in January 2007.
During 2007, we re-evaluated the net realizable value of our December 31,
2006 receivable balances and concluded that current revised estimates are less
than the prior year recorded amounts. As a result, we have recorded adjustments
39
in 2007 to appropriately reflect current estimates of the net realizable value
of our December 31, 2006 receivables which decreased 2007 net revenue by $8.5
million.
OPERATING EXPENSES
Operating expenses from continuing operations for the year ended
December 31, 2007 increased approximately $227.3 million, or 127.1%, to $404.3
million for the year ended December 31, 2007 compared to $177.0 million for the
year ended December 31, 2006. The following table sets forth our operating
expenses for the years ended December 31, 2007 and 2006 (dollars in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
2007 2006
-------- --------
(UNAUDITED)
Salaries and professional reading fees,
excluding stock compensation $178,573 $ 88,514
Stock compensation 3,313 510
Building and equipment rental 41,299 13,536
General administrative expenses 107,245 44,666
NASDAQ one-time listing fee 120 --
-------- --------
Operating expenses 330,550 147,226
Depreciation and amortization 45,281 19,542
Provision for bad debts 27,467 10,707
Loss on sale of equipment, net 72 335
Severance costs 934 205
-------- --------
Total operating expenses $404,304 $178,015
======== ========
o SALARIES AND PROFESSIONAL READING FEES (EXCLUDING STOCK COMPENSATION
AND SEVERANCE)
Salaries and professional reading fees increased $90.1 million, or
101.7%, to $178.6 million for the year ended December 31, 2007 compared
to $88.5 million for the year ended December 31, 2006. Salaries and
professional reading fees from Radiologix were $90.2 million and $11.2
million for the years ended December 31, 2007 and 2006, respectively.
Salaries excluding Radiologix increased $11.1 million for the year
ended December 31, 2007 when compared to the same period last year.
This increase includes a $600,000 accrual for a cash bonus tied to the
vesting of certain warrants. The remaining increase of $10.5 million is
consistent with DRA effected increases in net revenue and increases in
our procedure volumes.
o STOCK BASED COMPENSATION
Stock compensation increased $2.8 million to $3.3 million for the year
ended December 31, 2007 compared to $510,000 for the year ended
December 31, 2006. This increase is primarily due to additional options
and warrants granted during 2007 and $1.7 million of additional stock
based compensation expense recorded during 2007 as a result of the
vesting of certain warrants to our senior executives.
Messrs. Linden, Hames and Stolper who hold the positions of Executive
Vice President and General Counsel, Executive Vice President and Chief
Operating Officer, Western Operations and Executive Vice President and
Chief Financial Officer, respectively, were issued certain warrants in
prior periods which fully vest upon the sooner of their respective
multi-year vesting schedules or at such time as the 30 day average
closing stock price of our shares in the public market in which it
trades equals or exceeds $6.00. For the 30 day trading period ended
March 7, 2007, the average closing price exceeded $6.00 per share.
Accordingly, these warrants fully vested resulting in the expensing of
the remaining unamortized fair value of these warrants of $1.7 million.
o SEVERANCE
During the year ended December 31, 2007, we recorded severance costs of
$934,000 associated with the integration of Radiologix.
40
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $28.0 million, or
206.4%, to $41.5 million for the year ended December 31, 2007 compared
to $13.5 million for the year ended December 31, 2006. Building and
equipment rental expense from Radiologix was $29.8 million and $4.0
million for the years ended December 31, 2007 and 2006, respectively.
Building and equipment rental expenses excluding Radiologix increased
$2.0 million for the year ended December 31, 2007 when compared to the
same period in the previous year. The increase was due to normal
consumer price index escalations built into existing operating leases
as well as additional facility rent from new centers including
approximately $288,000 from centers acquired during 2007 (see Note 3 to
our consolidated financial statements). Also included in this increase
is $381,000 resulting from straight-lining the fixed rent escalators
existing in some of our lease contracts.
o GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance, business
tax and license, outside services, utilities, marketing, travel and
other expenses. Many of these expenses are variable in nature,
including medical supplies and billing fees, which increase with volume
and repairs, and maintenance under our GE service agreement, which
adjust with changes in net revenue. Overall, general and administrative
expenses increased $62.4 million, or 139.7%, to $107.1 million for the
year ended December 31, 2007 compared to $44.7 million for the year
ended December 31, 2006. General and administrative expenses for
Radiologix were $61.2 million and $7.4 million for the years ended
December 31, 2007 and 2006, respectively. General and administrative
expenses excluding Radiologix increased $8.8 million for the year ended
December 31, 2007 when compared to the same period last year. The
increase is in line with our increase in procedure volumes at both
existing centers as well as new centers. Also in this increase are
increased expenditures for accounting fees associated with our efforts
towards compliance with the Sarbanes-Oxley Act of 2002, as well as a
$172,000 increase to accrued medical insurance and a $120,000 increase
to accrued legal settlements.
o NASDAQ ONE-TIME LISTING FEE
During the year ended December 31, 2007, we recorded $120,000 for fees
associated with listing our common stock with NASDAQ.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $25.8 million, or 131.7%, to
$45.3 million for the year ended December 31, 2007 compared to $19.5
million for the year ended December 31, 2006. Depreciation and
amortization expense for Radiologix was $24.8 million and $3.0 million
for the years ended December 31, 2007 and 2006, respectively.
Depreciation and amortization expense excluding Radiologix increased
$3.9 million for the year ended December 31, 2007 when compared to the
same period last year primarily due to property and equipment
additions, as well as the acceleration of the amortization of leasehold
improvements related to our vacated San Francisco, Rancho Bernardo and
San Gabriel facilities of approximately $716,000, as well as $743,000
related to adjustments to our in-service dates in our fixed asset
system.
o PROVISION FOR BAD DEBTS
Provision for bad debts increased $16.8 million, or 156.5%, to $27.5
million, or 6.3% of net revenue, for the year ended December 31, 2007
compared to $10.7 million, or 5.6% of net revenue, for the year ended
December 31, 2006. Provision for bad debts for Radiologix was $21.2
million and $2.7 million, and was 8.0% and 8.8 % of net revenue, for
the years ended December 31, 2007 and 2006, respectively. Historically,
Radiologix has experienced higher bad debts/expense as compared to our
business pre-acquisition due to the higher concentration of business
associated with hospital payers in the markets that Radiologix serves
and the poor collection percentages that are inherent with hospital
business. Provision for bad debts excluding Radiologix was $6.3 million
and $8.0 million for the years ended December 31, 2007 and 2006,
respectively.
INTEREST EXPENSE
Interest expense for the year ended December 31, 2007 increased
approximately $21.3 million, or 92.5%, to $44.3 million compared to $23.0
million for the year ended December 31, 2006. The increase was primarily due to
the increased indebtedness of $214 million incurred upon the acquisition of
Radiologix as well as an addition to our first lien Term Loan B of $25 million
in August 2007. Also included is the amortization of our deferred finance costs
41
associated with this new financing which was approximately $1.6 million for the
year ended December 31, 2007 as well as realized losses on our fair value hedges
of $820,000 for the year ended December 31, 2007.
GAIN ON SALE OF JOINT VENTURE INTERESTS
During the year ended December 31, 2007, we recorded a gain of $1.9
million from the sale of part of our interest in a joint venture acquired from
our acquisition of Radiologix (see Acquisitions and Divestitures above).
INCOME TAX EXPENSE
For the year ended December 31, 2007, we recognized $337,000 in income
tax expense related to certain state tax obligations of Radiologix.
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
For the year ended December 31, 2007, we recognized $600,000 in
minority interest in income of our consolidated joint ventures.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the year ended December 31, 2007, we recognized equity in earnings
from unconsolidated joint ventures of $4.1 million.
TWO MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THE TWO MONTHS ENDED DECEMBER 31,
2005 (UNAUDITED)
During the two months ended December 31, 2006, we completed our
acquisition of Radiologix. The results of Radiologix and its wholly owned
subsidiaries have been included in our consolidated financial statements from
the date of acquisition, November 15, 2006, which is the primary reason for the
increase noted below.
NET REVENUE
Net revenue from continuing operations for the two months ended
December 31, 2006 was $57.4 million compared to $25.5 million for the two months
ended December 31, 2005, an increase of $31.9 million, or 125.1%. Net revenue
from the acquisition of Radiologix, effective November 15, 2006, was $30.5
million, and net revenue from five new centers added during calendar 2006 (net
of two closed centers) was $1.4 million. On the other hand, our same store net
revenue decreased $405,000 when compared to the same period in 2005. The
decrease was primarily the result of our Beverly Hills locations in which net
revenue decreased $514,000 when compared to the same period in 2005 due to
increased competition in the area.
OPERATING EXPENSES
Operating expenses from continuing operations for the two months ended
December 31, 2006 increased approximately $33.4 million, or 146.4%, from $22.6
million for the two months ended December 31, 2005 to $56.0 million for the two
months ended December 31, 2006. The following table sets forth our operating
expenses for the two months ended December 31, 2005 and 2006 (dollars in
thousands):
TWO MONTHS ENDED
DECEMBER 31,
-------------------------
2006 2005
-------- --------
(unaudited)
Salaries and professional reading fees $ 25,382 $ 11,880
Building and equipment rental 6,112 1,388
General administrative expenses 14,539 5,881
-------- --------
Operating expenses 46,033 19,149
Depreciation and amortization 5,907 2,759
Provision for bad debts 3,907 826
Gain on sale of equipment, net (38) --
Severance costs 205 --
-------- --------
Total operating expenses $ 56,014 $ 22,734
======== ========
42
o SALARIES AND PROFESSIONAL READING FEES
Salaries and professional reading fees increased $13.5 million, or
340.3%, from the two months ended December 31, 2005 to the two months
ended December 31, 2006. During the two months ended December 31, 2006,
salaries and professional reading fees were $11.2 million and $0.6
million for Radiologix and the five new centers opened during calendar
2006 (net of two closed centers), respectively. In addition, salaries
for the San Fernando Valley Interventional Radiology and Imaging
Center, or SFVIR, were $27,000 for the two months ended December 31,
2006. The costs were for the preliminary set up of the facility that
opened on March 12, 2007. Same store salaries and professional reading
fees increased $0.9 million and $0.8 million, respectively, for the two
months ended December 31, 2006 when compared to the same period last
year. The majority of the increases were at the sites of Palm Springs
and Palm Desert, Modesto, Orange Imaging, Tarzana Advanced and Ventura
due to increases in net revenue, and at corporate and the Beverly Hills
facilities due to the hiring or retention of key employees or
physicians.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $4.7 million, or
340.3%, to $6.1 million in the two months ended December 31, 2006
compared to $1.4 million in the two months ended December 31, 2005.
During the two months ended December 31, 2006, building and equipment
rental expense was $4.0 million and temporary$0.2 million for Radiologix and the
five new centers opened during calendar 2006 (net of two closed
centers), respectively. In addition, building rent expense for SFVIR
was $39,000 for the two months ended December 31, 2006. Same store
building and equipment rental expenses increased $114,000 and $347,000,
respectively, for the two months ended December 31, 2006 when compared
to the same period last year. The increase in building rent was due to
normal escalations built into the operating leases, and the increase in
equipment rental was primarily due to the increased costs of renting
mobile MRI and CT equipment while repairs were being done at two of our imaging centers.Orange
facility.
o GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance, business
tax and license, outside services, utilities, marketing, travel and
other expenses. Many of these expenses are variable in nature including
medical supplies and billing fees, which increase with volume and
repairs and maintenance under our GE service agreement at 3.62% of net
revenue.revenue for the two-month period. Overall, general and administrative
expenses increased $1.6$8.7 million, or 4.6%147.2%, in fiscalfor the two months ended
December 31, 2006 compared to the previous period primarily due toperiod. During the increase
in net revenue.
o DEPRECIATION AND AMORTIZATION
Depreciationtwo
months ended December 31, 2006, general and amortization decreased by $1.1administrative expenses
were $7.4 million in fiscal
yearand $450,000 for Radiologix and the five new centers
opened during calendar 2006 (net of two closed centers), respectively.
In addition, general and administrative expenses for SFVIR were $26,000
for the two months ended December 31, 2006. Same store general and
administrative expenses increased $0.8 million for the two months ended
December 31, 2006 when compared to the same period last year. The
decreaseincrease was primarily due to increased expenditures for accounting
fees, costs related to repairs at our Orange facility, and employee and
marketing expenditures at year-end.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $3.1 million, or 114.1%, in
the two months ended December 31, 2006 when compared to the same period
last year. During the two months ended December 31, 2006, depreciation
and amortization expense was primarily related$3.0 million and $0.2 million for
Radiologix and the five new centers opened during calendar 2006 (net of
two closed centers), respectively. In addition, depreciation and
amortization expense for SFVIR was $34,000 for the two months ended
December 31, 2006. Same store depreciation and amortization expense
decreased $7,000 for the two months ended December 31, 2006 when
compared to agingthe same period last year. Depreciation from same store
property and equipment additions during the two months ended December
31, 2006 was offset by historical property and equipment fully
depreciating during the period not
offset by the addition of new property and equipment.same period.
o PROVISION FOR BAD DEBT
The $2.7DEBTS
Provision for bad debts increased $3.1 million, increaseor 373.0%, in the two
months ended December 31, 2006 to $3.9 million compared to $826,000 for
the two months ended December 31, 2005. During the two months ended
December 31, 2006, the provision for bad debtdebts was primarily a result of increased net revenue$2.7 million and
$0.1 million for Radiologix and the increase infive new centers opened during
calendar 2006 (net of two closed centers), respectively. Radiologix's
provision for bad debts as a percentage of net revenue from 3.4% to 4.7% in fiscal
2005 and 2006, respectively. The bad debt percentage increased due
to maturing accounts receivable, the write-off of receivables due to
incomplete demographic information and billing statute issues, and
the faster write-off of slower-paying receivables to collection
agencies to expedite cash receipts.
o LOSS ON DISPOSAL OF EQUIPMENT, NET
During fiscal 2006, losses on disposal or sale of equipment were
$0.4 million and were primarilyis higher due to the write-offlarge number of
leasehold
improvements at our Emeryville and Woodward Park facilities, and the
sale of certain medical equipment at a loss. During fiscal 2005,
losses on disposal of equipment were $0.7 million and were primarily
due to the trade-in and upgrade of an MRI at our Tarzana Advanced
facility that was initiated to improve the existing equipment
increasing throughput and patient volume at the site.
INTEREST EXPENSE
Interesthospital-based receivables they possess. Same store provision for bad
debt expense for fiscal 2006 increased approximately $2.9 million, or
16.4%, from the same period in fiscal 2005. Interest expense is primarily from
our outstanding notes payable and capital lease obligations, subordinated bond
debentures, related party payables and our outstanding line of credit. The
increase was primarily the result of increases in notes payable and capital
lease obligations and our mark to market interest rate adjustment of $0.9
million for fiscal 2006 related to the swap arrangement. As part of the March
2006 refinancing, we were required to swap at least 50% of the aggregate
principal amount of the facilities to a floating rate within 90 days of the
close of the agreement on March 9, 2006. On April 11, 2006, effective April 28,
2006, on $73.0 million (one half of our First and Second Lien Term Loans of
$146.0 million), we entered into an interest rate swap fixing the LIBOR rate of
interest at 5.47% for a period of three years. Previously, the interest rate on
the $73.0 million was based upon a spread over LIBOR which floats with market
conditions. The amount is classified in long-term accrued expenses.
LOSS (GAIN) ON DEBT EXTINGUISHMENTS, NET
For the year ended October 31, 2005, we recognized gains from
extinguishments of debt for $0.5$0.3 million for the write-off of certain notes
payable past the statute of limitations for $475,000 and the settlement of other
notes payable at a discount of $40,000. For the year ended October 31, 2006, due
to the March 2006 debt restructuring, we recognized a net loss on extinguishment
of debt of $2.1 million. The loss is comprised of a gain of $2.1 million for a
discount on notes payable, offset by $2.1 million in pre-payment penalties and
$2.1 million for the write-off of capitalized debt issue costs.
OTHER INCOME
For the year ended October 31, 2005, we earned other income of $0.4
million. During fiscal 2005, we recognized gains from write-off of liabilities
previously expensed in fiscal 2004 for approximately $210,000, deferred rental
income of $90,000, and record copy income of $57,000. We had no other income
during the year ended October 31, 2006.
46
OTHER EXPENSE
In the years ended October 31, 2005 and 2006, we incurred other expense of
$349,000 and $788,000, respectively. During the twelvetwo months ended OctoberDecember
31, 2005, we recognized losses on the write-off of loan fees and other assets of
$349,000. During the twelve months ended October 31, 2006 we recorded expenses
of $788,000 that included the $500,000 settlement payment to Broadstream and
related legal fees.
EQUITY IN INCOME OF INVESTEE
In the year ended October 31, 2006, we earned income for our 47.5%
investment in a PET center of approximately $83,000. The investment of $237,000
was made in February 2006.
INCOME TAX EXPENSE
In fiscal 2005 and 2006, the valuation allowance was fully reserved.
YEAR ENDED OCTOBER 31, 2005 COMPARED TO THE YEAR ENDED OCTOBER 31, 2004
During fiscal 2005, we continued our efforts to enhance our operations and
expand our network, while improving our financial position and significantly
reducing our net loss. Our results for fiscal 2005 were aided by the opening and
integration of new facilities in prior periods, increases in PET volume, and
improvements in reimbursement from managed care capitated contracts and other
payors. As a result of these factors and the other matters discussed below, we
experienced an increase in income from operations of $4.1 million.
During fiscal 2005, we made more progress in solidifying our financial
condition. Effective November 30, 2004, we issued $4.0 million in principal
amount of notes to Post and Post repurchased the DVI affiliate's line of credit
facility with the residual funds utilized by us as working capital. The new note
payable has monthly interest only payments at 12% per annum until its maturity
in July 2008. In addition, Post acquired $15.2 million of our notes payable from
an affiliate of DVI and the indebtedness was restructured by Post and us. The
new note payable has monthly interest only payments at 11% per annum until its
maturity in June 2008. The assignment of the note payable to Post will not
result in any actual total dollar savings to us over the term of the new
obligation, but it will defer cash flow outlays of approximately $1.3 million
per year until maturity. See "Financial Condition - Liquidity and Capital
Resources."
NET REVENUE
Net revenue from continuing operations for fiscal 2005 was $145.6 million
compared to $137.3 million for fiscal 2004, an increase of approximately $8.3
million, or 6.0%. The largest net revenue increases were at the following
facilities:
Fiscal 05
Increase %
---------- -----
Orange (4 sites) $2,383,000 17.6%
Tarzana (2 sites) $1,775,000 24.2%
Palm Springs (5 sites) $1,618,000 21.7%
Temecula (4 sites) $1,366,000 21.9%
Orange's and Palm Springs' net revenue increases were primarily due to
increased patient volume, improved contracting and increases in reimbursement
from its managed care capitated payors. Temecula's net revenue increase was
primarily due to the return of a managed care capitated contract and the opening
of an additional facility in Murrieta providing MRI, CT, PET, nuclear medicine
and x-ray services in December 2004. Tarzana's net revenue increase was
primarily due to increased PET volume with the hiring of a new physician and the
upgrade of one of its MRI machines that increased throughput and patient volume.
Managed care capitated payor revenue increased from 25% of net revenue, or
approximately $34 million, to 26% of net revenue, or approximately $38 million,
for the years ended October 31, 2004 and 2005, respectively. We have been
successful in retaining existing contracts while obtaining increases in
reimbursement from the payors coupled with receiving increases in co-payments
from the individual patients upon service. We anticipate maintaining a similar
mix of managed care capitated payor business in fiscal 2006.
47
OPERATING EXPENSES
Operating expenses from continuing operations for fiscal 2005 increased
approximately $4.5 million, or 3.5%, from $127.7 million in fiscal 2004 to
$132.2 million in fiscal 2005. The following table sets forth our operating
expenses for fiscal 2004 and 2005 (dollars in thousands):
Year Ended October 31,
------------------------
2004 2005
----------- ----------
Salaries and professional reading fees $ 64,932 $ 66,674
Building and equipment rental 7,804 7,919
General administrative expenses 33,092 34,419
----------- ----------
Total operating expenses 105,828 109,012
Depreciation and amortization 17,917 17,536
Provision for bad debt 3,911 4,929
Loss on disposal of equipment, net -- 696
o SALARIES AND PROFESSIONAL READING FEES
Salaries and professional reading fees increased $1.7 million from fiscal
2004 to 2005. The majority of the increase is due to the increase in net
revenue from $137.3 million to $145.6 million in fiscal 2004 and 2005,
respectively. In addition to the hiring of additional employees to staff
two new centers in Murrieta and Westlake, California, professional fees
increased at certain sites due to contracts where compensation to the
professionals is based upon a percentage of net revenue.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $0.1 million in fiscal
year 2005 when compared to the same period last year. The increase iswas
primarily due to costincreased write-offs due to billing issues related to
untimely filing, and incomplete or incorrect demographic information
collected at the sites.
43
o SEVERANCE COSTS
During the two months ended December 31, 2006, we recorded severance
costs for Radiologix of living rental increases within existing building
lease agreements and the addition of new facilities and the$205,000 related rental
expense.
o GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance, business
tax and license, outside services, utilities, marketing, travel and other
expenses. Many of these expenses are variable in nature. These expenses
increased $1.3 million, or 4.0%, in fiscal 2005 compared to the previous
period primarily due to the increase in net revenue. The largest fiscal
2005 increases were expenditures for billing fees and medical supplies
that increased $711,000 and $635,000, respectively, when compared to the
same period last year.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased by $0.4 million in fiscal year
2005 when compared to the same period last year. The primary reason for
the decrease is the reduction in capital expenditures. During fiscal 2004
and 2005, capital expenditures were $13.1 million and $8.8 million,
respectively.
o PROVISION FOR BAD DEBT
The $1.0 million increase in provision for bad debt was primarily a result
of increased net revenue and the increase in bad debts as a percentage of
net revenue from 2.8% to 3.4% in fiscal 2004 and 2005, respectively. The
bad debt percentage increased due to maturing accounts receivable and the
faster write-off of slower-paying receivables to collection agencies to
expedite cash receipts and accounts receivable turnover.
o LOSS ON DISPOSAL OF EQUIPMENT, NET
The $0.7 million increase in losses on disposal of equipment is primarily
due to the trade-in and upgrade of an MRI at our Tarzana Advanced facility
that was initiated to improve the existing equipment increasing throughput
and patient volume at the site.acquisition.
INTEREST EXPENSE
Interest expense for fiscal 2005the two months ended December 31, 2006 increased
approximately $0.2$2.6 million, or 1.2%86.9%, from the same period in fiscal 2004. Interest expense is2005. The increase
was primarily from
our outstanding notes payable and capital lease obligations, subordinated bond
debentures, related party payables and our outstanding linedue to the increased indebtedness of credit.
48
$360.0 million upon the
acquisition of Radiologix.
LOSS (GAIN) ON DEBT EXTINGUISHMENTS, NET
For the yeartwo months ended OctoberDecember 31, 2005,2006, we recognized gainsa loss from
extinguishments of debt for $0.5 million forof $7.2 million. With the write-off of certainacquisition or Radiologix, we
paid off existing notes payable past statute for $475,000 and the settlementsubordinated bond debentures and incurred
pre-payment penalties of other notes payable at a
discount$2.3 million, and wrote-off deferred financing costs
related to prior debt instruments of $40,000.$4.9 million.
OTHER INCOME
For the yeartwo months ended OctoberDecember 31, 2004, there were no gain or
losses from debt extinguishments.
OTHER INCOME
In fiscal 20042006 and 2005, we earned other
income of $0.2 million$51,000 and $0.4
million, respectively, principally comprised of sublease income, medical record
copying income, deferred rent income, and business interruption and insurance
refunds.
OTHER EXPENSE
In fiscal 2004 and 2005, we incurred other expense of $1.7 million and
$0.3 million, respectively, principally comprised of write-offs of miscellaneous
receivables and other assets, losses on disposal of equipment, forgiveness of
notes, losses on the sale or disposal of assets, and costs related to bond
offerings and debt restructures. During fiscal 2004, we incurred approximately
$1.6 million of legal and professional service costs related to our earlier
attempts to solidify financing and the related bond offering that was not
completed.$29,000, respectively.
INCOME TAX EXPENSE
In fiscal 2004,For the two months ended December 31, 2006, we increased the valuation allowance for the net deferredrecognized $20,000 in
income tax asset by $5.2 million dueexpense related to our recurring losses from continuing operations
over the prior three fiscal years. In fiscal 2005, the valuation allowance was
fully reserved.Radiologix.
MINORITY INTEREST IN EARNINGS(INCOME) LOSS OF SUBSIDIARIES
Minority interestFor the two months ended December 31, 2006, we recognized $45,000 in earnings of subsidiaries represents the minority
investors' 25% share of the income from the Burbank Advanced Imaging Center LLC
and 25% share of the Rancho Bernardo Advanced LLC for the period. Both center's
residual interests were purchased by us in September and July 2004,
respectively. We now own 100% of all our locations and our
minority interest liabilities have been eliminated. Minority interest expense was $351,000related to joint ventures of Radiologix.
EARNINGS FROM MINORITY INVESTMENTS
For the two months ended December 31, 2006, we recognized earnings from
minority investments of $503,000 including $476,000 from investments of
Radiologix and $27,000 from an investment in fiscal 2004.
49
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for
each of our last eight fiscal quarters. We believe that all necessary
adjustments have been includeda PET center in the amounts stated below to present fairly the
quarterly results when read in conjunction with the consolidated financial
statements as restated. The selected quarterly financial data in 2005 and the
first quarter of 2006 below have been restated to reflect adjustments that arePalm Desert,
California.
RECENT ACCOUNTING PRONOUNCEMENTS
As discussed further in Note 2, "Restatementwe adopted the provisions of Financial Statements"SFAS 157 as of
January 1, 2008 for financial instruments. We are required to adopt the
provisions of SFAS 157 for non-financial instruments in the Notes2009 and do not expect
this adoption to the consolidated financial statements. Results of operations for any
particular quarter are not necessarily indicative of results of operations forhave a full year or predictive of future periods.
2005 QUARTER ENDED (AS RESTATED) 2006 QUARTER ENDED
-------------------------------------------- ----------------------------------------------
JAN 31
JAN 31 APR 30 JUL 31 (1) OCT 31 (AS RESTATED) APR 30 JUL 31 OCT 31
-------- -------- ----------- -------- ------------- -------- -------- --------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenue $34,110 $35,190 $36,178 $40,095 $38,538 $39,588 $40,336 $42,543
Operating expenses 32,206 32,168 32,088 35,711 34,638 34,820 36,400 38,877
Total other expense 4,211 3,727 4,236 4,796 4,410 7,469 5,392 5,976
Equity in income of investee -- -- -- -- -- -- (61) (22)
Income tax expense -- -- -- -- -- -- -- --
Net income (loss) (2,307) (705) (146) (412) (510) (2,701) (1,395) (2,288)
Basic earnings per share:
Basic net loss per share 1 (.11) (.03) (.01) (.02) (.02) (.13) (.07) (.11)
Diluted earnings per share:
Diluted net loss per share 1 (.11) (.03) (.01) (.02) (.02) (.13) (.07) (.11)
- -------------
1 Effective November 28, 2006, the Company completed a one-for-two reverse stock
split. The historical earnings per share and shares outstanding information
have been updated for the change in the number of shares.
See Note 2: "Restatement of Financial Statements" under Notes to Consolidated
Financial Statements of this Form 10-K for a summary of the effect of these
changesmaterial impact on our consolidated financial
statements as of October 31, 2004 and
2005, respectively.
The following is a summary of the significant effects of these corrections on
our summary of operations by quarter for all four quarters of fiscal 2005 and
the first quarter of fiscal 2006.
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
QUARTER ENDED JANUARY 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Net revenue $ 34,110 $ -- $ 34,110
Operating expenses 32,097 109 32,206
Total other expense 4,211 -- 4,211
Equity in income of investee -- -- --
Income tax expense -- -- --
Net income (loss) (2,198) (109) (2,307)
Basic earnings per share:
Basic net loss per share (1) (0.11) -- (0.11)
Diluted earnings per share:
Diluted net loss per share (1) (0.11) -- (0.11)
(1) Effective November 28, 2006, the Company completed a one-for-two reverse
stock split. The historical earnings per share and shares outstanding
information have been updated for the change in the number of shares.
50
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
QUARTER ENDED APRIL 30, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Net revenue $ 35,190 $ -- $ 35,190
Operating expenses 32,059 109 32,168
Total other expense 3,727 -- 3,727
Equity in income of investee -- -- --
Income tax expense -- -- --
Net income (loss) (596) (109) (705)
Basic earnings per share:
Basic net loss per share (1) (0.03) -- (0.03)
Diluted earnings per share:
Diluted net loss per share (1) (0.03) -- (0.03)
(1) Effective November 28, 2006, the Company completed a one-for-two reverse
stock split. The historical earnings per share and shares outstanding
information have been updated for the change in the number of shares.
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
QUARTER ENDED JULY 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Net revenue $ 36,178 $ -- $ 36,178
Operating expenses 31,979 109 32,088
Total other expense 4,236 -- 4,236
Equity in income of investee -- -- --
Income tax expense -- -- --
Net income (loss) (37) (109) (146)
Basic earnings per share:
Basic net loss per share (1) -- (0.01) (0.01)
Diluted earnings per share:
Diluted net loss per share (1) -- (0.01) (0.01)
(1) Effective November 28, 2006, the Company completed a one-for-two reverse
stock split. The historical earnings per share and shares outstanding
information have been updated for the change in the number of shares.
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
QUARTER ENDED OCTOBER 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Net revenue $ 40,095 $ -- $ 40,095
Operating expenses 35,603 108 35,711
Total other expense 4,796 -- 4,796
Equity in income of investee -- -- --
Income tax expense -- -- --
Net income (loss) (304) (108) (412)
Basic earnings per share:
Basic net loss per share (1) (0.02) -- (0.02)
Diluted earnings per share:
Diluted net loss per share (1) (0.02) -- (0.02)
(1) Effective November 28, 2006, the Company completed a one-for-two reverse
stock split. The historical earnings per share and shares outstanding
information have been updated for the change in the number of shares.
51
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
QUARTER ENDED JANUARY 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Net revenue $ 38,538 $ -- $ 38,538
Operating expenses 34,605 33 34,638
Total other expense 4,410 -- 4,410
Equity in income of investee -- -- --
Income tax expense -- -- --
Net income (loss) (477) (33) (510)
Basic earnings per share:
Basic net loss per share (1) (0.02) -- (0.02)
Diluted earnings per share:
Diluted net loss per share (1) (0.02) -- (0.02)
(1) Effective November 28, 2006, the Company completed a one-for-two reverse
stock split. The historical earnings per share and shares outstanding
information have been updated for the change in the number of shares.
RELATED PARTY TRANSACTIONS
We describe certain transactions between us and certain related parties
under "Certain Relationships and Related Transactions" below.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
"Share-Based Payment" which was amended effective April 2005. The new rule
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements based on the fair value of the equity or
liability instruments issued. We applied Statement 123R on November 1, 2005. We
routinely use share-based payment arrangements as compensation for our
employees. During fiscal 2004 and 2005, had this rule been in effect, we would
have recorded the non-cash expense of $379,000 and $341,000, respectively.
In June 2006, FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return in accordance with SFAS No. 109, "Accounting for
Income Taxes." Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. The accounting provision of FIN 48 will be effective for
the Company beginning January 1, 2007. The Company has not yet completed its
evaluation of the impact of adoption on the Company's financial position or
results of operations.statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements,"FAIR VALUE MEASUREMENTS,
which defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under most other accounting pronouncements
that require or permit fair value measurements, and does not
require any newthe FASB having previously
concluded in those accounting pronouncements that fair value measurements. This Statementis the relevant
measurement attribute. We adopted the provisions of SFAS 157 as of January 1,
2008 for financial instruments. Although the adoption of SFAS 157 for financial
instruments did not materially impact our financial position, results of
operations, or cash flow, we are now required to provide additional disclosures
as part of our financial statements (see Note 2 to our consolidated financial
statements). We are required to adopt the provisions of SFAS 157 for
non-financial instruments in 2009 and do not expect this adoption to have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES, INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115, which is effective for
financial statements issued for fiscal years beginning after November
15, 2007. SFAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other U.S. generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. As we have not elected the fair value option
allowed for by SFAS 159 for any assets or liabilities that are otherwise not
permitted to be accounted for at fair value under other U.S. generally accepted
accounting principals, the adoption of SFAS 159 did not have an impact on our
consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), BUSINESS COMBINATIONS
and SFAS 160, NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS.
Those standards were intended to improve, simplify, and converge internationally
the accounting for business combinations and the reporting of noncontrolling
(minority) interests in consolidated financial statements. SFAS 141(R) requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; requires acquisition related transaction costs to be
expensed, and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective for fiscal years,
and interim periods within those fiscal years, with earlier application
encouraged. The provisionsbeginning on or after December
15, 2008. SFAS 141(R) applies prospectively to business combinations for which
44
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is prohibited.
We have not evaluated the potential impact that SFAS No. 157 should141(R) will have on our
financial statements.
SFAS 160 is designed to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report minority interests in subsidiaries in the same way as equity
in the consolidated financial statements. Moreover, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and minority interests by requiring they be treated as equity transactions. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
In addition, SFAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which the Statementit is initially applied, except for a limited form of retrospective applicationthe presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for certain financial
instruments. The Company will adopt this statement for fiscal year 2009.
