UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 31, 2002 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
New York 13-3326724
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1516 Cotner Avenue
Los Angeles, California 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (310) 478-7808
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 [ ]
Number of shares outstanding of the issuer's common stock as of September 17,
2002 was 41,005,734 [excluding treasury shares].
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEETS
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JULY 31, OCTOBER 31,
2002 2001
(UNAUDITED)
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,000 $ 40,000
Accounts receivable, net 28,956,000 28,764,000
Unbilled receivables and other receivables 2,145,000 133,000
Due from related party -- 94,000
Deferred income taxes 2,235,000 5,235,000
Other 1,698,000 1,328,000
-------------- --------------
Total current assets 35,064,000 35,594,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 86,587,000 65,368,000
-------------- --------------
OTHER ASSETS:
Accounts receivable, net 2,486,000 2,499,000
Due from related parties -- 60,000
Goodwill, net 23,720,000 24,064,000
Deferred income taxes 3,000,000 --
Other 733,000 844,000
-------------- --------------
Total other assets 29,939,000 27,467,000
-------------- --------------
$ 151,590,000 $ 128,429,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash disbursements in transit $ 4,042,000 $ 3,804,000
Accounts payable and accrued expenses 23,200,000 19,361,000
Income tax payable -- 125,000
Subordinated debentures payable 16,293,000 --
Notes payable to related party 1,173,000 119,000
Current portion of notes and leases payable 29,707,000 39,172,000
-------------- --------------
Total current liabilities 74,415,000 62,581,000
-------------- --------------
LONG-TERM LIABILITIES:
Subordinated debentures payable -- 16,303,000
Notes payable to related party 105,000 1,330,000
Notes and leases payable, net of current portion 123,814,000 90,569,000
Accrued expenses 781,000 1,986,000
-------------- --------------
Total long-term liabilities 124,700,000 110,188,000
-------------- --------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,214,000 1,142,000
-------------- --------------
REDEEMABLE STOCK -- 160,000
-------------- --------------
STOCKHOLDERS' DEFICIT (48,739,000) (45,642,000)
-------------- --------------
$ 151,590,000 $ 128,429,000
============== ==============
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 INCOME (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUE
Revenue $ 98,438,000 $ 75,798,000 $ 274,275,000 $ 202,799,000
Less: Allowances 62,858,000 46,334,000 172,532,000 123,121,000
-------------- -------------- -------------- --------------
Net revenue 35,580,000 29,464,000 101,743,000 79,678,000
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Operating expenses 29,361,000 20,521,000 76,782,000 55,356,000
Depreciation and amortization 4,066,000 2,755,000 11,191,000 7,540,000
Provision for bad debts 2,338,000 845,000 4,885,000 2,244,000
-------------- -------------- -------------- --------------
Total operating expenses 35,765,000 24,121,000 92,858,000 65,140,000
-------------- -------------- -------------- --------------
(Loss) Income from operations (185,000) 5,343,000 8,885,000 14,538,000
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest expense, net (4,341,000) (3,332,000) (12,126,000) (9,882,000)
Gain (loss) on sale of imaging
centers and equipment (217,000) 9,000 (300,000) 3,538,000
Other (expense) income, net (234,000) 163,000 393,000 204,000
-------------- -------------- -------------- --------------
Total other expense (4,792,000) (3,160,000) (12,033,000) (6,140,000)
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE
MINORITY INTEREST AND
EXTRAORDINARY ITEM (4,977,000) 2,183,000 (3,148,000) 8,398,000
-------------- -------------- -------------- --------------
MINORITY INTEREST IN
EARNINGS OF SUBSIDIARY (146,000) (102,000) (222,000) (292,000)
-------------- -------------- -------------- --------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (5,123,000) 2,081,000 (3,370,000) 8,106,000
EXTRAORDINARY ITEM-GAIN
FROM EXTINGUISHMENT OF
DEBT (NET OF INCOME TAXES OF $-0-) 1,000 -- 1,000 113,000
-------------- -------------- -------------- --------------
NET (LOSS) INCOME $ (5,122,000) $ 2,081,000 $ (3,369,000) $ 8,219,000
============== ============== ============== ==============
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 INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
BASIC EARNINGS PER SHARE:
