UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 2002 Commission File Number 0-19019
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PRIMEDEX HEALTH SYSTEMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
New York 13-3326724
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1516 Cotner Avenue
Los Angeles, California 90025
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (310) 478-7808
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 No
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Number of shares outstanding of the issuer's common stock as of June 7, 2002 was
41,001,234 [excluding treasury shares].
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEETS
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APRIL 30, OCTOBER 31,
2002 2001
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,000 $ 40,000
Accounts receivable, net 30,793,000 28,764,000
Unbilled receivables and other receivables 312,000 133,000
Due from related party 78,000 94,000
Deferred income taxes 5,235,000 5,235,000
Other 1,493,000 1,328,000
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Total current assets 37,918,000 35,594,000
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PROPERTY AND EQUIPMENT, NET 81,587,000 65,368,000
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OTHER ASSETS:
Accounts receivable, net 2,620,000 2,499,000
Due from related parties -- 60,000
Goodwill, net 24,064,000 24,064,000
Other 856,000 844,000
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Total other assets 27,540,000 27,467,000
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$ 147,045,000 $ 128,429,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash disbursements in transit $ 4,335,000 $ 3,804,000
Accounts payable and accrued expenses 17,984,000 19,361,000
Income taxes payable -- 125,000
Notes payable to related party -- 119,000
Current portion of notes and leases payable 43,114,000 39,172,000
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Total current liabilities 65,433,000 62,581,000
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LONG-TERM LIABILITIES:
Subordinated debentures payable 16,303,000 16,303,000
Notes payable to related party 1,330,000 1,330,000
Notes and leases payable, net of current portion 105,751,000 90,569,000
Accrued expenses 779,000 1,986,000
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Total long-term liabilities 124,163,000 110,188,000
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,068,000 1,142,000
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REDEEMABLE STOCK -- 160,000
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STOCKHOLDERS' DEFICIT (43,619,000) (45,642,000)
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$ 147,045,000 $ 128,429,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
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REVENUE
Revenue $ 91,717,000 $ 66,223,000 $ 175,837,000 $ 127,001,000
Less: Allowances 57,995,000 40,119,000 109,674,000 76,787,000
-------------- -------------- -------------- --------------
Net revenue 33,722,000 26,104,000 66,163,000 50,214,000
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OPERATING EXPENSES
Operating expenses 23,850,000 17,963,000 47,421,000 34,834,000
Depreciation and amortization 3,792,000 2,428,000 7,125,000 4,786,000
Provision for bad debts 1,347,000 731,000 2,547,000 1,399,000
-------------- -------------- -------------- --------------
Total operating expenses 28,989,000 21,122,000 57,093,000 41,019,000
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Income from operations 4,733,000 4,982,000 9,070,000 9,195,000
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OTHER INCOME (EXPENSE)
Interest expense, net (3,987,000) (3,212,000) (7,785,000) (6,550,000)
Gain (loss) on sale of centers
and equipment (92,000) 3,529,000 (82,000) 3,529,000
Other 307,000 (79,000) 626,000 41,000
-------------- -------------- -------------- --------------
Total other income (expense) (3,772,000) 238,000 (7,241,000) (2,980,000)
-------------- -------------- -------------- --------------
INCOME BEFORE MINORITY
INTEREST AND
EXTRAORDINARY ITEM 961,000 5,220,000 1,829,000 6,215,000
-------------- -------------- -------------- --------------
MINORITY INTEREST IN
EARNINGS OF SUBSIDIARY (125,000) (113,000) (76,000) (191,000)
-------------- -------------- -------------- --------------
INCOME BEFORE
EXTRAORDINARY ITEM 836,000 5,107,000 1,753,000 6,024,000
EXTRAORDINARY ITEM-GAIN
FROM EXTINGUISHMENT OF
DEBT (NET OF INCOME TAXES OF $-0-) -- 108,000 -- 113,000
-------------- -------------- -------------- --------------
NET INCOME $ 836,000 $ 5,215,000 $ 1,753,000 $ 6,137,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2002 2001 2002 2001
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BASIC EARNINGS PER SHARE:
Income before extraordinary gain .02 .12 .04 .15
Extraordinary gain .00 .00 .00 .00
--------------- --------------- --------------- ---------------
BASIC NET INCOME
PER SHARE: $ .02 $ .12 $ .04 $ .15
=============== =============== =============== ===============
DILUTED EARNINGS PER SHARE:
Income before extraordinary gain .02 .11 .04 .14
Extraordinary gain .00 .00 .00 .00
--------------- --------------- --------------- ---------------
DILUTED NET INCOME
PER SHARE: $ .02 $ .11 $ .04 $ .14
=============== =============== =============== ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 40,759,664 40,133,139 40,745,928 39,691,146
=============== =============== =============== ===============
DILUTED 45,664,135 46,132,870 43,198,164 43,169,565
=============== =============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
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Common Stock $.01 par value
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100,000,000 shares authorized Treasury Stock, at cost
------------------------------ Paid-in -------------------------------
Shares Amount Capital Shares Amount
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BALANCE - OCTOBER 31, 2001 42,432,010 $ 425,000 $ 100,108,000 (1,825,000) $ (695,000)
Issuance of Common Stock [Note 6 and 7] 393,558 4,000 58,000 -- --
Retirement of Redeemable Stock -- -- 160,000 -- --
Payment of Subscription Receivable -- -- -- -- --
Net income -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
BALANCE - APRIL 30, 2002
(UNAUDITED) 42,825,568 $ 429,000 $ 100,326,000 (1,825,000) $ (695,000)
============== ============== ============== ============== ==============
(CONTINUED BELOW)
Stock Total
Accumulated Subscription Stockholders'
Deficit Receivable Deficit
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BALANCE - OCTOBER 31, 2001 $(145,432,000) $ (48,000) $ (45,642,000)
Issuance of Common Stock [Note 6 and 7] -- 18,000 80,000
Retirement of Redeemable Stock -- --
160,000
Payment of Subscription Receivable -- 30,000 30,000
Net income 1,753,000 -- 1,753,000
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BALANCE - APRIL 30, 2002
(UNAUDITED) $(143,679,000) $ -- $ (43,619,000)