Management hasall periods presented. We currently do not determined the effect the adoption of this statement will
have on its consolidated financial position or results of operations.
52
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"), which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
SAB 108 is effective for fiscal years ending after November 15, 2006. The
Company will adopt this statement for fiscal 2007. Management has not determined
the effect the adoption of this statement will have on its consolidated
financial position or results of operations.
In October 2006, the Company adopted FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirements -- an interpretation ofexpect
SFAS No.
143" ("FIN 47"). FIN 47 clarifies that uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists160 to make a reasonable estimate of the fair value of the obligation. The
provisions of this interpretation were effective for the Company's fiscal year
ended October 31, 2006 and did not have a material impact on our financial statements, however, the
effect is largely dependent on potential future transactions which we are
currently unable to forecast.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not
believed by management to, have a material impact on our present or future
consolidated financial position or results of operations. See discussion above under
Long-Lived Assets.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements reflect, among other things, management's current
expectations and anticipated results of operations, all of which are subject to
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to differ
materially from those expressed or implied by such forward-looking statements.
Therefore, any statements contained herein that are not statements of historical
fact may be forward-looking statements and should be evaluated as such. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "intends,"
"will," "expects," "should" and similar words and expressions are intended to
identify forward-looking statements. Except as required under the federal
securities laws or by the rules and regulations of the SEC, we assume no
obligation to update any such forward-looking information to reflect actual
results or changes in the factors affecting such forward-looking information.
The factors included in "Risks Relating to Our Business," among others, could
cause our actual results to differ materially from those expressed in, or
implied by, the forward-looking statements.
Specific factors that might cause actual results to differ from our
expectations, include, but are not limited to:
o economic, competitive, demographic, business and other conditions in
our markets;
o a decline in patient referrals;
o changes in the rates or methods of third-party reimbursement for
diagnostic imaging services;
o the enforceability or termination of our contracts with radiology
practices;
o the availability of additional capital to fund capital expenditure
requirements;
o burdensome lawsuits against our contracted radiology practices and
us;
o reduced operating margins due to our managed care contracts and
capitated fee arrangements;
o any failure on our part to comply with state and federal
anti-kickback and anti-self-referral laws or any other applicable
healthcare regulations;
o our substantial indebtedness, debt service requirements and
liquidity constraints;
o the interruption of our operations in certain regions due to
earthquake or other extraordinary events;
o the recruitment and retention of technologists by us or by
radiologists of our contracted radiology groups;
o successful integration of Radiologix operations;
o and other factors discussed in the "Risk Factors" section or
elsewhere in this report.
All future written and verbal forward-looking statements attributable to
us or any person acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this section. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.
A large portion of our interest expense is not sensitive to changes in
the general level of interest in the United States because the majority of our
indebtedness has interest rates that were fixed when we entered into the note
payable or capital lease obligation. On November 15, 2006, we entered into a
$405 million senior secured credit facility with GE Commercial Finance
Healthcare Financial Services. This facility was used to finance our acquisition
of Radiologix, refinance existing indebtedness, pay transaction costs and
expenses relating to our acquisition of Radiologix, and to provide financing for
working capital needs post-acquisition. The facility consists of a revolving
credit facility of up to $45 million, a $225 million term loan and a $135
million second lien term loan. The revolving credit facility has a term of five
years, the term loan has a term of six years and the second lien term loan has a
term of six and one-half years. Interest is payable on all loans initially at an
Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the "base rate on corporate loans posted by
at least 75% of the nation's largest 30 banks" or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each the revolving credit facility
and the term loan is 2% and on the second lien term loan is 6%. We may request
that the interest rate instead be based on LIBOR plus the Applicable LIBOR
Margin, which is 3.5% for the revolving credit facility and the term loan and
7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
On February 22, 2008, we secured an incremental $35 million ("Second
Incremental Facility") as part of our existing credit facilities with GE
Commercial Finance Healthcare Financial Services. The Second Incremental
Facility consists of an additional $35 million as part of our second lien term
loan and the ability to further increase the second lien term loan by up to $25
million and the first line term loan or revolving credit facility by up to an
additional $40 million sometime in the future. As part of the transaction,
partly due to the drop in LIBOR of over 2.00% since the credit facilities were
established in November 2006, we increased the Applicable LIBOR Margin to 4.25%
for the revolving credit facility and the term loan and 9.0% for the second lien
term loan. The additions to RadNet's existing credit facilities are intended to
provide capital for near-term opportunities and future expansion.
As part of the financing, we were required to swap at least 50% of the
aggregate principal amount of the facilities to a floating rate within 90 days
of the close of the agreement on November 15, 2006. On April 11, 2006, effective
April 28, 2006, we entered into an interest rate swap on $73.0 million fixing
the LIBOR rate of interest at 5.47% for a period of three years. This swap was
made in conjunction with the $161.0 million credit facility closed on March 9,
2006. In addition, on November 15, 2006, we entered into an interest rate swap
on $107.0 million fixing the LIBOR rate of interest at 5.02% for a period of
three years, and on November 28, 2006, we entered into an interest rate swap on
$90.0 million fixing the LIBOR rate of interest at 5.03% for a period of three
years. Previously, the interest rate on the above $270.0 million portion of the
credit facility was based upon a spread over LIBOR which floats with market
conditions.
Subsequent to year end 2008, the Company was able to modify two of its
three interest rate swaps. The modifications extended the maturity of, and
re-priced two existing interest rate hedges originally executed in 2006 for an
additional 36 months, resulting in an annualized cash interest expense savings
of $2.9 million. On one of the LIBOR hedge modifications for a notional amount
of $107 million of LIBOR exposure, the Company on January 29, 2009 replaced a
fixed LIBOR rate of 5.02% with a new rate of 3.47% maturing on November 15,
2012. On the second LIBOR hedge modification for a notional amount of $90
million of LIBOR exposure, the Company on February 5, 2009 replaced a fixed
LIBOR rate of 5.03% with a new rate of 3.61% also maturing on November 15, 2012.
45
In addition, our credit facility, classified as a long-term liability on
our financial statements, is interest expense sensitive to changes in the
general level of interest because it is based upon the current prime rate plus a
factor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are attached hereto and begin on page F-1.
5447.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theThe Board of Directors and Stockholders of RadNet, Inc.
We have audited the accompanying consolidated balance sheets of RadNet, Inc. and
affiliatessubsidiaries (the "Company" or "RadNet") as of OctoberDecember 31, 20052008 and 20062007, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for eachthe years then ended. Our audit also includes the financial
statement schedule listed in the index at Item 15(b) for the years ended
December 31, 2008 and 2007. These financial statements and schedule are the
responsibility of the three yearsCompany's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RadNet, Inc. and
subsidiaries at December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule for the years ended December 31, 2008 and
2007, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), RadNet's internal control over
financial reporting as of December 31, 2008, based on criteria established in
INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 16, 2009,
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 16, 2009
<
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
RadNet, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of RadNet, Inc. and subsidiaries (the
"Company") for the two month period ended December 31, 2006 and for the year
ended October 31, 2006. Our audits also included the financial statement
schedule listed in the indexIndex at Item 15(a)15(b). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. AnWe were not
engaged to perform an audit includesof the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. 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 consolidated financial position of RadNet,
Inc. and affiliates as of October 31, 2005 and 2006, and the consolidated
results of their operations
and their cash flows of RadNet, Inc. and subsidiaries for each of the three years intwo month period
ended December 31, 2006 and for the periodyear ended October 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As described in Note 2 to the consolidated financial statements, the Company
restated its previously issued consolidated financial statements to correct its
accounting for leasehold improvements.
As described in Notes 2 and 10 to the consolidated financial statements,
effective November 1, 2005, the Company changed its method of accounting for
share-based payment arrangements to conform to Statement of Financial Accounting
Standard No. 123R, Share-Based Payment.
/s/ MOSS ADAMSMoss Adams LLP
Los Angeles, California
February 5,April 17, 2007
F-148
RADNET, INC. AND AFFILIATESSUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2005
OCTOBER(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31, (AS RESTATED) 2006
- ---------------- ------------- -------------
DECEMBER 31,
2008 2007
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,000-- $ 2,00018
Accounts receivable, net 22,319,000 28,136,000
Unbilled receivables96,097 87,285
Refundable income taxes 103 105
Prepaid expenses and other receivables 476,000 948,000
Other 1,799,000 3,603,000
------------- -------------current assets 12,370 10,273
--------- ---------
Total current assets 24,596,000 32,689,000
============= =============108,570 97,681
PROPERTY AND EQUIPMENT, NET 64,658,000 64,566,000
------------- -------------193,104 164,097
OTHER ASSETS
Accounts receivable, net 1,267,000 1,079,000
Goodwill 23,099,000 23,099,000
Debt issue105,278 84,395
Other intangible assets 56,861 58,908
Deferred financing costs, net 472,000 5,195,000
Trade name10,907 9,161
Investment in joint ventures 17,100 15,036
Deposits and other 3,692,000 4,738,000
------------- -------------3,752 4,342
--------- ---------
Total other assets 28,530,000 34,111,000
------------- -------------193,898 171,842
--------- ---------
Total assets $117,784,000 $131,366,000
============= =============$ 495,572 $ 433,620
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursements in transit $ 3,425,000 $ 612,000
Line of credit 13,341,000 --
Accounts payable and accrued expenses 22,469,000 25,951,000
Short-term notes expected$ 83,676 $ 59,965
Due to be refinanced:affiliates 1,977 1,350
Notes payable 69,066,000 --5,501 3,536
Current portion of deferred rent 390 195
Obligations under capital lease 56,927,000 --
Advance due to related party -- 737,000
Notes payable 1,101,000 1,162,000
Obligations under capital lease 1,697,000 2,410,000
------------- -------------leases 15,064 9,455
--------- ---------
Total current liabilities 168,026,000 30,872,000
============= =============106,608 74,501
--------- ---------
LONG-TERM LIABILITIES
Subordinated debentures payable 16,147,000 16,031,000
Line of credit -- 12,437,000
Notes payable to related party 3,533,000 --1,742 4,222
Deferred rent, net of current portion 7,996 4,394
Deferred taxes 277 277
Notes payable, net of current portion -- 145,987,000419,735 382,064
Obligations under capital lease, net of current portion 4,129,000 3,889,00024,238 22,527
Other non-current liabilities 31,000 944,000
------------- -------------16,006 15,259
--------- ---------
Total long-term liabilities 23,840,000 179,288,000
============= =============469,994 428,743
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 78 206
STOCKHOLDERS' DEFICIT
Preferred stock - $.0001 par value, 30,000,000 shares
authorized, none issued -- --
Common stock - $.0001 par value, 200,000,000 shares authorized;
21,615,90635,911,474 and 22,985,25235,239,558 shares issued;
20,703,406issued and 22,072,752 shares outstanding at
OctoberDecember 31, 20052008 and 2006,2007, respectively 433,000 460,000
Paid-in capital 100,590,000 102,745,000
(Accumulated deficit) (174,410,000) (181,304,000)
------------- -------------
(73,387,000) (78,099,000)
Less: Treasury stock - 912,500 shares at cost (695,000) (695,000)
------------- -------------4 4
Paid-in-capital 153,006 149,631
Accumulated other comprehensive loss (6,396) (4,579)
Accumulated deficit (227,722) (214,886)
--------- ---------
Total stockholders' deficit (74,082,000) (78,794,000)
============= =============(81,108) (69,830)
--------- ---------
Total liabilities and stockholders' deficit $117,784,000 $131,366,000
============= =============
F-2$ 495,572 $ 433,620
========= =========
The accompanying notes are an integral part of these financial statements.
49
RADNET, INC. AND AFFILIATESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2004 2005(IN THOUSANDS EXCEPT SHARE DATA)
YEARS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
(AS RESTATED) (AS RESTATED)------------------------------ ------------ -------------
2008 2007 2006 - ---------------------------- --------------- --------------- ---------------2006
------------ ------------ ------------ ------------
NET REVENUE $ 137,277,000502,118 $ 145,573,000425,470 $ 161,005,00057,374 $ 161,005
OPERATING EXPENSES
Operating expenses 105,828,000 109,012,000 120,342,000384,297 330,550 46,033 120,342
Depreciation and amortization 17,917,000 17,536,000 16,394,00053,548 45,281 5,907 16,394
Provision for bad debts 3,911,000 4,929,000 7,626,00030,832 27,467 3,907 7,626
Loss (gain) on disposalsale of equipment net516 72 (38) 373
Severance costs 335 934 205 --
696,000 373,000
--------------- --------------- --------------------------- ------------ ------------ ------------
Total operating expenses 127,656,000 132,173,000 144,735,000
=============== =============== ===============469,528 404,304 56,014 144,735
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 9,621,000 13,400,000 16,270,00032,590 21,166 1,360 16,270
OTHER EXPENSEEXPENSES (INCOME)
Interest expense 17,285,000 17,493,000 20,362,00051,811 44,307 5,620 20,362
Gain from sale of joint venture interest -- (1,868) -- --
Loss (gain) on debt extinguishment, net -- (515,000) 2,097,000-- 7,212 2,097
Other income (176,000) (357,000) --
Other(income) expense 1,657,000 349,000 788,000
--------------- --------------- ---------------(151) (29) (51) 788
------------ ------------ ------------ ------------
Total other expense 18,766,000 16,970,000 23,247,000
=============== =============== ===============
LOSS BEFORE EQUITY IN INCOME OF INVESTEE,
INCOME TAXES AND MINORITY INTEREST (9,145,000) (3,570,000) (6,977,000)
EQUITY IN INCOME OF INVESTEE -- -- 83,000
--------------- --------------- ---------------51,660 42,410 12,781 23,247
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
MINORITY INTEREST (9,145,000) (3,570,000) (6,894,000)
INCOME TAX EXPENSE (5,235,000)INVESTMENTS (19,070) (21,244) (11,421) (6,977)
Provision for income taxes (151) (337) (20) --
Minority interest in income of subsidiaries (103) (600) (45) --
--------------- --------------- ---------------
LOSS BEFORE MINORITY INTEREST (14,380,000) (3,570,000) (6,894,000)
MINORITY INTEREST IN EARNINGS
OF SUBSIDIARIES 351,000 -- --
--------------- --------------- ---------------Equity in earnings of joint ventures 6,488 4,050 503 83
------------ ------------ ------------ ------------
NET LOSS (14,731,000) (3,570,000) (6,894,000)
--------------- --------------- ---------------$ (12,836) $ (18,131) $ (10,983) $ (6,894)
============ ============ ============ ============
BASIC NET LOSS PER SHARE (1) (0.72) (0.17) (0.33)
--------------- --------------- ---------------AND DILUTED NET LOSS PER SHARE (1) (0.72) (0.17)$ (0.36) $ (0.52) $ (0.35) $ (0.33)
--------------- --------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING
(1)
Basic 20,553,406 20,603,955and diluted 35,721,028 34,592,716 30,972,282 21,013,957
--------------- --------------- ---------------
Diluted 20,553,406 20,603,955 21,013,957
--------------- --------------- ---------------
(1) All share information is restated for all periods presented to reflect the decrease in common shares
outstanding resulting from the one-for-two reverse common stock split effected November 28, 2006.
F-3The accompanying notes are an integral part of these financial statements.
50
RADNET, INC. AND AFFILIATESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 2004, 2005 AND 2006
- -------------------------------------------
COMMON STOCK, $.0001 PAR
VALUE, 200,000,000
SHARES AUTHORIZED TREASURY STOCK, AT COST TOTAL
------------------------ ------------------------- ACCUMULATED STOCKHOLDERS'
PAID-IN DEFICIT DEFICIT
SHARES (1) AMOUNT CAPITAL SHARES (1) AMOUNT (AS RESTATED) (AS RESTATED)
------------ ---------- -------------- ------------(IN THOUSANDS EXCEPT SHARE DATA)
Common Stock Treasury stock, at cost
---------------------------- Paid-in ---------------------------
Shares Amount Capital Shares Amount
----------- -------------- ------------------------ ----------- ----------- -----------
BALANCE - OCTOBER 31, 2003 21,465,9062005 21,615,906 $ 430,0002 $ 100,428,000101,021 (912,500) $ (695,000) $(156,109,000) $(55,946,000)(695)
Issuance of warrant 1,290,062 -- 1,451 -- --
108,000Issuance of common stock upon
exercise of options/warrants 56,084 156
Conversion of bonds 23,200 -- 116 -- --
Share-based compensation -- 108,000-- 459 -- --
Net loss -- -- -- -- --
(14,731,000) (14,731,000)
------------ ---------- -------------- ------------Comprehensive loss
----------- -------------- ------------------------ ----------- ----------- -----------
BALANCE - OCTOBER 31, 2004 21,465,906 430,000 100,536,0002006 22,985,252 $ 2 $ 103,203 (912,500) (695,000) (170,840,000) (70,569,000)$ (695)
Issuance of common stock
150,000 3,000 54,000to shareholders of Radiologix 11,310,950 1 39,399 -- --
Issuance of common stock
upon conversion of bonds 674,600 -- 3,373 -- --
Issuance of common stock upon
exercise of options/warrants 3,125 -- 3 -- --
Stock split partial shares (147) -- -- -- 57,000--
Share-based compensation -- -- 78 -- --
Unrealized loss on the change in fair
value of cash flow hedging -- -- -- -- --
Net loss -- -- -- -- --
(3,570,000) (3,570,000)
------------ ---------- -------------- ------------Comprehensive loss
----------- -------------- ------------------------ ----------- ----------- -----------
BALANCE - OCTOBERDECEMBER 31, 2005 21,615,906 433,000 100,590,0002006 34,973,780 $ 3 $ 146,056 (912,500) (695,000) (174,410,000) (74,082,000)
Issuance$ (695)
Cumulative effect adjustment pursuant
to adoption of warrant -- -- 110,000SAB No. 108 -- -- -- 110,000
Exercise-- --
Issuance of common stock upon
exercise of options/warrants 1,290,062 26,000 1,425,0001,178,278 1 957 -- --
Retirement of treasury shares (912,500) -- (695) 912,500 695
Share-based compensation -- -- 3,313 -- --
Change in fair value of
cash flow hedge -- -- -- 1,451,000
Exercise of options 56,084 1,000 45,000 -- -- -- 46,000
Conversion of bonds 23,200 -- 116,000 -- -- -- 116,000
Share-based payments -- -- 459,000 -- -- -- 459,000
Net loss -- -- -- -- --
(6,894,000) (6,894,000)
------------ ---------- -------------- ------------Comprehensive loss
----------- -------------- ------------------------ ----------- ----------- -----------
BALANCE - DECEMBER 31, 2007 35,239,558 $ 4 $ 149,631 -- $ --
Issuance of common stock upon
exercise of options/warrants 671,916 -- 473 -- --
Share-based compensation -- -- 2,902 -- --
Change in fair value of
cash flow hedge -- -- -- -- --
Net loss -- -- -- -- --
Comprehensive loss
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2008 35,911,474 $ 4 $ 153,006 -- $ --
=========== =========== =========== =========== ===========
51a
[table continued on next page]
[table continued from previous page]
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit Loss Deficit
----------- ----------- -----------
BALANCE - OCTOBER 31, 2005 $ (174,410) $ -- $ (74,082)
Issuance of warrant -- -- 1,451
Issuance of common stock upon
exercise of options/warrants 156
Conversion of bonds -- -- 116
Share-based compensation -- -- 459
Net loss (6,894) -- (6,894)
-----------
Comprehensive loss (6,894)
----------- ----------- -----------
BALANCE - OCTOBER 31, 2006 22,985,252 $ 460,000(181,304) $ 102,745,000 (912,500)-- $ (695,000) $(181,304,000) $(78,794,000)
============ ========== ============== ============ =========== ============== =============
1 All share information is restated for all periods presented to reflect the decrease in common shares outstanding resulting from
the one-for-two reverse(78,794)
Issuance of common stock
to shareholders of Radiologix -- -- 39,400
Issuance of common stock
upon conversion of bonds -- -- 3,373
Issuance of common stock upon
exercise of options/warrants -- -- 3
Stock split effected November 28, 2006.
F-4partial shares -- -- --
Share-based compensation -- -- 78
Unrealized loss on the change in fair
value of cash flow hedging -- (73) (73)
Net loss (10,983) -- (10,983)
-----------
Comprehensive loss (11,056)
----------- ----------- -----------
BALANCE - DECEMBER 31, 2006 $ (192,287) $ (73) $ (46,996)
Cumulative effect adjustment pursuant
to adoption of SAB No. 108 (4,468) -- (4,468)
Issuance of common stock upon
exercise of options/warrants -- -- 958
Retirement of treasury shares -- -- --
Share-based compensation -- -- 3,313
Change in fair value of
cash flow hedge -- (4,506) (4,506)
Net loss (18,131) -- (18,131)
-----------
Comprehensive loss (22,637)
----------- ----------- -----------
BALANCE - DECEMBER 31, 2007 $ (214,886) $ (4,579) $ (69,830)
Issuance of common stock upon
exercise of options/warrants -- -- 473
Share-based compensation -- -- 2,902
Change in fair value of
cash flow hedge -- (1,817) (1,817)
Net loss (12,836) -- (12,836)
-----------
Comprehensive loss (14,653)
----------- ----------- -----------
BALANCE - DECEMBER 31, 2008 $ (227,722) $ (6,396) $ (81,108)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
51b
RADNET, INC. AND AFFILIATESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 2004 2005(IN THOUSANDS)
YEARS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
(AS RESTATED) (AS RESTATED)2008 2007 2006 - ---------------------------- --------------- --------------- ---------------2006
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($14,731,000) ($3,570,000) ($6,894,000)$ (12,836) $ (18,131) $ (10,983) $ (6,894)
Adjustments to reconcile net loss to net cash
fromprovided by operating activities:
Depreciation and amortization - continuing operations 17,917,000 17,536,000 16,394,00053,548 45,281 5,907 16,394
Provision for bad debts 3,911,000 4,929,000 7,626,000
Equity30,832 27,467 3,907 7,626
Minority interest in income of investeesubsidiaries 103 600 45 --
Distributions to minority interests (231) (1,219) (285) --
Equity in earnings of joint ventures (6,488) (4,050) (503) (83)
Distributions from joint ventures 5,216 4,570 179 --
Deferred rent amortization 3,514 1,037 -- --
(83,000)
Deferred income taxfinancing cost interest expense 5,235,0002,567 1,632 233 710
Net loss (gain) on disposal of assets 516 72 (38) 373
Gain from sale of joint venture interest -- (1,868) -- --
Loss (gain) on extinguishmentsextinguishment of debt (34,000) (430,000) 2,097,000
Loss (gain) on sale of assets and operating sites 27,000 696,000 373,000(47) -- 4,939 2,097
Accrued interest expense and interest related to swap 6,565,000 1,248,000 2,076,000
Share-based payments3,674 2,959 2,426 1,366
Refinancing fees and pre-payment penalties -- -- 459,000
Tenant improvement allowances2,273 --
Share-based compensation 2,902 3,313 78 459
Amortization of tenant improvements and other contracts -- -- 98,000
Minority interest in earnings of continuing subsidiaries 351,000 -- --(46) 98
Changes in operating assets and liabilities:liabilities, net of assets
acquired and liabilities assumed in purchase transactions:
Accounts receivable 1,696,000 (6,617,000) (13,254,000)
Unbilled receivables (786,000) 490,000 (473,000)(36,297) (42,923) (2,705) (13,727)
Other current assets (1,515) 4,396 621 --
Other assets (286,000) (2,572,000) (1,973,000)684 588 2,077 (1,973)
Accounts payable and accrued expenses (2,811,000) (570,000) 3,805,000
--------------- --------------- ---------------(941) 5,477 (7,685) 3,805
--------- --------- --------- ---------
Net cash provided by operating activities 17,054,000 11,140,000 10,251,000
--------------- --------------- ---------------45,201 29,201 440 10,251
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of imaging facilities (35,000)(28,859) (18,465) -- (4,092,000)(4,092)
Purchase of property and equipment (3,774,000) (4,063,000) (9,452,000)(29,199) (27,207) (2,513) (9,452)
Purchase of Radiologix, net of cash acquired -- (370) 12,708 --
Proceeds from sale of divisions,equipment 2,961 845 19 47
Proceeds from sale of joint venture interest -- 2,260 -- --
Purchase of equity interest in joint ventures (938) (4,413) -- --
Proceeds from the divestiture of imaging centers and equipment -- 65,000 47,000
--------------- --------------- ---------------1,625 -- --
Purchase of covenant not to compete contract -- (250) -- --
Payments collected on notes receivable -- 111 -- --
--------- --------- --------- ---------
Net cash usedprovided (used) by investing activities (3,809,000) (3,998,000) (13,497,000)
--------------- --------------- ---------------(56,035) (45,864) 10,214 (13,497)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit (317,000) 889,000 (2,813,000)-- (5,099) 4,488 (2,813)
Principal payments on notes and leases payable (13,247,000) (14,146,000) (6,962,000)
Proceeds from short and long-term borrowings 1,000,000 4,746,000 11,425,000
Proceeds from borrowings from related parties -- 1,370,000 737,000(19,112) (10,398) (708) (6,962)
Repayment of debt upon extinguishments -- -- (141,242,000)(348,411) (141,242)
Proceeds from borrowings upon refinancing 1,212 -- 360,000 146,468
Proceeds from borrowings on notes payable 35,000 33,137 -- 11,425
Proceeds from borrowings from line of credit -- -- 146,468,000
Debt issue4,918 737
Deferred financing costs (4,277) (1,351) (9,655) (5,864)
Payments on notes to related party -- -- (5,864,000)
Purchase(737) --
Payments on line of subordinated debentures (60,000) --credit (2,480) (3,787) (17,333) --
Proceeds from issuance of common stock -- -- 1,497,000
Joint venture distributions (650,000) -- -
--------------- --------------- ---------------473 958 3 1,497
--------- --------- --------- ---------
Net cash (used by) provided (used) by financing activities (13,274,000) (7,141,000) 3,246,000
--------------- --------------- ---------------10,816 13,460 (7,435) 3,246
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH (29,000) 1,000(18) (3,203) 3,219 --
CASH, beginning of year 30,000 1,000 2,000
--------------- --------------- ---------------BEGINNING OF PERIOD 18 3,221 2 2
--------- --------- --------- ---------
CASH, end of year $1,000 $2,000 $2,000
=============== =============== ===============END OF PERIOD $ -- $ 18 $ 3,221 $ 2
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the yearperiod for interest $10,686,000 $16,073,000 $18,392,000
=============== =============== ===============
F-5$ 49,236 $ 41,382 $ 3,229 $ 18,392
Cash paid during the period for income taxes $ 389 $ 186 $ -- $ --
The accompanying notes are an integral part of these financial statements.
52
RADNET, INC. AND AFFILIATESSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2004, 2005 AND 2006(CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
We entered into capital leases or financedand equipment through notes payable for approximately
$9,351,000 , $4,781,000$23.7 million, $19.6 million, $6.0 million and $4,009,000$4.0 million for the years ended
December 31, 2008 and 2007, the two months ended December 31, 2006 and the year
ended October 31, 2004, 2005 and 2006, respectively. F-6We also acquired capital equipment for
approximately $17.8 million and $4.4 million during the years ended December 31
2008 and 2007 that we had not paid for as of December 31, 2008 and 2007,
respectively. The offsetting amount due was recorded in our consolidated balance
sheets under accounts payable and accrued expenses.
We record the change in fair value of our interest rate swaps that are
designated as cash flow hedges to accumulated other comprehensive loss. During
the years ended December 31, 2008 and 2007 and the two months ended December 31,
2006, we recorded unrealized losses of $1.8 million, $4.5 million and 73,000,
respectively, to accumulated other comprehensive loss for the change in fair
value in these respective periods.
Detail of non-cash investing and financing activity related to
acquisitions can be found in Notes 3 and 4.
53
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
NATURE OF BUSINESS
Radnet,RadNet, Inc. or RadnetRadNet (formerly Primedex Health Systems, Inc.), ("we"
or the "Company") was incorporated on October 21, 1985 provides diagnostic imaging servicesin New York. On September
3, 2008, we reincorporated in the state of California. ImagingDelaware. We operate a group of
regional networks comprised of 165 diagnostic imaging facilities located in six
states with operations primarily in California, Maryland, the Treasure Coast
area of Florida, Kansas, Delaware and the Finger Lakes (Rochester) and Hudson
Valley areas of New York, providing diagnostic imaging services includeincluding
magnetic resonance imaging or MRI,(MRI), computed tomography or CT,(CT), positron emission
tomography or PET,(PET), nuclear medicine, mammography, ultrasound, diagnostic
radiology, or X-ray, and fluoroscopy. OurThe Company's operations comprise a single
segment for financial reporting purposes.
BUSINESSThe consolidated financial statements also include the accounts of
RadNet Management, Inc., or RadNet Management, and Beverly Radiology Medical
Group III (BRMG), which is a professional partnership, all collectively referred
to as "us" or "we". The consolidated financial statements also include RadNet
Sub, Inc., RadNet Management I, Inc., RadNet Management II, Inc., SoCal MR Site
Management, Inc. (sold in 2008), Radiologix, Inc., RadNet Management Imaging
Services, Inc., Delaware Imaging Partners, Inc. and Diagnostic Imaging Services,
Inc. (DIS), all wholly owned subsidiaries of RadNet Management.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 18% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
BRMG. BRMG provides all of the professional medical services at the majority of
our facilities located in California under a management agreement with us, and
contracts with various other independent physicians and physician groups to
provide the professional medical services at most of our other California
facilities. We generally obtain professional medical services from BRMG in
California, rather than provide such services directly or through subsidiaries,
in order to comply with California's prohibition against the corporate practice
of medicine. However, as a result of our close relationship with Dr. Berger and
BRMG, we believe that we are able to better ensure that medical service is
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated physician groups. BRMG is a
partnership of Pronet Imaging Medical Group, Inc. (99%), Breastlink Medical
Group, Inc. (100%) and Beverly Radiology Medical Group, Inc. (99%), each of
which are 99% or 100% owned by Dr. Berger. RadNet provides non-medical,
technical and administrative services to BRMG for which it receives a management
fee, per the management agreement. Through the management agreement and our
relationship with Dr. Berger, we have exclusive authority over all non-medical
decision making related to the ongoing business operations of BRMG. Based on the
provisions of the agreement, we have determined that BRMG is a variable interest
entity, and that we are the primary beneficiary as defined in Financial
Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51
(FIN 46(R)), and consequently, we consolidate the revenue and expenses of BRMG.
All intercompany balances and transactions have been eliminated in
consolidation.
At a portion of our centers in California and at all of the centers
which are located outside of California, we have entered into long-term
contracts with independent radiology groups in the area to provide physician
services at those facilities. These third party radiology practices provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our diagnostic imaging centers. The radiology practices
maintain full control over the provision of professional services. The
contracted radiology practices generally have outstanding physician and practice
credentials and reputations; strong competitive market positions; a broad
sub-specialty mix of physicians; a history of growth and potential for continued
growth. In these facilities we enter into long-term agreements with radiology
practice groups (typically 40 years). Under these arrangements, in addition to
obtaining technical fees for the use of our diagnostic imaging equipment and the
provision of technical services, we provide management services and receive a
fee based on the practice group's professional revenue, including revenue
derived outside of our diagnostic imaging centers. We own the diagnostic imaging
equipment and, therefore, receive 100% of the technical reimbursements
associated with imaging procedures. The radiology practice groups retain the
professional reimbursements associated with imaging procedures after deducting
management service fees. Our management service fees are included in net revenue
in the consolidated statement of operations and totaled $31.8 and $31.2 for the
years ended December 31, 2008 and 2007, respectively. We have no financial
controlling interest in the independent radiology practices, as defined in EITF
97-2; accordingly, we do not consolidate the financial statements of those
practices in our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital balance of $2.0 million and $23.2 million at
December 31, 2008 and 2007, respectively. We had net losses of $12.8 million,
$18.1 million, $11.0 million and $6.9 million for the years ended December 31,
2008 and 2007, the two months ended December 31, 2006, and the year ended
October 31, 2006, respectively. We also had a stockholders' deficit of $81.1
million and $69.8 million at December 31, 2008 and 2007, respectively.
54
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations. In addition to
operations, we require a significant amount of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations. Because our cash flows from
operations have been insufficient to fund all of these capital requirements, we
have depended on the availability of financing under credit arrangements with
third parties.
Our business strategy with regard to operations focuses on the
following:
|X| Maximizing performance at our existing facilities;
|X| Focusing on profitable contracting;
|X| Expanding MRI, CT and PET applications;
|X| Optimizing operating efficiencies; and
|X| Expanding our networks.
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. Although no assurance can be given, taking these factors
into account, including our historical experience, we believe that through
implementing our strategic plans and continuing to restructure our financial
obligations, we will obtain sufficient cash to satisfy our obligations as they
become due in the next twelve months.
On February 22, 2008, we secured a second incremental $35 million
("Second Incremental Facility") of capacity as part of our existing credit
facilities with GE Commercial Finance Healthcare Financial Services. The Second
Incremental Facility consists of an additional $35 million as part of our second
lien term loan and the first lien term loan or revolving credit facility may be
increased by up to an additional $40 million sometime in the future. As part of
the transaction, partly due to a material drop in LIBOR since the credit
facilities were established in November 2006, we increased the Applicable LIBOR
Margin to 4.25% for the revolving credit facility and the term loan to 9% from
6% for the second lien term loan. The additions to our existing credit
facilities are intended to provide capital for near-term opportunities and
future expansion.