(Loss) Income before extraordinary gain (.12) .05 (.08) .19
Extraordinary gain .00 .00 .00 .00
------------- ------------- ------------- -------------
BASIC NET (LOSS) INCOME
PER SHARE: $ (.12) $ .05 $ (.08) $ .19
============= ============= ============= =============
DILUTED EARNINGS PER SHARE:
(Loss) Income before extraordinary gain (.12) .04 (.08) .18
Extraordinary gain .00 .00 .00 .00
------------- ------------- ------------- -------------
DILUTED NET (LOSS) INCOME
PER SHARE: $ (.12) $ .04 $ (.08) $ .18
============= ============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 41,001,000 40,147,000 40,832,000 39,845,000
============= ============= ============= =============
DILUTED 41,001,000 47,593,000 40,832,000 44,639,000
============= ============= ============= =============
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
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
$.01 par value
100,000,000
shares authorized Treasury Stock, at cost Stock Total
-------------------- Paid-in ------------------------ Accumulated Subscription Stockholders'
Shares Amount Capital Shares Amount Deficit Receivable Deficit
---------- -------- ------------ ----------- ---------- -------------- -------- -------------
BALANCE - OCTOBER 31, 2001 42,432,010 $425,000 $100,108,000 (1,825,000) $(695,000) $(145,432,000) $(48,000) $(45,642,000)
Issuance of Common
Stock [Note 6 & 7] 398,224 4,000 60,000 -- -- -- 18,000 82,000
Retirement of
Redeemable Stock -- -- 160,000 -- -- -- -- 160,000
Payment of
Subscription Receivable -- -- -- -- -- -- 30,000 30,000
Net loss -- -- -- -- -- (3,369,000) -- (3,369,000)
---------- -------- ------------ ----------- ---------- -------------- -------- -------------
BALANCE - JULY 31, 2002
(UNAUDITED) 42,830,234 $429,000 $100,328,000 (1,825,000) $(695,000) $(148,801,000) $ -- $(48,739,000)
========== ======== ============ =========== ========== ============== ======== =============
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)
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JULY 31,
--------------------------------
2002 2001
------------- -------------
NET CASH FROM OPERATING ACTIVITIES $ 9,621,000 $ 8,980,000
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in imaging centers and subsidiary's common stock -- (160,000)
Purchase of property and equipment (6,428,000) (3,867,000)
Proceeds from sale of imaging centers and equipment 1,700,000 4,000,000
Payments from related parties 132,000 --
Loans or payments to related parties (171,000) (105,000)
------------- -------------
Net cash used by investing activities (4,767,000) (132,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit 238,000 1,256,000
Principal payments on notes and leases payable (14,504,000) (12,836,000)
Proceeds from short-term and long-term borrowings 9,572,000 2,351,000
Proceeds from issuance of common stock 4,000 22,000
Purchase of subordinated debentures (9,000) (37,000)
Loan fees (15,000) (15,000)
Joint venture proceeds 125,000 400,000
Joint venture distribution (275,000) --
------------- -------------
Net cash used by financing activities (4,864,000) (8,859,000)
------------- -------------
NET DECREASE IN CASH (10,000) (11,000)
CASH, beginning of period 40,000 36,000
------------- -------------
CASH, end of period $ 30,000 $ 25,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,800,000 $ 9,284,000
============= =============
Income taxes $ 156,000 $ --
============= =============
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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NINE MONTHS ENDED JULY 31, 2002 AND 2001
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The
Company entered into capital leases or financed equipment through notes payable
for $26,826,000 and $7,870,000 for the nine months ended July 31, 2002 and 2001,
respectively.
Effective July 2, 2002, the Company renegotiated twelve of its outstanding
notes payable with DVI, obtained working capital and incurred $2.8 million in
charges which will be expensed as interest over the six year life of the loans.
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.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 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 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 May 1, 2002, the Company acquired the assets and business of
Grove Diagnostic Imaging ["Grove"] in Rancho Cucamonga, California for
approximately $1,454,000 in assumed liabilities. The Company recorded net
property and equipment of approximately $1,441,000 and other current assets of
approximately $13,000 as part of the transaction.