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED
APRIL 30,
2002 2001
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NET CASH FROM OPERATING ACTIVITIES $ 7,071,000 $ 5,756,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiary's common stock -- (30,000)
Purchase of property and equipment (3,953,000) (1,810,000)
Proceeds from sale of imaging centers, property and equipment 1,700,000 4,000,000
Investment in center -- (100,000)
Payments from related parties 77,000 --
Loans to related parties -- (75,000)
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Net cash (used) provided by investing activities (2,176,000) 1,985,000
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit 531,000 1,019,000
Principal payments on notes and leases payable (10,542,000) (9,019,000)
Proceeds from short-term and long-term borrowings 5,360,000 294,000
Proceeds from sale of common stock 2,000 22,000
Purchase of subordinated debentures -- (37,000)
Loan fees (10,000) (10,000)
Payments to related parties (119,000) --
Joint venture proceeds 125,000 --
Joint venture distribution (275,000) --
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Net cash used by financing activities (4,928,000) (7,731,000)
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NET (DECREASE) INCREASE IN CASH (33,000) 10,000
CASH, beginning of period 40,000 36,000
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CASH, end of period $ 7,000 $ 46,000
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 7,145,000 $ 6,084,000
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Income taxes $ 156,000 $ --
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED APRIL 30, 2002 AND 2001
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The
Company entered into capital leases or financed equipment through notes payable
for approximately $21,505,000 and $5,625,000 for the six months ended April 30,
2002 and 2001, respectively.
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
In April 2002, an officer of the Company exercised his option to purchase
300,000 shares of common stock at $.15 per share. As part of the transaction,
the officer gave the Company 30,201 mature shares of its common stock previously
held by the officer worth $45,000 ($1.49 per share public closing price on the
transaction date). In addition, the officer gave the Company an additional
13,424 mature shares of common stock previously held by the officer worth
$20,000 in payment of his note payable with accumulated interest (classified as
Stock Subscription Receivable on the Company's financial statements). By
combining the transaction, the Company issued a net 256,375 shares of common
stock to the officer for his option exercise.
Effective March 1, 2001, the Company's DIS subsidiary sold its Valley
Regional Oncology Center ["VROC"] for $4,000,000 cash and recognized a gain on
the sale of approximately $3,527,000. As part of the sale, the Company wrote-off
approximately $404,000 in net property and equipment and approximately $75,000
in net other current assets.
Effective January 19, 2001, the Company settled five of its outstanding
notes payable related to the historical acquisition of DIS common stock from
unrelated third parties. The debt was reduced by warrants issued with the notes
payable that were exercised for 920,100 shares of the Company's common stock at
$.25 per share, or approximately $230,000.
On December 29, 2000, the Company renegotiated two of its existing notes
payable with General Electric Company ["GE"] aggregating $3,130,000 into a new
promissory note with interest at 8.0% payable along with unpaid interest on
December 29, 2005 for approximately $4,664,000. As part of the transaction, the
Company issued five-year warrants to purchase 778,655 shares of the Company's
common stock at a price of $1.00 per share. The Company allocated approximately
$225,000 of the renegotiated notes to the warrants which represented the
approximate interest discount GE gave the Company in consideration for the
warrants when the rate was compared to other recent financing.
Effective December 13, 2000, the Company's major lender, DVI Business
Credit Corporation, agreed to convert a $5,542,000 note payable into a new
series of non-voting convertible preferred stock on the basis of one share of
preferred stock for each one dollar of debt cancelled. Subsequent to April 30,
2001, but prior to October 31, 2001, the Company converted the preferred stock
back in to notes payable with accrued interest of approximately $235,000
accumulated into the new notes payable balances.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENATATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles for
complete financial statements; however, in the opinion of the management of the
Company, all adjustments consisting of normal recurring adjustments necessary
for a fair presentation of financial position, results of operations and cash
flows for the interim periods ended April 30, 2002 and 2001 have been made. The
results of operations for any interim period are not necessarily indicative of
the results for the full year. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto contained in the Company's Annual Report on Form 10-K for
the year ended October 31, 2001.
The consolidated financial statements include the accounts of Primedex
Health Systems, Inc., and its subsidiaries outlined as follows:
(1) Radnet Management, Inc. ["Radnet"]
Subsidiaries
a. Radnet Sub, Inc. ["Tower"],
b. Radnet Heartcheck Management, Inc.,
c. Radnet Managed Imaging Services, Inc. ["RMIS"],
d. SoCal MR Site Management, Inc.,
e. Radnet Management I, Inc.,
f. Radnet Management II, Inc. ["Modesto"],
g. Westchester Imaging Group (a 50% joint venture),
h. Burbank Advanced Imaging Center, LLC (75%)
i. Rancho Bernardo Advanced Imaging Center, LLC (75%)
(2) Diagnostic Imaging Services, Inc. ["DIS"]
Both Radnet and DIS are combined with Beverly Radiology Medical Group
III ["BRMG"]
Operating activities of subsidiary entities are included in the
accompanying financial statements from the date of acquisition. All intercompany
transactions and balances have been eliminated in consolidation and
combinations. Westchester Imaging Group is consolidated with the Company based
upon the criteria of both SFAS 94 and EITF 97-2.
Medical services and supervision at most of the Company's 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 a shareholder and
president of Primedex Health Systems, Inc.. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
NOTE 2 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services through its 49 facilities. The Company arranges for
the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound,
mammography, nuclear medicine and general diagnostic radiology to the public.
7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, effective for
purchases after June 30, 2001 and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill [and intangible assets deemed to have indefinite lives] will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.