Subsequent to year end 2008, the Company was able to modify two of its
three interest rate swaps. The modifications extended the maturity of, and
re-priced two existing interest rate hedges originally executed in 2006 for an
additional 36 months, resulting in an annualized cash interest expense savings
of $2.9 million. On one of the LIBOR hedge modifications for a notional amount
of $107 million of LIBOR exposure, the Company on January 29, 2009 replaced a
fixed LIBOR rate of 5.02% with a new rate of 3.47% maturing on November 15,
2012. On the second LIBOR hedge modification for a notional amount of $90
million of LIBOR exposure, the Company on February 5, 2009 replaced a fixed
LIBOR rate of 5.03% with a new rate of 3.61% also maturing on November 15, 2012.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The operating activities of subsidiaries
are included in the accompanying consolidated financial statements from the date
of acquisition. Investments in companies in which the Company has the ability to
exercise significant influence, but not control, are accounted for by the equity
method. All intercompany transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. These estimates and assumptions
affect various matters, including our reported amounts of assets and liabilities
in our consolidated balance sheets at the dates of the financial statements; our
disclosure of contingent assets and liabilities at the dates of the financial
statements; and our reported amounts of revenues and expenses in our
consolidated statements of operations during the reporting periods. These
estimates involve judgments with respect to numerous factors that are difficult
to predict and are beyond management's control. As a result, actual amounts
could materially differ from these estimates.
REVENUE RECOGNITION - Our consolidated net revenue consists of net
patient fee for service revenue and revenue from capitation arrangements, or
capitation revenue. Net patient service revenue is recognized at the time
services are provided net of contractual adjustments based on our evaluation of
expected collections resulting from the analysis of current and past due
accounts, past collection experience in relation to amounts billed and other
relevant information. The amount of expected collection is continually adjusted
as more information is received and such adjustments are recorded in current
operations. Contractual adjustments result from the differences between the
rates charged for services performed and reimbursements by government-sponsored
healthcare programs and insurance companies for such services. Capitation
revenue is recognized as revenue during the period in which we were obligated to
provide services to plan enrollees under contracts with various health plans.
Under these contracts, we receive a per-enrollee amount each month covering all
contracted services needed by the plan enrollees. Net revenue is reduced by the
provision for bad debts.
55
CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially
subject us to credit risk are primarily cash equivalents and accounts
receivable. We have placed our cash and cash equivalents with one major
financial institution. At times, the cash in the financial institution is
temporarily in excess of the amount insured by the Federal Deposit Insurance
Corporation, or FDIC. Substantially all of our accounts receivable are due under
fee-for-service contracts from third party payors, such as insurance companies
and government-sponsored healthcare programs, or directly from patients.
Services are generally provided pursuant to one-year contracts with healthcare
providers. Receivables generally are collected within industry norms for
third-party payors. We continuously monitor collections from our clients and
maintain an allowance for bad debts based upon any specific payor collection
issues that we have identified and our historical experience. As of December 31,
2008 and 2007, our allowance for bad debts was $12.1 million and $11.6 million,
respectively.
CASH AND CASH EQUIVALENTS - We consider all highly liquid investments
purchased that mature in three months or less when purchased to be cash
equivalents. The carrying amount of cash and cash equivalents approximates their
fair market value.
DEFERRED FINANCING COSTS - Costs of financing are deferred and
amortized on a straight-line basis over the life of the loan.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization of
property and equipment are provided using the straight-line method over the
estimated useful lives, which range from 3 to 15 years. Leasehold improvements
are amortized at the lesser of lease term or their estimated useful lives,
whichever is lower, which range from 3 to 30 years. Only a few leasehold
improvements are deemed to have a life greater than 15 to 20 years. Maintenance
and repairs are charged to expenses as incurred.
GOODWILL - Goodwill at December 31, 2008 totaled $105.3 million.
Goodwill is recorded as a result of business combinations. Management evaluates
goodwill, at a minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable in
accordance with Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets." Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair value of a
reporting unit is estimated using a combination of the income or discounted cash
flows approach and the market approach, which uses comparable market data. If
the carrying amount of the reporting unit exceeds its fair value, goodwill is
considered impaired and a second step is performed to measure the amount of
impairment loss, if any. We tested goodwill on October 1, 2008. Based on our
review, we noted no impairment related to goodwill as of October 1, 2008.
However, if estimates or the related assumptions change in the future, we may be
required to record impairment charges to reduce the carrying amount of goodwill.
LONG-LIVED ASSETS - We evaluate our long-lived assets (property and
equipment) and definite-lived intangibles for impairment whenever indicators of
impairment exist. The accounting standards require that if the sum of the
undiscounted expected future cash flows from a long-lived asset or
definite-lived intangible is less than the carrying value of that asset, an
asset impairment charge must be recognized. The amount of the impairment charge
is calculated as the excess of the asset's carrying value over its fair value,
which generally represents the discounted future cash flows from that asset or
in the case of assets we expect to sell, at fair value less costs to sell. No
indicators of impairment were identified with respect to our long-lived assets
as of December 31, 2008.
INCOME TAXES - Income tax expense is computed using an asset and
liability method and using expected annual effective tax rates. Under this
method, deferred income tax assets and liabilities result from temporary
differences in the financial reporting bases and the income tax reporting bases
of assets and liabilities. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefit that, based on available evidence,
is not expected to be realized. When it appears more likely than not that
deferred taxes will not be realized, a valuation allowance is recorded to reduce
the deferred tax asset to its estimated realizable value. Income taxes are
further explained in Note 10.
UNINSURED RISKS - Prior to November 1, 2006 the Company maintained a
high deductible self-insured workers' compensation insurance program. The
liability is based on the Company's estimate of losses for claims incurred but
unpaid. Funding is made directly to the providers and/or claimants through a
third party administrator. To guarantee performance under the workers'
compensation program, the Company has maintained a cash collateral account with
the administrator. The cash collateral account is restricted as security for
potential claims. The Company has recorded restricted cash of approximately $1.3
million and $1.3 million as of December 31, 2008 and December 31, 2007,
respectively. These amounts are included in the other current assets balance
sheet line item. At December 31, 2008 and December 31, 2007 the Company has
recorded a reserve of approximately $973,000 and $1.4 million, respectively, for
potential losses on existing claims as such amounts are believed to be probable
and reasonably estimable.
For the subsequent two years that ended October 31, 2008, the Company
pre-funded the anticipated claims' losses as well as the policy and claim
handling costs. The total loss reserves reported as of January 2009 for the two
years ended October 31, 2008 was $1.26 million and the company has paid $2.15
million to the administrator. Thus, unless the incurred losses increase by more
than $900,000, the Company will not have any uninsured risks for those periods.
The Company does not anticipate that the loss development will exceed our
reserve.
On November 1, 2008 the Company obtained a fully funded and insured
workers' compensation policy, thereby eliminating any uninsured risks for
injuries occurring on or after that date.
We and our affiliated physicians are insured by Fairway Physicians
Insurance Company. Fairway provides claims-made medical malpractice insurance
coverage that covers only asserted medical malpractice claims during the year
that fall within policy limits. We accrued a liability of $1.7 million as of
56
December 31, 2007 for our exposure to incurred but unreported claims. In
December 2008, to remove the exposure to unreported claims, the Company
purchased a medical malpractice tail policy, which provides coverage for any
future claims reported that were incurred during previous periods. Therefore, as
of December 31, 2008 the Company no longer requires an accrued liability for
future claims. The $960,000 cost of the policy versus the reversal of the
previous accrual of $1.7 million resulted in a $700,000 reduction in the
Company's malpractice insurance costs in 2008. We currently hold a $300,000
asset for the cost basis of our investment in the common stock we hold in
Fairway Physicians Insurance Company, the risk retention group that holds our
medical malpractice policy.
On January 1, 2008 the Company entered into an arrangement with Blue
Shield to administer and process the claims for the Company's new self-insured
health insurance plan that provides coverage for its employees and dependents.
We have recorded a $1.7 million liability as of December 31, 2008 for claims
incurred in 2008 by its participants, but were not paid by December 31, 2008.
Additionally, the Company entered into an agreement with Sun Life Assurance
Company to provide a stop loss policy that provides coverage for any claims in
excess of $150,000 up to a maximum of $1.0 million in order to limit its
exposure for unusual or catastrophic claims.
LOSS CONTRACTS - We assess the profitability of our contracts to
provide management services to our contracted physician groups and identify
those contracts where current operating results or forecasts indicate probable
future losses. Anticipated future revenue is compared to anticipated costs. If
the anticipated future costs exceeds the revenue, a loss contract accrual is
recorded. In connection with the acquisition of Radiologix in November 2006, we
acquired certain management service agreements for which forecasted costs
exceeds forecasted revenue. As such, an $8.9 million loss contract accrual was
established in purchase accounting, and is included in other non-current
liabilities. The recorded loss contract accrual is being accreted into
operations over the remaining term of the acquired management service
agreements. As of December 31, 2008 and 2007, the remaining accrual balance is
$8.8 million, and $8.5 million, respectively.
EQUITY BASED COMPENSATION - We have three long-term incentive plans. We
have not issued options under the 1992 plan since the adoption of the 2000 plan
and we have not issued options under the 2000 plan since the adoption of the
2006 plan. We have reserved for issuance under the 2006 plan 2,500,000 shares of
common stock. Options granted under the 2006 plan to employees are intended to
qualify as incentive stock options under existing tax regulations. In addition,
we issue non-qualified stock options and warrants under the 2006 plan from time
to time to non-employees, in connection with acquisitions and for other purposes
and we may also issue stock under the plans. Stock options and warrants
generally vest over two to five years and expire five to ten years from date of
grant.
The compensation expense recognized for all equity-based awards is net
of estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation within operating expenses with the same line item as
the majority of the cash compensation paid to employees
SEGMENTS OF AN ENTERPRISE - The Company reports segment information in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). Under SFAS 131 all publicly traded companies
are required to report certain information about the operating segments,
products, services and geographical areas in which they operate and their major
customers. The Company operates in a single business segment and operates only
in the United States.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company holds derivative
financial instruments for the purpose of hedging the risks of certain
identifiable and anticipated transactions. In general, the types of risks hedged
are those relating to the variability of cash flows caused by movements in
interest rates. The Company documents its risk management strategy and hedge
effectiveness at the inception of the hedge, and, unless the instrument
qualifies for the short-cut method of hedge accounting, over the term of each
hedging relationship. The Company's use of derivative financial instruments is
limited to interest rate swaps, the purpose of which is to hedge the cash flows
of variable-rate indebtedness. The Company does not hold or issue derivative
financial instruments for speculative purposes.
In accordance with Statement of Financial Accounting Standards No. 133,
derivatives that have been designated and qualify as cash flow hedging
instruments are reported at fair value. The gain or loss on the effective
portion of the hedge (i.e., change in fair value) is initially reported as a
component of other comprehensive income in the Company's Consolidated Statement
of Stockholders' Deficit. The remaining gain or loss, if any, is recognized
currently in earnings. Amounts in accumulated other comprehensive income are
reclassified into income in the same period in which the hedged forecasted
transaction affects earnings.
COMPREHENSIVE INCOME - SFAS No. 130 REPORTING COMPREHENSIVE INCOME
establishes rules for reporting and displaying comprehensive income and its
components. SFAS No. 130 requires unrealized gains or losses on the change in
fair value of the Company's cash flow hedging activities to be included in
comprehensive income. The components of comprehensive loss are included in the
Consolidated Statement of Stockholders Deficit.
FAIR VALUE MEASUREMENTS - In September 2006, the FASB issued SFAS 157,
FAIR VALUE MEASUREMENTS. SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with accounting principles generally
accepted in the United States, and expands disclosures about fair value
measurements. We adopted the provisions of SFAS 157 as of January 1, 2008 for
financial instruments. Although the adoption of SFAS 157 did not materially
impact our financial position, results of operations, or cash flow, we are now
required to provide additional disclosures as part of our financial statements.
57
SFAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers are: Level 1,
defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
Our consolidated balance sheets include the following financial
instruments: cash and cash equivalents, receivables, trade accounts payable,
capital leases, long-term debt and other liabilities. We consider the carrying
amounts of cash and cash equivalents, receivables, other current assets and
current liabilities to approximate their fair value because of the relatively
short period of time between the origination of these instruments and their
expected realization or payment. Additionally, we consider the carrying amount
of our capital lease obligations to approximate their fair value because the
weighted average interest rate used to formulate the carrying amounts
approximates current market rates.
At December 31, 2008, based on Level 2 inputs, we determined the fair
values of our first and second lien term loans issued on November 15, 2006 and
extended on August 23, 2007 (see Note 9) to be $196.1million and $127.5million,
respectively. The carrying amount of the first and second lien term loans at
December 31, 2008 was $245.1 million and $170.0 million, respectively.
The Company maintains interest rate swaps which are required to be
recorded at fair value on a recurring basis. At December 31, 2008 the fair value
of these swaps of $7.2 million was determined using Level 2 inputs. More
specifically, the fair value was determined by calculating the value of the
difference between the fixed interest rate of the interest rate swaps and the
counterparty's forward LIBOR curve, which would be the input used in the
valuations. The forward LIBOR curve is readily available in the public markets
or can be derived from information available in the public markets. We have
included $822,000 of this fair value in accounts payable and accrued expenses
and the remaining in other non-current liabilities.
EARNINGS PER SHARE - Earnings per share is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding, net of common stock held in treasury, as follows (in thousands
except share and per share data):
YEARS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
-------------------------------------------------------------------
2008 2007 2006 2006
------------ ------------ ------------ ------------
Net loss $ (12,836) $ (18,131) $ (10,983) $ (6,894)
BASIC LOSS PER SHARE
Weighted average number of common shares
outstanding during the year 35,721,028 34,592,716 30,972,282 21,013,957
------------ ------------ ------------ ------------
Basic loss per share:
Basic loss per share $ (0.36) $ (0.52) $ (0.35) $ (0.33)
------------ ------------ ------------ ------------
DILUTED LOSS PER SHARE
Weighted average number of common shares
outstanding during the year 35,721,028 34,592,716 30,972,282 21,013,957
------------ ------------ ------------ ------------
Add additional shares issuable upon exercise of
stock options and warrants -- -- -- --
------------ ------------ ------------ ------------
Weighted average number of common shares used
in calculating diluted loss per share 35,721,028 34,592,716 30,972,282 21,013,957
------------ ------------ ------------ ------------
Diluted loss per share:
Diluted loss per share $ (0.36) $ (0.52) $ (0.35) $ (0.33)
------------ ------------ ------------ ------------
For all periods presented we excluded all options and warrants in the
calculation of diluted earnings per share because their effect would be
antidilutive. However, these instruments could potentially dilute earnings per
share in future years.
INVESTMENT IN JOINT VENTURES - We have eight unconsolidated joint
ventures with ownership interests ranging from 22% to 50%. These joint ventures
represent partnerships with hospitals, health systems or radiology practices and
were formed for the purpose of owning and operating diagnostic imaging centers.
Professional services at the joint venture diagnostic imaging centers are
performed by contracted radiology practices or a radiology practice that
participates in the joint venture. Our investment in these joint ventures is
accounted for under the equity method. Investment in joint ventures increased
$2.1 million to $17.1 million at December 31, 2008 compared to $15.0 million at
December 31, 2007. This increase is primarily related to our purchase of an
additional $938,000 of share holdings in joint ventures that were existing as of
58
December 31, 2007 as well as our equity earnings of $6.5 million for the year
ended December 31, 2008, offset by $5.2 of distributions received during the
period.
We received management service fees from the centers underlying these
joint ventures of approximately $7.6 million, $5.0 million and $456,000 for the
years ended December 31, 2008 and 2007, and the two months ended December 31,
2006, respectively.
The following table is a summary of key financial data for these joint
ventures as of and for the years ended December 31, 2008 and 2007, respectively
(in thousands):
DECEMBER 31,
----------------------
Balance Sheet Data: 2008 2007
-------- --------
Current assets $ 20,732 $ 21,076
Noncurrent assets 23,557 13,691
Current liabilities (4,634) (3,360)
Noncurrent liabilities (7,848) (5,300)
-------- --------
Total net assets $ 31,807 $ 26,107
======== ========
Book value of Radnet joint venture interests $ 13,717 $ 11,674
Cost in excess of book value of acquired joint venture interests 3,383 3,362
-------- --------
Total value of Radnet joint venture interests $ 17,100 $ 15,036
======== ========
Total book value of other joint venture partner interests $ 18,090 $ 14,433
======== ========
Net revenue $ 80,948 $ 59,501
Net income $ 17,758 $ 11,758
NOTE 3 - FACILITY ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On October 31, 2008, we acquired the assets and business of Middletown
Imaging in Middletown, Delaware for $210,000 in cash and the assumption of
capital lease debt of $1.2 million. We made a preliminary purchase price
allocation of the acquired assets and liabilities, and approximately $530,000 of
goodwill was recorded with respect to this transaction.
On August 15, 2008, we acquired the women's imaging practice of Parvis
Gamagami, M.D., Inc. in Van Nuys, CA for $600,000. Upon acquisition, we
relocated the practice to a nearby center we recently acquired from InSight
Health in Encino, CA. We rebranded the InSight center as the Encino Breast Care
Center, and focused it on Digital Mammography, Ultrasound, MRI and other
modalities pertaining to women's health. We have allocated the full purchase
price of $600,000 to goodwill.
On July 23, 2008, we acquired the assets and business of NeuroSciences
Imaging Center in Newark, Delaware for $4.5 million in cash. The center, which
performs MRI, CT, Bone Density, X-ray, Fluoroscopy and other specialized
procedures, is located in a highly specialized medical complex called the
Neuroscience and Surgery Institute of Delaware. The acquisition complements our
recent purchase of the Papastavros Associates Imaging centers completed in
March, 2008. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $2.6 million of goodwill was recorded
with respect to this transaction.
On June 18, 2008, we acquired the assets and business of Ellicott Open
MRI for the assumption of approximately $181,000 of capital lease debt. We made
a preliminary purchase price allocation of the acquired assets and liabilities,
and no goodwill was recorded with respect to this transaction.
On June 2, 2008, we acquired the assets and business of Simi Valley
Advanced Medical, a Southern California based multi-modality imaging center, for
the assumption of capital lease debt of $1.7 million. We made a preliminary
purchase price allocation of the acquired assets and liabilities, and
approximately $313,000 of goodwill was recorded with respect to this
transaction.
59
On April 15, 2008, we acquired the net assets of five Los Angeles area
imaging centers from InSight Health Corp. We completed the purchase of a sixth
center in Van Nuys, CA from Insight Health Corp. on June 2, 2008. The total
purchase price for the six centers was $8.5 million in cash. The centers provide
a combination of imaging modalities, including MRI, CT, X-ray, Ultrasound and
Mammography. We made a preliminary purchase price allocation of the acquired
assets and liabilities, and approximately $5.6 million of goodwill was recorded
with respect to this transaction.
On April 1, 2008, we acquired the net assets and business of BreastLink
Medical Group, Inc., a prominent Southern California breast medical oncology
business and a leading breast surgery business, for the assumption of
approximately $4.0 million of accrued liabilities and capital lease obligations.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $2.1 million of goodwill was recorded with
respect to this transaction.
On March 12, 2008, we acquired the net assets and business of
Papastavros Associates Medical Imaging for $9.0 million in cash and the
assumption of capital leases of $337,000. Founded in 1958, Papastavros
Associates Medical Imaging is one of the largest and most established outpatient
imaging practices in Delaware. The 12 Papastavros centers offer a combination of
MRI, CT, PET, nuclear medicine, mammography, bone densitometry, fluoroscopy,
ultrasound and X-ray. We made a preliminary purchase price allocation of the
acquired assets and liabilities, and approximately $3.6 million of goodwill, and
$1.2 million for covenants not to compete, was recorded with respect to this
transaction.
On February 1, 2008, we acquired the net assets and business of The
Rolling Oaks Imaging Group, located in Westlake and Thousand Oaks, California,
for $6.0 million in cash and the assumption of capital leases of $2.7 million.
The practice consists of two centers, one of which is a dedicated women's
center. The centers are multimodality and include a combination of MRI, CT,
PET/CT, mammography, ultrasound and X-ray. The centers are positioned in the
community as high-end, high-quality imaging facilities that employ
state-of-the-art technology, including 3 Tesla MRI and 64 slice CT units. The
facilities have been fixtures in the Westlake/Thousand Oaks market since 2003.
We made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $5.6 million of goodwill was recorded with
respect to this transaction.
On October 9, 2007, we acquired the assets and business of Liberty
Pacific Imaging located in Encino, California for $2.8 million in cash. The
center operates a successful MRI practice utilizing a 3T MRI unit, the strongest
magnet strength commercially available at this time. The center was founded in
2003. The acquisition allows us to consolidate a portion of our Encino/Tarzana
MRI volume onto the existing Liberty Pacific scanner. This consolidation allows
us to move our existing 3T MRI unit in that market to our Squadron facility in
Rockland County, New York. Approximately $1.1 million of goodwill was recorded
with respect to this transaction. Also, $200,000 was recorded for the fair value
of a covenant not to compete contract.
In September 2007, we acquired the assets and business of three
facilities comprising Valley Imaging Center, Inc. located in Victorville, CA for
$3.3 million in cash plus the assumption of approximately $866,000 of debt. The
acquired centers offer a combination of MRI, CT, X-ray, Mammography, Fluoroscopy
and Ultrasound. The physician who provided the interpretive radiology services
to these three locations joined BRMG. The leased facilities associated with
these centers includes a total monthly rental of approximately $18,000.
Approximately $3.0 million of goodwill was recorded with respect to this
transaction. Also, $150,000 was recorded for the fair value of a covenant not to
compete contract.
In September 2007, we acquired the assets and business of Walnut Creek
Open MRI located in Walnut Creek, CA for $225,000. The center provides MRI
services. The leased facility associated with this center includes a monthly
rental of approximately $6,800 per month. Approximately $50,000 of goodwill was
recorded with respect to this transaction.
In July 2007, we acquired the assets and business of Borg Imaging Group
located in Rochester, NY for $11.6 million in cash plus the assumption of
approximately $2.4 million of debt. Borg was the owner and operator of six
imaging centers, five of which are multimodality, offering a combination of MRI,
CT, X-ray, Mammography, Fluoroscopy and Ultrasound. After combining the Borg
centers with RadNet's existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester. The leased facilities associated with
these centers includes a total monthly rental of approximately $71,000 per
month. Approximately $8.9 million of goodwill was recorded with respect to this
transaction. Also, $1.4 million was recorded for the fair value of covenant not
to compete contracts.
In March 2007, we acquired the assets and business of Rockville Open
MRI, located in Rockville, Maryland, for $540,000 in cash and the assumption of
a capital lease of $1.1 million. The center provides MRI services. The center is
3,500 square feet with a monthly rental of approximately $8,400 per month.
Approximately $365,000 of goodwill was recorded with respect to this
transaction.
DIVESTITURES
In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures for approximately $2.3 million reducing our
ownership to 49%. As a result of this transaction, we no longer consolidate this
joint venture. Accordingly, our consolidated balance sheet at December 31, 2007
60
includes this 49% interest as a component of our total investment in
non-consolidated joint ventures where it is accounted for under the equity
method. The amounts eliminated from our consolidated balance sheet as a result
of the deconsolidation were not material. Since the deconsolidation occurred at
the end of 2007, no significant amounts were eliminated from our statement of
operations.
In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.
In June 2007 we divested a non-core center in Duluth, Minnesota to a
local multi-center operator for $1.3 million.
NOTE 4 - ACQUISITION OF RADIOLOGIX
On November 15, 2006, we completed our previously announced acquisition of Radiologix, Inc.
(AMEX: RGX).as a stock purchase. Under the terms of the acquisitionmerger agreement, Radiologix
shareholders received an aggregate consideration of 11,310,96111,310,950 shares
(or 22,621,922 shares before the one-for-two reverse stock split) of our common
stock and $42,950,000 in cash.
The total purchase price and the allocation of the estimated purchase price
discussed below are preliminary and have not been finalized. The preliminary
estimated total purchase price of the merger is as follows:
(in thousands)(IN THOUSANDS)
--------------
Value of stock given by RadNet to Radiologix* $ 39,400*$39,400
Cash 42,950
Estimated transactionTransaction fees and expenses 15,208*expenses** ----------15,208
-------
Total Purchase Price $ 97,558
==========purchase price $97,558
=======
(*) Calculated as 11,310,96111,310,950 shares multiplied by $3.48 (average closing price
of $1.74$3.48 from June 28, 2006 to July 13, 2006, adjusted for the one-for-two
reverse stock split)2006).
(**) Includes $8,274,000 in assumed liabilities of Radiologix, including
$3,210,000 in merger and acquisition fees and $5,064,000 in Radiologix bond
prepayment penalties.
Under the purchase method of accounting, the total estimated purchase price as
shown above is allocated to Radiologix's net tangible and intangible assets
based on their estimated fair values as of the date of acquisition. The purchase
price allocation is preliminary and has not been finalized because the valuation
of the assets and liabilities has not been completed. The following table
summarizedsummarizes the preliminaryfinal purchase price allocation at the date of acquisition:
(in thousands)acquisition.
(IN THOUSANDS)
--------------
Current assets $ 116,788114,764
Property and equipment, net 76,80278,644
Identifiable intangible assets 58,73961,000
Goodwill 46,17847,762
Investments in joint ventures 9,4819,482
Other assets 585974
Current liabilities (24,145)(25,191)
Accrued restructuring charges (314)
Contracts (8,994)
Assumption of debt (177,358)
Long-term liabilities (7,989)(2,002)
Minority interests in consolidated subsidiaries (1,209)
--------------------
Total purchase price $ 97,558
===========
F-7
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS ACQUISITION - CONTINUED
We have estimated the fair value of tangible assets acquired and liabilities
assumed. Some of these estimates are subject to change, particularly those
estimates relating to the valuation of property and equipment and identifiable
intangible assets. The final allocation of the purchase price will be based upon
Radiologix's assets and liabilities on the closing date and the allocation of
the purchase price will be reviewed by an external valuation expert.=========
CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: RadNetWe valued
cash, marketable securities, investments and other assets at their respective
carrying amounts as RadNet believeswe believe that these amounts approximateapproximated their current fair
values or the
fair values.
IDENTIFIABLE INTANGIBLE ASSETS. RadNet expects identifiableASSETS: Identifiable intangible assets acquired
to include management service agreements.agreements and covenants not to compete. Management
service agreements represent the underlying relationships and agreements with
certain professional radiology groups. Covenants not to compete are contracts
entered into with certain former members of management of Radiologix on the date
of acquisition.
Identifiable intangible assets consist of:
ESTIMATED
ESTIMATED AMORTIZATION ANNUAL
(IN THOUSANDS) FAIR VALUE PERIOD AMORTIZATION
- ---------------------------------- ---------- ------------ ------------
Management service agreements $ 58,739 25 years $ 2,350
RadNet has determined the preliminary fair value of intangible assets with
limited discussions with Radiologix management and a review of certain
transaction-related documents prepared by Radiologix management.
ESTIMATED
ESTIMATED AMORTIZATION ANNUAL
(IN THOUSANDS) FAIR VALUE PERIOD AMORTIZATION
------------- ----------- ------------------ ------------
Management service agreements $57,880 25 years $ 2,315
Covenants not to compete 3,120 1 to 2 years 1,810
61
Estimated useful lives for the intangible assets were based on the
average contract terms, which are greater than the amortization period that will
be used for management contracts. Intangible assets are being amortized using
the straight-line method, considering the pattern in which the economic benefits
of the intangible assets are consumed.
GOODWILL. Approximately $46,178,000GOODWILL: $47,762,000 has been allocated to goodwill. This is an
increase of approximately $9.3 million from our previous estimate. The increase
in goodwill relates to an $8.0 million decrease to property and equipment, a
$100,000 increase to current assets, a $277,000 increase to deferred taxes and a
$1.1 million increase to accrued liabilities. Goodwill represents the excess of
the purchase price over the fair value of the underlying net tangible and
identifiable intangible assets.assets net of liabilities assumed. In accordance with
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,"Goodwill and Other Intangible Assets" goodwill will not be
amortized but instead will be tested for impairment at least annually. In the event that theWe
performed this test on October 1, 2008. As a result of this test, management
of the combined company determinesdetermined that the value of goodwill has
become impaired,is not impaired. Because this goodwill was
established through a stock purchase, no amount is deductible for tax purposes.
OPERATING LEASES: We assumed certain operating leases for both
equipment and facilities. All related historical deferred rent liabilities have
been eliminated.
NOTE 5 - RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
As discussed in Note 2, we adopted the combined companyprovisions of SFAS 157 as of
January 1, 2008 for financial instruments. We are required to adopt the
provisions of SFAS 157 for non-financial instruments in 2009 and do not expect
this adoption to have a material impact on our consolidated financial
statements.
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES, INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115, which is effective for fiscal years beginning after November
15, 2007. SFAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other U.S. generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. The adoption of SFAS 159 did not have a
material impact on our consolidated financial statements. As we have not elected
the fair value option allowed for by SFAS 159 for any assets or liabilities that
are otherwise not permitted to be accounted for at fair value under other U.S.
generally accepted accounting principals, the adoption of SFAS 159 did not have
an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), BUSINESS COMBINATIONS
and SFAS 160, NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS.
Those standards were intended to improve, simplify, and converge internationally
the accounting for business combinations and the reporting of noncontrolling
(minority) interests in consolidated financial statements. SFAS 141(R) requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; requires acquisition related transaction costs to be
expensed and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008. SFAS 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is prohibited.
We have not evaluated the potential impact that SFAS 141(R) will incurhave on our
financial statements.
SFAS 160 is designed to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report minority interests in subsidiaries in the same way as equity
in the consolidated financial statements. Moreover, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an accounting chargeentity
and minority interests by requiring they be treated as equity transactions. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
In addition, SFAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the amountpresentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. We currently do not expect
SFAS 160 to have a material impact on our financial statements, however, the
effect is largely dependent on potential future transactions which we are
currently unable to forecast.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not
believed by management to, have a material impact on our present or future
consolidated financial statements.
62
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization
are as follows (in thousands):
DECEMBER 31,
------------------------
2008 2007
--------- ---------
Buildings $ 2 $ 602
Medical equipment 173,884 142,423
Office equipment, furniture and fixtures 49,676 42,466
Leasehold improvements 93,573 80,518
Equipment under capital lease 59,543 43,162
--------- ---------
376,678 309,171
Accumulated depreciation and amortization (183,574) (145,074)
--------- ---------
$ 193,104 $ 164,097
========= =========
Depreciation and amortization expense on property and equipment, including
amortization of impairment duringequipment under capital leases, for the fiscal quarter in whichyears ended
December 31, 2008 and 2007, the determination is
made.
F-8
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES
Attwo months ended December 31, 2006 and the year
ended October 31, 2006 our working capital was $1.8$49.4 million, $40.7 million, $5.4 million and $16.2
million, respectively.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 31, 2008 totaled $105.3 million. AtGoodwill is recorded
as a result of business combinations. Activity in goodwill for the year ended
October 31, 2005,
our working capital deficit was approximately $143.4 million due2006, the two months ended December 31, 2006, and the years ended
December 31, 2007 and 2008 are provided below (in thousands):
Balance as of October 31, 2006 and 2005 $ 23,099
Goodwill acquired through the acquisition of Radiologix 38,508
---------
Balance as of December 31. 2006 61,607
Adjustments to our preliminary allocation of the purchase price of Radiologix 9,253
Goodwill acquired through the acquisition of Walnut Creek Open MRI 50
Goodwill acquired through the acquisition of Valley Imaging Center, Inc. 2,818
Goodwill acquired through the acquisition of Borge Imaging Group 9,202
Goodwill acquired through the acquisition of Rockville Open MRI 365
Goodwill acquired through the acquisition of Liberty Pacific Imaging 1,100
---------
Balance as of December 31, 2007 84,395
Adjustments to our preliminary allocation of the purchase price of Borge Imaging Group (254)
Adjustments to our preliminary allocation of the purchase price of Valley Imaging Center, Inc. 212
Goodwill acquired through the acquisition of Rolling Oaks Imaging Group 5,612
Goodwill acquired through the acquisition of Papastavros Associates Medical Imaging 3,649
Goodwill acquired through the acquisition of BreastLink Medical Group, Inc 2,048
Goodwill acquired through the acquisition of InSight Health Corp. 5,560
Goodwill acquired through the acquisition of Simi Valley Advanced Medical 313
Goodwill acquired through the acquisition of NeuroSciences Imaging Center 2,613
Goodwill acquired through the acquisition of imaging practice of Parvis Gamagami, M.D 600
Goodwill acquired through the acquisition of Middletown Imaging 530
---------
Balance as of December 31, 2008 $ 105,278
=========
Other intangible assets are primarily related to the reclassificationvalue of
approximately $109management service agreements obtained through our acquisition of Radiologix and
are recorded at cost of $57.9 million less accumulated amortization of $4.9
million at December 31, 2008. Also included in notes and capital lease
obligations as current liabilities expectedother intangible assets is the
value of covenant not to be refinanced and the
classification of approximately $13.3 million in line of credit liabilities as
current. We were subject to financial covenants under our debt agreements and
believed we may have been unable to continue to be in compliancecompete contracts associated with our existing financial covenants during fiscal 2006. As such,recent facility
acquisitions (see note 3) totaling $6.4 million less accumulated amortization of
$3.9 million, as well as the value of trade names associated debtwith acquired
imaging facilities totaling $2.2 million less accumulated amortization of
$791,000. Amortization expense for the year ended December 31, 2008 was reclassified as a current liability.$4.1
million. Intangible assets are amortized using the straight-line method.