Effective May 10, 2001, the Company acquired the assets and business of
Modesto Imaging Center. As part of the transaction, the Company recorded net
property and equipment of $1,868,000, notes payable of $6,886,000, other
liabilities of $1,032,000 and goodwill of $6,050,000. Subsequent to the
acquisition in May 2002, the Company reduced both the goodwill and other
liabilities by approximately $344,000, respectively, for an adjustment to the
purchase price based upon guaranteed annual net revenues and the ultimate
shortfall.
Effective June 1, 2001, the Company acquired a portion of the equipment of
two imaging centers located in Palm Springs and Palm Desert, California. As part
of the transaction, the Company recorded net property and equipment of $377,000,
notes payable of $342,000 and other liabilities of $35,000.
Effective March 1, 2001, the Company's DIS subsidiary sold its Valley
Regional Oncology Center ["VROC"] and recognized a gain on the sale of
$3,525,000. As part of the sale, the Company wrote-off $405,000 in net property
and equipment and $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 920,000 shares of the Company's common stock at
$.25 per share, or $230,000.
6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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NINE MONTHS ENDED JULY 31, 2002 AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
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 $4,664,000. As part of the transaction, 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 $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 canceled. The Company recorded
additions to redeemable stock based upon its right to redeem the preferred stock
at a price beginning at $1.15 per share and increasing by $.10 per year for five
years. 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
7
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 July 31, 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:
o Radnet Management, Inc. ["Radnet"]
Subsidiaries:
o Radnet Sub, Inc. ["Tower"],
o Radnet Heartcheck Management, Inc.,
o Radnet Managed Imaging Services, Inc. ["RMIS"],
o SoCal MR Site Management, Inc.,
o Radnet Management I, Inc.,
o Radnet Management II, Inc. ["Modesto"],
o Westchester Imaging Group (a 50% joint venture),
o Burbank Advanced Imaging Center, LLC (75%)
o Rancho Bernardo Advanced Imaging Center, LLC (75%)
o 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 52 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.
8
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
During 2002, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 146 ("Accounting for
Cost Associated with Exit or Disposal Activities"), No. 145 ("Rescission of FASB
Statements No.4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Correction"), No. 144 ("Accounting for Impairment or Disposal of Long-Lived
Assets"), and No. 143 ("Accounting for Asset Retirement Obligations"). SFAS No.
145 is effective for fiscal years beginning after May 15, 2002. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. Management does not
believe the adoption of SFAS 143, SFAS 144, SFAS 145, and SFAS 146 will have
material impact on the financial statements.
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 $1,116,000 ($0.03 per share) for the nine months ended July 31,
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 ["RB"], will be 75%-owned by the Company and 25%-owned by two
physicians who will invest $250,000. As of July 31, 2002, the Company has
received $125,000 of the investment. The lease term is ten years from June 2002
and the monthly rental is approximately $12,000. The center is expected to open
in the first quarter of fiscal 2003.
In the second quarter of fiscal 2002, the Company entered into two new
building leases for approximately 10,000 square feet of space in the building
across the street from Orange Imaging Center to open Orange Advanced Imaging
Center and Orange Women's Center. The combined monthly rental will be
approximately $23,000 and the lease terms are ten years. Orange Advanced will
offer MRI, PET, nuclear medicine and x-ray services and Orange Women's Center
will offer ultrasound and mammography services. The Centers will open in late
September or early October 2002.
Center openings:
In late November 2001, the Company opened Burbank Advanced Imaging Center,
LLC ["Burbank"], which provided MRI, CT, PET, ultrasound, nuclear medicine and
x-ray services. Subsequent to its opening, the Company moved the PET and nuclear
medicine equipment to Orange Advanced Imaging Center. Burbank is a joint venture
with two physicians and is 75%-owned by the Company.
In January 2002, the Company opened Tarzana Advanced Imaging Center which
provides MRI, CT and PET services.
9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES - CONTINUED
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 entered into two new building leases in Sun City [approximately 3,000
square feet] and Lake Elsinore [approximately 1,000 square feet], California,
north of Temecula, which will provide x-ray services to support the new
contract.
Center acquisitions:
Effective May 1, 2002, the Company acquired certain assets and related
liabilities of Grove Diagnostic Imaging ["Grove"] in Rancho Cucamonga,
California for approximately $1,454,000. The transaction was financed by DVI.