The Company implemented No. 142 effective November 1, 2001. In connection
with the adoption of No. 142, the Company performed a transitional goodwill
impairment assessment and determined there would be no effect on the earnings
and financial position of the Company at this time. Application of the
nonamortization provisions of the Statement resulted in an increase in income of
approximately $750,000 ($0.02 per share) for the six months ended April 30,
2002.
NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES
Future imaging center openings:
Effective November 26, 2001, the Company entered into a new building lease
in Rancho Bernardo, California, near San Diego, for 9,557 square feet of space
to develop a multi-modality imaging center providing MRI, CT, PET, mammography,
ultrasound and x-ray services. The center, Rancho Bernardo Advanced Imaging
Center, LLC, will be 75%-owned by the Company and 25%-owned by two physicians
who will invest $250,000. As of April 30, 2002, the Company has received
$125,000 of the investment. The lease term is ten years from the anticipated
opening date and completion of tenant improvements which is expected to be on or
around August 1, 2002. The beginning monthly rental at that time will be
approximately $12,000.
Effective April 1, 2002, the Company entered into two additional lease
agreements for 10,500 square feet of additional space near its Orange facility.
The lease terms are for ten years with beginning monthly rentals of
approximately $24,000 per month.
Center openings:
Effective January 1, 2002, the Company entered into a capitation
arrangement with Primecare Medical Group for approximately 62,000 lives
primarily benefiting the Company's Temecula Valley Imaging Center ["TVIC"]. The
Company opened two additional facilities in Sun City and Lake Elsinore,
California, which will provide x-ray services to support the new contract.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill is recorded at cost of $30,330,000, less accumulated amortization
of $6,266,000 as of April 30, 2002 and October 31, 2001. Other intangible assets
consist of offering costs and loan fees which are expected to be fully amortized
by June 2003 and December 2003, respectively.
The Company implemented Statement of Financial Accounting Standards No.
141, Business Combinations and No. 142, Goodwill and Other Intangible Assets,
effective November 1, 2001. Under the new rules, goodwill [and intangible assets
deemed to have indefinite lives] will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will
8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 5 - GOODWILL AND INTANGIBLE ASSETS - CONTINUED
continue to be amortized over their useful lives. Application of the
nonamortization provisions of the Statement resulted in an increase in income of
approximately $750,000 ($0.02 per share) for the six months ended April 30,
2002. Amortization expense of approximately $600,000 was recognized for the six
months ended April 30, 2001.
NOTE 6 - CAPITAL TRANSACTIONS
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
During the six months ended April 30, 2002, the Company issued 805,000
five-year warrants with average exercise prices from $.95 to $1.61 per share. In
each of the above cases, the consideration was a radiologist's agreement to
accept a full-time relationship at one of the Company's facilities.
During the six months ended April 30, 2002, two employees exercised their
options to purchase 4,333 shares of common stock at $.46 per share, or
approximately $2,000.
In April 2002, an officer of the Company exercised his option to purchase
300,000 shares of common stock at $.15 per share. As part of the transaction,
the officer gave the Company 30,201 mature shares of its common stock previously
held by the officer worth $45,000 ($1.49 per share public closing price on the
transaction date). In addition, the officer gave the Company an additional
13,424 mature shares of common stock previously held by the officer worth
$20,000 in payment of his note payable with accumulated interest (classified as
Stock Subscription Receivable on the Company's financial statements). By
combining the transaction, the Company issued a net 256,375 shares of common
stock to the officer for his option exercise.
During the six months ended April 30, 2002, options to purchase 14,000
shares of the Company's common stock at $.46 per share were canceled 90-days
after the termination of employment of the individual option holders.
Effective November 1, 2001, the Company paid $40,000 to a former officer
eliminating his options to require the Company to repurchase 400,000 shares
under his separation agreement [stock put was classified as Redeemable Stock on
the Company's financial statements]. The $40,000 was charged to other expenses.
During November 2001, the Company received $30,000 as payment in full of a
stock subscription receivable.
Effective December 13, 2000, the Company's major lender, DVI Business
Credit Corporation, agreed to convert a $5,542,000 note payable into a new
series of non-voting convertible preferred stock on the basis of one share of
preferred stock for each one dollar of debt canceled. Subsequent to April 30,
2001, but prior to October 31, 2001, the Company converted the preferred stock
back into notes payable with accrued interest of approximately $235,000
accumulated into the new notes payable balances.
9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 6 - CAPITAL TRANSACTIONS - CONTINUED
On December 29, 2000, the Company renegotiated two of its existing
notes with General Electric Company aggregating $3,130,000 into a new promissory
note with interest at 8.0% payable along with unpaid interest on December 29,
2005 for $4,664,000. As part of the renegotiation, the Company issued five-year
warrants to purchase 779,000 shares of the Company's common stock at a price of
$1.00 per share. The Company allocated approximately $225,000 of the
renegotiated notes to the warrants which represented the approximate interest
discount GE gave the Company in consideration for the warrants when the rate was
compared to other recent financing.
Effective January 19, 2001, the Company settled five of its outstanding
notes payable relating to the historical acquisition of DIS common stock from
unrelated third parties. Warrants issued with the notes were exercised for
920,100 shares of the Company's common stock at $.25 per share, or $230,000. As
part of the settlement, the Company issued a total of 150,000 warrants at $1.00
per share.
NOTE 7 - RELATED PARTY TRANSACTIONS
The amount due from related parties at October 31, 2001 consisted of notes
to a current officer of the Company of approximately $18,000 [classified as
Stock Subscription Receivable], short-term loans made to a current officer of
the Company of approximately $94,000 to be repaid within one year, notes to a
prior officer of the Company for $70,000 bearing interest at 6.5% [including
$30,000 classified as Stock Subscription Receivable], and accrued interest of
approximately $20,000.