Management service agreements are amortized over 25 years using the straight
line method.
63
The following table shows annual amortization expense, by asset classes
that will be recorded over the next five years (in thousands):
YEAR ENDED DECEMBER 31,
2009 2010 2011 2012 2013 THEREAFTER TOTAL
------- ------- ------- ------- ------- ------- -------
Management service agreements $ 2,315 $ 2,315 $ 2,315 $ 2,315 $ 2,315 $41,385 $52,960
Covenent not to compete contracts 727 660 597 438 50 -- 2,472
Trade names 150 150 150 150 109 720 1,429
------- ------- ------- ------- ------- ------- -------
Total annual amortization $ 3,192 $ 3,125 $ 3,062 $ 2,903 $ 2,474 $42,105 $56,861
======= ======= ======= ======= ======= ======= =======
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES (IN THOUSANDS)
DECEMBER 31,
-------------------
2008 2007
------- -------
Accounts payable $26,071 $13,288
Accrued expenses 37,950 31,950
Accrued payroll and vacation 11,506 8,216
Accrued professional fees 8,149 6,511
------- -------
Total $83,676 $59,965
======= =======
NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES
On November 15, 2006, we entered into a $405 million senior secured
credit facility with GE Commercial Finance Healthcare Financial Services.Services (the
"November 2006 Credit Facility"). This facility was used to finance our
acquisition of Radiologix, refinance existing indebtedness, pay transaction
costs and expenses relating to our acquisition of Radiologix, and to provide
financing for working capital needs post-acquisition.
Debt issue costs related to the March 2006 refinancing and line of credit of
approximately $5.0 million will be written off and we will recognize a loss on
the extinguishments of debt with the transaction. The facility consists of a
revolving credit facility of up to $45 million, a $225 million term loanfirst lien Term
Loan and a $135 million second lien term loan.Term Loan. The revolving credit facility has a term of
five years, thefirst lien term loan has a
term of six years and the second lien term loan has a term of six and one-half
years. Interest is payable on all loans initially at an Index Rate plus the
Applicable Index Margin, as defined. The Index Rate is initially a floating rate
equal to the higher of the rate quoted from time to time by The Wall Street
Journal as the "base rate on corporate loans posted by at least 75% of the
nation's largest 30 banks" or the Federal Funds Rate plus 50 basis points. The
Applicable Index Margin on each of the revolving credit facility and the term
loan is 2% and on the second lien term loan is 6%. We may request that the
interest rate instead be based on LIBOR plus the Applicable LIBOR Margin, which
is 3.5% for the revolving credit facility and the term loan and 7.5% for the
second lien term loan. The credit facility includes customary covenants for a
facility of this type, including minimum fixed charge coverage ratio, maximum
total leverage ratio, maximum senior leverage ratio, limitations on
indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
On August 23, 2007, we secured an incremental $35 million ("Incremental
Facility") as part of our existing credit facilities with GE Commercial Finance
Healthcare Financial Services. The Incremental Facility consists of an
additional $25 million as part of our first lien Term Loan and $10 million of
additional capacity under our existing revolving line of credit bringing the
total capacity to $55 million. As of December 31, 2008, the Company qualified to
borrow up to $34 million on the revolver. The Incremental Facility will be used
to fund certain identified strategic initiatives and for general corporate
purposes.
On February 22, 2008, we secured a second incremental $35 million
("Second Incremental Facility") of capacity as part of our existing credit
facilities with GE Commercial Finance Healthcare Financial Services. The Second
Incremental Facility consists of an additional $35 million as part of our second
lien term loan and the first lien term loan or revolving credit facility may be
increased by up to an additional $40 million sometime in the future. As part of
the transaction, partly due to the drop in LIBOR of over 2.00% since the credit
facilities were established in November 2006, we increased the Applicable LIBOR
Margin to 4.25% for the revolving credit facility and first lien term loan and
to 9.0% for the second lien term loan. The additions to our existing credit
facilities are intended to provide capital for near-term opportunities and
future expansion.
As part of the senior secured credit facility financing, we were required to swap at leastswapped 50%
of the aggregate principal amount of the facilities to a floating rate within 90
days of the close of the agreement on November 15, 2006.closing. On April 11, 2006, effective April 28, 2006, we entered
into an interest rate swap, not designated as a cash flow hedge, on $73.0
million fixing the LIBOR rate of interest at 5.47% for a period of three years.
This swap was made in conjunction with the $161.0 million credit facility that
closed on March 9, 2006. In addition, on November 15, 2006, we entered into ana
designated cash flow hedge interest rate swap on $107.0 million fixing the LIBOR
rate of interest at 5.02% for a period of three years, and on November 28, 2006,
64
we entered into ana designated cash flow hedge interest rate swap on $90.0 million
fixing the LIBOR rate of interest at 5.03% for a period of three years.
Previously, the interest rate on the above $270.0 million portion of the credit
facility was based upon a spread over LIBOR which floats with market conditions.
The Company documents its risk management strategy and hedge
effectiveness at the inception of the hedge, and, unless the instrument
qualifies for the short-cut method of hedge accounting, over the term of each
hedging relationship. The Company's use of derivative financial instruments is
limited to interest rate swaps, the purpose of which is to hedge the cash flows
of variable-rate indebtedness. The Company does not hold or issue derivative
financial instruments for speculative purposes. In accordance with Statement of
Financial Accounting Standards No. 133, derivatives that have been designated
and qualify as cash flow hedging instruments are reported at fair value. The
gain or loss on the effective portion of the hedge (i.e., change in fair value)
is initially reported as a component of other comprehensive income in the
Company's Consolidated Statement of Stockholders' Equity. The remaining gain or
loss, if any, is recognized currently in earnings. For the derivative held that
is not designated as a cash flow hedging instrument, we recorded a decrease to
interest expense of approximately $707,000 and an increase to interest expense
of $820,000 for the years ended December 31, 2008 and 2007, respectively. The
corresponding liability of approximately $823,000 is included in accounts
payable and accrued expenses in the consolidated balance sheet at December 31,
2008. Of the derivatives that were
not designated as cash flow hedging instruments,
we recorded interest expense of
approximately $920,000 classified as accrued expenses on the Company's balance
sheet at October 31, 2006.
F-9
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Effective March 2006, we completed the issuance of a $161$6.4 million senior secured
credit facility that we used to refinance substantially all of our existing
indebtedness (except for $16.1 million of outstanding subordinated debenturesaccumulated other comprehensive loss, and approximately $5 million of capital lease obligations). We incurred fees and
expenses for the transaction of approximately $5.6 million. Debt issue costs are
being amortized on a straight-line basis over 65 months and are classified as
Deferred financing costs. In addition, we recorded a net loss on extinguishments
of debt of $2.1 million, which includes $1.2 million in pre-payment penalty fees
that are unpaid as of October 31, 2006 and classified as accrued expenses under
current liabilities. The facility provided for a $15 million five-year revolving
credit facility,have an
$86 million term loan due in five years and a $60 million
second lien term loan due in six years. The loans were subject to acceleration
on December 27, 2007, unless we made arrangements to discharge or extend our
outstanding subordinated debentures by that date. Under the terms and conditionsoffsetting liability of the Second Lien Term Loan, subject to achieving certain leverage ratios, we
had the right to raise up to $16.1 million in additional funds as part of the
Second Lien Term Loan for the purposes of redeeming the subordinated debentures.
Additionally, under the current facilities, we the ability to pursue other
funding sources to refinance the subordinated debentures. The loans were payable
interest only monthly except for the $86 million term loan that required
amortization payments of 1.0% per annum, or $860,000, paid quarterly.
The revolving credit facility and the $86 million term loan bear interest at a
base rate ("base rate" means corporate loans posted by at least 75% of the
nation's 30 largest banks as quoted by the Wall Street Journal) plus 2.5%, or at
our election, the LIBOR rate plus 4.0% per annum, payable monthly. The $60
million second lien term loan bears interest at the base rate plus 7.0%, or at
our election, the LIBOR rate plus 8.5% per annum, payable monthly. The $86
million term loan included amortization payments of 1.0% per annum, payable in
quarterly installments of $215,000. Upon the close of the refinancing on March
9, 2006, we utilized approximately $1.5 million of the new $15 million revolving
credit facility.
Under the new facility, we were subject to various financial covenants including
a limitation on capital expenditures, maximum days sales outstanding, minimum
fixed charge coverage ratio, maximum leverage ratio and maximum senior leverage
ratio. Availability under our $15 million revolving credit facility was governed
by the margins calculated under the maximum senior leverage ratio and maximum
total leverage ratio covenants. As of October 31, 2006, we had approximately
$2.6 million of availability based upon our borrowing base formula.
Prior to November 2005, we entered into various other financing arrangements
over the periods reported in this Form 10-K in order to improve our working
capital and meet our obligations as they became due (see Note 7).
F-10
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations. In addition to operations, we
require significant amounts of capital for the initial start-up and development
expense of new diagnostic imaging facilities, the acquisition of additional
facilities and new diagnostic imaging equipment, and to service our existing
debt and contractual obligations. Because our cash flows from operations have
been insufficient to fund all of these capital requirements, we have depended on
the availability of financing under credit arrangements with third parties.
Historically, our principal sources of liquidity have been funds available for
borrowing under our existing lines of credit, now with General Electric Capital
Corporation. We finance the acquisition of equipment mainly through capital and
operating leases. As of October 31, 2006 and October 31, 2005, our line of
credit liabilities were $12.4 million and $13.3 million, respectively.
Our business strategy with regard to operations will focus on the following:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI and CT applications
o Optimizing operating efficiencies; and
o Expanding our networks
F-11
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
Our ability to generate sufficient cash flow from operations to make payments on
our debt and other contractual obligations will depend on our future financial
performance. A range of economic, competitive, regulatory, legislative and
business factors, many of which are outside of our control, will affect our
financial performance. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in the next twelve
months.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF FINANCIAL STATEMENTS
On February 7, 2005, the Office of the Chief Accountant of the SEC (the "OCA")
issued a letter to the American Institute of Certified Public Accountants
regarding lease accounting which identified lease accounting issues including
amortization of leasehold improvements.
The OCA believes that leasehold improvements in an operating lease should be
amortized by the lessee over the shorter of their economic lives or the lease
term, as defined in paragraph 5 (f) of FASB Statement 13 ("SFAS 13"), Accounting
for Leases, as amended. The OCA believes amortizing leasehold improvements over
a term that includes assumption of lease renewals is appropriate only when the
renewals have been determined to be "reasonably assured," as that term is
contemplated by SFAS 13.
In connection with the preparation of our Annual Report on Form 10-K for the
fiscal year ended October 31, 2006, our Management and the Audit Committee of
our Board of Directors determined that our accounting for leases was not
consistent with the accounting principle described in the OCA's letter. Similar
to many other companies with multiple sites including outpatient medical service
companies, retailers and restaurants, we have corrected our error in accounting
for leases.
Generally we have amortized leasehold improvements over the shorter of the
assets' estimated useful lives or the initial lease terms including renewal
options which are reasonably assured. This is consistent with our utilization of
initial lease terms including renewal options in our calculation of straight
line rent expense, however, in some situations the Company depreciated leasehold
improvements over a 15-year period while the straight line rent expense in those
same years was computed over the initial lease terms including renewal options,
which were less than 15 years. Therefore, to ensure compliance with generally
accepted accounting principles, we are correcting our calculation of its
amortization of leasehold improvements to utilize the shorter of the assets'
estimated useful lives or the initial terms including renewal options of the
related leases.
The following is a summary of the significant effects of these corrections on
our consolidated balance sheet as of October 31, 2005, the effects of these
corrections on our statements of income and our statements of cash flows for the
years ended October 31, 2004 and 2005, respectively, as well as the effects of
these corrections on our statements of stockholders' deficit as of October 31,
2003, 2004, and 2005, respectively.
F-12
CONSOLIDATED BALANCE SHEETS
AS PREVIOUSLY
AS OF OCTOBER 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents 2,000 -- 2,000
Accounts Receivable, net 22,319,000 -- 22,319,000
Unbilled receivables and other receivables 476,000 -- 476,000
Other 1,799,000 -- 1,799,000
-----------------------------------------------------------
Total current assets 24,596,000 -- 24,596,000
PROPERTY & EQUIPMENT, net 68,107,000 (3,449,000) 64,658,000
OTHER ASSETS:
Accounts receivable, net 1,267,000 -- 1,267,000
Goodwill 23,099,000 -- 23,099,000
Debt issue costs, net 472,000 -- 472,000
Trade name and other 3,692,000 -- 3,692,000
-----------------------------------------------------------
Total other assets 28,530,000 -- 28,530,000
Total assets 121,233,000 (3,449,000) 117,784,000
===========================================================
LIABILITIES & SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash disbursements in transit 3,425,000 -- 3,425,000
Line of credit 13,341,000 -- 13,341,000
Accounts payable and accrued expenses 22,469,000 -- 22,469,000
Short-term notes expected to be refinanced:
Notes payable 69,066,000 -- 69,066,000
Obligations under capital lease 56,927,000 -- 56,927,000
Advances due to related party -- -- --
Notes payable 1,101,000 -- 1,101,000
Obligations under capital lease 1,697,000 -- 1,697,000
-----------------------------------------------------------
Total current liabilities 168,026,000 -- 168,026,000
LONG-TERM LIABILITIES:
Subordinated debentures payable 16,147,000 -- 16,147,000
Line of credit -- -- --
Notes payable to related party 3,533,000 -- 3,533,000
Notes payable, net of current portion -- -- --
Obligations under capital lease, net of current 4,129,000 -- 4,129,000
Accrued expenses 31,000 -- 31,000
-----------------------------------------------------------
Total long-term liabilities 23,840,000 -- 23,840,000
COMMITMENTS AND CONTINGENCIES -- -- --
STOCKHOLDERS' DEFICIT
Common Stock 433,000 -- 433,000
Paid-in capital 100,590,000 -- 100,590,000
Treasury Stock (695,000) -- (695,000)
Retained Earnings (deficit) (170,961,000) (3,449,000) (174,410,000)
-----------------------------------------------------------
(70,633,000) (3,449,000) (74,082,000)
Total liabilities and stockholders' deficit 121,233,000 (3,449,000) 117,784,000
===========================================================
F-13
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2004 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
NET REVENUE
137,277,000 -- 137,277,000
OPERATING EXPENSES
Operating Expenses 105,828,000 -- 105,828,000
Depreciation and Amortization 17,762,000 155,000 17,917,000
Provision for bad debts 3,911,000 -- 3,911,000
Loss on disposal of equipment, net -- -- --
-----------------------------------------------------------
Total Operating Expenses 127,501,000 155,000 127,656,000
INCOME FROM OPERATIONS 9,776,000 (155,000) 9,621,000
OTHER EXPENSE (INCOME):
Interest Expense 17,285,000 -- 17,285,000
Loss (gain) on Debt Extinguishment, net -- -- --
Other Income (176,000) -- (176,000)
Other Expense 1,657,000 -- 1,657,000
-----------------------------------------------------------
Total Other Expense 18,766,000 -- 18,766,000
LOSS BEFORE EQUITY IN INCOME OF INVESTEE
INCOME TAXES, AND MINORITY INTEREST IN
EARNINGS OF SUBSIDIARIES (8,990,000) (155,000) (9,145,000)
EQUITY IN INCOME OF INVESTEE -- -- --
-----------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST IN EARNINGS OF SUBSIDIARIES (8,990,000) (155,000) (9,145,000)
INCOME TAX EXPENSE (5,235,000) -- (5,235,000)
-----------------------------------------------------------
LOSS BEFORE MINORITY INTEREST IN EARNINGS
OF SUBSDIARIES (14,225,000) (155,000) (14,380,000)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES 351,000 -- 351,000
-----------------------------------------------------------
NET LOSS (14,576,000) (155,000) (14,731,000)
BASIC EARNINGS PER SHARE $ (0.71) $ (0.01) $ (0.72)
DILUTED EARNINGS PER SHARE $ (0.71) $ (0.01) $ (0.72)
F-14
CONSOLIDATED STATEMENTS OF OPERATIONS
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
NET REVENUE 145,573,000 -- 145,573,000
OPERATING EXPENSES
Operating Expenses 109,012,000 -- 109,012,000
Depreciation and Amortization 17,101,000 435,000 17,536,000
Provision for bad debts 4,929,000 -- 4,929,000
Loss on disposal of equipment, net 696,000 -- 696,000
-----------------------------------------------------------
Total Operating Expenses 131,738,000 435,000 132,173,000
INCOME FROM OPERATIONS 13,835,000 (435,000) 13,400,000
OTHER EXPENSE (INCOME):
Interest Expense 17,493,000 -- 17,493,000
Loss (gain) on Debt Extinguishment, net (515,000) -- (515,000)
Other Income (357,000) -- (357,000)
Other Expense 349,000 -- 349,000
-----------------------------------------------------------
Total Other Expense 16,970,000 -- 16,970,000
LOSS BEFORE EQUITY IN INCOME OF INVESTEE
INCOME TAXES, AND MINORITY INTEREST IN
EARNINGS OF SUBSIDIARIES (3,135,000) (435,000) (3,570,000)
EQUITY IN INCOME OF INVESTEE -- -- --
-----------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST IN EARNINGS OF SUBSIDIARIES (3,135,000) (435,000) (3,570,000)
INCOME TAX EXPENSE -- -- --
-----------------------------------------------------------
LOSS BEFORE MINORITY INTEREST IN EARNINGS
OF SUBSDIARIES (3,135,000) (435,000) (3,570,000)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES -- -- --
-----------------------------------------------------------
NET LOSS (3,135,000) (435,000) (3,570,000)
BASIC EARNINGS PER SHARE $ (0.15) $ (0.02) $ (0.17)
DILUTED EARNINGS PER SHARE $ (0.15) $ (0.02) $ (0.17)
F-15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2003 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Retained Earnings (153,250,000) (2,859,000) (156,109,000)
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2004 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Retained Earnings (167,826,000) (3,014,000) (170,840,000)
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
Retained Earnings (170,961,000) (3,449,000) (174,410,000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2004 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (14,576,000) (155,000) (14,731,000)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 17,762,000 155,000 17,917,000
Provision for bad debts 3,911,000 -- 3,911,000
Equity in income of investee -- -- --
Deferred income tax expense 5,235,000 -- 5,235,000
Loss (gain) on extinguishments of debt (34,000) -- (34,000)
Loss (gain) on sale of assets and operating sites 27,000 -- 27,000
Accrued interest expense and interest related
to swap 6,565,000 -- 6,565,000
Share-based payments -- -- --
Tenant improvement allowances -- -- --
Minority interest in earnings of continuing
subsidiaries 351,000 -- 351,000
Changes in assets and liabilities:
Accounts receivable 1,696,000 -- 1,696,000
Unbilled receivables (786,000) -- (786,000)
Other assets (286,000) -- (286,000)
Accounts payable and accrued expenses (2,811,000) -- (2,811,000)
--------------------------------------------------------
Net cash provided by operating activities 17,054,000 -- 17,054,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of imaging facilities (35,000) -- (35,000)
Purchase of property and equipment (3,774,000) -- (3,774,000)
Proceeds from sale of divisions, centers,
and equipment -- -- --
--------------------------------------------------------
Net cash used by investing activities (3,809,000) -- (3,809,000)
CASH FLWOS FROM FINANCING ACTIVITIES:
Cash disbursements in transit (317,000) -- (317,000)
Principal payments on notes and leases payable (13,247,000) -- (13,247,000)
Proceeds from short and long-term borrowings 1,000,000 -- 1,000,000
Proceeds from borrowings from related parties -- -- --
Repayment of debt upon extinguishments -- -- --
Proceeds from borrowings upon refinancing -- -- --
Debt issue costs -- -- --
Purchase of subordinated debentures (60,000) -- (60,000)
Proceeds from issuance of common stock -- -- --
Joint venture distributions (650,000) -- (650,000)
--------------------------------------------------------
Net cash used by financing activities (13,274,000) -- (13,274,000)
NET INCREASE IN CASH (29,000) -- (29,000)
CASH, beginning of year 30,000 -- 30,000
--------------------------------------------------------
CASH, end of year 1,000 -- 1,000
F-16
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS PREVIOUSLY
FISCAL YEAR ENDED OCTOBER 31, 2005 REPORTED ADJUSTMENTS AS RESTATED
-------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss (3,135,000) (435,000) (3,570,000)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 17,101,000 435,000 17,536,000
Provision for bad debts 4,929,000 -- 4,929,000
Equity in income of investee -- -- --
Deferred income tax expense -- -- --
Loss (gain) on extinguishments of debt (430,000) -- (430,000)
Loss (gain) on sale of assets and operating sites 696,000 -- 696,000
Accrued interest expense and interest related to
swap 1,248,000 -- 1,248,000
Share-based payments -- -- --
Tenant improvement allowances -- -- --
Minority interest in earnings of continuing
subsidiaries -- -- --
Changes in assets and liabilities:
Accounts receivable (6,617,000) -- (6,617,000)
Unbilled receivables 490,000 -- 490,000
Other assets (2,572,000) -- (2,572,000)
Accounts payable and accrued expenses (570,000) -- (570,000)
-----------------------------------------------------------
Net cash provided by operating activities 11,140,000 -- 11,140,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of imaging facilities -- -- --
Purchase of property and equipment (4,063,000) -- (4,063,000)
Proceeds from sale of divisions, centers, and
equipment 65,000 -- 65,000
-----------------------------------------------------------
Net cash used by investing activities (3,998,000) -- (3,998,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash disbursements in transit 889,000 -- 889,000
Principal payments on notes and leases payable (14,146,000) -- (14,146,000)
Proceeds from short and long-term borrowings 4,746,000 -- 4,746,000
Proceeds from borrowings from related parties 1,370,000 -- 1,370,000
Repayment of debt upon extinguishments -- -- --
Proceeds from borrowings upon refinancing -- -- --
Debt issue costs -- -- --
Purchase of subordinated debentures -- -- --
Proceeds from issuance of common stock -- -- --
Joint venture distributions -- -- --
-----------------------------------------------------------
Net cash used by financing activities (7,141,000) -- (7,141,000)
NET INCREASE IN CASH 1,000 -- 1,000
CASH, beginning of year 1,000 -- 1,000
-----------------------------------------------------------
CASH, end of year 2,000 -- 2,000
F-17
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of Radnet,
Inc. include all the accounts of Radnet Inc., its wholly owned direct
subsidiary, Radnet Management, Inc., and Beverly Radiology Medical Group III, or
BRMG, which is a professional corporation, all collectively referred to as "us"
or "we". The consolidated financial statements also include Radnet Sub, Inc.,
Radnet Management I, Inc., Radnet Management II, Inc., or Modesto, SoCal MR Site
Management, Inc., Diagnostic Imaging Services, Inc., or DIS, Burbank Advanced
LLC, or Burbank, and Rancho Bernardo Advanced LLC, or RB, all wholly owned
subsidiaries of Radnet Management, Inc. Interests of minority shareholders are
separately disclosed in the consolidated balance sheets and consolidated
statements of operations of the Company. Effective July 31, 2004 and September
30, 2004, we purchased the remaining 25% minority interests in Rancho Bernardo
and Burbank, respectively.
The operations of BRMG are consolidated with us as a result of the contractual
and operational relationship among BRMG, Dr. Berger and us. We are considered to
have a controlling financial interest in BRMG pursuant to the guidance in EITF
97-2. Medical services and supervision at most of our imaging centers are
provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99%-owned by Dr. Berger. Radnet
provides non-medical, technical and administrative services to BRMG for which
they receive a management fee.
The operating activities of subsidiaries areamount, included in the accompanying
consolidated financial statements from the date of acquisition. Investments in
companies in which the Company has the ability to exercise significant
influence, but not control, are accountedother non-current
liabilities, for by the equity method. All
intercompany transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. These estimates and
assumptions affect various matters, including our reported amounts of assets and
liabilities in its consolidated balance sheets at the dates of the financial
statements; its disclosure of contingent assets and liabilities at the dates of
the financial statements; and its reported amounts of revenues and expenses in
its consolidated statements of operations during the reporting periods. These
estimates involve judgments with respect to numerous factors that are difficult
to predict and are beyond management's control. As a result, actual amounts
could materially differ from these estimates.
REVENUE RECOGNITION - Revenue consists of net patient fee for service revenue
and revenue from capitation arrangements, or capitation revenue.
Net patient service revenue is recognized at the time services are provided net
of contractual adjustments based on our evaluation of expected collections
resulting from their analysis of current and past due accounts, past collection
experience in relation to amounts billed and other relevant information.
Contractual adjustments result from the differences between the rates charged
for services performed and reimbursements by government-sponsored healthcare
programs and insurance companies for such services.
Capitation revenue is recognized as revenue during the period in which we were
obligated to provide services to plan enrollees under contracts with various
health plans. Under these contracts, we receive a per enrollee amount each month
covering all contracted services needed by the plan enrollees.
F-18
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The following table summarizes net revenue for the years ended October 31, 2004,
2005 and 2006:
2004 2005 2006
------------ ------------ ------------
Net patient service $103,271,000 $107,324,000 $118,045,000
Capitation 34,006,000 38,249,000 42,960,000
------------ ------------ ------------
Net revenue $137,277,000 $145,573,000 $161,005,000
============ ============ ============
Accounts receivable are primarily amounts due under fee-for-service contracts
from third party payors, such as insurance companies and patients and
government-sponsored healthcare programs geographically dispersed throughout
California. Receivables from government agencies made up approximately 17.0% and
24.0% of accounts receivable at October 31, 2005 and 2006, respectively.
Accounts receivable as of October 31, 2006 are presented net of allowances of
approximately $60,043,000, of which $57,826,000 is included in current and
$2,217,000 is included in noncurrent. Accounts receivable as of October 31,
2005, are presented net of allowances of approximately $59,491,000, of which
$56,296,000 is included in current and $3,195,000 is included in noncurrent.
Included in allowances as of October 31, 2006 are allowances for bad debts of
approximately $1,490,000, of which $1,436,000 is included in current and $54,000
is included in noncurrent. Included in allowances as of October 31, 2005 are
allowances for bad debts of approximately $980,000, of which $927,000 is
included in current and $53,000 is included in noncurrent.
CREDIT RISKS - Financial instruments that potentially subject us to credit risk
are primarily cash equivalents and accounts receivable. We have placed our cash
and cash equivalents with one major financial institution. At times, the cash in
the financial institution is temporarily in excess of the amount insured by the
Federal Deposit Insurance Corporation, or FDIC.
With respect to accounts receivable, we routinely assess the financial strength
of our customers and third-party payors and, based upon factors surrounding
their credit risk, establish a provision for bad debt. Net revenue by payor for
the years ended October 31, 2004, 2005 and 2006 were:
Net Revenue
------------------------------
2004 2005 2006
-------- -------- --------
Capitation contracts 24.8% 26.3% 26.7%
HMO/PPO/Managed care 21.3% 21.7% 23.7%
Medicare 13.6% 14.9% 15.0%
Blue Cross/Shield/Champus 13.2% 14.6% 14.4%
Special group contract 12.3% 9.2% 8.2%
Commercial insurance 4.9% 4.2% 3.0%
Workers compensation 3.8% 2.8% 2.4%
Medi-Cal 2.6% 2.9% 3.5%
Other 3.5% 3.4% 3.1%
Management believes that its accounts receivable credit risk exposure, beyond
allowances that have been provided, is limited.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, we
consider all highly liquid investments purchased that mature in three months or
less when purchased to be cash equivalents. The carrying amount of cash and cash
equivalents approximates their fair market value.
LOAN FEES - Costs of financing are deferred and amortized on a straight-line
basis over the life of the respective loan.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less
accumulated depreciation and amortization and valuation impairment allowances.
Depreciation and amortization of property and equipment are provided using the
straight-line method over their estimated useful lives, which range from 3 to 15
years. Leasehold improvements are amortized at the lower of lease term or their
estimated useful lives, whichever is lower, which range from 3 to 30 years. Only
a few leasehold improvements are deemed to have a life greater than 15 to 20
years. Maintenance and repairs are charged to expenses as incurred.
F-19
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GOODWILL - Goodwill at October 31, 2006 totaled $23,099,000. Goodwill is
recorded as a result of business combinations. Management evaluates goodwill, at
a minimum, on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable in accordance with
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets." Impairment of goodwill is tested at the reporting unit
level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of these hedging instruments at December 31,
2008.
Subsequent to year end 2008, the reporting unit.Company was able to modify two of its
three interest rate swaps. The fair valuemodifications extended the maturity of, a reporting unit is
estimated using a combinationand
re-priced two existing interest rate hedges originally executed in 2006 for an
additional 36 months, resulting in an annualized cash interest expense savings
of $2.9 million. On one of the income or discounted cash flows approach
and the market approach, which uses comparable market data. If the carryingLIBOR hedge modifications for a notional amount
of $107 million of LIBOR exposure, the reporting unit exceeds its fair value, goodwill is considered
impaired andCompany on January 29, 2009 replaced a
fixed LIBOR rate of 5.02% with a new rate of 3.47% maturing on November 15,
2012. On the second step is performed to measure theLIBOR hedge modification for a notional amount of impairment
loss, if any. For each$90
million of LIBOR exposure, the three year periods ended October 31, 2006 we
recorded no impairment loss related to goodwill. However, if estimates or the
related assumptions change in the future, we may be required to record
impairment charges to reduce the carrying amountCompany on February 5, 2009 replaced a fixed
LIBOR rate of goodwill.
LONG-LIVED ASSETS - We evaluate our long-lived assets (property, plant and
equipment) and definite-lived intangibles for impairment whenever indicators5.03% with a new rate of impairment exist. The accounting standards require that if the sum of the
undiscounted expected future cash flows from a long-lived asset or
definite-lived intangible is less than the carrying value of that asset, an
asset impairment charge must be recognized. The amount of the impairment charge
is calculated as the excess of the asset's carrying value over its fair value,
which generally represents the discounted future cash flows from that asset or
in the case of assets we expect to sell, at fair value less costs to sell.
INCOME TAXES - Income tax expense is computed using an asset and liability
method and using expected annual effective tax rates. Under this method,
deferred income tax assets and liabilities result from temporary differences in
the financial reporting bases and the income tax reporting bases of assets and
liabilities. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefit that, based on available evidence, is not expected
to be realized. When it appears more likely than not that deferred taxes will
not be realized, a valuation allowance is recorded to reduce the deferred tax
asset to its estimated realizable value. Income taxes are further explained in
Note 9.
EQUITY BASED COMPENSATION --We have two long-term incentive stock option plans.
The 1992 plan has not issued options since the inception of the new 2000 plan.
The 2000 plan reserves 1,000,000 shares of common stock. Options granted under
the plan are intended to qualify as incentive stock options under existing tax
regulations. In addition, we have issued non-qualified stock options from time
to time in connection with acquisitions and for other purposes and have3.61% also issued stock under the plan. Employee stock options generally vest over three
years and expire five to ten years from date of grant.
During the first quarter of fiscal 2006, we adopted SFAS No. 123(R),
"Share-Based Payment," applying the modified prospective method. This Statement
requires all equity-based payments to employees, including grants of employee
options, to be recognized in the consolidated statement of earnings based on the
grant date fair value of the award. Under the modified prospective method, we
are required to record equity-based compensation expense for all awards granted
after the date of adoption and for the unvested portion of previously granted
awards outstanding as of the date of adoption. The fair values of all options
were valued using a Black-Scholes model. In anticipation of the adoption of SFAS
No. 123(R), we did not modify the terms of any previously granted awards.
The compensation expense recognized for all equity-based awards is net of
estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation within operating expenses with the same line item as
the majority of the cash compensation paid to employees.
SEGMENTS OF AN ENTERPRISE - The Company reports segment information in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). Under SFAS 131 all publicly traded companies
are required to report certain information about the operating segments,
products, services and geographical areas in which they operate and their major
customers. The Company operates in a single business segment and operates only
in the United States.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
with the current year presentation. These changes have no effect on net income.
F-20
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
EARNINGS PER SHARE - Earnings per share are based upon the weighted average
number of shares of common stock and common stock equivalents outstanding, net
of common stock held in treasury, and includes the effect of the one-for-two
reverse stock split effective November 28, 2006, as follows:
Year Ended October 31,
------------------------------------------------
2004 2005 2006
-------------- -------------- --------------
Net loss from continuing operations $ (14,731,000) $ (3,570,000) $ (6,894,000)
-------------- -------------- --------------
BASIC EARNINGS (LOSS) PER SHARE
Weighted average number of common shares
outstanding during the year 20,553,407 20,603,955 21,013,957
-------------- -------------- --------------
Basic earnings (loss) per share:
Basic loss per share $ (0.72) $ (0.17) $ (0.33)
-------------- -------------- --------------
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average number of common shares
outstanding during the year 20,553,407 20,603,955 21,013,957
Add additional shares issuable upon exercise
of stock options and warrants -- -- --
-------------- -------------- --------------
Weighted average number of common shares used
in calculating diluted earnings per share 20,553,407 20,603,955 21,013,957
-------------- -------------- --------------
Diluted earnings (loss) per share:
Diluted loss per share $ (0.72) $ (0.17) $ (0.33)
-------------- -------------- --------------
For the years ended October 31, 2004, 2005 and 2006, we excluded all options,
warrants and convertible debentures in the calculation of diluted earnings per
share because their effect would be antidilutive. However, these instruments
could potentially dilute earnings per share in future years.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" which was amended effective April 2005. The new rule requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements based on the fair value of the equity or liability
instruments issued. We applied Statement 123Rmaturing on November 1, 2005. We routinely
use share-based payment arrangements as compensation for our employees. During
fiscal 2004 and 2005, had this rule been in effect, we would have recorded the
non-cash expense of $379,000 and $341,000, respectively.