The center provides MRI, CT, ultrasound, mammography and x-ray services.
NOTE 5 - INTANGIBLE ASSETS
Intangible Assets consist of goodwill recorded at cost of $29,986,000 and
$30,330,000, less accumulated amortization of $6,266,000 and $6,266,000 as of
July 31, 2002 and October 31, 2001, respectively. Amortization expense of
approximately $-0- and $377,000 was recognized for the three months ended July
31, 2002 and 2001, respectively. Amortization expense of approximately $-0- and
$979,000 was recognized for the nine months ended July 31, 2002 and 2001,
respectively.
In May 2002, the Company reduced both the goodwill and other liabilities of
Modesto Imaging Center by approximately $344,000, respectively, for an
adjustment to the purchase price based upon guaranteed annual net revenues and
the ultimate shortfall.
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 subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Application of the
nonamortization provisions of the Statement resulted in an increase in income of
approximately $1,116,000 ($.03 per share) for the nine months ended July 31,
2002.
NOTE 6 - CAPITAL TRANSACTIONS
During the nine months ended July 31, 2002, options to purchase 19,750
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.
During the nine months ended July 31, 2002, the Company issued 923,000
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 nine months ended July 31, 2002, four employees exercised their
options to purchase 9,000 shares of common stock at $.46 per share, or
approximately $4,000.
10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - CAPITAL TRANSACTIONS - CONTINUED
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
$20,000 in payment of his note payable with accumulated interest (classified as
Stock Subscription Receivable on the Company's financial statements). By
combining the transaction, the Company issued a net 256,375 shares of common
stock to the officer for his option exercise.
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
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 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.
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 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 July 31,
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.
NOTE 7 - RELATED PARTY TRANSACTIONS
During the nine months ended July 31, 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 $94,000 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 $50,000. 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).
11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS - CONTINUED
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.
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 nine months ended July 31,
2002, the Company repaid $119,000 to the officer for short-term loans and
approximately $52,000 to an officer for long-term notes. The long-term notes
bear interest at 6.58% paid annually. During the nine months ended July 31, 2002
and 2001, interest expense was approximately $66,000 in each period.
NOTE 8 - 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 July 31, 2002,
the Company has a deficiency in equity of $48,739,000 compared to $45,642,000 as
of October 31, 2001, and a working capital deficiency of $39,351,000 as of July
31, 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 were
positive until the latest quarter. Thus, continued effort is planned in the
future to allow the Company to operate profitably. Such actions and plans
include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. The following centers have opened
or will open in California in the near future:
o In late November 2001, the Company opened a new center in Burbank
o In January 2002, the Company opened a new center in Tarzana
o In May 2002, the Company acquired Grove Diagnostic Imaging in
Rancho Cucamonga
o In October 2002, the Company will open up two offices adjacent to
its Orange facility
o In the first quarter of fiscal 2003, the Company will open a new
multi-modality center in Rancho Bernardo
o Increase revenue by negotiating new and existing managed care
contracts for additional services and more favorable terms. The
Company has entered into the following new contractual agreements to
increase revenue:
o Effective January 1, 2002, the Company entered into a new
capitation agreement 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. July's YTD net revenue at TVIC
increased approximately 99% over the prior year's nine month
period after the implementation of the new contract.
o In June 2002, the Company entered into a new capitation contract
for approximately 25,000 lives primarily benefiting the Company's
Los Coyotes facility.
o On July 15, 2002, the Company entered into a new capitation
contract for approximately 15,000 lives primarily benefiting the
Company's Desert Advanced facilities.
12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - LIQUIDITY - CONTINUED
o Effective August 1, 2002, the Company entered into an additional
capitation agreement for approximately 53,000 lives primarily
benefiting the Company's Grove facility.
o Effective August 1, 2002, the Company entered into an agreement
to provide utilization review services to an unrelated third
party for approximately $20K per month.
o 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 and plans to ask for increases in capitation rates from at
least one contract for Desert Advanced where reimbursement is falling short
of costs.