During the six months ended April 30, 2002, the Company received $38,000
from the prior officer as payment of his $30,000 Stock Subscription Receivable
and $8,000 of accumulated interest, received $39,000 from an officer in
repayment of short-term loans, and forgave a portion of interest and debt from a
prior officer of the Company of approximately $26,000. In addition, another
officer of the Company gave 13,424 mature shares of common stock previously held
by him worth $20,000 [$1.49 per share public trading price on date of the
transaction] as payment in full of his note payable with accumulated interest
(classified as Stock Subscription Receivable on the Company's financial
statements).
The amount due to related parties at October 31, 2001 consisted of
$1,330,000 of long-term notes payable due to an officer and employee of the
Company for the purchase of DIS common stock in 1996 and $119,000 in short-term
loans made by an officer to the Company. During the six months ended April 30,
2002, the Company repaid $119,000 to the officer for short-term loans. The
long-term notes bear interest at 6.58% paid annually. During the six months
ended April 30, 2002 and 2001, interest expense was approximately $44,000 and
$64,000, respectively.
NOTE 8 - SUBSEQUENT EVENT
Effective May 1, 2002, the Company acquired Grove Diagnostic Imaging
["Grove"] located in Rancho Cucamonga, California for approximately $1,455,000
in assumed net liabilities. The 8,800 square foot multi-modality center includes
MRI, ultrasound, mammography and x-ray services. The Company will add a CT
during the third quarter of fiscal 2002 from its existing inventory of medical
equipment.
10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 9 - LIQUIDITY
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. At April 30, 2002,
the Company has a deficiency in equity of $43,619,000 compared to $45,642,000 as
of October 31, 2001, and a working capital deficiency of $27,515,000 as of April
30, 2002 compared to a deficiency of $26,987,000 as of October 31, 2001. Over
the past several years, management has been addressing the issues that have led
to these deficiencies, and the results of management's plans and efforts have
been positive as indicated by improvement in operating income and profitability
over the last two years. However, continued effort is planned in the future to
allow the Company to continue to operate profitably. Such actions and plans
include:
(1) Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In late November 2001, the
Company opened a new center in Burbank and in January 2002, the
Company opened a new center in Tarzana, California. In May 2002, the
Company acquired Grove Diagnostic Imaging in Rancho Cucamonga.
(2) Increase revenue by negotiating new and existing managed care
contracts for additional services and more favorable terms. The
Company entered into a new capitation contract effective January 1,
2002 with Primecare Medical Group for approximately 62,000 lives
primarily benefiting the Company's Temecula Valley Imaging Center
["TVIC"]. The Company opened two additional facilities in Sun City and
Lake Elsinore, California, which will provide x-ray services to
support the new contract. April's YTD net revenue and net income at
TVIC increased approximately 85% and 87%, respectively, over the prior
year's six month period after the implementation of the new contract.
(3) Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursements
fall short of the Company's costs. The Company has renegotiated
several of its existing capitation contracts increasing net
reimbursement for the current fiscal year.
(4) Continue to evaluate all facilities' operations and trim excess
operating costs as well as general and administrative costs where it
is feasible to do so including consolidating underperforming
facilities to reduce operating cost duplication and improve operating
income.
(5) Continue to selectively acquire new medical equipment and replace old
and obsolete equipment in order to increase service volume and
throughput at many facilities. The Company has demonstrated continued
success in upgrading its medical equipment enhancing its technology
and increasing volume at many of its locations.
(6) Continue to work with lessors and lenders to extend terms of leases
and financing to accommodate cash flow requirements for ongoing
agreements and upon the expiration of leases and notes. The Company
has demonstrated past success in renegotiation of many of its existing
notes payable and capital lease obligations by extending payment
terms, reducing interest rates, reducing or eliminating monthly
payments and creating long-term balloon payments. During the second
quarter, the Company renegotiated several notes payable with DVI to
obtain working capital of $2,000,000 and extend payment terms. In
addition, the Company financed historically accrued maintenance
charges with General Electric for approximately $1,108,000 with
payment terms of 35 months at 9.5%.
11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY - CONTINUED
(7) Continue its attempt to settle historical notes payable, subordinated
bond debentures and other debt at a discount.
12
ITEM 2:
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Primedex Health Systems, Inc. provides diagnostic imaging services through its
49 facilities throughout California. The Company arranges for the non-medical
aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography,
nuclear medicine and general diagnostic radiology to the public.
The consolidated financial statements include the accounts of Primedex Health
Systems, Inc., and its subsidiaries outlined as follows:
(1) Radnet Management, Inc. ["Radnet"] Subsidiaries
a. Radnet Sub, Inc. ["Tower"],
b. Radnet Heartcheck Management, Inc.,
c. Radnet Managed Imaging Services, Inc. ["RMIS"],
d. SoCal MR Site Management, Inc.,
e. Radnet Management I, Inc.,
f. Radnet Management II, Inc.,
g. Westchester Imaging Group (a 50% joint venture),
h. Burbank Advanced Imaging Center, LLC (75%)
i. Rancho Bernardo Advanced Imaging Center, LLC (75%)
(2) Diagnostic Imaging Services, Inc.
Both Radnet and DIS are combined with Beverly Radiology Medical Group
III ["BRMG"]
Operating activities of subsidiary entities are included in the accompanying
financial statements from the date of acquisition. All intercompany transactions
and balances have been eliminated in consolidation and combinations. Westchester
Imaging Group is consolidated with the Company based upon the criteria of both
SFAS 94 and EITF 97-2.