F-21
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED
In June 2006, FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return in accordance with SFAS No. 109, "Accounting for
Income Taxes." Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and
in subsequent periods. The accounting provision of FIN 48 will be effective for
the Company beginning January 1, 2007. The Company has not yet completed its
evaluation of the impact of adoption on the Company's financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under most other accounting
pronouncements that require or permit fair value measurements and does not
require any new fair value measurements. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years, with earlier application
encouraged. The provisions of SFAS No. 157 should be applied prospectively as of
the beginning of the fiscal year in which the Statement is initially applied,
except for a limited form of retrospective application for certain financial
instruments. The Company will adopt this statement for its fiscal year beginning
on January 1, 2008. Management has not determined the effect the adoption of
this statement will have on its consolidated financial position or results of
operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"), which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. SAB 108 is effective
for fiscal years ending after November 15, 2006. The Company will adopt this
statement for fiscal 2007. Management has not determined the effect the adoption
of this statement will have on its consolidated financial position or results of
operations.
In October 2006, the Company adopted FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirements -- an interpretation of SFAS No. 143" ("FIN 47").
FIN 47 clarifies that uncertainty about the timing and (or) method of settlement
of a conditional asset retirement obligation should be factored into the
measurement of the liability when sufficient information exists to make a
reasonable estimate of the fair value of the obligation. The provisions of this
interpretation were effective for the Company's fiscal year ended October 31,
2006 and did not have a material impact on its consolidated financial position
or results of operations. See Note 4.
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES
FACILITY OPENINGS
In September 2006, we acquired the assets and business of Fresno Imaging Center
for $1,500,000 in cash utilizing our existing line of credit. The center
provides MRI, CT, ultrasound and x-ray services. The center is 14,470 square
feet with a monthly rental of approximately $20,000 per month. No goodwill was
recorded in the transaction.
In September 2006, we acquired the assets and business of Irvine Imaging
Services for $500,000 in assumed liabilities. The center provides MRI, CT,
ultrasound and x-ray services. The monthly rental is approximately $14,560 per
month. No goodwill was recorded in the transaction.
In September 2006, we acquired the net assets and business of San Francisco
Advanced Imaging Center, in San Francisco, California, from an external third
party for $1,650,000 paid from working capital. The center provides MRI, CT and
x-ray services. The center is 7,115 square feet with a monthly rental of
approximately $29,000 with an initial lease term through April 2017. No goodwill
was recorded in the transaction.
On August 25, 2006, we acquired the assets and business of Corona Imaging
Center, in Corona, California, from an external third party for $1,500,000
financed through a third party lender over five years at 8.5%. In addition, we
financed certain medical equipment for approximately $243,000 as part of the
transaction. The center provides MRI, CT, ultrasound, and x-ray services. The
center is 2,133 square feet with a monthly rental of approximately $3,839 per
month with an initial lease term through November 2011. No goodwill was recorded
in the transaction.
On May 15, 2006, we opened an additional multi-modality site in Emeryville,
California that provides MRI, CT and x-ray services. Ultrasound services will be
added in the near future. We entered into a new building lease for 6,500 square
feet with a beginning monthly rental of $9,754 and invested approximately $1.7
million in leasehold improvements for the new center. The improvements were paid
for from working capital.
F-22
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES - CONTINUED
FACILITY OPENINGS - CONTINUED
Effective February 1, 2006, upon the inception of a new capitation arrangement,
we opened two additional satellite offices in Yucaipa and Moreno Valley,
California that provide x-ray services for our Riverside location. In addition,
in February 2006, we opened one additional satellite office providing x-ray
services in Temecula, California.
Effective February 1, 2006, we invested $237,000 for a 47.5% membership interest
in an entity that operates a PET center in Palm Springs, California. We account
for this investment under the equity method of accounting. Income in earnings of
this equity method investment was approximately $83,000. The center will provide
PET services for our existing facilities in the area replacing a prior
arrangement where PET services were provided by a mobile unit for a "per use"
fee. We have an option to purchase the other 52.5% interest subsequent to
November 1, 2006 and prior to February 29, 2008 for $512,500.
Effective February 1, 2006, we entered into a facility use agreement for an open
MRI center in Vallejo, California. The agreement provides for the use of the
equipment and facility for a monthly fee.
In December 2005, we entered into a new building lease in Encino, California for
approximately 10,425 square feet to begin the development of a new center, San
Fernando Interventional Radiology and Imaging Center, which is expected to open
by March 2007. The center will offer MRI, CT, ultrasound and x-ray services as
well as biopsy, angiography, shunt, and pain management procedures. The monthly
rent is approximately $19,600 and the first month's rent was due in August 2006.
In March 2005, we opened a new center with approximately 3,533 square feet of
space in Westlake, California, near Thousand Oaks that offers MRI, mammography,
ultrasound and x-ray services. During fiscal 2005, we used existing lines of
credit for the payment of approximately $873,000 in leasehold improvements for
the new facility.
Effective July 31, 2004, we purchased the 25% minority interest in Rancho
Bernardo Advanced Imaging from two physicians for $200,000 that consisted of an
$80,000 down payment and monthly payments of $10,000 due from September 2004 to
August 2005. All payments were made during fiscal 2005. There was no goodwill
recorded in the transaction.
In January 2004, we entered into a new building lease for approximately 3,963
square feet of space in Murrieta, California, near Temecula. The center opened
in December 2004 and offers MRI, CT, PET, nuclear medicine and x-ray services.
The equipment was financed by GE. During fiscal 2004, we had used existing lines
of credit for the payment of approximately $840,000 in leasehold improvements
for Murrieta.
In addition, during fiscal 2004, we opened an additional three satellite
facilities servicing our Northridge, Rancho Cucamonga and Thousand Oaks centers.
At various times, we may open small x-ray facilities acquired primarily to
service larger capitation arrangements over a specific geographic region.
FACILITY CLOSURES
Upon the acquisition of Fresno Imaging Center in September 2006, we closed our
existing Woodward Park facility and incurred a loss on the disposal of leasehold
improvements in that center of approximately $55,000. All of the business of the
old Fresno site transferred to the new location.
Upon the acquisition of Irvine Imaging Services in September 2006, we closed our
existing Tustin Imaging facility. There was no loss on the disposal of leasehold
improvements in that center. All of the business of the old Tustin site
transferred to the new Irvine location.
After the opening of a new site in Emeryville, California, we closed our
existing Emeryville MRI only facility and incurred a loss on the disposal of
leasehold improvements in that center of approximately $143,000. All of the
business of the old Emeryville site transferred to the new location.
In early fiscal 2004, we first downsized and later closed our San Diego
facility. The center's location was no longer productive and business could be
sent to our new facility in Rancho Bernardo. The equipment was moved to other
locations and our leasehold improvements were written off. During the year ended
October 31, 2004, the center generated net revenue of $49,000 and incurred a net
loss of $122,000.
In addition, during fiscal 2004, we closed two satellite facilities servicing
our Antelope Valley and Lancaster regions.
F-23
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FACILITY CLOSURES - CONTINUED
At various times, we may close small x-ray facilities acquired primarily to
service larger capitation arrangements over a specific geographic region. Over
time, patient volume from these contracts may vary, or we may end the
arrangement, resulting in the subsequent closures of these smaller satellite
facilities.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization as of
October 31, 2005 and 2006 are:
2005 2006
------------- -------------
Buildings $ 600,000 $ 600,000
Medical equipment 21,956,000 107,729,000
Office equipment, furniture and fixtures 7,587,000 13,371,000
Leasehold improvements 28,313,000 33,453,000
Equipment under capital lease 96,438,000 11,110,000
------------- -------------
154,894,000 166,263,000
Accumulated depreciation and amortization (90,236,000) (101,697,000)
------------- -------------
$ 64,658,000 $ 64,566,000
============= =============
Effective March 9, 2006, we completed the issuance of a $161 million senior
secured credit facility that we used to refinance substantially all of our
existing indebtedness including a significant portion of the medical equipment
under capital lease (except for $16.1 million of outstanding subordinated
debentures and approximately $5 million of capital lease obligations).
Depreciation and amortization expense on property and equipment for the years
ended October 31, 2004, 2005 and 2006 was approximately $17,649,000, $17,301,000
and $16,244,000, respectively. Accumulated amortization for equipment under
capital leases as of October 31, 2005 and 2006 was approximately $52,243,000 and
$3,666,000, respectively. Amortization expense for equipment under capital
leases for the years ended October 31 2004, 2005 and 2006, included above, was
approximately, $11,550,000, $10,494,000 and $988,000, respectively.
We record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred, if a reasonable estimate of fair value can
be made and it is material to the financial statements. The related asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asst and amortized over the asset's economic life. We have identified
a conditional asset retirement obligation related to returning leased facilities
to their original state upon lease termination. Management does not believe the
cost is material to its financial statements.
NOTE 5 - GOODWILL
Goodwill is recorded at cost of $29,144,000 less accumulated amortization of
$6,045,000 for the years ended October 31, 2005 and 2006.
Upon the adoption of SFAS No. 142, we discontinued amortization of goodwill
effective November 1, 2001. Thus, for the three years ended October 31, 2004,
2005 and 2006, no adjustment to amortization expense is necessary when comparing
net income and earnings per share.
F-24
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2005 2006
------------ ------------
Accounts payable $ 9,001,000 $ 11,157,000
Accrued expenses 7,371,000 8,953,000
Accrued payroll and vacation 4,226,000 5,025,000
Accrued professional fees 693,000 533,000
Accrued patient service payable 1,209,000 1,227,000
------------ ------------
22,500,000 26,895,000
Less long-term portion (31,000) (944,000)
------------ ------------
$ 22,469,000 $ 25,951,000
============ ============
The long-term portion relates to accrued interest from our swap arrangement and
to professional fees from accounts receivable classified as long-term. Accrued
professional fees consist of outside professional agreements, which are paid out
of net cash collections. Accrued patient service payable relates to one contract
that prepays us for future diagnostic exams to be performed for which they
receive a discount.
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES2012.
Notes payable, long-term debt, line of credit and capital lease
obligations at
October 31, 2005 and 2006 consist of the following:following (in thousands):
2005 2006
------------- -------------
DECEMBER 31,
------------------------
2008 2007
--------- ---------
Revolving lines of credit $ 13,341,0001,742 $ 12,437,0004,222
Notes payable at interest rates ranging from 8.8% to 13.5%, due
through 2009, collateralized by medical equipment 71,940,000 147,149,000425,236 385,600
Obligations under capital leases at interest rates ranging from 9.1% to 13.0%,
due through 2010, collateralized by medical and
office equipment 62,753,000 6,299,000
------------- -------------
148,034,000 165,885,000
Less: discount on notes payable (1,773,000) --39,302 31,982
--------- ---------
466,280 421,804
Less: current portion (142,132,000) (3,572,000)
------------- -------------(20,565) (12,991)
--------- ---------
$ 4,129,000445,715 $ 162,313,000
============= =============408,813
========= =========
At October 31, 2006, our working capital was $1.8 million. At October 31, 2005,
our working capital deficit was approximately $143.4 million due to the
reclassification of approximately $109 million in notes and capital lease
obligations as current liabilities expected to be refinanced and the
classification of approximately $13.3 million in line of credit liabilities as
current. We were subject to financial covenants under our debt agreements and
believed we may have been unable to continue to be in compliance with our
existing financial covenants during fiscal 2006. As such, the associated debt
was reclassified as a current liability.
F-25
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES --
CONTINUED
On November 15, 2006, we entered into a $405 million senior secured credit
facility with GE Commercial Finance Healthcare Financial Services. This facility
was used to finance our acquisition of Radiologix, (Note 2) refinance existing
indebtedness, pay transaction costs and expenses relating to our acquisition of
Radiologix, and to provide financing for working capital needs post-acquisition.
The facility consists of a revolving credit facility of up to $45 million, a
$225 million term loan and a $135 million second lien term loan. As of November
15, 2006, aggregate borrowings under the credit facility were $4.3 million. We
accounted for the refinancing of our existing indebtedness as an extinguishment
of a liability. As a result, we recognized a loss on extinguishment in November
2006 of approximately $5.0 million, primarily comprised of debt issue costs
related to our March 2006 refinancing, described below. The revolving credit
facility has a term of five years, the term loan has a term of six years and the
second lien term loan has a term of six and one-half years. Interest is payable
on all loans initially at an Index Rate plus the Applicable Index Margin, as
defined. The Index Rate is initially a floating rate equal to the higher of the
rate quoted from time to time by The Wall Street Journal as the "base rate on
corporate loans posted by at least 75% of the nation's largest 30 banks" or the
Federal Funds Rate plus 50 basis points. The Applicable Index Margin on each the
revolving credit facility and the term loan is 2% and on the second lien term
loan is 6%. We may request that the interest rate instead be based on LIBOR plus
the Applicable LIBOR Margin, which is 3.5% for the revolving credit facility and
the term loan and 7.5% for the second lien term loan. The credit facility
includes customary covenants for a facility of this type, including minimum
fixed charge coverage ratio, maximum total leverage ratio, maximum senior
leverage ratio, limitations on indebtedness, contingent obligations, liens,
capital expenditures, lease obligations, mergers and acquisitions, asset sales,
dividends and distributions, redemption or repurchase of equity interests,
subordinated debt payments and modifications, loans and investments,
transactions with affiliates, changes of control, and payment of consulting and
management fees.
Effective March 2006, we completed the issuance of a $161 million senior secured
credit facility that we used to refinance substantially all of our existing
indebtedness (except for $16.1 million of outstanding subordinated debentures
and approximately $5 million of capital lease obligations). We incurred fees and
expenses for the transaction of approximately $5.6 million. Debt issue costs are
being amortized on a straight-line basis over 65 months and are presented as
debt issue costs in the consolidated balance sheet. We accounted for the
refinancing as an extinguishment and issuance of new debt. As a result, we
recorded a net loss on extinguishments of debt of $2.1 million, which includes
$1.2 million in pre-payment penalty fees that are unpaid as of October 31, 2006
and classified as accrued expenses under current liabilities. The facility
provided for a $15 million five-year revolving credit facility, an $86 million
term loan due in five years and a $60 million second lien term loan due in six
years. The loans were subject to acceleration on December 27, 2007, unless we
made arrangements to discharge or extend our outstanding subordinated debentures
by that date. Under the terms and conditions of the Second Lien Term Loan,
subject to achieving certain leverage ratios, we had the right to raise up to
$16.1 million in additional funds as part of the Second Lien Term Loan for the
purposes of redeeming the subordinated debentures. The loans were payable
interest only monthly except for the $86 million term loan that required
amortization payments of 1.0% per annum, or $860,000, paid quarterly.
F-26
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES --
CONTINUED
The revolving credit facility and the $86 million term loan bear interest at a
base rate ("base rate" means corporate loans posted by at least 75% of the
nation's 30 largest banks as quoted by the Wall Street Journal) plus 2.5%, or at
our election, the LIBOR rate plus 4.0% per annum, payable monthly. The $60
million second lien term loan bears interest at the base rate plus 7.0%, or at
our election, the LIBOR rate plus 8.5% per annum, payable monthly. The $86
million term loan included amortization payments of 1.0% per annum, payable in
quarterly installments of $215,000. Upon the close of the refinancing on March
9, 2006, we utilized approximately $1.5 million of the new $15 million revolving
credit facility.
Under the facility, we are subject to various financial covenants including a
limitation on capital expenditures, maximum days sales outstanding, minimum
fixed charge coverage ratio, maximum leverage ratio and maximum senior leverage
ratio. Availability under our $15 million revolving credit facility was governed
by the margins calculated under the maximum senior leverage ratio and maximum
total leverage ratio covenants. As of October 31, 2006, we had approximately
$2.6 million of availability based upon our borrowing base formula.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the November 2006 financing, we were required to swap at least 50% of
the aggregate principal amount of the facilities to a floating rate within 90
days of the close of the agreement on November 15, 2006. As part of the March
2006 financing on April 11, 2006, effective April 28, 2006, we entered into an
interest rate swap on $73.0 million fixing the LIBOR rate of interest at 5.47%
for a period of three years. This swap was made in conjunction with the $161.0
million credit facility closed on March 9, 2006. In addition, on November 15,
2006, we entered into an interest rate swap on $107.0 million fixing the LIBOR
rate of interest at 5.02% for a period of three years, and on November 28, 2006,
we entered into an interest rate swap on $90.0 million fixing the LIBOR rate of
interest at 5.03% for a period of three years. Previously the interest rate on
the above $270.0 million portion of the credit facility was based upon a spread
over LIBOR which floats with market conditions.
The Company documents its risk management strategy and hedge effectiveness at
the inception of the hedge, and unless the instrument qualifies for the
short-cut method of hedge accounting, over the term of each hedging
relationship. The Company's use of derivative financial instruments is limited
to interest rate swaps, the purpose of which is to hedge the cash flows of
variable-rate indebtedness. The Company does not hold or issue derivative
financial instruments for speculative purposes. In accordance with Statement of
Financial Accounting Standards No. 133, derivatives that have been designated
and qualify as cash flow hedging instruments are reported at fair value. The
gain or loss on the effective portion of the hedge (i.e., change in fair value)
is initially reported as a component of other comprehensive income in the
Company's Consolidated Statement of Stockholders' Equity. The remaining gain or
loss, if any, is recognized currently in earnings. At October 31, 2006, there
were no derivatives that were designated as cash flow hedging instruments. Of
the derivatives that were not designated as cash flow hedging instruments, we
recorded interest expense of approximately $920,000 in 2006. The corresponding
liability of $920,000 is included in the other non-current liabilities in the
consolidated balance sheet at October 31, 2006.
Prior to March 2006, BRMG and Wells Fargo Foothill were parties to a credit
facility under which BRMG could borrow the lesser of 85% of the net collectible
value of eligible accounts receivable plus one month of average capitation
receipts for the prior six months, two times the trailing month cash
collections, or $20,000,000. Eligible accounts receivable excluded those
accounts older than 150 days from invoice date and were net of customary
reserves. In addition, Wells Fargo Foothill set up a term loan where they could
advance up to the lesser of $3,000,000 or 80% of the liquidation value of the
equipment value servicing the loan. Under this term loan, we borrowed $880,000
in February 2005 to acquire medical equipment. The five-year term loan had
interest only payments through February 28, 2005 with the first quarterly
principal payments due on April 1, 2005. Access to additional funds under the
term loan expired soon after the February 2005 draw.
Under the $20,000,000 revolving loan, an overadvance subline was available not
to exceed $2,000,000, or one month of the average capitation receipts for the
prior six months, until June 30, 2005. From July 1 to September 30, 2005, the
overadvance subline was available not to exceed $1,500,000, or one month of the
average capitation receipts for the prior six months.
Beginning October 1, 2005, the maximum overadvance could not exceed the lesser
of $1,000,000 or one month of the average capitation receipts for the prior six
months. Also under the revolving loan, we were entitled to request that Wells
Fargo Foothill issue guarantees of payment in an aggregate amount not to exceed
$5,000,000 at any one time outstanding.
F-27
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT, LINE OF CREDIT AND CAPITAL LEASES --
CONTINUED
Advances outstanding under the revolving loan bore interest at the base rate
plus 1.5%, or the LIBOR rate plus 3.0%. Advances under the overadvance subline
and term loan bore interest at the base rate plus 4.75%. Letter of credit fees
bore interest of 3.0% per annum times the undrawn amount of all outstanding
lines of credit. The base rate refers to the rate of interest announced within
Wells Fargo Bank at its principal office in San Francisco as it prime rate. The
line was collateralized by substantially all of our accounts receivable and
requires us to meet certain financial covenants including minimum levels of
EBITDA, fixed charge coverage ratios and maximum senior debt/EBITDA ratios as
well as limitations on annual capital expenditures.
Effective September 14, 2005, we established a new $20 million working capital
revolving credit facility with Bridge Healthcare Finance, or Bridge, a specialty
lender in the healthcare industry. Upon the establishment of this credit
facility, we borrowed $15.5 million that was used to pay off the entire balance
of our existing credit facility with Wells Fargo Foothill. Upon repayment, the
existing credit facility with Wells Fargo Foothill was terminated. Additionally,
Bridge provided us approximately $0.8 million in the form of a term loan, which
we used to pay the balance of a term loan owed to Wells Fargo Foothill.
Under the Bridge revolving credit facility, we could borrow the lesser of 85% of
the net collectible value of eligible accounts receivable plus one month
capitation receipts for the preceding month, or $20,000,000. An overadvance
subline is available not to exceed $2,000,000, so long as after giving effect to
the overadvance subline, the revolver usage does not exceed $20,000,000.
Eligible accounts receivable shall exclude those accounts older than 150 days
from invoice date and will be net of customary reserves. Dr. Berger has agreed
to personally guaranty the repayment of any monies under the overadvance
subline. Advances under the revolving loan bear interest at the base rate plus
3.25%. The base rate refers to the prime rate publicly announced by La Salle
Bank National Association, in effect from time to time. The term loan bears
interest at the annual rate of 12.50%. The revolving credit facility
wascollateralized by substantially all of our accounts receivable and requires
us to meet certain financial covenants including minimum levels of EBITDA, fixed
charge coverage ratios and maximum senior debt/EBITDA ratios. The term loan is
collateralized by specific imaging equipment used by us at certain of our
locations.
Until November 2004, we had a line of credit with an affiliate of DVI Financial
Services, Inc. ("DVI"), when we issued $4.0 million in principal amount of notes
to Post Advisory Group, LLC ("Post"), a Los Angeles-based investment advisor,
and Post purchased the DVI affiliate's line of credit facility with the residual
funds utilized by us as working capital. The new note payable has monthly
interest only payments at 12% per annum until its maturity in July 2008.
On December 19, 2003, we issued a $1.0 million convertible subordinated note
payable to Galt Financial, Ltd., at a stated rate of 11% per annum with interest
payable quarterly. The note payable was convertible at the holder's option
anytime after January 1, 2006 at $1.00 per share. As additional consideration
for the financing we issued a warrant for the purchase of 250,000 shares at an
exercise price of $1.00 per share. In November 2005, the right to convert was
waived in exchange for the issuance of a five-year warrant to purchase 150,000
shares of our common stock at a price of $1.00 per share. The convertible note
payable to Galt Financial, Ltd. was repaid in November 2006. All transactions
with Galt Financial, Ltd. were adjusted for the one-for-two reverse stock split.
INTEREST AND PRINCIPAL REPAYMENTS
General Electric Capital Corporation's prime rate on October 31, 2006 was
10.75%. For fiscal 2005 and 2006, the weighted average interest rates on
short-term borrowings were 8.6% and 10.4% respectively.
The following is a listing of annual principal maturities of notes
payable and long-term obligations exclusive of capital leases and repayments on
our revolving credit facilities for future years ending OctoberDecember 31 are adjusted to reflect the
November 2006 refinancing. See refinancing described above under the caption
"$405 million Senior Secured Credit Facility - November 15, 2006." The schedule
is based on aggregate borrowings under the senior secured credit facility of
$371,250,000 as of November 15, 2006:
Net Principal
-------------
2007 $2,250,000
2008 $2,250,000(in thousands):
2009 $2,250,000$ 5,501
2010 $2,250,0004,993
2011 $2,250,000
Thereafter $360,000,000
------------
$371,250,000
============
F-285,711
2012 238,636
2013 170,395
--------
$425,236
========
65
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INTEREST AND PRINCIPAL REPAYMENTS--CONTINUED
We lease equipment under capital lease arrangements. Future minimum
lease payments under capital leases for future years ending OctoberDecember 31 are:
2007(in thousands)
is as follows:
2009 $ 2,955,000
2008 2,119,000
2009 1,753,00017,700
2010 388,00013,597
2011 105,000
Thereafter ---
------------8,288
2012 4,155
2013 615
--------
Total minimum payments 7,320,00044,355
Amount representing interest (1,021,000)
------------(5,053)
--------
Present value of net minimum
lease payments 6,299,000
Current39,302
Less current portion (2,410,000)
------------(15,064)
--------
Long-term portion $ 3,889,000
============24,238
========
NOTE 8 - SUBORDINATED DEBENTURES
In June 1993, our registration for a total of $25,875,000 of 10% Series A
convertible subordinated debentures due June 2003 was declared effective by the
Securities and Exchange Commission. The net proceeds to us were approximately
$23,000,000. Costs of $3,000,000 associated with the original offering were
fully amortized over ten years. The debentures were convertible into shares of
common stock at any time before maturity into $1,000 principal amounts at a
conversion price of $12.00 per share after June 1999.
In October 2003, we successfully consummated a "pre-packaged" Chapter 11 plan of
reorganization with the United States Bankruptcy Court, Central District of
California, in order to modify the terms of our convertible subordinated
debentures by extending the maturity to June 30, 2008, increasing the annual
interest rate from 10.0% to 11.5%, reducing the conversion price from $12.00 to
$2.50 and restricting its ability to redeem the debentures prior to July 1,
2005. The plan of reorganization did not affect any of our operations or
obligations, other than the subordinated debentures.
Interest expense for the years ended October 31, 2004, 2005 and 2006 was
approximately $1,862,000, $1,857,000, and $1,856,000, respectively. During the
year ended October 31, 2006, bondholders converted $116,000 face value bonds
into 23,200 shares of common stock. There were no conversions during the years
ended October 31, 2004 and 2005. During the year ended October 31, 2004, we
repurchased debentures with face amounts of $68,000 for $60,000 resulting in a
gain on early extinguishments of $8,000. There were no repurchases of debentures
during the years ended October 31, 2005 and 2006.
Subsequent to October 31, 2006, bondholders converted $3,373,000 face value
debentures into 674,600 shares of common stock (adjusted for the November 27,
2006 reverse stock split). Effective November 28, 2006, the Company announced a
one-for-two reverse stock split changing the conversion rate of bonds from $2.50
to $5.00 per common share. The subordinated debentures were extinguished in
December 2007. A loss of $473,000 was recognized upon extinguishments for a
prepayment premium.
NOTE 910 - INCOME TAXES
Income taxes have been recorded under SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial and
income tax reporting purposes and operating loss carryforwards. For the years
ended December 31, 2008 and 2007, and the two months ended December 31, 2006, we
recognized $151,000, $337,000 and $20,000, respectively, of state income tax
related to profitable imaging centers from Radiologix. We did not incur any
federal or state income taxes in 2004, 2005 orduring the year ended October 31, 2006.
ReconciliationFollowing is a reconciliation between the effective tax rate and the statutory
tax rates for
the years ended October 31, 2004, 2005 and 2006 are as follows:
2004 2005 2006
---- ---- ----
Federal tax (34.0)% (34.0)% (34.0)%
State franchise tax, net of federal benefit 2.2 (5.8) (5.8)
Non deductible expenses 0 0 0.7
Change in valuation allowance 90.0 39.8 39.1
----- ----- -----
Income tax expense 58.2% --% --%
===== ===== =====
F-29rates:
YEARS ENDED TWO MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
---------------------------- -----------------------------
2008 2007 2006 2006
------------ ------------ ------------ ------------
Federal tax -34.00% -34.00% -34.00% -34.00%
State franchise tax, net of federal benefit 1.26% 2.12% 0.00% 0.00%
Non deductible expenses 1.44% 1.14% 0.70% 0.70%
Provision to return reconciliation and other -2.89% 1.36%
Changes in valuation allowance 35.45% 31.50% 33.30% 33.30%
------------ ------------ ------------ ------------
Income tax expense 1.26% 2.12% 0.00% 0.00%
============ ============ ============ ============
66
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES - CONTINUED
At October 31, 2005 and 2006, ourOur deferred tax assets and liabilities were
comprised ofcomprise the following items:
DEFERRED TAX ASSETS & LIABILITIES:
DEFERRED TAX ASSETS: 2005 2006
---- ----
Net operating loss $ 57,239,000 $ 61,537,000
Allowance for doubtful accounts 1,545,000
Accrued expenses 990,000
Other 794,000 160,000
----------------------------------
TOTAL DEFERRED TAX ASSETS $ 58,033,000 $ 64,232,000
----------------------------------
DEFERRED TAX LIABILIITIES:
Fixed and intangible assets $ (9,353,000) $ (11,090,000)
----------------------------------
TOTAL DEFERRED TAX LIABILITIES $ (9,353,000) $ (11,090,000)
----------------------------------
NET DEFERRED TAX ASSET $ 48,680,000 $ 53,142,000
VALUATION ALLOWANCE (48,680,000) (53,142,000)
----------------------------------
$ -- $ --
==================================
Deferred Tax Assets & Liabilities:
- ----------------------------------
DECEMBER 31,
-----------------------
Deferred tax assets: 2008 2007
-------- --------
Net operating losses $ 68,860 $ 61,108
Tax Basis in Goodwill & Intangibles 25,276 26,657
Unfaverable contract liability 3,647 3,348
Allowance for doubtful accounts 1,510 1,482
Other 8,020 1,567
Valuation Allowance (57,409) (48,002)
-------- --------
Total Deferred Tax Assets $ 49,904 $ 46,160
-------- --------
Deferred tax liabilities:
Property Plant & Equipment (7,421) (7,638)
Book Basis in Goodwill (19,195) (14,276)
Book Basis in Intangibles (23,065) (24,275)
Other (500) (248)
-------- --------
Total Deferred Tax Liabilities $(50,181) $(46,437)
-------- --------
-------- --------
Net deferred tax liability $ (277) $ (277)
======== ========
As of OctoberDecember 31, 2006,2008, we had federal and state net operating loss
carryforwards of approximately $168,963,000$181.2 million and $47,412,000,$166.8 million, respectively,
which expire at various intervals from the years 2007 to 2026. As of OctoberDecember
31, 2006,
$3,439,000 of federal net operating loss carryforwards expired unused. As of
October 31, 2006, $14,608,0002008, $23.3 million of our federal net operating loss carryforwards acquired
during 1998 in connection with the 1998 acquisition of Diagnostic Imaging Services, Inc. and
the 2006 acquisition of Radiologix Inc. were subject to limitations related to
their utilization under Section 382 of the Internal Revenue Code, however, the annual limitation amount
has not been determined. FutureCode. As of December
31, 2006, future ownership changes as determined under Section 382 of the
Internal Revenue Code could further limit the utilization of net operating loss
carryforwards. Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance.
Included in the net operating loss is $3.4$1.6 million of excess tax benefits
related to the exercise of nonqualified stock options which will be recorded in
equity when realized.
We consider all evidence available when determining whether deferred
tax assets are more likely-than-not to be realized, including tax planning
strategies that would be employed to prevent an NOL from expiring unutilized. As
of December 31, 2008, we have determined that deferred tax assets of $49.9
million are more-likely than not to be realized. We have also determined that
deferred tax liabilities of $19.2 million are required related to book basis in
goodwill that has an indefinite life.
For the next five years, and thereafter, federal net operating loss
carryforwards expire as follows:
Total Net
Operating Loss Subject tofollows (in thousands):
TOTAL NET OPERATING AMOUNT SUBJECT
Year Ended CarryforwardLOSS CARRYFORWARDS TO 382 Limitation
------------ -------------- -------------
2007LIMITATION
- ---------------------- -------------------------- -------------------------
2009 $ 1,226,00018,562 $ 1,226,000
2008 22,533,000 2,295,000
2009 16,421,000 2,513,0005,337
2010 18,563,000 5,337,00013,283 1,737
2011 13,283,00 1,737,0001,501 1,501
2012 - -
2013 - -
Thereafter 96,937,000 1,500,000
------------- -------------147,852 14,698
------------------------------------------------------
$ 168,963,000181,198 $ 14,608,000
============= =============
F-3023,273
======================================================
67
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1011 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS
PREFERRED STOCK
At October 31, 2006, we have authorized the issuance of 5,000,000 shares of
preferred stock with a par value of $0.0001 per share. There were no preferred
shares issued or outstanding at October 31, 2004, 2005 or 2006. Shares may be
issued in one or more series.
STOCK OPTION INCENTIVE PLANS
We have twothree long-term incentive stock option plans. The original plan hasWe have not issued options
under the 1992 plan since the inceptionadoption of the new 2000 plan. The 2000 plan reserves
1,000,000and we have not issued
options under the 2000 plan since the adoption of the 2006 plan. We have
reserved for issuance under the 2006 plan 2,500,000 shares of common stock.
Options granted under the 2006 plan to employees are intended to qualify as
incentive stock options under existing tax regulations. In addition, we have issuedissue
non-qualified stock options and warrants under the 2006 plan from time to time
to non-employees, in connection with acquisitions and for other purposes and havewe
may also issuedissue stock under the plan. Employee stockStock options and warrants generally vest
over threetwo to five years and expire five to ten years from date of grant.