Medical services and supervision at most of the Company's 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 a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
FORWARD-LOOKING INFORMATION
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgment with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions, future business decisions, and future governmental medical
reimbursement decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. There are number of other risks
presented by the Company's business and operations which could cause the
Company's financial performance to vary markedly from prior results or results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
13
cause the Company to alter its capital investment and other expenditures, which
may also adversely affect the Company's results of operations. In light of
significant uncertainties inherent in forward-looking information included in
this Quarterly Report on Form 10-Q, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2002 AND 2001
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR
PERCENT OF NET REVENUE INCREASE
SIX MONTHS ENDED APRIL 30, (DECREASE)
--------------------------------------- ---------------------
2002 2001 `01 TO `02
------------------- ------------------- ---------------------
Revenue 265.8% 252.9 % 38.5%
Less: Allowances (165.8) (152.9) 42.8
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 31.8
Operating expense
Operating expenses (71.7) (69.4) 36.1
Depreciation and amortization (10.8) (9.5) 48.9
Provision for bad debts (3.8) (2.8) 82.0
------------------- ------------------- ---------------------
Total operating expense (86.3) (81.7) 39.2
------------------- ------------------- ---------------------
Income from operations 13.7 18.3 (1.4)
Interest expense, net (11.8) (13.0) 18.9
Gain (loss) on sale of centers
and equipment (0.1) 7.0 (102.3)
Other, net 1.0 0.1 1426.8
------------------- ------------------- ---------------------
Income before minority interest 2.8 12.4 (70.6)
and extraordinary item
Minority interest (0.1) (0.4) (60.2)
------------------- ------------------- ---------------------
Income before extraordinary item 2.7 12.0 (70.9)
Extraordinary item -- 0.2 (100.0)
------------------- ------------------- ---------------------
Net income 2.7 12.2 (71.4)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the six months ended April
30, 2002 compared to the six months ended April 30, 2001. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report.
14
2002 2001
---- ----
NET REVENUE $66,163,000 $ 50,214,000
- -----------
Net revenue increased approximately $15,949,000, or 31.8%, for the six months
ended April 30, 2002, compared to the same period last year. Of the net revenue
increase, 57.3% was due to the addition of eight new sites subsequent to April
30, 2001, offset by a 3.7% decrease due to the sale of the Valley Regional
Oncology Center ["VROC"] facility in the second quarter of fiscal 2001. The
remaining 46.4% increase was due to new contracts, renegotiation of existing
contracts to more favorable rates, an improved economy with increasing
population, and increased throughput at many sites due to the upgrade of medical
equipment. In particular were improvements at the Company's Tower, Riverside and
Temecula facilities where net revenue increased by approximately $1,333,000,
$1,114,000 and $1,110,000, respectively, during the six months ended April 30,
2002 versus the same period the prior year.
OPERATING EXPENSES 2002 2001
- ------------------ ---- ----
OPERATING EXPENSES $47,421,000 $34,834,000
DEPRECIATION AND AMORTIZATION 7,125,000 4,786,000
PROVISION FOR BAD DEBTS 2,547,000 1,399,000
------------------------------
TOTAL OPERATING EXPENSES $57,093,000 $41,019,000
Operating expenses for the six months ended April 30, 2002 increased
approximately $12,587,000, or 36.1%, compared to the same period last year. Of
this increase, 62.0% is due to the addition of eight new sites subsequent to
April 30, 2001, offset by a 2.5% decrease due to the sale of the Valley Regional
Oncology Center ["VROC"] facility in the second quarter of fiscal 2001. The
remaining 40.5% increase in operating expenses is primarily due to the 31.8%
increase in net revenue and the variable nature of many of the expense line
items. In addition, the Company has been expanding its Corporate infrastructure
to handle the increased volume due to its rapid expansion while preparing for
its future growth in recent center acquisitions and the building and development
of new centers.
Included in operating expenses for the six months ended April 30, 2002 and 2001
is approximately $28,703,000 and $19,917,000, respectively, for salaries and
reading fees, approximately $4,184,000 and $3,400,000, respectively, for
building and equipment rentals, and approximately $14,534,000 and $11,517,000,
respectively, in general and administrative expenditures.
Depreciation and amortization for the six months ended April 30, 2002 increased
approximately $2,339,000, or 48.9%, compared to the same period last year. The
increase is due to the addition of eight new sites subsequent to April 30, 2001
and the upgrade of addition of equipment throughout fiscal 2001 and the first
six months of fiscal 2002. As of April 30, 2001, net property and equipment was
approximately $47.3 million compared to approximately $81.6 million as of April
30, 2002.
Provision for bad debt for the six months ended April 30, 2002 increased
approximately $1,148,000, or 82.0%, compared to the same period last year. A
primary reason for the increase is due to the 31.8% increase in net revenue.
With the increase in business and the expansion into new regions with the
addition and acquisition of new centers, the Company has experienced slight
increases in bad debt write-offs. As the new business and contracts stabilize in
the future, the Company expects its bad debt percentage to decrease in a
consistent manner.
2002 2001
---- ----
INTEREST EXPENSE, NET $ 7,785,000 $ 6,550,000
- ---------------------
Net interest expense for the six months ended April 30, 2002 increased
approximately $1,235,000, or 18.9%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing, offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
15
2002 2001
---- ----
GAIN (LOSS) ON SALE OF CENTERS AND EQUIPMENT ($ 82,000) $ 3,529,000
- --------------------------------------------
Gain on sale of centers and equipment for the six months ended April 30, 2002
decreased $3,611,000, or 102.3%, compared to the same period last year. During
the six months ended April 30, 2001, the Company's DIS subsidiary sold VROC for
$4,000,000 cash and recognized a gain on the sale of approximately $3,527,000.
2002 2001
---- ----
OTHER $ 626,000 $ 41,000
- -----
Other income, net of other expense, for the six months ended April 30, 2002
increased approximately $585,000, or 1426.8%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the six
months ended April 30, 2001, the Company incurred pre-acquisition charges for
one site of approximately $225,000 and expensed approximately $44,000 more in
modification fee amortization than the current six month period. During the six
months ended April 30, 2002, the Company recognized deferred income from the
sale and leaseback of its Orange facility of $45,000, received approximately
$80,000 in general insurance refund checks for losses sustained at its
Northridge and Tustin facilities, and received approximately $150,000 for an
insurance reimbursement for a business interruption loss at its Roxsan facility
when its MRI sustained water damage and was out of service for approximately six
weeks.
2002 2001
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 76,000) ($ 191,000)
- -------------------------------------------
Minority interest expense for the six months ended April 30, 2002 decreased
approximately $115,000, or 60.3%, compared to the same period last year.
Minority interest is primarily comprised of 25% of the earnings of Burbank
Advanced Imaging Center and 50% of the earnings of Westchester Imaging Group.
The primary reason for the decrease is that during the six months ended April
30, 2002, Burbank, which opened in late November 2001, incurred a loss of
approximately $330,000 and the minority interest portion was offset against
other minority interest expense.
2002 2001
---- ----
PROVISION FOR INCOME TAXES $ -- $ --
- --------------------------
The provision for income taxes for the six months ended April 30, 2002 was
offset by a deferred income tax benefit of the same amount. The benefit is
derived from the reversal of a portion of the allowance applied to the deferred
tax asset only to the extent that the Company realized income for the period.
The Company assessed its position with respect to the entire allowance against
the deferred tax assets as of April 30, 2002, and determined that recognizing
any additional benefit, under the criteria of FAS statement 109, was not
justified at this time. The Company will continue to assess its position with
respect to deferred taxes each quarter.
2002 2001
---- ----
EXTRAORDINARY ITEM $ -- $ 113,000
- ------------------
Extraordinary items for the six months ended April 30, 2002 decreased $113,000,
or 100%, compared to the same period last year. Extraordinary gains represent
the write-off of limited partner notes past statute and the settlement of
limited partner notes or the repurchase of subordinated debentures at a
discount. The Company has not made any settlements during fiscal 2002.
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2002 AND 2001
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR
PERCENT OF NET REVENUE INCREASE
THREE MONTHS ENDED APRIL 30, (DECREASE)
--------------------------------------- ---------------------
2002 2001 `01 TO `02
------------------- ------------------- ---------------------
Revenue 272.0% 253.7 % 38.5%
Less: Allowances (172.0) (153.7) 44.6
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 29.2
Operating expense
Operating expenses (70.7) (68.8) 32.8
Depreciation and amortization (11.3) (9.3) 56.2
Provision for bad debts (4.0) (2.8) 84.2
------------------- ------------------- ---------------------
Total operating expense (86.0) (80.9) 37.2
------------------- ------------------- ---------------------
Income from operations 14.0 19.1 (5.0)
Interest expense, net (11.8) (12.3) 24.1
Gain (loss) on sale of centers
and equipment (0.3) 13.5 (102.6)
Other, net 1.0 (0.3) 488.6
------------------- ------------------- ---------------------
Income before minority interest 2.9 20.0 (81.6)
and extraordinary item
Minority interest (0.4) (0.4) 10.6
------------------- ------------------- ---------------------
------------------- ------------------- ---------------------
Income before extraordinary item 2.5 19.6 (83.6)
Extraordinary item -- 0.4 (100.0)
------------------- ------------------- ---------------------
Net income 2.5 20.0 (84.0)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the three months ended April
30, 2002 compared to the three months ended April 30, 2001. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this quarterly report.
2002 2001
---- ----
NET REVENUE $33,722,000 $ 26,104,000
- -----------
Net revenue increased approximately $7,618,000, or 29.2%, for the three months
ended April 30, 2002, compared to the same period last year. Of the net revenue
increase, 64.0% was due to the addition of eight new sites subsequent to April
30, 2001, offset by a 1.3% decrease due to the sale of the VROC facility in the
second quarter of fiscal 2001. The remaining 37.3% increase was due to new
17
contracts, renegotiation of existing contracts to more favorable rates, an
improved economy with increasing population, and increased throughput at many
sites due to the upgrade of medical equipment. In particular were improvements
at the Company's Tower, Riverside and Temecula facilities where net revenue
increased by approximately $575,000, $372,000 and $746,000, respectively, during
the three months ended April 30, 2002 versus the same period the prior year.
OPERATING EXPENSES 2002 2001
- ------------------ ---- ----
OPERATING EXPENSES $23,850,000 $17,963,000
DEPRECIATION AND AMORTIZATION 3,792,000 2,428,000
PROVISION FOR BAD DEBTS 1,347,000 731,000
------------------------------
TOTAL OPERATING EXPENSES $28,989,000 $21,122,000
Operating expenses for the three months ended April 30, 2002 increased
approximately $5,887,000, or 32.8%, compared to the same period last year. Of
this increase, 64.8% is due to the addition of eight new sites subsequent to
April 30, 2001, offset by a 1.4% decrease due to the sale of the VROC in the
second quarter of fiscal 2001. The remaining 36.6% increase in operating
expenses is primarily due to the 29.2% increase in net revenue and the variable
nature of many of the expense line items. In addition, the Company has been
expanding its corporate infrastructure to handle the increased volume due to its
rapid expansion while preparing for its future growth in recent center
acquisitions and the building and development of new centers.
Included in operating expenses for the three months ended April 30, 2002 and
2001 is approximately $14,475,000 and $10,016,000, respectively, for salaries
and reading fees, approximately $2,129,000 and $1,668,000, respectively, for
building and equipment rentals, and approximately $7,246,000 and $6,279,000,
respectively, in general and administrative expenditures.
Depreciation and amortization for the three months ended April 30, 2002
increased approximately $1,364,000, or 56.2%, compared to the same period last
year. The increase is due to the addition of eight new sites subsequent to April
30, 2001 and the upgrade of addition of equipment throughout fiscal 2001 and the
first six months of fiscal 2002. As of April 30, 2001, net property and
equipment was approximately $47.3 million compared to approximately $81.6
million as of April 30, 2002.