Of the 82,500 options granted under the plan during the year ended October 31,
2006, 75,000 options vested in full on the date of grant and 7,500 options vest
over three years in equal installments beginning on the grant date. All 82,500
options are exercisable for period up to five years from the date of grant at a
price equal to the fair market value of the common shares underlying the option
at the date of grant. As of OctoberDecember 31, 2006, 348,750,2008, 932,500, or approximately 99%38.0%, of all the
outstanding stock options and warrants under our option plans are fully vested.
During the year ended December 31, 2008, we granted options and warrants to
acquire approximately 1.4 million shares of common stock.
We have issued warrants outside the plan under various types of
arrangements to employees, in conjunction with debt financing and in exchange
for outside services. All warrants issued to employees, directors and
consultants after our February 2007 listing on the NASDAQ Global Market have
been characterized as awards under the 2006 plan. All warrants outside the plan
are issued with an exercise price equal to the fair market value of the
underlying common stock on the date of issuance.grant. The warrants expire from five to
seven years from the date of grant. Warrants issued to employees can vest
immediately or up to seven years. The vestingVesting terms are determined by the board of
directors or the compensation committee of the board of directors at the date of
issuance. Of the 2,325,000 warrants granted during
the year ended October 31, 2006, 350,000 vested in full on the date of grant and
1,975,000 vest in various stages beginning one year from the date of grant up to
seven years.grant.
As of OctoberDecember 31, 2006, 2,277,833,2008, 2,666,232, or 49%approximately 77.7%, of all the
outstanding warrants outside the 2006 plan are fully vested. During the first quarteryear
ended December 31, 2008, we granted warrants outside the 2006 plan to acquire
160,000 shares of fiscal 2006, we adopted SFAS No. 123(R),
"Share-Based Payment," applying the modified prospective method. This Statement
requires all equity-based payments to employees, including grants of employee
options, to be recognized in the consolidated statement of earnings based on the
grant date fair value of the award. Under the modified prospective method, we
are required to record equity-based compensation expense for all awards granted
after the date of adoption and for the unvested portion of previously granted
awards outstanding as of the date of adoption. The fair values of all options
were valued using a Black-Scholes model.common stock.
In anticipation of the adoption of SFAS No. 123(R), we did not modify
the terms of any previously granted awards.
Mssrs. Linden, Hames and Stolper who hold the positions of Executive
Vice President and General Counsel, Executive Vice President and Chief Operating
Officer, Western Operations and Executive Vice President and Chief Financial
Officer, respectively, were issued certain warrants in prior periods which fully
vest upon the sooner of their respective multi-year vesting schedules or at such
time as the 30 day average closing stock price of our shares in the public
market in which it trades equals or exceeds $6.00. For the 30 day trading period
ended March 7, 2007, the average closing price exceeded $6.00 per share.
Accordingly, these warrants fully vested resulting in the expensing of the
remaining unamortized fair value of these warrants of $1.7 million in the first
quarter of 2007. In 2007, we also recorded $600,000 in bonus expense for the
$0.40 per share for each share exercised cash bonus Mr. Hames will receive for
each vested share exercised (see Note 12).
The compensation expense recognized for all equity-based awards is net
of estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation withinin operating expenses with the same line item as the
majority of the cash compensation paid to employees.
The following table illustratestables illustrate the impact of equity-based compensation
on reported amounts:amounts (in thousands except per share data):
For the Year Ended For the Year Ended
October 31, 2005(1) October 31, 2006(1)
------------------- -------------------
Impact of Impact of
Equity-Based Equity-Based
As Reported Compensation As Reported Compensation
-----------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
2008 2007
---------------------------------------------------------------
IMPACT OF EQUITY-BASED COMPENSATION
---------------------------------------------------------------
AS REPORTED COMP. AS REPORTED COMP.
---------------------------------------------------------------
Income from operations (2) $ 13,400,00032,590 $ --(2,902) $ 16,270,00021,166 $ (459,000)(3,313)
Loss before income tax $ (12,685) $ (2,902) $ (17,794) $ (3,313)
Net loss $ (3,570,000)(12,836) $ --(2,902) $ (6,894,000)(18,131) $ (459,000)(3,313)
Net basic and diluted earning per share $ (.17)(0.36) $ --(0.08) $ (.33)(0.52) $ (.02)(0.10)
[table continued]
FOR THE TWO MONTHS ENDED FOR THE YEAR ENDED
DECEMBER 31, 2006 OCTOBER 31, 2006
------------------------------------------------------------
IMPACT OF EQUITY-BASED COMPENSATION
------------------------------------------------------------
AS REPORTED COMP. AS REPORTED COMP.
------------------------------------------------------------
Income from operations $ 1,360 $ (78) $ 16,270 $ (459)
Loss before income tax $ (10,963) $ (78) $ (6,894) $ (459)
Net loss $ (10,983) $ (78) $ (6,894) $ (459)
Net basic and diluted earning per share $ (0.35) $ (0.00) $ (0.33) $ (0.02)
(1) Prior to the first quarter of fiscal 2006, we accounted for
equity-based awards under the intrinsic value method, which followed
the recognition and measurement principles of APB Opinion No. 25 and
related Interpretations.
(2) The expense related includes $135,000 for the year ended October 31,
2006 for the unvested portion of previously granted employee awards
outstanding as of the date of adoption.
F-3168
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS - CONTINUED
The following summarizes all of our option and warrant transactions
from NovemberJanuary 1, 20052006 to OctoberDecember 31, 2006 and includes the effect of the one-for-two reverse stock split
effective November 28, 2006:2008:
Weighted
Weighted Average Average
Exercise Price Remaining
Per Common Contractual Life Aggregate
Outstanding Options and Warrants Exercise price Contractual Life Intrinsic
Under the 2006 Plan Shares Per Common Share (in years) Intrinsic Value
------------------------------- ------------ ----------------- ------------------ -----------------
------------------- ------ ---------------- ---------- -----
Balance, OctoberDecember 31, 2005 343,5832007 1,165,250 $ 1.025.74
Granted 82,500 0.781,355,000 5.06
Exercised (56,083) 0.82(50,250) 1.44
Canceled or expired (16,250) 0.80
------------ -----------------(19,000) 7.69
---------
Balance, OctoberDecember 31, 2006 353,7502008 2,451,000 5.44 4.88 $ 1.02 3.81 $1,461,000
------------ ----------------- ------------------ -----------------456,680
==========
Exercisable at OctoberDecember 31, 2006 348,750 $ 1.02 3.72 $1,450,000
============ ================= ================== =================
Weighted2008 932,500 5.05 4.51 397,280
==========
Weighted Average
Weighted Average
Exercise Price Remaining Aggregate
Per CommonNon-Plan Exercise price Contractual Life Intrinsic
Outstanding Warrants Shares Per Common Share (in years) Intrinsic Value
------------------------------- ------------ ----------------- ------------------ ------------------------------------- ------ ---------------- ---------- -----
Balance, OctoberDecember 31, 2005 6,002,3852007 3,996,667 $ 1.201.85
Granted 2,325,000 1.32160,000 3.26
Exercised (1,559,890) 1.26(621,666) 0.99
Canceled or expired (2,139,328) 1.28
------------ -----------------(102,103) 1.78
----------
Balance, OctoberDecember 31, 2006 4,628,167 $ 1.20 4.08 $18,222,000
------------ ----------------- ------------------ -----------------2008 3,432,898 2.07 3.05 $5,465,363
==========
Exercisable at OctoberDecember 31, 2006 2,277,833 $ 1.10 1.17 $ 8,400,000
============ ================= ================== =================2008 2,666,232 1.44 3.01 5,302,296
==========
During the twelve months ended October 31, 2006, there was a cashless exercise
of 500,000 warrant shares for which 250,000 shares of common stock were issued.
In addition, one employee utilized his personal shares as consideration for the
exercise of 100,000 warrant shares.
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value (the difference between our closing stock price on
OctoberDecember 31, 20062008 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holder had all
option holders exercised their options on OctoberDecember 31, 2006.2008. Total intrinsic
value of options and warrants exercised during the twelve monthsyear ended OctoberDecember 31, 20062008
was approximately $6.3$4.2 million. As of OctoberDecember 31, 2006,2008, total unrecognized
share-based compensation expense related to non-vested employee awards was
approximately $2.0$6.3 million, which is expected to be recognized over a weighted
average period of approximately 5.13.1 years.
The weighted average fair value of options and warrants granted during the year
ended October 31, 2006 was $1.30.
F-32
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS - CONTINUED
FAIR VALUE DISCLOSURES - PRIOR TO ADOPTING SFAS NO. 123(R)
We adopted SFAS 123(R) using the modified prospective transition method, which
requires that application of the accounting standard as of November 1, 2005, the
first day of our fiscal year 2006. Our consolidated financial statements as of
and for the year ended October 31, 2006 reflect the impact of SFAS 123(R). In
accordance with the modified prospective transition method, our consolidated
financial statements for prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123(R).
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition principles of SFAS No. 123 to
stock-based employee compensation:
Years Ended October 31,
2004 2005
--------------------------------
Net loss as reported $ (14,731,000) $ (3,570,000)
Deduct: Total stock-based employee compensation expense determined
under fair value-based method (379,000) (341,000)
------------- ------------
Pro forma net loss $ (15,110,000) $ (3,911,000)
============= ============
Loss per share:
Basic - as reported $ (0.72) $ (0.17)
============= ============
Basic - pro forma $ (0.74) $ (0.19)
============= ============
Diluted - as reported $ (0.72) $ (0.17)
============= ============
Diluted - pro forma $ (0.74) $ (0.19)
============= ============
The fair value of each option granted is estimated on the grant date
using the Black-Scholes option pricing model which takes into account as of the
grant date the exercise price and expected life of the option, the current price
of the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The following
is the average of the data used to calculate the fair value:
Risk-freeRISK-FREE EXPECTED EXPECTED
INTEREST RATE LIFE VOLATILITY
------------- ---- ----------
December 31, 2008 2.75% 3.41 years 71.75%
December 31, 2007 4.54% 4.19 years 94.38%
December 31, 2006 No options were granted during the two months
ended December 31, 2006
October 31, interest rate Expected life Expected volatility Expected dividends
----------- ------------- ------------- ------------------- ------------------
2006 4.75% to 5.07% 3.5 years 96.21% to 101.31%% --
2005 3.00% 5 years 99.22% --
2004 3.00% 5 years 121.88% --
We have determined the 20062008 and 2007 expected termlife assumption under the
"Simplified Method" as defined in SAB 107.107 and amended by SAB 110. The expected
stock price volatility is based on the historical volatility of our stock. The
risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of grant with an equivalent remaining term. We have not paid dividends in
the past and do not currently plan to pay any dividends in the near future.
F-33
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS - CONTINUED
The following table summarizes the activity for each of the three years ended
October 31, 2006 adjusted for the one-for-two reverse stock split effective
November 28, 2006:
Outstanding Warrants Outstanding Options
---------------------------- -----------------------------
Exercise
Shares Price Range Number Price Range
------------ ------------- ------------ --------------
Balance, October 31, 2003 4,041,067 $ 0.38 - 3.22 529,458 $ 0.80 - $3.34
Granted 2,162,500 0.60 - 1.40 75,000 0.92
Exercised -- -- -- --
Canceled or expired (201,182) 0.82 - 1.60 (3,750) 0.92 - 3.34
------------ ------------- ------------ --------------
Balance, October 31, 2004 6,002,385 $ 0.38 - 3.22 600,708 $ 0.80 - 3.34
Granted 450,000 0.60 - 0.80 -- --
Exercised (150,000) 0.38 -- --
Canceled or expired (300,000) 0.70 - 1.40 (257,125) 0.80 - 3.34
------------ ------------- ------------ --------------
Balance, October 31, 2005 6,002,385 $ 0.60 - 3.22 343,583 $ 0.80 - 3.34
Granted 2,325,000 0.80 - 3.10 82,500 0.76 - 1.00
Exercised (1,559,890) 0.78 - 2.18 (56,083) 0.80 - 0.92
Canceled or expired (2,139,328) 0.76 - 2.00 (16,250) 0.80 - 0.92
------------ ------------- ------------ --------------
Balance, October 31, 2006 4,628,167 $ 0.60 - 3.22 353,750 $ 0.76 - 3.34
============ ============= ============ ==============
Options under the plans are issued at the fair market value of the common stock
on the date issued. The following summarizes information about employee stock
options and warrants outstanding at October 31, 2006 adjusted for the one-for
- -two reverse stock split effective November 28, 2006:
Outstanding Options
---------------------------------------------------------------
Range of exercise prices Number Weightedweighted average Weighted average
------------------------ outstanding remaining contractual life exercise price
------------- ---------------------------- ------------------
$ 0.76 - $ 1.43 294,750 3.79 years $ 0.87
$ 1.44 - $ 3.44 59,000 3.87 years $ 1.73
-------------
353,750 3.81 years $ 1.01
=============
Outstanding Warrants
---------------------------------------------------------------
Range of exercise prices Number Weighted average Weighted average
------------------------ outstanding remaining contractual life exercise price
------------- ---------------------------- ------------------
$ 0.60 - $ 2.00 3,921,167 4.27 years $ 0.95
$ 2.01 - $ 3.22 707,000 2.99 years $ 2.60
-------------
4,628,167 4.08 years $ 1.20
=============
F-34
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS - CONTINUED
CAPITAL TRANSACTIONS
Effective November 28, 2006, the Company announced a one-for-two reverse stock
split affecting all shares of common stock, including those underlying
outstanding stock options and warrants.
On November 15, 2006, we completed our previously announced acquisition of
Radiologix, Inc. (AMEX: RGX). Under the terms of the acquisition agreement,
Radiologix shareholders received an aggregate consideration of 11,310,961 (or
22,621,922 shares before the one-for-two reverse stock split) shares of our
common stock and $42,950,000 in cash.
On February 17, 2004, we filed a certificate of merger with the Delaware
Secretary of State to acquire the balance of our 91%-owned subsidiary, DIS, that
we did not previously own. Pursuant to the terms of the merger, we are obligated
to pay each stockholder of DIS, other than RadNet, $0.05 per share or
approximately $60,000 in the aggregate. We believe the price per share
represents the value of the minority interest. Stockholders had the right to
contest the price by exercising their appraisal rights at any time through March
15, 2004. During the year ended October 31, 2004, we paid $35,000 to acquire
648,366 shares of DIS common stock and recorded the purchases as goodwill.
On December 19, 2003, we issued a $1.0 million convertible subordinated note
payable at a stated rate of 11% per annum with interest payable quarterly. As
additional consideration for the financing, we issued a warrant for the purchase
of 250,000 shares at an exercise price of $1.00 per share and an expiration date
of December 19, 2010 (adjusted for the one-for-two reverse stock split). We have
allocated $0.1 million to the value of the warrants and believe the value of the
conversion feature is nominal.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments as of Octoberoptions granted during the years
ended December 31, as follows:
2005 2006
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ------------ -----------
Accounts receivable, current $22,319,000 $22,319,000 $28,136,000 $28,136,000
Accounts receivable, long term 1,267,000 1,267,000 1,079,000 1,079,000
Debt maturing within one year 83,508,000 83,508,000 1,162,000 1,162,000
Long-term debt -- -- 158,424,000 130,969,000
Notes payable to related parties, long-term 3,533,000 2,654,000 -- --
Subordinated debentures 16,147,000 16,882,000 16,031,000 16,684,000
In assessing2008 and 2007 was $2.54 and $3.43, respectively. No options
were issued during the two months ended December 31, 2006. The weighted average
fair value of these financial instruments, we had used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, cash overdraft, accounts receivable and current and
short-term debt, it was assumed that the carrying amount approximated fair value
for the majority of these instruments because of their short maturities. The
fair value of the long-term amounts for notes payable to related parties and
debt is based on current rates at which the Company could borrow funds with
similar remaining maturities. The fair value of the subordinated debentures is
the estimated value of debentures available to repurchase at current market
rates over the bond term including an estimated interest payment stream.
The amount due to related parties at October 31, 2005 consisted of notes
payable, with interest at 6.58%, due to an officer and employee of ours for the
purchase of DIS common stock in 1996 of $940,000 and $61,000, respectively, and
a note payable of $2,532,000, with interest at 6.58%, due to another officer of
ours for loans made by him to us. During the year ended October 31, 2005, the
note payable due the employee was reduced by $43,000 and applied to the purchase
of his stock options exercised in the same period (see "Capital Transactions").
In addition,granted during the year ended October 31, 2005, an officer loaned the
Company an additional $1,370,000 (included above).
All related party notes payable were repaid as part of the March 9, 2006 refinancing (Note 7). One check for $737,000 was never cashed by the CEO and
chairman of the Company and was reclassified from cash overdraft as advance due
to related party at October 31, 2006. In December 2006, the check was cashed.
F-35$1.30.
69
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1312 - COMMITMENTS AND CONTINGENCIES
LEASES - We lease various operating facilities and certain medical equipment
under operating leases with renewal options expiring through 2029.2025. Certain
leases contain renewal options from two to ten years and escalation based primarilyeither
on the consumer price index.index or fixed rent escalators. The schedule below
includes lease renewals that are reasonably assured. Minimum annual payments
under noncancellable operating leases for future years ending OctoberDecember 31 are as
follows:
Facilities Equipment Total
------------ ------------- ------------
2006 $ 8,990,000 96,000 9,086,000
2007 8,357,000 96,000 8,453,000
2008 8,157,000 63,000 8,220,000
2009 8,047,000 18,000 8,065,000
2010 7,747,000 -- 7,747,000
Thereafter 74,100,000 -- 74,100,000
------------ -------- ------------
$115,398,000 $273,000 $115,671,000
============ ======== ============
follows (in thousands):
FACILITIES EQUIPMENT TOTAL
---------- ---------- ----------
2009 $ 27,320 $ 11,211 $ 38,531
2010 26,014 9,427 35,441
2011 23,590 5,262 28,852
2012 21,447 3,486 24,933
2013 18,484 2,343 20,827
Thereafter 74,771 -- 74,771
---------- ---------- ----------
$ 191,626 $ 31,729 $ 223,355
========== ========== ==========
Total rent expense, including equipment rentals, for the years ended
December 31, 2008 and 2007, the two months ended December 31, 2006 and the year
ended October 31, 2004, 20052006 was $43.5 million, $41.3 million, $6.1 million and 2006 amounted to approximately $7,804,000, $7,919,000, and
$8,811,000$8.8
million, respectively. Effective November 1, 2003, we converted operating
leases with an affiliate of GE into capital leases by amending the lease
agreements to include $1.00 buyouts. The total converted equipment cost and
capitalized lease obligation was $6,206,000.
Salaries and consulting agreements - We have a variety of arrangements
for the payment of professional and employment services. The agreements provide
for the payment of professional fees to physicians under various arrangements,
including a percentage of revenue collected from 15.0% to 21.0%, fixed amounts
per periods and combinations thereof.
In consideration of the continued employment by Norman Hames, our
Executive Vice President and Chief Operating Officer - Western Operations and a
director in March 2006 we issued to Mr. Hames a seven year warrant to purchase
1,500,000 shares at an exercise price of $1.12 per share, the price of our
common stock on the date of the transaction in the public market in which it
trades, vesting over the seven year period. The issuance was an extension of the
option originally issued to Mr. Hames in 2001 in connection with the sale of his
business to us. We have agreed to provide to Mr. Hames a bonus of $0.40 per
share for each share exercised. This warrant will
fully vest if RadNet's publicly traded common stock averages $6.00vested in March 2007.
Accordingly, we have accrued $600,000 as of December 31, 2007 for the vested
$0.40 per share for
30 days.
We also have employment agreements with officers, key employees and through
BRMG, physicians, at annual compensation rates ranging from $50,000 to $500,000
per year and for periods extending up to five years through September 2011.
Total commitments under the agreements are approximately $25,372,000 for fiscal
2007. The majority of the contracts are for one year.
PURCHASE COMMITMENT
On December 18, 2003, we entered into a three-year purchase agreement with an
imaging film provider whereby we must purchase $7,500,000 of film at a rate of
approximately $2,500,000 annually over the term of the agreement. Effective July
1, 2005, the agreement was amended and we entered into a two-year purchase
agreement with the imaging film provider whereby we must purchase $4,400,000 of
film at a rate of approximately $2,200,000 annually over the term of the
agreement.bonus.
EQUIPMENT SERVICE CONTRACT
On March 1, 2000, we entered into an equipment maintenance service
contract through October 2005, extended through October 2009, with GE Medical
Systems to provide maintenance and repair on the majority of itsour medical
equipment for a fee based upon a percentage of net revenues, subject to certain
minimum aggregate net revenue requirements.
Net revenueLITIGATION
We are involved in the following litigation:
(a) In Re DVI, Inc. Securities Litigation. UNITED STATES DISTRICT
COURT, EASTERN DISTRICT OF PA, DOCKET NO. 2:03-CV-05336-LDD
This is reduceda class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by the provision for
bad debt, mobile PET revenue and other professional reading service revenue to
obtain adjusted net revenue. The fiscal 2005 annual service fee was the highershareholders of 3.50%DVI,
Inc. ("DVI"), one of our adjusted net revenue,former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.
The putative plaintiff class consists of those persons who purchased or
$4,970,000. The fiscal 2006 annual
service rate wasotherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the higher of 3.62% of our adjusted net revenue, or $5,393,800.
For the fiscal years 2007, 2008 and 2009, the annual service fee will be the
higher of 3.62% of our adjusted net revenue, or $5,430,000. We believe this
framework of basing service costs on usage is an effective and unique method for
controlling our overall costs on a facility-by-facility basis. We have met or
exceeded the minimum required revenue for each of the last three fiscal years.
As of October 31, 2006, we owe GE Medical Systems $2,532,000 for past services
under the arrangement since fiscal 2002. GE has made arrangements for
interest-free paymentsfact that will continue to reduce this liability during fiscal
2007. The liability is classified as "Accounts Payable and Accrued
Expenses-current"existing
DVI loans on the financial statements.centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.
The Company plans to renegotiate
its existingplaintiff's have signed an agreement with GE in early 2007 adding Radiologixand given notice to the service
plan and reducingclass
that they intend to dismiss us from the overall service fee percentage.
F-36case in exchange for our agreement not
to seek costs in connection with our being named. The Court is expected to rule
on the dismissal in April 2009.
70
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED
LITIGATION
In the ordinary course of businessGENERAL
We are engaged from time to time we become involved in certain legal proceedings, the majoritydefense of which are covered by insurance.
Management is not aware of any pending material legal proceedings outsidelawsuits arising out
of the ordinary course and conduct of our business. We believe that the outcome
of our current litigation will not have a material adverse impact on our
business, financial condition and results of operations. However, we could be
subsequently named as a defendant in other lawsuits that could adversely affect
us.
NOTE 1413 - EMPLOYEE BENEFIT PLAN
We adopted a profit-sharing/savings plan pursuant to Section 401(k) of
the Internal Revenue Code that covers substantially all non-professional
employees. Eligible employees may contribute on a tax-deferred basis a
percentage of compensation, up to the maximum allowable under tax law. Employee
contributions vest immediately. The plan does not require a matching
contribution by us. There was no expense for any periods presented in the
report.
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth a summary of our unaudited quarterly
operating results for each of the last eight quarters in the years ended
OctoberDecember 31, 2004, 2005 or 2006.
NOTE 15 - MALPRACTICE INSURANCE
We2008 and 2007. This quarterly data has been derived from our
affiliated physiciansunaudited consolidated interim financial statements which, in our opinion, have
been prepared on substantially the same basis as the audited financial
statements contained elsewhere in this report and include all normal recurring
adjustments necessary for a fair presentation of the financial information for
the periods presented. These unaudited quarterly results should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this report. The operating results in any quarter are insured by Fairway Physicians Insurance
Company. Fairway provides claims-based malpractice insurance coveragenot necessarily
indicative of the results that covers only asserted malpractice claims within policy limits. Management does
not believe there are material uninsured malpractice costs at Octobermay be expected for any future period (in
thousands except for earnings per share).
2008 QUARTER ENDED 2007 QUARTER ENDED
--------------------------------------------- ---------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31
--------- --------- --------- --------- --------- --------- --------- ---------
(1) (2)
Statement of Operations Data:
Net revenue $ 114,698 $ 127,446 $ 131,717 $ 128,257 $ 105,815 $ 107,027 $ 110,209 $ 102,419
Total operating expenses 107,961 119,011 121,362 121,194 101,406 96,875 101,546 104,477
Total other expense 13,556 12,495 12,047 13,562 10,837 9,728 11,575 10,270
Equity in earnings of joint ventures 1,491 1,950 1,871 1,176 995 982 1,103 970
Minority interests in income
of subsidiaries (24) (25) (27) (27) (115) (170) (198) (117)
Income tax expense 123 14 14 -- 16 13 86 222
Net income (loss) (5,475) (2,149) 138 (5,350) (5,564) 1,223 (2,093) (11,697)
Basic earnings (loss) per share: (0.15) (0.06) 0.00 (0.15) (0.16) 0.04 (0.06) (0.33)
Diluted earnings (loss) per share: (0.15) (0.06) 0.00 (0.15) (0.16) 0.03 (0.06) (0.33)
(1) During the quarter ended December 31, 2006.
We2008, the Company revised its
estimate of the net realizable value of its accounts receivable and recorded a
$300,000 noncurrent asset forcharge of $7.2 million.
(2) During the cost basis of our investment in
the common stock we hold in Fairway Physicians Insurance Company, the risk
retention group that holds our malpractice policy.
NOTE 16 - SUBSEQUENT EVENTS
On November 15, 2006, we completed our previously announced acquisition of
Radiologix, Inc. (AMEX: RGX) and entered into a $405 million senior secured
credit facility with GE Commercial Finance Healthcare Financial Services. See
Notes 2 and 7.
On November 27, 2006,quarter ended December 31, 2007, the Company announcedrevised its
estimate of the net realizable value of its accounts receivable and recorded a
one-for-two reverse stock split
and name change to Radnet, Inc. (formerly Primedex Health Systems, Inc.)
effective November 28, 2006 and trading commenced under a new symbol (RDNT.OB)
on November 28, 2006.
F-37
RADNET, INC. AND AFFILIATES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
-----------------
Balance at
Beginning Charged Against Deductions from Balance at
of Year Income Reserves (a) End of Year
-------------- ----------------- ----------------- ---------------
YEAR ENDED OCTOBER 31, 2006:
Accounts receivable-contractual
allowances-current $ 55,369,000 $ 295,881,000 $ 294,860,000 $ 56,390,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-current $ 927,000 $ 7,344,000 $ 6,835,000 $ 1,436,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-contractual
allowances-noncurrent $ 3,142,000 $ 11,347,000 $ 12,326,000 $ 2,163,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-noncurrent $ 53,000 $ 282,000 $ 281,000 $ 54,000
-------------- ----------------- ----------------- ---------------
YEAR ENDED OCTOBER 31, 2005:
Accounts receivable-contractual
allowances-current $ 52,961,000 $ 278,523,000 $ 276,115,000 $ 55,369,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-current $ 678,000 $ 4,664,000 $ 4,415,000 $ 927,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-contractual
allowances-noncurrent $ 4,939,000 $ 15,805,000 $ 17,602,000 $ 3,142,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-noncurrent $ 63,000 $ 265,000 $ 275,000 $ 53,000
-------------- ----------------- ----------------- ---------------
YEAR ENDED OCTOBER 31, 2004:
Accounts receivable-contractual
allowances-current $ 54,650,000 $ 279,414,000 $ 281,103,000 $ 52,961,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-current $ 955,000 $ 3,577,000 $ 3,854,000 $ 678,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-contractual
allowances-noncurrent $ 4,361,000 $ 26,056,000 $ 25,478,000 $ 4,939,000
-------------- ----------------- ----------------- ---------------
Accounts receivable-bad debt
allowances-noncurrent $ 76,000 $ 334,000 $ 347,000 $ 63,000
-------------- ----------------- ----------------- ---------------
(a) Deductions include sales and divestitures
S-1charge of $8.5 million.
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Inapplicable.
ITEM 9A. CONTROLS AND PROCEDURES
At October 31, 2005 and October 31, 2006, we-----------------------
We have performed an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, (asas defined inunder the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)).of 1934. Based uponon that
evaluation, our management, including our Chief Executive Officer, and our Chief
Financial Officer, concluded that our disclosure controls and procedures are notwere
effective in alerting them prioras of December 31, 2008 to the end of a reporting period to all materialensure that information required to be
includeddisclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. There were no significant changes in our
periodic filingsdisclosure controls and procedures during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
SEC becauseparticipation of our management, including our Chief Executive Officer, and
Chief Financial Officer, we identifiedconducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2008 based on the
guidelines established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our
internal control over financial reporting includes policies and procedures that
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles GAAP.
Based on the results of our evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31,
2008. We reviewed the results of management's assessment with our Audit
Committee.
The effectiveness of the Company's internal control over financial
reporting has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report appearing on the page
immediately following, material weaknesswhich expresses an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2008.
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
RadNet, Inc.
We have audited RadNet Inc. and subsidiaries ("RadNet's") internal control over
financial reporting as of December 31, 2008, based on criteria established in
INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the designCommittee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). RadNet's
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting:reporting included in the accompanying "Management's
Report on Internal Control over Financial Reporting." Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We concludedconducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we had insufficient personnel
resourcesplan
and technical accounting expertise withinperform the accounting functionaudit to resolveobtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the following non-routine accounting matters,risk that a material weakness exists, testing
and evaluating the recordingdesign and operating effectiveness of non-typical cost-based investmentsinternal control based
on the assessed risk, and unusual debt-related transactionsperforming such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the appropriate analysispreparation of the amortization lives of leasehold improvementsfinancial statements for external purposes in accordance
with generally accepted accounting principles. The incorrect
accounting for the foregoing was sufficient to lead management to conclude that
a material weakness in the design of internal control over the accounting for
non-routine transactions existed at October 31, 2005 and October 31, 2006.
Subsequent to October 31, 2005, we determined to change the design of our
internal controls over non-routine accounting matters by the identification of
an outside resource at a recognized professional services company that we can
consult with on non-routine transactions or the employment of qualified
accounting personnel to deal with this issue together with the utilization of
other senior corporate accounting staff, who are responsible for reviewing all
non-routine matters and preparing formal reports on their conclusions, and
conducting quarterly reviews and discussions of all non-routine accounting
matters with our independent public accountants. On August 1, 2006, we entered
into an agreement with MorganFranklin Corporation, a professional service
company we believe capable of providing the necessary consulting services which
we believe address the identified weakness. We engaged MorganFranklin, a
consulting firm with the requisite accounting expertise, to assist us, from time
to time, in the evaluation and application of the appropriate accounting
treatment, to provide support in the form of technical analysis related to
accounting and financial reporting matters that may arise, and to provide
management advice with respect to their preliminary conclusions regarding issues
we wish to bring to their attention. To the extent our Chief Financial Officer
identifies any non-routine accounting matters which require resolution, he will
contact MorganFranklin and work closely with them, our audit committee and our
auditors to resolve any issues. We are continuing to evaluate additional
controls and procedures that we can implement and may add additional accounting
personnel during early fiscal 2007 to enhance our technical accounting
resources. We do not anticipate that the cost of this remediation effort will be
material to our financial statements. We believe that the engagement of
MorganFranklin and use of their services should adequately address the
identified weakness. With the acquisition of Radiologix we have added additional
technical accounting staff from their organization which we believe will further
reduce any material weakness.
The above identified material weakness in internal control was determined
by management during our year-end audit to be a material change in ourA company's internal control over
financial reporting duringincludes those policies and procedures that (1) pertain to
the quarter ended October 31, 2005.
In connectionmaintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the preparationpolicies or procedures may deteriorate.
In our opinion RadNet, Inc. maintained, in all material respects, effective
internal control over financial reporting as of this Annual ReportDecember 31, 2008, based on Form 10-K, our
management on February 2,the
COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated balance sheets of
RadNet, Inc. as of December 31, 2008 and 2007, in consultation with our independent registered
public accounting firm, Moss Adams LLP, determined we would restate certainand the related consolidated
statements of our previously issued financial statements. The adjustments result from
management's historical treatment of depreciation expense related to the
depreciation of leasehold improvements of our facilities. Although the
adjustments to certain prior period financial statements are all non-cash,operations, stockholders' deficit, and
do not affect our historical reported revenues, cash flows or cash position for
any of the affected fiscal or quarterly periods, the adjustments resulted in:
o a one-time adjustment to decrease retained earnings as of
October 31, 2003 by $2,859,595;
o an adjustment to increase fiscal 2004 depreciation expense and
decrease retained earnings by $154,707;
o an adjustment to increase fiscal 2005 depreciation expense and
decrease retained earnings by $434,442; and
o an adjustment to increase depreciation expense and decrease
retained earnings by $33,215 for our first quarter ended
January 31, 2006.
The consolidated financial statements have been adjusted for the fiscal
years
then ended October 31, 2005 and 2004, and are adjusted for the quarterly
unaudited financial statements for these years and for the first quarter ended
January 31, 2006.
55our report dated March 16, 2009 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 16, 2009
73
As a result, the consolidated financial statements, as previously filed,
contain errors related to the recording of the depreciation expense of leasehold
improvements and should, therefore, not be relied upon. The related auditor
reports of Moss Adams LLP with respect to these consolidated financial
statements should also no longer be relied upon.