Provision for bad debt for the three months ended April 30, 2002 increased
approximately $616,000, or 84.2%, compared to the same period last year. A
primary reason for the increase is due to the 29.2% increase in net revenue.
With the increase in business and the expansion into new regions with the
addition and acquisition of new centers, the Company has experienced slight
increases in bad debt write-offs. As the new business and contracts stabilize in
the future, the Company expects its bad debt percentage to decrease in a
consistent manner.
2002 2001
---- ----
INTEREST EXPENSE, NET $ 3,987,000 $ 3,212,000
- ---------------------
Net interest expense for the three months ended April 30, 2002 increased
approximately $775,000, or 24.1%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing, offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
18
2002 2001
---- ----
GAIN (LOSS) ON SALE OF CENTERS AND EQUIPMENT ($ 92,000) $ 3,529,000
- --------------------------------------------
Gain on sale of centers and equipment for the three months ended April 30, 2002
decreased $3,621,000, or 102.6%, compared to the same period last year. During
the three months ended April 30, 2001, the Company's DIS subsidiary sold its
Valley Regional Oncology Center ["VROC"] for $4,000,000 cash and recognized a
gain on the sale of approximately $3,527,000.
2002 2001
---- ----
OTHER $ 307,000 ($ 79,000)
- -----
Other income, net of other expense, for the three months ended April 30, 2002
increased approximately $386,000, or 488.6%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the
three months ended April 30, 2001, the Company incurred pre-acquisition charges
for one site of approximately $225,000 and expensed approximately $23,000 more
in modification fee amortization than the current three-month period. During the
three months ended April 30, 2002, the Company recognized deferred income from
the sale and leaseback of its Orange facility of $23,000 and received
approximately $80,000 in general insurance refund checks for losses sustained at
its Northridge and Tustin facilities.
2002 2001
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 125,000) ($ 113,000)
- -------------------------------------------
Minority interest expense for the three months ended April 30, 2002 increased
approximately $12,000, or 10.6%, compared to the same period last year. Minority
interest is primarily comprised of 25% of the earnings of Burbank Advanced
Imaging Center and 50% of the earnings of Westchester Imaging Group.
2002 2001
---- ----
PROVISION FOR INCOME TAXES $ -- $ --
- --------------------------
The provision for income taxes for the three months ended April 30, 2002 was
offset by a deferred income tax benefit of the same amount. The benefit is
derived from the reversal of a portion of the allowance applied to the deferred
tax asset only to the extent that the Company realized income for the period.
The Company assessed its position with respect to the entire allowance against
the deferred tax assets as of April 30, 2002, and determined that recognizing
any additional benefit, under the criteria of FAS statement 109, was not
justified at this time. The Company will continue to assess its position with
respect to deferred taxes each quarter.
2002 2001
---- ----
EXTRAORDINARY ITEM $ -- $ 108,000
- ------------------
Extraordinary items for the three months ended April 30, 2002 decreased
$108,000, or 100%, compared to the same period last year. Extraordinary gains
represent the write-off of limited partner notes past statute and the settlement
of limited partner notes or the repurchase of subordinated debentures at a
discount. The Company has not made any settlements during fiscal 2002.
19
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased for the six months ended April 30, 2002 by $33,000 and increased
for the six months ended April 30, 2001 by $10,000.
Cash used by investing activities for the six months ended April 30, 2002 was
$2,176,000 compared to the cash provided by investing activities for the six
months ended April 30, 2001 of $1,985,000. For the six months ended April 30,
2002 and 2001, the Company purchased property and equipment for approximately
$3,953,000 and $1,810,000, respectively, received proceeds from the sale of
imaging centers or property and equipment of $1,700,000 and $4,000,000,
respectively. During the six months ended April 30, 2002, the Company sold the
land and building at its Northridge facility for $1,700,000 and leased the
existing facility for ten years with a beginning base rent of $13,458 per month.
The Company recognized a loss on the sale of approximately $147,000. During the
six months ended April 30, 2001, the Company sold its VROC facility for
$4,000,000 and recognized a gain on the sale of approximately $3,527,000. In
addition, during the six months ended April 30, 2002, the Company received
payments from related parties of $77,000. During the six months ended April 30,
2001, the Company made loans to related parties of $75,000, invested $100,000 in
a center and acquired addition DIS common stock for approximately $30,000.
Cash used for financing activities for the six months ended April 30, 2002 was
$4,928,000 compared to $7,731,000 for the same period in 2001. For the six
months ended April 30, 2002 and 2001, the Company made principal payments on
capital leases and notes payable of approximately $10,542,000 and $9,019,000,
respectively, increased its cash disbursements in transit by $531,000 and
$1,019,000, respectively, received proceeds from the sale of common stock of
$2,000 and $22,000, respectively, received proceeds from borrowing under
existing lines of credit and refinancing arrangements of approximately
$5,360,000 and $294,000, respectively, and paid loan fees of $10,000 in each
period. In addition, during the six months ended April 30, 2002, the Company
made payments to related parties of $119,000, distributed $275,000 to one of its
joint venture partners, and received joint venture proceeds of $125,000 for its
new center in Rancho Bernardo. During the six months ended April 30, 2001, the
Company purchased subordinated debentures for $37,000.
At April 30, 2002, the Company had a working capital deficit of $27,515,000 as
compared to a working capital deficit of $26,987,000 at October 31, 2001,
representing an increased deficit of $528,000. Included in current liabilities
of the Company at April 30, 2002 and October 31, 2001 are approximately $20.1
million and $20.7 million, respectively, of revolving lines of credit
liabilities. Over the past several years, management has been addressing the
issues that have led to these deficiencies, and the results of management's
plans and efforts have been positive as indicated by improvement in operating
income and profitability over the last two years. However, continued effort is
planned in the future to allow the Company to continue to operate profitably.
Such actions and plans include:
(1) Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In late November 2001, the
Company opened a new center in Burbank and in January 2002, the
Company opened a new center in Tarzana, California. In May 2002, the
Company acquired Grove Diagnostic Imaging in Rancho Cucamonga.
(2) Increase revenue by negotiating new and existing managed care
contracts for additional services and more favorable terms. The
Company entered into a new capitation contract effective January 1,
2002 with Primecare Medical Group for approximately 62,000 lives
primarily benefiting the Company's Temecula Valley Imaging Center
["TVIC"]. The Company opened two additional facilities in Sun City and
Lake Elsinore, California, which will provide x-ray services to
support the new contract. April's YTD net revenue and net income at
TVIC increased approximately 85% and 87%, respectively, over the prior
year's six month period after the implementation of the new contract.
20
(3) Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursements
fall short of the Company's costs. The Company has renegotiated
several of its existing capitation contracts increasing net
reimbursement for the current fiscal year.
(4) Continue to evaluate all facilities' operations and trim excess
operating costs as well as general and administrative costs where it
is feasible to do so including consolidating underperforming
facilities to reduce operating cost duplication and improve operating
income.
(5) Continue to selectively acquire new medical equipment and replace old
and obsolete equipment in order to increase service volume and
throughput at many facilities. The Company has demonstrated continued
success in upgrading its medical equipment enhancing its technology
and increasing volume at many of its locations.
(6) Continue to work with lessors and lenders to extend terms of leases
and financing to accommodate cash flow requirements for ongoing
agreements and upon the expiration of leases and notes. The Company
has demonstrated past success in renegotiation of many of its existing
notes payable and capital lease obligations by extending payment
terms, reducing interest rates, reducing or eliminating monthly
payments and creating long-term balloon payments. During the second
quarter, the Company renegotiated several notes payable with DVI to
obtain working capital of $2,000,000 and extend payment terms. In
addition, the Company financed historically accrued maintenance
charges with General Electric for approximately $1,108,000 with
payment terms of 35 months at 9.5%.
(7) Continue its attempt to settle historical notes payable, subordinated
bond debentures and other debt at a discount.
The Company's future obligations for debt and equipment under capital lease for
the next five years, including lines of credit, will be approximately
$55,012,000, $33,237,000, $31,050,000, $34,409,000 and $17,741,000,
respectively. Interest expense, excluding interest expense on operating lines of
credit and subordinated bond debentures, for the next five years, included in
the above payments, will be approximately $11,898,000, $9,538,000, $7,055,000,
$4,464,000 and $1,938,000, respectively. The Company estimates interest on its
bond debentures to be approximately $1,630,000 in fiscal 2002. In addition, the
Company has noncancelable operating leases for the use of its facilities and
certain medical equipment, which will average approximately $6,700,000 in annual
payments over the next five years. The increase in primarily due to the recent
building lease agreements for Rancho Bernardo, the two adjacent Orange sites,
Lake Elsinore, Sun City, Northridge and Grove Imaging.
Effective March 1, 2000, the Company entered into an agreement with GE Medical
Systems for the maintenance of the majority of its medical equipment for a fee
based upon a percentage of net revenues with minimum aggregate net revenue
requirements. In August 2001, the agreement was amended and expires on November
1, 2005. The service fee ranges from 2.82% to 3.74% of net revenue [less
provisions for bad debt] and the aggregate minimum net revenue ranges from
$85,000,000 to $125,000,000 during the term of the agreement. For the six months
ended April 30, 2002, the monthly service fees were 3.64% of net revenues.
The Company's working capital needs are currently provided under two lines of
credit. Under one agreement with Coast Business Credit, due December 31, 2003,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$22,000,000 or the prior 120-days' cash collections. In any scenario, the
Company may borrow up to the aggregate collection of receivables in the prior
120-days as long as the collections in any one month do not decrease by more
than 25% from the prior month. Borrowings under this line are repayable together
with interest at an annual rate equal to the greater of (a) the bank's prime
rate plus 2.5%, or (b) 8%. The lender holds a first lien on substantially all of
Radnet's ["Beverly Radiology's"] assets, the President and C.E.O. of PHS has
21
personally guaranteed $10,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the President and C.E.O.
of PHS. At April 30, 2002, $17,342,000 was outstanding under this line.
Under a second line of credit with DVI Business Credit, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. The line,
originally due October 31, 2000, is currently on a month-to-month basis pending
renegotiation. The credit line is collateralized by approximately 80% of the
Tower division's accounts receivable. Borrowings under this line are repayable
together with interest at an annual rate equal to the bank's prime rate plus
1.0%. At April 30, 2002, $2,739,000 was outstanding under this line.
22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
There are no matters to be reported under this heading.
ITEM 2. CHANGES IN SECURITIES
There are no matters to be reported under this heading.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no matters to be reported under this heading.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There
are no matters to be reported under this heading.
ITEM 5. OTHER INFORMATION
During the six months ended April 30, 2002, the following
securities were sold by the Company pursuant to the exemption
to registration provided under Section 4(2) of the Securities
Act of 1933, as amended:
(1) On November 1, 2001, the Company issued to one
individual a five-year warrant exercisable at a price
of $.95 per share to purchase 75,000 shares of the
Company's common stock.
(2) On February 5, 2002, the Company issued to one
individual a five-year warrant exercisable at a price
of $1.10 per share to purchase 200,000 shares of the
Company's common stock.
(3) On April 11, 2002, the Company issued to two
individuals five-year warrants exercisable at a price
of $1.61 as to 30,000 shares of the Company's common
stock and $1.26 as to 500,000 shares of the Company's
common stock.
In each of the above cases the consideration was a
radiologist's agreement to accept a full-time relationship at
one of the Company's facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - Computation of Earnings Per Share
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SIGNATURE
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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.
Primedex Health Systems, Inc.
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(Registrant)
June 10, 2002 By: Howard G. Berger, M.D.
-----------------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
24