We have remediated the matter and included the restated financial
statements for the 2005 and 2004 fiscal years in this report. Our Audit
Committee and management have discussed the matters associated with the
restatements with Moss Adams LLP.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.
ITEM 9B. OTHER INFORMATION.
------------------
None
56
PART III
As used in this Part III, "RadNet" and the "Company" means RadNet, Inc.
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE
------------------------------------------------------
The following table sets forth certain information with respect to each of
ourrequired by this item regarding the Company's directors
and executive officers asis incorporated herein by reference to the sections
entitled "Proposal 1 - Election Of Directors" and "Compensation of January 25, 2007:
Director or
Name Age Officer Since Position
- ---------- ----- --------------- ------------
Howard G. Berger, M.D. 62 1992 President, Treasurer, Chief Executive Officer,
and Director
Marvin S. Cadwell (2) 63 2007 Director
John V. Crues, III, M.D. 57 2000 Medical Director and Director
Stephen M. Forthuber 45 2006 Executive Vice President and Chief
Operating Officer-Eastern Operations
Norman R. Hames 50 1996 Executive Vice President, Secretary,
Chief Operating Officer-Western
Operations and Director
Lawrence L. Levitt (1) (2) 63 2005 Director
Jeffrey L. Linden 64 2001 Executive Vice President and General Counsel
Michael L. Sherman, M.D. (1) 63 2007 Director
Mark D. Stolper 35 2004 Executive Vice President and Chief
Financial Officer
David L. Swartz (1) (2) 62 2004 Director
Directors and
Executive Officers" and "Corporate Governance - ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
The following is a brief description of the business experience of each
director and executive officer during the past five years.
Howard G. Berger, M.D. has served as President and Chief Executive Officer
of our company and its predecessor entities since 1987. Dr. Berger is also the
president of the entities that own BRMG. Dr. Berger has over 25 years of
experienceBoard Committees - Section 16(a)
Beneficial Ownership Reporting Compliance" in the development and management of healthcare businesses. He began
his career in medicine at the University of Illinois Medical School, is Board
Certified in Nuclear Medicine and trained in an Internal Medicine residency, as
well as in a masters program in medical physics in the University of California
system.
Marvin S. Cadwell was appointed as a director in January 2007. He served
as a director of Radiologix between June 2002 and November 2006. He was
appointed Chairman of the Board of Radiologix in December 2002 and served as
Chairman of the Nominations and Governance Committee of the Board. He was the
Radiologix interim Chief Executive Officer from September 2004 until November
2004. From December 2001 until November 2002, Mr. Cadwell served as Chief
Executive Officer of SoftWatch, Ltd., an Israeli based company that provided
Internet software. From August 1995 until September 2000, Mr. Cadwell was
President, Chief Executive Officer and a director of Shared Medical Systems
Corporation, an international supplier of systems to healthcare providers. He
served as President and a director of that company starting in April 1995, and
held a series of executive positions for various operations starting in 1975.
Since 2003, he has served as a director of ChartOne, Inc., a private company
that provides patient chart management services to the health industry. Since
2001, Mr. Cadwell has also served as a director of Concuity, Inc., which
provides contract management software to hospitals.
John V. Crues, III, M.D. is a world-renowned radiologist. Dr. Crues plays
a significant role as a musculoskeletal specialist for many of our patients as
well as a resource for physicians providing services at our facilities. Dr.
Crues received his M.D. at Harvard University, completed his internship at the
University of Southern California in Internal Medicine, and completed a
residency at Cedars-Sinai in Internal Medicine and Radiology. Dr. Crues has
authored numerous publications while continuing to actively participate in
radiological societies such as the Radiological Society of North America,
American College of Radiology, California Radiological Society, International
Society for Magnetic Resonance Medicine and the International Skeletal Society.
57
Stephen M. Forthuber became our Executive Vice President and Chief
Operating Officer for Eastern Operations subsequent to the Radiologix
acquisition. He joined Radiologix in January 2000 as Regional Director of
Operations, Northeast. From July 2002 until January 2005 he served as Regional
Vice President of Operations, Northeast and from February until December 2005 he
was Senior Vice President and Chief Development Officer for Radiologix. Prior to
working at Radiologix, Mr. Forthuber was employed from 1982 until 1999 by Per-Se
Technologies, Inc. and its predecessor companies, where he had significant
physician practice management and radiology operations responsibilities.
Norman R. Hames has served as our Chief Operating Officer since 1996.
Applying his 20 years of experience in the industry, Mr. Hames oversees all
aspects of facility operations. His management team, comprised of regional
directors, managers and sales managers, are responsible for responding to all of
the day-to-day concerns of our facilities, patients, payors and referring
physicians. Prior to joining our company, Mr. Hames was President and Chief
Executive Officer of his own company, Diagnostic Imaging Services, Inc. (which
we have acquired), which owned and operated 14 multi-modality imaging facilities
throughout Southern California. Mr. Hames gained his initial experience in
operating imaging centers for American Medical International, or AMI, and was
responsibleCompany's definitive Proxy
Statement for the developmentAnnual Meeting of AMI's single and multi-modality imaging
centers.
Lawrence L. LevittShareholders to be held on May ___, 2009
(the "Proxy Statement"). Information regarding the Company's executive officers
is set forth in Part 1 of this Report under the caption "Executive Officers."
The Company adopted a C.P.A. and has since 1987 been the president andcode of financial ethics applicable to its chief
executive officer, chief financial officer, controller and other finance
leaders, which is a "code of Canyon Management Company, a company which manages a
privately held investment fund. Mr. Levittethics" as defined by applicable rules of the SEC.
This code is also a director of River Downs
Management Company, operator of a thoroughbred racetrack in Ohio.
Jeffrey L. Linden joined us in 2001 as our Vice President and General
Counsel. He is also associated with Cohen & Lord, a professional corporation,
outside general counsel to us. Prior to joining us, Mr. Linden had been engaged
in the private practice of law. He has lectured before numerous organizations on
various topics, including the California State Bar, American Society of
Therapeutic Radiation Oncologists, California Radiological Association, and
National Radiology Business Managers Association.
Michael L. Sherman, M.D., F.A.C. R., was appointed as a director in
January 2007. He had been a Radiologix director since 1997. He served as
President of Advanced Radiology, P.A., a 90-person radiology practice located in
Baltimore, Maryland, from 1995 to 2001, and subsequently as its board chairman
and a consultant until his retirement from active practice in 2005. Radiologix
has a contractual relationship with Advanced Radiology, P.A. Dr. Sherman has
broad experience in the medical and business aspects of radiology. In addition,
Dr. Sherman was a director of MedStar Health, a seven-hospital system in the
Baltimore-Washington, D.C. market from 1998 until 2006. He continues to servepublicly available on the boardCompany's web site at WWW.RADNET.COM. If
the Company makes any amendments to this code other than technical,
administrative or other non-substantive amendments, or grants any waivers,
including implicit waivers, from a provision of MedStar Health's captive insurance company, Greenspring Financial
Insurance Limited, Inc. Dr. Sherman is also a Senior Advisor for healthcare at
FOCUS Enterprises, a Washington, D.C.-based investment banking firm.
Mark D. Stolper had diverse experiences in investment banking, private
equity, venture capital investing and operations priorthis code to joining us. Mr.
Stolper began his career as a memberthe Company's chief
executive officer, chief financial officer or controller, the Company will
disclose the nature of the corporate finance group at Dillon,
Readamendment or waiver, its effective date and Co., Inc., executing mergers and acquisitions, public and private
financings and private equity investments with Saratoga Partners LLP, an
affiliated principal investment group of Dillon Read. After Dillon Read, Mr.
Stolper joined Archon Capital Partners, backed by the Milken Family and
NewsCorp, which made private equity investmentsto whom
it applies on its web site or in media and entertainment
companies. Mr. Stolper received his operating experience with Eastman Kodak,
where he was responsible for business development for Kodak's Entertainment
Imaging subsidiary ($1.5 billion in sales). Mr. Stolper was also co-founder of
Broadstream Capital Partners, a Los Angeles-based investment banking firm
focusedreport on advising middle market companies engaged in financing and merger and
acquisition transactions.
David L. Swartz is a C.P.A. with thirty-five years of experience providing
accounting and advisory services to clients. Mr. Swartz currently serves as the
president of the California Board of Accountancy. Since 1993, Mr. Swartz has
been the managing partner of Good, Swartz, Brown & Berns. Prior to this, Mr.
Swartz served as managing partner and was on the national Board of Directors of
a 50 office international accounting firm. Mr. Swartz is also a former CFO of a
publicly held shopping center and development company.
None of the directors serves as a director of any other corporation with a
class of securities registered pursuant to Section 12 of the Exchange Act or
subject to the requirements of Section 15(d) of the Exchange Act. There are no
family relationships among any of the officers and directors. Furthermore, none
of the events described in Item 401(f) of Regulation S-K involve a director or
officer during the past five years.
The officers are elected annually and serve at the discretion of the Board
of Directors. There are no family relationships among any of the officers and
directors. During the fiscal year ended October 31, 2006, the Board of Directors
held six meetings in which all directors were present, except that Mr. Swartz
was absent from one such meeting, and took board action by unanimous written
consent on 11 occasions. All directors participated in all such actions.
58
AUDIT AND COMPENSATION COMMITTEES
AUDIT COMMITTEE
The board has an Audit Committee comprised of three directors--Mr. Levitt,
Mr. Cadwell and Mr. Swartz, who also serves as the Chairperson of the Audit
Committee. The Audit Committee reviews the results and scope of the audit and
other services provided by our independent auditors. The board has determined
that both Messrs Levitt and Swartz are "audit committee financial experts" as
defined under the rules and regulations of the Securities and Exchange
Commission. The board has also determined that all members of the Audit
Committee meet the rules and regulation of "independence" as defined pursuant to
the New York Stock Exchange. The Audit Committee met four times in fiscal 2006.
COMPENSATION COMMITTEE
The board has a Compensation Committee that determines the salaries and
incentive compensation for our employees and consultants. The Compensation
Committee is composed of Mr. Swartz, Dr. Sherman and Mr. Levitt. The
Compensation Committee did not meet during fiscal 2006.
DIRECTOR COMPENSATION
Independent directors receive compensation of $25,000 per year and an
annual warrant to purchase 25,000 shares of our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2006, all executive compensation was determined by the then
members of our Board of Directors, Howard G. Berger, M.D., Norman R. Hames, John
V. Crues, III, M.D. Lawrence L. Levitt and David L. Swartz. In addition, no
individual who served as an executive officer of our company during fiscal 2006,
served during fiscal 2006, on the board of directors or compensation committee
of another entity where an executive officer of the other entity also served on
our Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our directors and officers and persons who own more than 10% of a registered
class of our equity securities to file reports of ownership and changes in
ownershipForm 8-K filed with the SEC.
Directors and officers and greater than 10% stockholders are required by
SEC regulation to furnish us with copies of the reports they file. Based solely
on the review of the copies of such reports and written representations from
certain persons that certain reports were not required to be filed by such
persons, we believe that all our directors, officers and greater than 10%
beneficial owners complied with all filing requirements applicable to them with
respect to transactions for the period November 1, 2005 through October 31,
2006.
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
Our Board of Directors has adopted a Code of Ethics for Senior Financial
Officers. A copy of the Code of Ethics is available on our website at
www.radnet.com.
59
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth information concerningrequired by this item is incorporated by reference to
the annual,
long-termsections entitled "Compensation of Directors and all other compensation for services rendered in all capacities to
us and our subsidiaries for the years ended October 31, 2006, 2005 and 2004, of
(i) the person who served as our chief executive officer during the year ended
October 31, 2006, and (ii) our three most highly compensated executive officers
(other than the chief executive officer) serving as executive officers at
October 31, 2006 ("Other Executive Officers"), and
whose aggregate cash
compensation exceeded $100,000 for the year ended October 31, 2006. We
collectively refer to them as the "Named Executive Officers":
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
-------------------------------------------- ------------------------------------------
Year Other Securities Restricted All
Ended Annual Underlying Stock LTIP Other
Name and Principal Position 10/31 Salary($) Bonus ($) Comp.($) (1) Options (#)(6) Awards($) Pay-outs ($) Comp($)
- ----------------------------- ----- ----------- ----------- ------------- ---------------- ----------- -------------- ---------
Howard G. Berger, M.D., 2006 $ 0 -- -- -- -- -- --
Chief Executive Officer 2005 $200,000(2) -- -- -- -- -- --
2004 $225,000(2) -- -- -- -- -- --
Norman R. Hames, 2006 $224,500 -- -- 1,500,000 -- -- --
Executive Vice President, 2005 $220,000 -- -- 1,500,000 -- -- --
Secretary and Chief Operating 2004 $229,000 -- -- 1,500,000 -- -- --
Officer - Western Operations
John V. Crues, III, M.D., 2006 $450,000(3) -- -- 500,000 -- -- --
Medical Director 2005 $440,000(3) -- -- 500,000 -- -- --
2004 $370,000(4) -- -- 500,000 -- -- --
Jeffrey L. Linden, 2006 $350,000(5) -- -- 387,500 -- -- --
Executive Vice President and 2005 $350,000(5) -- -- 637,500 -- -- --
General Counsel 2004 $350,000(5) -- -- 787,455 -- -- --
Mark D. Stolper, 2006 $250,000 -- -- 450,000 -- -- --
Executive Vice President and 2005 $223,750 -- -- 350,000 -- -- --
Chief Financial Officer 2004 $ 53,780(7) -- -- 350,000 -- -- --
(1) The dollar value of perquisites"Compensation Discussion and other personal benefits, if any, for
each of the Named Executive Officers was less than $50,000 or 10% of salary and
bonus, the reporting thresholds established by the SEC.
(2) Includes $225,000 and $200,000 received from BRMG (see "Employment
Agreements") in 2004 and 2005, respectively. Dr. Berger voluntarily reduced
compensation payable by us in 2004 and 2005 and in 2006 waived all compensation
to assist with our liquidity.
(3) Received from BRMG.
(4) Includes $185,000 received from BRMG.
(5) Cohen & Lord, a professional corporation, a law firm with which Mr. Linden
is associated, received $448,497 in fees from us during the year ended October
31, 2006. Mr. Linden has specifically waived any interest in our fees paid to
Cohen & Lord since becoming an officer.
(6) Shares of our common stock subsequent to the one for two reverse stock
split effected in November 2006.
(7) Mr. Stolper commenced employment with us on August 1, 2004.
REPORT OF THE COMPENSATION COMMITTEE
RadNet's Board of Directors reviews and approves the salaries and equity
awards of the executive officers of RadNet as well as all grants of options and
warrants to purchase shares of Common Stock and other equity-based compensation
awards.
OBJECTIVES
The Board of Directors' primary objectives are to retain the best
qualified people and to ensure that they are properly motivated to have RadNet
prosper over the long term. In furtherance of the foregoing, the Board of
Directors, in establishing the components and levels of compensation for its
executive officers, seeks (i) to enable RadNet to attract and retain highly
qualified executives and (ii) to provide financial incentivesAnalysis" in the form of
equity compensation in order to align the interests of executive officers more
closely with those of the stockholders of RadNet and to motivate such executives
to increase stockholder value by improving corporate performance and
profitability.
60
EMPLOYMENT AGREEMENTS
RadNet has entered into employment agreements with each of the Named
Executive Officers, except for Dr. Berger, RadNet's Chief Executive Officer, who
has entered into a management Consultant Agreement with BRMG. The Board has
considered the advisability of using employment agreements and has determined
that the use of employment agreements is in the best interest of RadNet because
it facilitates (consistent with the Board of Director's overall objectives)
RadNet's ability to attract and retain the services of the most highly qualified
executive officers. Each such employment agreement separately reflects the terms
that the Board of Directors felt were appropriate and/or necessary to retain the
services of the particular executive.
COMPONENTS OF EXECUTIVE COMPENSATION
There are two components of RadNet's executive compensation program:
o Cash compensation.
o Equity compensation.
CASH COMPENSATION
Cash compensation is comprised of base salary. Since, as noted above, each
of RadNet's Named Executive Officers was party to employment agreements with
RadNet effective during the fast fiscal year, their respective cash compensation
levels were subject to the provisions of such employment agreements or
amendments to compensation as may be approved from time to time. The Board of
Directors subjectively arrives at appropriate base salary compensation levels in
the process of negotiating such agreements or of extending them.
EQUITY COMPENSATION
Equity compensation is comprised of stock options and stock bonus awards.
Stock option and warrant grants reflect the Board of Director's desire to
provide a meaningful equity incentive for the executive to have RadNet prosper
over the long term. As of October 31, 2006, 4,981,917 options and warrants to
purchase shares were outstanding under all equity compensation plans, and of
such amount, 2,837,500 options and warrants to purchase shares were held by
executive officers of RadNet (as revised to reflect the one-for -two reverse
stock split effected in November 2006).
CHIEF EXECUTIVE OFFICER COMPENSATION
Dr. Berger's compensation is determined pursuant to the Management
Consultant Agreement. Dr. Berger waived his annual salary in 2006. Dr. Berger
received no compensation from RadNet in 2005 and 2006.
SECTION 162(M)
Section 162(m) of the Code generally disallows a deduction to publicly
traded companies to the extent of excess compensation over $1.0 million per year
paid to its named executive officers. Qualifying performance-based compensation
which is paid in accordance with regulations promulgated under Section 162(m) of
the Code is not subject to the deduction limit. RadNet reserves the right to pay
compensation to its named executive officers that does not qualify as
performance based compensation under Section 162(m) of the Code if compliance
with applicable regulations conflicts with RadNet's compensation philosophy or
with what is believed to be the best interests of RadNet and its stockholders.
By the Board of Directors
Howard G. Berger, M.D.
Norman R. Hames
John V. Crues, III, M.D.
David L. Swartz
Lawrence L. Levitt
61
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
In fiscal 2006, we granted options to Norman R. Hames, Mark D. Stolper and
Jeffrey L. Linden and to no other Named Executive Officer. The following table
provides information about those option grants and projects potential realizable
gains at hypothetical assumed annual compound rates of appreciation. RadNet had
outstanding 4,981,917 options and warrants to purchase common stock as of
October 31, 2006.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATE OF
TOTAL OPTION GRANTS IN STOCK PRICE
NUMBER OF OPTIONS/SARS 2006 INDIVIDUAL APPRECIATION FOR
SECURITIES GRANTED TO GRANTS OPTION TERM (1)
UNDERLYING EMPLOYEES -------------------------- ------------------------
OPTIONS/SARS IN FISCAL EXERCISE(3) EXPIRATION
NAME GRANTED(2) YEAR PRICE DATE 5% 10%
- ------------------ ------------ ------------ ------------ ----------- ---------- ------------
Norman R. Hames 1,500,000 66% $ 1.12(4) 03/27/13 $588,000 $1,176,000
Jeffrey L. Linden 250,000 11% $ 2.52 04/28/12 $189,000 $ 378,000
Mark D. Stolper 100,000 5% $ 3.10 07/11/11 $77,500 $ 155,000
- ------------------
(1) These values are solely the mathematical results of hypothetical assumed
appreciation of the market value of the underlying shares at an annual rate of
5% and 10% over the full term of the options, less the exercise price. Actual
gains, if any, will depend on future stock market performance of the underlying
stock, market factors and conditions, and optionee's continued employment
through the applicable vesting periods. We make no prediction as to the future
value of these options or of the underlying stock, and these values are provided
solely as examples required by the SEC rules.
(2) All share numbers are revised to reflect the one-for-two reverse stock
split effected in November 2006.
(3) Exercise prices reflect the market price on the date of grant.
(4) We have agreed to pay him a bonus of $0.40 per share at the time of
exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
There were no option exercises in the year ended October 31, 2006 by the Named
Executive Officers except as follows:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR END OPTIONS(3)
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ --------------- ------------- ------------- --------------- ------------- ---------------
John V. Crues, III, M.D. 160,344 $372,000 400,000 -- $1,714,000 --
Jeffrey L. Linden 250,000 $215,000 135,500 250,000 $ 604,000 $640,000
- ---------------
1) All share numbers are revised to reflect the one-for-two reverse stock
split effected in November 2006.
2) The value realized equals the fair market value of the common stock
acquired on the date of exercise minus the exercise price.
3) Based on the closing price of the common stock of $5.08 per share as of
January 16, 2007, less the option exercise price.
62
EMPLOYMENT AGREEMENTS
BRMG entered into a Management Consulting Agreement with Howard G. Berger,
M.D. as of January 1, 1994. The Agreement automatically renews annually unless
either party delivers notice of non-renewal to the other party no less than 90
days prior to the scheduled termination date. Dr. Berger serves as the manager
of BRMG and the chief executive for BRMG's partnerships, and receives
compensation for his services from BRMG equal to $300,000 per year. In fiscal
2006 Dr. Berger waived his compensation from BRMG. Dr. Berger's duties include
the direction of day-to- day activities of BRMG, supervision of personnel, and
the implementation of policies and plans appropriate to carry out the
operational, financial and business objectives of BRMG. Under this agreement, if
we terminate his employment for cause, he will be entitled to compensation equal
to one year's base salary. If Dr. Berger terminates this agreement without
cause, he is entitled to compensation accrued through the effective date of
termination, and if his employment is terminated by BRMG without cause, BRMG
shall pay to Dr. Berger an amount equal to the sum of (i) his base salary
accrued through the effective date of termination; (ii) his base salary for the
balance of the term, but not less than his base salary for five years; and (iii)
an amount equal to the cost of all benefits he would receive for the balance of
the term. Dr. Berger's employment shall not terminate in the event of a merger,
consolidation, dissolution or other transaction whereby BRMG would not be the
surviving entity of such transaction, and Dr. Berger holds the right to
terminate this agreement upon 60 days notice in the event of any such
transaction.
John V. Crues, III, M.D. entered into a renewable one-year employment
agreement dated as of January 15, 1996 with each of us and BRMG which requires
him to devote one-half of his time to each entity in exchange for annual
combined remuneration currently of $370,000. Dr. Crues' duties for us include
information management systems for radiology practices, imaging facility network
development and network marketing and management, utilization management,
utilization review, all forms of provider and payor contracts and physician
interaction. For BRMG, Dr. Crues' duties include diagnostic imaging,
professional physician services, utilization management, utilization review, all
forms of provider and payor contracts and physician interaction, some of which
require a license to practice medicine.
On April 16, 2001, we entered into a five-year employment agreement with
Jeffrey L. Linden for Mr. Linden to serve as vice president and general counsel.
The agreement provides for annual compensation of $350,000. Under this
agreement, if we terminate Mr. Linden's employment for cause, he will be
entitled to compensation equal to one year's base salary. If Mr. Linden
terminates this agreement without cause, he is entitled to compensation accrued
through the effective date of termination, and if his employment is terminated
by us without cause, we shall pay Mr. Linden an amount equal to the sum of (i)
his base salary accrued through the effective date of termination; (ii) his base
salary for the balance of the term, but not less than his base salary for five
years; and (iii) an amount equal to the cost of all benefits he would receive
for the balance of the term. Mr. Linden's employment shall not terminate in the
event of a merger, consolidation, dissolution or other transaction whereby we
would not be the surviving entity of such transaction, and Mr. Linden holds the
right to terminate this agreement upon 60 days notice in the event of any such
transaction. If Mr. Linden's employment is terminated in connection with any
such transaction he shall be entitled to the same compensation he would have
received if we terminated his employment without cause.
On May 1, 2001, we entered into a three-year employment agreement with
Norman R. Hames. Pursuant to the agreement Mr. Hames agreed to continue his
employment with us as our vice president and chief operations officer. The
agreement provides for Mr. Hames to receive annual compensation of $225,000.
Additionally, in consideration of his entry into the agreement Mr. Hames
received the option to purchase 1,500,000 shares of our common stock at a price
of $1.12 per share (the closing price reported on the OTC Bulletin Board on the
date the agreement was executed) exercisable throughout his employment, or by
March 27, 2013 if Mr. Hames' employment is terminated. We also agreed to provide
a cash bonus to Mr. Hames of $0.40 for each share that he exercises under the
options, up to a maximum of $600,000. Under this agreement, if we terminate his
employment for cause, he will be entitled to compensation equal to one year's
base salary. If Mr. Hames terminates this agreement without cause, he is
entitled to compensation accrued through the effective date of termination, and
if his employment is terminated by us without cause, we shall pay Mr. Hames an
amount equal to the sum of (i) his base salary accrued through the effective
date of termination; (ii) his base salary for the balance of the term, but not
less than his base salary for three years; and (iii) an amount equal to the cost
of all benefits he would receive for the balance of the term. Mr. Hames'
employment shall not terminate in the event of a merger, consolidation,
dissolution or other transaction whereby we would not be the surviving entity of
such transaction.
On July 30, 2004, we entered into a three year employment agreement with
Mark Stolper for Mr. Stolper to serve as our chief financial officer. Mr.
Stolper received a $25,000 payment on entry into the agreement and receives
annual compensation of $250,000 per year. In connection with his employment, Mr.
Stolper received five-year warrants to purchase 325,000 shares of our common
stock at $0.60 per share (the closing price reported on the OTC Bulletin Board
on the date the agreement was executed).
63
On November 15, 2006, we entered into an employment retention agreement
with Stephen M. Forthuber which provides for annual compensation of $250,000
with a bonus to be paid on the first anniversary of $125,000 and on the second
anniversary of $250,000. In the event we terminate Mr. Forthuber's employment in
the first year we agreed to pay to him severance of $500,000 and if we terminate
in the second year $250,000.
STOCK INCENTIVE PLANS
We have two stock incentive plans: our 2000 Long-Term Incentive Plan and
our 2006 Equity Incentive Plan.
We have reserved 1,000,000 shares of common stock for issuance under our
2000 Long-Term Incentive Plan, or the 2000 Plan. The material features of the
2000 Plan are as follows:
ADMINISTRATION
The 2000 Plan is presently administered by our Board of Directors, but
upon our locating non-employee directors who have the requisite qualifications
will then be administered by a compensation committee appointed by the Board
which will consist of two or more non-employee Directors. Subject to the terms
of the 2000 Plan, the Board, and the compensation committee, if established, has
full authority to administer the 2000 Plan in all respects, including: (i)
selecting the individuals who are to receive awards under the 2000 Plan; (ii)
determining the specific form of any award; and (iii) setting the specific terms
and conditions of each award. Our senior legal and human resources
representatives are also authorized to take ministerial actions as necessary to
implement the 2000 Plan and awards issued under the 2000 Plan.
ELIGIBILITY
Employees, directors and other individuals who provide services to us, our
affiliates and subsidiaries who, in the opinion of the Board, or the
compensation committee, if applicable, are in a position to make a significant
contribution to our success or the success of our affiliates and subsidiaries
are eligible for awards under the 2000 Plan.
AMOUNT OF AWARDS
The value of shares or other awards to be granted to any recipient under
the 2000 Plan are not presently determinable. However, the 2000 Plan restricts
the number of shares and the value of awards not based on shares that may be
granted to any individual during a calendar year or performance period. In order
to facilitate our compliance with Section 162(m) of the Internal Revenue Code of
1986, as amended, or the Code, which deals with the deductibility of
compensation for any of the chief executive officer and the four other most
highly-paid executive officers, the 2000 Plan limits to 500,000 the number of
shares for which options, stock appreciation rights or other stock awards may be
granted to an individual in a calendar year and limits to $1,000,000 the value
of non-stock-based awards that may be paid to an individual with respect to a
performance period. These restrictions were adopted by the Board of Directors as
a means of complying with Code Section 162(m) and are not indicative of
historical or contemplated awards made or to be made to any individual under the
2000 Plan.
STOCK OPTIONS
The 2000 Plan authorizes the grant of options to purchase shares of common
stock, including options to employees intended to qualify as incentive stock
options within the meaning of Section 422 of the Code, as well as non-statutory
options. The term of each option will not exceed ten years and each option will
be exercisable at a price per share not less than 100% of the fair market value
of a share of common stock on the date of the grant. Generally, optionees will
pay the exercise price of an option in cash or by check, although the Board, and
the compensation committee, if established, may permit other forms of payment
including payment through the delivery of shares of common stock. Options
granted under the 2000 Plan are generally not transferable, except at death or
as gifts to certain Family Members, as defined in the 2000 Plan. At the time of
grant or thereafter, the Board, and the compensation committee, if established,
may determine the conditions under which stock options vest and remain
exercisable.
Unless otherwise determined by the Board, and the compensation committee,
if established, unexercised options will terminate if the holder ceases for any
reason to be associated with us, our affiliates or our subsidiaries. Options
generally remain exercisable for a specified period following termination for
reasons other than for Cause, as defined in the 2000 Plan, particularly in
circumstances of death, Disability and Retirement, as defined in the 2000 Plan.
In the event of a Change in Control or Covered Transaction, as defined in the
Incentive 2000 Plan, of our company, options become immediately exercisable
and/or are converted into options for securities of the surviving party as
determined by the Board, and the compensation committee, if established.
64
OTHER AWARDS
The Board, and the compensation committee, if established, may grant stock
appreciation rights which pay, in cash or common stock, an amount generally
equal to the difference between the fair market values of the common stock at
the time of exercise of the right and at the time of grant of the right. In
addition, the Board, and the compensation committee, if established, may grant
awards of shares of common stock at a purchase price less than fair market value
at the date of issuance, including zero. A recipient's right to retain these
shares may be subject to conditions established by the Board, and the
compensation committee, if established, if any, such as the performance of
services for a specified period or the achievement of individual or company
performance targets. The Board, and the compensation committee, if established,
may also issue shares of common stock or authorize cash or other payments under
the 2000 Plan in recognition of the achievement of certain performance
objectives or in connection with annual bonus arrangements.
PERFORMANCE CRITERIA
The Board, and the compensation committee, if established, may condition
the exercisability, vesting or full enjoyment of an award on specified
Performance Criteria. For purposes of Performance Awards, as defined in the 2000
Plan, that are intended to qualify for the performance-based compensation
exception under Code Section 162(m), Performance Criteria means an objectively
determinable measure of performance relating to any of the following as
specified by the Board, and the compensation committee, if established,
determined either on a consolidated basis or, as the context permits, on a
divisional, subsidiary, line of business, project or geographical basis or in
combinations thereof: (i) sales; revenue; assets; liabilities; costs; expenses;
earnings before or after deduction for all or any portion of interest, taxes,
depreciation, amortization or other items, whether or not on a continuing
operations or an aggregate or per share basis; return on equity, investment,
capital or assets; one or more operating ratios; borrowing levels, leverage
ratios or credit rating; market share; capital expenditures; cash flow; working
capital requirements; stock price; stockholder return; sales, contribution or
gross margin, of particular products or services; particular operating or
financial ratios; customer acquisition, expansion and retention; or any
combination of the foregoing; or (ii) acquisitions and divestitures, in whole or
in part; joint ventures and strategic alliances; spin-offs, split-ups and the
like; reorganizations; recapitalizations, restructurings, financings of debt or
equity and refinancings; transactions that would constitute a change of control;
or any combination of the foregoing. Performance Criteria measures and targets
determined by the Board, and the compensation committee, if established, need
not be based upon an increase, a positive or improved result or avoidance of
loss.
AMENDMENTS
The Board, and the compensation committee, if established, may amend the
2000 Plan or any outstanding award for any purpose permitted by law, or may at
any time terminate the 2000 Plan as to future grants of awards. The Board, and
the compensation committee, if established, may not, however, increase the
maximum number of shares of common stock issuable under the 2000 Plan or change
the description of the individuals eligible to receive awards. In addition, no
termination of or amendment to the 2000 Plan may adversely affect the rights of
a participant with respect to any award previously granted under the 2000 Plan
without the participant's consent, unless the compensation committee expressly
reserves the right to do so in writing at the time the award is made. To the
extent the Board, and the compensation committee, if established, desires the
2000 Plan to qualify under the Code, certain amendments may require stockholder
approval.
Our stockholders have adopted our Incentive Stock Option Plan, or the
Incentive Plan. The Incentive Plan is designed to qualify as an "incentive stock
option plan" under Section 422A of the Code. Under the Incentive Plan, options
to purchase up to 1,600,000 shares of common stock were authorized for grant to
key employees, including officers and directors. A committee of three directors
appointed by the Board of Directors administers the Incentive Plan and
designates the optionees, the number of shares subject to the options, and the
terms and conditions of each option.
In May 1992, our Board of Directors authorized amendments to the Incentive
Plan, subject to stockholder approval, increasing the number of shares reserved
under the Incentive Plan to 2,000,000 shares of our common stock and amending
the Incentive Plan in accordance with changes adopted in 1986 to the Code. These
proposed amendments to the Incentive Plan were adopted by stockholders at the
annual meeting of stockholders held on November 17, 1992.
65
Under the Incentive Plan, as amended, except for options granted to
holders of 10% or more of our outstanding stock, the exercise price of an option
must be at least 100% of the fair market value of the common stock on the
effective date of grant. Options granted under the Incentive Plan to
stockholders possessing more than 10% of our outstanding stock must be at an
exercise price equal to not less than 110% of such fair market value. We are not
issuing any additional options under the Incentive Plan because the Incentive
Plan terminated in 2002. All options granted must be exercised within 10 years
of date of grant. The aggregate fair market value of our common stock with
respect to which options are exercisable for the first time by a grantee under
the Incentive Plan during any calendar year may not exceed $100,000. Options
must be exercised by an optionee, if at all, within three months after the
termination of such optionee's employment for any reason other than for cause,
and within one year after termination of employment due to death or permanent
disability, unless by its terms the option expires sooner.
THE 2006 EQUITY INCENTIVE PLAN:
ELIGIBLE PARTICIPANTS
Awards may be granted under the 2006 Plan to any of our employees,
officers, directors, or consultants or those of our affiliates. An incentive
stock option may be granted under the 2006 Plan only to a person who, at the
time of the grant, is an employee of Radnet or a related corporation. The 2006
Plan was approved by our Board on October 11, 2006 and by our stockholders at
our special meeting held on November 15, 2006.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE
A total of 2,500,000 new shares of our common stock have been reserved for
issuance under the 2006 Plan. The maximum aggregate number of shares that may be
issued under the 2006 Plan through the exercise of incentive stock options is
2,500,000. If an award is cancelled, terminates, expires, or lapses for any
reason without having been fully exercised or vested, or is settled for less
than the full number of shares of common stock represented by such award
actually being issued, the unvested, cancelled, or unissued shares of common
stock generally will be returned to the available pool of shares reserved for
issuance under the 2006 Plan. In addition, if we experience a stock dividend,
reorganization, or other change in our capital structure, the administrator may,
in its discretion, adjust the number of shares available for issuance under the
2006 Plan and any outstanding awards as appropriate to reflect the stock
dividend or other change. The share number limitations included in the 2006 Plan
will also adjust appropriately upon such event.
ADMINISTRATION OF THE 2006 PLAN.
The 2006 Plan will be administered by the board of directors or one or
more committees of the board of directors, which we refer to as the Committee.
The RadNet board has appointed the Compensation Committee as the Committee
referred to in the 2006 Plan. In the case of awards intended to qualify as
"performance-based-compensation" excludable from the deduction limitation under
Section 162(m) of the Code, the Committee will consist of two or more "outside
directors" within the meaning of Section 162(m).
The administrator has the authority to, among other things, select the
individuals to whom awards will be granted and to determine the type of award to
grant; determine the terms of the awards, including the exercise price, the
number of shares subject to each award, the exercisability of the awards, and
the form of consideration payable upon exercise; to provide for a right to
dividends or dividend equivalents; and to interpret the 2006 Plan and adopt
rules and procedures relating to administration of the 2006 Plan. Except to the
extent prohibited by any applicable law, the administrator may delegate to one
or more individuals the day-to-day administration of the 2006 Plan.
AWARD TYPES
OPTIONS
A stock option is the right to purchase shares of RadNet's common stock at
a fixed exercise price for a fixed period. An option under the 2006 Plan may be
an incentive stock option or a nonstatutory stock option. The exercise price of
an option granted under the 2006 Plan must be at least equal to the fair market
value of RadNet's common stock on the date of grant. In addition, the exercise
price for any incentive stock option granted to any employee owning more than
ten percent of our common stock may not be less than 110 percent of the fair
market value of RadNet's common stock on the date of grant.
66
Unless the administrator determines to use another method, the fair market
value of our common stock on the date of grant will be determined as the closing
sales price for our common stock on the date the option is granted (or if no
sales are reported that day, the closing price on the last preceding day on
which a sale occurred), using a reporting source selected by the administrator.
The administrator determines the acceptable form of consideration for exercising
an option, including the method of payment, either through the terms of the
option agreement or at the time of exercise of an option, provided that
consideration must have a value of not less than the par value of the shares to
be issued and must be actually received before issuing any shares. The 2006 Plan
permits payment in the form of cash, check or wire transfer, other shares of
common stock of RadNet, cashless exercises, any other form of consideration and
method of payment permitted by applicable laws, or any combination thereof.
An option granted under the 2006 Plan cannot be exercised until it becomes
vested. The administrator establishes the vesting schedule of each option at the
time of grant and the option will expire at the time established by the
administrator. After termination of the optionee's service, he or she may
exercise his or her option for the period stated in the option agreement, to the
extent the option is vested on the date of termination. If termination is due to
death or disability, the option usually will remain exercisable for twelve
months following such termination. In all other cases, the option generally will
remain exercisable for three months. Nevertheless, an option may never be
exercised later than the expiration of its term. The term of any stock option
may not exceed ten years, except that with respect to any participant who owns
ten percent or more of the voting power of all classes of RadNet's outstanding
capital stock, the term for incentive stock options must not exceed five years.
STOCK AWARDS
Stock awards are awards or issuances of shares of our common stock that
vest in accordance with terms and conditions established by the administrator.
Stock awards include stock units, which are bookkeeping entries representing an
amount equivalent to the fair market value of a share of common stock, payable
in cash, property, or other shares of stock. The administrator may determine the
number of shares to be granted, and impose whatever conditions to vesting it
determines to be appropriate, including performance criteria and level of
achievement versus the criteria that the administrator determines. The criteria
may be based on financial performance, personal performance evaluations, and
completion of service by the participant. Unless the administrator determines
otherwise, shares that do not vest typically will be subject to forfeiture or to
a right of repurchase of the unvested portion of such shares at the original
price paid by the participant, which RadNet may exercise upon the voluntary or
involuntary termination of the awardee's service with RadNet for any reason,
including death or disability.
For stock awards intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, the measures established by
the administrator must be qualifying performance criteria. Qualifying
performance criteria under the 2006 Plan include any of the following
performance criteria, individually or in combination:
------------------------------------------------------- -------------------------------------------------------
o cash flow o earnings (including gross margin, earnings
before interest and taxes, earnings before taxes, and
net earnings)
------------------------------------------------------- -------------------------------------------------------
o earnings per share o growth in earnings or earnings per share
------------------------------------------------------- -------------------------------------------------------
o stock price o return on equity or average stockholders'
equity
------------------------------------------------------- -------------------------------------------------------
o total stockholder return o return on capital
------------------------------------------------------- -------------------------------------------------------
o return on assets or net assets o return on investment
------------------------------------------------------- -------------------------------------------------------
o revenue o income or net income
------------------------------------------------------- -------------------------------------------------------
o operating income or net operating income o operating profit or net operating profit
------------------------------------------------------- -------------------------------------------------------
o operating margin o return on operating revenue
------------------------------------------------------- -------------------------------------------------------
o market share o contract awards or backlog
------------------------------------------------------- -------------------------------------------------------
o overhead or other expense reduction o growth in stockholder value relative to the
moving average of the S&P 500 Index or a peer group
index
------------------------------------------------------- -------------------------------------------------------
o credit rating o strategic plan development and implementation
------------------------------------------------------- -------------------------------------------------------
o improvement in workforce diversity o EBITDA
------------------------------------------------------- -------------------------------------------------------
o any other similar criteria
------------------------------------------------------- -------------------------------------------------------
67
Qualifying performance criteria may be applied either to RadNet as a whole
or to a business unit, affiliate, or business segment, individually or in any
combination. Qualifying performance criteria may be measured either annually or
cumulatively over a period of years, and may be measured on an absolute basis or
relative to a pre-established target, to previous years' results, or to a
designated comparison group, in each case as specified by the administrator in
writing in the award.
STOCK APPRECIATION RIGHTS
A stock appreciation right is the right to receive the appreciation in the
fair market value of our common stock in an amount equal to the difference
between (a) the fair market value of a share of our common stock on the date of
exercise, and (b) the exercise price. This amount will be paid, as determined by
the administrator, in shares of our common stock with equivalent value, cash, or
a combination of both. The exercise price must be at least equal to the fair
market value of our common stock on the date of grant. Subject to these
limitations, the administrator determines the exercise price, term, vesting
schedule, and other terms and conditions of stock appreciation rights, except
that stock appreciation rights terminate under the same rules that apply to
stock options.
CASH AWARDS
Cash awards confer upon the participant the opportunity to earn future
cash payments tied to the level of achievement with respect to one or more
performance criteria established by the administrator for a performance period.
The administrator will establish the performance criteria and level of
achievement versus these criteria, which will determine the target and the
minimum and maximum amount payable under a cash award. The criteria may be based
on financial performance or personal performance evaluations, or both. For cash
awards intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the measures established by the
administrator must be specified in writing.
OTHER PROVISIONS OF THE 2006 PLAN
TRANSFERABILITY OF AWARDS
Unless the administrator determines otherwise, the 2006 Plan does not
permit the transfer of awards other than by beneficiary designation, will, or by
the laws of descent or distribution, and only the participant may exercise an
award during his or her lifetime.
PREEMPTIVE RIGHTS
The 2006 Plan provides that no shares will be issued in violation of any
preemptive rights held by any stockholder of RadNet.
ADJUSTMENTS UPON MERGER OR CHANGE IN CONTROL
The 2006 Plan provides that in the event of a merger with or into another
corporation in which RadNet is not the surviving entity or RadNet's "change in
control," including the sale of all or substantially all of RadNet 's assets,
and various other events, RadNet 's Board or the Committee may, in its
discretion, provide for the assumption or substitution of, or adjustment to,
each outstanding award; accelerate the vesting of options and stock appreciation
rights, and terminate any restrictions on stock awards or cash awards; provide
for the cancellation of awards in exchange for a cash payment to the
participant; or provide for the cancellation of awards that have not been
exercised or redeemed as of the relevant event.
68
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDERSHAREHOLDER MATTERS
---------------------------
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of January 15, 2007, by (i) each
holder known by us to beneficially own more than five percent of the outstanding
common stock and (ii) each of our directors and executive officers. The
percentages set forth in the table have been calculated on the basis of treating
as outstanding, for purposes of computing the percentage ownership of a
particular holder, all shares of our common stock outstanding at such date and
all shares of common stock purchasable upon exercise of options and warrants
owned by such holder which are exercisable at or within 60 days after such date.
SHARES OF COMMON PERCENT
STOCK OF
Name of Beneficial Owner BENEFICIALLY OWNED(1) CLASS
- --------------------------- ----------------------- ------------
Howard G. Berger, M.D.* 6,507,500(2) 17.0%
Marvin S. Cadwell -- --
John V. Crues, III, M.D.* 715,859(3) 1.9%
Stephen M. Forthuber -- --
Norman R. Hames -- --
David L. Swartz* 85,000(4) -- (4)
Lawrence L. Levitt* 25,000(5) -- (5)
Jeffrey L. Linden* 585,000(6) 1.5%
Michael L. Sherman, M.D. -- --
Mark D. Stolper* 354,400(7) -- (7)
Contrarian Capital Management, LLC 1,912,075 5.2%(8)
All directors and executive officers as a group (ten persons) 8,272,759(9) 21.7%
- ------------------------------
* The address of all of our officers and directors is c/o RadNet, 1510
Cotner Avenue, Los Angeles, California 90025.
(1) Subject to applicable community property statutes and except as otherwise
noted, each holder named in the table has sole voting and investment power
with respect to all shares of common stock shown as beneficially owned.
Share numbers reflect the reverse one-for-two stock split effected in
November 2006.
(2) As a result of his stock ownership and his positions as president and a
director of our company, Howard G. Berger, M.D. may be deemed to be a
controlling person of our company.
(3) Includes warrants for 400,000 shares exercisable between $0.72 and $0.92
per share.
(4) Includes 75,000 warrants exercisable between $0.80 and $1.20 per share and
is less than 1.0% of the class.
(5) Represents warrants exercisable at $0.64 per share and is less than 1.0%
of the class.
(6) Includes 137,500 options and warrants exercisable at prices between $0.60
and $0.92 per share.
(7) Includes warrants for 350,000 shares exercisable at prices between $0.60
and $1.20 per share.
(8) The address reported is 411 W. Putnam Ave., Greenwich, Connecticut 06830.
(9) See the above footnotes. Includes 7,285,259 shares owned of record and
987,500 shares issuable upon exercise of presently exercisable options,
warrants and convertible debentures.
69
REPORT OF THE AUDIT COMMITTEE
The primary function of RadNet's Committee is oversight of the
Corporation's financial reports, internal accounting and financial controls and
the independent audit of the annual consolidated financial statements. Our
Committee acts under a charter which is available at our web site at
www.radnet.com. We periodically review the adequacy of the charter. Each of our
members is independent, and both of our members are audit committee financial
experts under Securities and Exchange Commission rules. We held five meetings in
fiscal 2006 at which, as discussed in more detail below, we had extensive
reports and discussions with the independent auditors, internal auditors and
other members of management.
The Committee met and held discussions with management, who reported to
the Committee that the Company's consolidated financial statements were prepared
in accordance with accounting principles generally accepted in the United States
of America. The Committee reviewed and discussed the consolidated financial
statements with both management and Moss Adams LLP ("Moss Adams"), the
independent auditors. The Committee also discussed with Moss Adams matters
required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committee). We discussed significant accounting
policies applied by RadNet in its financial statements, as well as alternative
treatments.
Moss Adams also provided the Committee with written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committee), and the Committee discussed with Moss Adams their
independence. The Committee considered the services that Moss Adams performed
for RadNet, during 2006 other than in conjunction with the audit and review of
its consolidated financial statements and determined that those services are
compatible with maintaining Moss Adams' independence.
The Committee discussed with Moss Adams the overall scope and plans for
their audit. We met with Moss Adams, both with and without management present.
Discussions included the results of its examination and the overall quality of
RadNet's financial reporting.
Based on the reviews and discussions referred to above, in reliance on
management and Moss Adams, and subject to the limitations of our role described
below, we recommended to the Board, and the Board has approved, the inclusion of
the audited consolidated financial statements in RadNet's Annual Report on Form
10-K for the year ended October 31, 2006, for filing with the Securities and
Exchange Commission.
The Committee has also appointed Moss Adams to audit the Corporation's
consolidated financial statements for 2007, subject to stockholder ratification
of that appointment.
In carrying out our responsibilities, we look to management and the
independent auditors. Managementthis item is responsible for the preparation and fair
presentation of RadNet's consolidated financial statements and for maintaining
effective internal control Management is also responsible for assessing and
maintaining the effectiveness of internal control over the financial reporting
process in compliance with Sarbanes-Oxley Section 404 requirements. The
independent auditors perform their responsibilities in accordance with the
standards of the Public Company Accounting Oversight Board. While our members
are or have been professionally engaged in the practice of accounting or
auditing, they are not experts under the Securities Act of 1933 in either of
those fields or in auditor independence.
Respectfully submitted,
David L. Swartz, Chairperson
Lawrence L. Levitt
71
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in cumulative
total stockholder return of the Company's Common Stock during the period from
2001 to 2006 with (i) the cumulative total return of the S&P500 index and (ii)
the cumulative total return of the S&P500 - Healthcare Sector index. The
comparison assumes $100 was invested in January 1, 2001 in the Common Stock and
in each of the foregoing indices and the reinvestment of dividends through
January 1, 2006. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
This graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Form 10-K into any filing under the
Securities Act or under the Exchange Act, except to
the extent that RadNet
specifically incorporates this information by reference,sections entitled "Security Ownership of Certain Beneficial Owners and
shall not otherwise
be deemed filed under such Acts.
[stock graph here]
S&P Healthcare
Primedex S&P 500 Index Sector Index
-------- ------------- ------------
1/2/2001 100 100 100
1/1/2002 418.1818182 88.7116589 88.66787776
1/1/2003 130.3030303 68.56079787 70.95913721
1/1/2004 169.6969697 86.64740784 80.40563847
1/3/2005 169.6969697 93.67319707 79.7502265
1/3/2006 90.90909091 98.87242884 85.60259388
72
Management" and "Compensation of Directors and Executive Officers- Summary
Compensation Table" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, Howard G. Berger, M.D.AND DIRECTOR
------------------------------------------------------------
INDEPENDENCE
------------
The information required by this item is RadNet's Presidentincorporated by reference to
the section entitled ""Certain Relationships and Chief Executive, chair of
RadNet's Board of Directors, and owns approximately 17% of RadNet's outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
BRMG. BRMG provides all of the professional medical services at 53 of RadNet's
facilities under a management agreement with RadNet, and contracts with various
other independent physicians and physician groups to provide all of the
professional medical services at most of RadNet's other California facilities.
RadNet obtains professional medical services from BRMG in California, rather
than providing such services directly or through subsidiaries, in order to
comply with California's prohibition against the corporate practice of medicine.
However, as a result of this close relationship with Dr. Berger and BRMG, RadNet
believes that it is able to better ensure that professional medical services are
provided at its California facilities in a manner consistent with RadNet's needs
and expectations and those of its referring physicians, patients and payors than
if RadNet obtained these services from unaffiliated practice groups.
Under RadNet's management agreement with BRMG, which expires on January 1,
2014, BRMG pays RadNet, as compensation for the use of RadNet's facilities and
equipment and for RadNet's services, a percentage of the gross amounts collected
for the professional services it renders. The percentage, which was 79% at
October 31, 2006, is adjusted annually, if necessary, to ensure that the parties
receive fair value for the services they render. In operation and historically,
the annual revenue of BRMG from all sources closely approximates its expenses,
including Dr. Berger's compensation, fees payable to RadNet and amounts payable
to third parties. For administrative convenience and in order to avoid
inconveniencing and confusing RadNet's payors, a single bill is prepared for
both the professional medical services provided by the radiologists and RadNet's
non-medical, or technical, services, generating a receivable for BRMG. BRMG
maintains a $45 million revolving credit facility with General Electric Capital
Corporation from which it may obtain funds by utilizing its accounts receivable
for working capital purposes, if needed. RadNet repays or offsets these advances
with periodic payments from BRMG to RadNet under the management agreement.
RadNet guarantees BRMG's obligations under this working capital facility.
John V. Crues, III, M.D. agreed to continue his employment and leadership
roles with us in consideration of our agreement in June 2005, to issue to him
our five year warrant to purchase 250,000 shares of our common stock at an
exercise price of $0.72 per share (the price of our common stock on the date of
the agreementRelated Party Transactions" in
the public market in which it trades).
Both Dr. Berger and Dr. Crues receive all or a portion of their salary
from BRMG. See "Employment Agreements."
At October 31, 2005, we owed Jeffrey L. Linden $61,151 in connection with
our acquisition of his interest in DIS. This obligation was paid in March 2006.
In the acquisition transaction, we issued to Mr. Linden warrants to purchase
98,682 shares of common stock at a price of $1.20 per share expiring June 30,
2004. In connection with an agreement to extend our obligation to Mr. Linden, we
issued to him warrants to purchase 150,000 shares of common stock at a price of
$0.38 per share that he exercised in June 2005. On July 30, 2004, we issued to
Mr. Linden a five year warrant to purchase 100,000 shares of our common stock at
an exercise price of $0.60 per share in consideration of Mr. Linden's agreement
to subordinate our obligation to him to our debt with our revolving line of
credit. In April 2006, in order to induce Mr. Linden to continue his employment
we issued to him a six year warrant to purchase 250,000 shares of common stock
at a price of $2.52, the price of our common stock on the date of the
transaction in the public market in which it trades, vesting over the six year
period. This warrant will fully vest if RadNet's publicly traded common stock
averages $6.00 per share for 30 days.
Cohen & Lord, a professional corporation, a law firm with which Mr. Linden
is associated, received $448,497 in fees from us during the year ended October
31, 2006. Mr. Linden has specifically waived any interest in RadNet's fees since
becoming an officer of Radnet.
In consideration of the continued employment by Norman Hames, our
Executive Vice President and Chief Operating Officer - Western Operations and a
director in March 2006 we issued to Mr. Hames a seven year warrant to purchase
1,500,000 shares at an exercise price of $1.12 per share, the price of our
common stock on the date of the transaction in the public market in which it
trades, vesting over the seven year period. We have agreed to provide to Mr.
Hames a bonus of $.040 per share for each share exercised. This warrant will
fully vest if RadNet's publicly traded common stock averages $6.00 per share for
30 days.
On July 30, 2004, RadNet issued to Mark D. Stolper five-year warrants to
purchase 325,000 shares of our common stock at $0.60 per share in consideration
of his entry into a three year employment agreement with us under which he
became our chief financial officer and his assistance in refinancing our
outstanding institutional debt. The warrant exercise price is the price of our
common stock on the date of the agreement in the public market in which it
trades. In recognition of Mr. Stolper's services to RadNet on July 11, 2006,
RadNet issued to Mr. Stolper a five-year warrant to purchase 100,000 shares of
RadNet common stock at $3.10 per share, the price of our common stock on the
date of the transaction in the public market in which it trades, vesting over a
three-year period. This warrant will fully vest if RadNet's publicly traded
common stock averages $6.00 per share for 30 days.
73
Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.SERVICES
--------------------------------------
The information required by this item is incorporated by reference to
the sections entitled "Independent Registered Public Accounting Firm Fees" and
"Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of the Independent Registered Public Accounting Firm" in the Proxy
Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PAGE NO.
------------------------------------------ --------
(a) Financial Statements - The following table presents information about fees that Moss Adams LLP
charged us to audit our annual financial statements for 2006 and 2005, and fees
billed for other services rendered by Moss Adams LLP during those years.
2006 2005
----------- -----------
Audit Fees (1) $ 290,000 $ 282,000
Audit Related Fees (2) 144,000 13,000
Tax Fees (3) 78,000 92,000
----------- -----------
Total $ 512,000 $ 387,000
=========== ===========
----------
(1) Audit Fees - Fees for audit services, including fees associated with
the annual auditare
filed herewith:
Reports of our consolidated financial statements and reviewsIndependent Registered Public Accounting Firms 47 to 48
Consolidated Balance Sheets 49
Consolidated Statements of interim
consolidated financial statements included in our Quarterly Reports on Form
10-Q.
(2) Audit-Related Fees -- Audit-related fees include fees for the auditOperations 50
Consolidated Statements of our 401(k) benefit plan and offering memorandum.
(3) Tax Fees -- Tax fees billedStockholders' Deficit 51
Consolidated Statements of Cash Flows 52
Notes to us include services providedConsolidated Financial Statements 54 to prepare
federal, state, and local income and franchise tax returns for 2005, and related
tax services and estimated tax payments for 2006.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF INDEPENDENT AUDITOR
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services, and other services. Pre-approval
is generally provided for up to 12 months from the date of pre-approval and any
pre-approval is detailed as to the particular service or category of services.
The Audit Committee may delegate pre-approval authority to one or more of its
members when expedited services are necessary. The Audit Committee has
determined that the provision of non-audit services by Moss Adams LLP is
compatible with maintaining Moss Adams' independence.71
74
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PAGE NO.
-------------
(a) Financial Statements - The following financial statements are filed herewith:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Deficit F-4
Consolidated Statements of Cash Flows F-5 to F-7
Notes to Consolidated Financial Statements F-8 to F-25(b) Financial Statements Schedules
Schedules - The Following financial statement schedules are filed herewith:
Schedule II - Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
(b)RADNET, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGES
BEGINNING OF AGAINST DEDUCTIONS BALANCE AT END
YEAR INCOME FROM RESERVE OF YEAR
-------- -------- -------- --------
Year Ended December 31, 2008
Accounts Receivable-Allowance for Bad Debts $ 11,571 $ 30,833 $(30,338) $ 12,066
Year Ended December 31, 2007
Accounts Receivable-Allowance for Bad Debts $ 8,486 $ 27,467 $ 24,382 $ 11,571
Two months Ended December 31, 2006
Accounts Receivable-Allowance for Bad Debts $ 1,490 $ 3,907 $ (3,807) $ 8,486
Year Ended October 31, 2006
Accounts Receivable-Allowance for Bad Debts $ 980 $ 7,626 $ 7,116 $ 1,490
75
(c) Exhibits - The following exhibits are filed herewith or incorporated by
reference herein:
INCORPORATED BY
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE TO
- ----------- ---------------------- ---------------
2.1------------
2.1.1 Agreement and Plan of Merger, dated as of July 6, 2006, by and among (O)
Primedex, Radiologix, RadNet and Merger Sub
(O)2.1.2 Agreement and Plan of Merger and Reorganization, dated as of September 3, (Y)
2008
3.1.1 Certificate of Incorporation as amended (A)
3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A)
3.1.3 December 27, 2000 amendment to the Certificate of Incorporation (E)
3.1.4 November 15, 2006 amendment to the Certificate of Incorporation (Q)
3.1.5 November 27, 2006 amendment to the Certificate of Incorporation (Q)
3.23.1.6 Certificate of Incorporation of RadNet, Inc., a Delaware corporation (Y)
3.1.7 Certificate of Amendment to Certificate of Incorporation of RadNet, Inc., (Y)
a Delaware corporation, dated September 2, 2008
3.3 By-laws (P)(Y)
3.2.1 First Amendment to By-laws
4.1 Form of Common Stock Certificate (R)
4.2 Form of Supplemental Indenture between Registrant and American Stock (B)
Transfer and Trust Company as Incorporated by Indenture Trustee with
respect to the 11.5% Series A Convertible Subordinated Debentures due 2008
(B)
4.3 Form of 11.5% Series A Convertible Subordinated Debenture Due 2008 (B)
[Included in Exhibit 4.2] (B)
10.1 Employment Agreement dated as of June 12, 1992 between RadNet and Howard (C)
G. Berger, M.D. (C)
and amendment to Agreement.* (I)
10.6 Securities Purchase Agreement dated March 22, 1996, between the Company (D)
and Diagnostic Imaging Services, Inc. (D)
10.7 Stockholders Agreement by and among the Company, Diagnostic Imaging (D)
Services, Inc. and Norman Hames (D)
10.8 Securities Purchase Agreement dated June 18, 1996 between the Company and (D)
Norman Hames (D)
75
10.10 DVI Securities Purchase Agreement (E)
10.11 General Electric Note Purchase Agreement (E)
10.12 Securities Purchase Agreement between the Company and Howard G. Berger, (E)
M.D. (E)
10.13 2000 Long-Term Incentive Plan* (F)
10.14 Employment Agreement dated April 16, 2001, with Jeffrey L. Linden (G)
and amendment to agreement* (I)
10.15 Employment Agreement with Norman R. Hames dated May 1, 2001 (G)
and amendment to agreement* (I)
76
INCORPORATED BY
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE TO
- ----------- ---------------------- ------------
10.16 Amended and Restated Management Agreement with Beverly Radiology Medical (H)
Group III dated as of January 1, 2004
(H)
10.18 Incentive Stock Option PlanPlan* (H)
10.19 DVI Agreement as amended (J)
10.20 Master Amendment Agreement with General Electric Capital Corporation, (K)
General Electric Company and GE Healthcare Financial Services (K)
10.21 Amended, Restated and Consolidated Loan and Security Agreement with DVI (K)
Financial Services, Inc. (K)
10.22 Amendment to Loan Documents re US Bank Portfolio Services (K)
10.23 Credit Agreement with Wells Fargo Foothill, Inc. (K)
10.24 Employment Agreement with Mark Stolper dated July 30, 2004* (N)
10.25 Second Amended and Restated Loan and Security Agreement with Post Advisory (L)
Group, LLC (L)
10.26 Amended, Restated and Consolidated Loan and Security Agreement with Post (L)
Advisory Group, LLC (L)
10.27 Fourth Amendment to Credit Agreement Substituting Bridge Healthcare (M)
Finance, LLC for Wells Fargo Foothill, Inc. (M)
10.28 2006 Incentive Stock Plan* (O)
10.29 Credit Agreement, dated as November 15, 2006, among Radnet Management, (P)
Inc., the Credit Parties designated therein, General Electric Capital
Corporation, as Agent, the lenders described therein, and GE Capital
Markets, Inc.
(P)
10.30 Guaranty, dated as of November 15, 2006, by and among the Guarantors (P)
identified therein and General Electric Capital Corporation. (P)
10.31 Pledge Agreement, dated as of November 15, 2006, by and among
the Pledgors (P) identified therein and General Electric
Capital Corporation. (P)
10.32 Security Agreement, dated as of November 15, 2006, by and among the (P)
Grantors identified therein and General Electric Capital Corporation. (P)
10.33 Second Lien Credit Agreement, dated as of November 15, 2006, among Radnet (P)
Management, Inc., the Credit Parties designated therein, General Electric
Capital Corporation, as Agent, the Lenders described therein,
and GE Capital Markets, Inc.
(P)
76
10.34 Second Lien Guaranty, dated as of November 15, 2006, by and
among the (P) Guarantors identified therein and General
Electric Capital Corporation. (P)
10.35 Pledge Agreement, dated as of November 15, 2006, by and among
the Pledgors (P) identified therein and General Electric
Capital Corporation. (P)
10.36 Second Lien Security Agreement, dated as of November 15, 2006, by and (P)
among the Grantors identified therein and General Electric Capital
Corporation.
(P)10.37 Retention Agreement with Stephen Forthuber dated November 15, 2006. (S)
10.38 Amendment of Existing Credit Agreement with General Electric Capital (T)
Corporation dated November 2007.
10.39 Amendment of Existing Credit Agreement with General Electric Capital (V)
Corporation dated February 2008.
77
INCORPORATED BY
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE TO
- ----------- ---------------------- ------------
10.40 First amendment to the 2006 Equity Incentive Plan (W)
10.41 Form of warrant recharacterized as under the 2006 Equity Incentive plan - (W)
Form A
10.42 Form of warrant recharacterized as under the 2006 Equity Incentive plan - (W)
Form B
10.43 Form of Indemnification Agreement between the registrant and each of its (X)
officers and directors
14 Code of Financial Ethics (H)
21 List of Subsidiaries (R)
23(Z)
23.1 Consent of Registered Independent Public Accountants (R)Accounting Firm (Z)
31.1 CEO Certification pursuant to Section 302 (R)(Z)
31.2 CFO Certification pursuant to Section 302 (R)(Z)
32.1 CEO Certification pursuant to Section 906 (R)(Z)
32.2 CFO Certification pursuant to Section 906 (R)
---------------------(Z)
- ---------------
* Management contract with compensatory arrangement.
(A) Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form S-1 [FileFile No. 33-51870].
(AA) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-3 [File 33-73150].33-51870.
(B) Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form T-3 [FileFile No. 022-28703].022-28703.
(C) Incorporated by reference to exhibit filed in an amendment to Form 8-K
report for June 12, 1992.
(D) Incorporated by reference to exhibit filed with Form 10-K for the year
ended October 31, 1996.
(E) Incorporated by reference to exhibit filed with the Form 10-K for the
year ended October 31, 2000.
(F) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended January 31, 2000.
(G) Incorporated by reference to exhibit filed with the Form 10-K for the
year ended October 31, 2001.
(H) Incorporated by reference to exhibit filed with the Form 10-K for the
year ended October 31, 2003.
(I) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended January 31, 2004.
(J) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended April 30, 2004.
(K) Incorporated by reference to exhibit filed with the Form 8-K report for
August 2, 2004.
(L) Incorporated by reference to exhibit filed with Form 8-K for November
29, 2004.
(M) Incorporated by reference to exhibit filed with Form 8-K for September
14, 2005.
(N) Incorporated by reference to exhibit filed with Form 10-K for October
31, 2004.
(O) Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form S-4 (File No. 333-136800).
(P) Incorporated by reference to exhibit filed with Form 8-K for November
15, 2006.
(Q) Incorporated by reference to exhibit filed with Form 8-K for November
27, 2006.
(R) Incorporated by reference to exhibit filed with Form 10-K for October
31, 2006.
78
(S) Incorporated by reference to exhibit filed with Form 10-K/T for
December 31, 2006.
(T) Incorporated by reference to exhibit filed with Form 8-K for August 24,
2007.
(U) Incorporated by reference to exhibit filed with Form 8-K for November
30, 2007.
(V) Incorporated by reference to exhibit filed with Form 10-K for December
31, 2007.
(W) Incorporated by reference to exhibit filed with Form 10-Q for the
quarter ended June 30, 2008.
(X) Incorporated by reference to exhibit filed with Form 10-Q for the
quarter ended March 31, 2008.
(Y) Incorporated by reference to exhibit filed with Form 8-K for September
3, 2008.
(Z) Filed herewith.
7779
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RADNET, INC.
Date: February 6, 2007March 16, 2009 /s/ HOWARD G. BERGER, M.D.
------------------------------------
HOWARD G. BERGER, M.D., PRESIDENT,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
By /s/ HOWARD G. BERGER, M.D.
------------------------------------------------------------------------------------------------------------
HOWARD G. BERGER, M.D., DIRECTOR, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: February 6, 2007March 16, 2009
By /s/ MARVIN S. CADWELL
------------------------------------------------------------------------------------------------------------
MARVIN S. CADWELL, DIRECTOR
Date: February 6, 2007March 16, 2009
By /s/ JOHN V. CRUES, III, M.D.
------------------------------------------------------------------------------------------------------------
JOHN V. CRUES, III, M.D., DIRECTOR
Date: February 6, 2007March 16, 2009
By /s/ NORMAN R. HAMES
------------------------------------------------------------------------------------------------------------
NORMAN R. HAMES, DIRECTOR
Date: February 6, 2007March 16, 2009
By /s/ DAVID L. SWARTZ
------------------------------------------------------------------------------------------------------------
DAVID L. SWARTZ, DIRECTOR
Date: February 6, 2007March 16, 2009
By /s/ LAWRENCE L. LEVITT
------------------------------------------------------------------------------------------------------------
LAWRENCE L. LEVITT, DIRECTOR
Date: February 6, 2007March 16, 2009
80
By /s/ MICHAEL L. SHERMAN, M.D.
------------------------------------------------------------------------------------------------------------
MICHAEL L. SHERMAN, M.D., DIRECTOR
Date: February 6, 2007March 16, 2009
By /s/ MARK D. STOLPER
------------------------------------------------------------------------------------------------------------
MARK D. STOLPER, CHIEF FINANCIAL OFFICER (Principal Accounting Officer)
Date: February 6, 2007
78March 16, 2009
81