o 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. Due to a shortage
of qualified radiologists in the marketplace, the Company has recently
experienced difficulty in hiring and retaining physicians by its affiliated
medical group [BRMG] at the individual sites. This has required the
engagement of independent contractors and locum tenens (part-time fill-in
physicians) to interpret patient films. The cost of these individuals can
be double the salary of a BRMG full-time physician with additional costs
for travel and lodging required. Recently, BRMG hired a new nationally
prominent medical director who will oversee physician recruitment and
staffing. The new director has already arranged for BRMG to hire 12 new
physicians during the third quarter and the first month of the fourth
quarter of fiscal 2002. BRMG is working to solidify its physicians at the
majority of the Company's sites while increasing the volume of
interpretations done by physicians at the Company's main offices utilizing
the Company's computer and PACS systems. In addition, the Company is
reviewing its entire personnel staff and reduced its work force where
possible, incurring severance costs of approximately $92,000 which were
recorded in July 2002.
o 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. During fiscal 2002, the Company purchased
or financed approximately $13.1 million in new property and equipment for
its facilities open one year or longer ("same store centers").
o 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%. In the third quarter, the Company obtained $17
million in working capital from DVI to provide a secured source of
financing in advance of the June 30, 2003 date for retirement of the
remaining approximately $16.3 million of PMDX 10% Series A Convertible
Subordinated Debentures. Initially, the funds were utilized to reduce
outstanding revolving credit lines improving the negative effect on the
Company's working capital position when the Subordinated Debentures became
current liabilities in June 2002.
13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - LIQUIDITY - CONTINUED
o Continue its attempt to settle historical notes payable, subordinated bond
debentures and other debt at a discount.
14
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
52 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:
o Radnet Management, Inc. ["Radnet"]
Subsidiaries:
o Radnet Sub, Inc. ["Tower"],
o Radnet Heartcheck Management, Inc.,
o Radnet Managed Imaging Services, Inc. ["RMIS"],
o SoCal MR Site Management, Inc.,
o Radnet Management I, Inc.,
o Radnet Management II, Inc. ["Modesto"],
o Westchester Imaging Group (a 50% joint venture),
o Burbank Advanced Imaging Center, LLC (75%)
o Rancho Bernardo Advanced Imaging Center, LLC (75%)
o 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.
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
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.
15
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 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
NINE MONTHS ENDED JULY 31, (DECREASE)
--------------------------------------- ---------------------
2002 2001 '01 TO '02
------------------- ------------------- ---------------------
Revenue 269.6% 254.5 % 35.2%
Less: Allowances (169.6) (154.5) 40.1
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 27.7
Operating expense
Operating expenses (75.5) (69.5) 38.7
Depreciation and amortization (11.0) (9.5) 48.4
Provision for bad debts (4.8) (2.8) 117.7
------------------- ------------------- ---------------------
Total operating expense (91.3) (81.8) 42.6
------------------- ------------------- ---------------------
(Loss) income from operations 8.7 18.2 (38.9)
Interest expense, net (11.9) (12.4) 22.7
Gain (loss) on sale or disposal of (0.3) 4.4 (108.5)
centers and equipment
Other, net 0.4 0.3 92.6
------------------- ------------------- ---------------------
(Loss) income before minority (3.1) 10.5 (137.5)
interest and extraordinary item
Minority interest (0.2) (0.3) (24.0)
------------------- ------------------- ---------------------
(Loss) income before extraordinary (3.3) 10.2 (141.6)
item
Extraordinary item 0.0 0.1 (99.1)
------------------- ------------------- ---------------------
Net (loss) income (3.3) 10.3 (141.0)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the nine months ended July
31, 2002 compared to the nine months ended July 31, 2001. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report.
16
2002 2001
---- ----
NET REVENUE $ 101,743,000 $ 79,678,000
Net revenue increased approximately $22,065,000, or 28%, for the nine months
ended July 31, 2002, compared to the same period last year. Of the net revenue
increase, 56% was due to the addition of eight new sites subsequent to July 31,
2001 and the full effect of one new site acquired in mid-May 2001, offset by a
3% decrease due to the sale of the VROC facility in second quarter 2001. The
remaining 47% increase was due to new contracts, renegotiation of existing
contracts to more favorable rates, and increased throughput at many sites due to
the upgrade of medical equipment.
OPERATING EXPENSES 2002 2001
- ------------------ ---- ----
OPERATING EXPENSES $ 76,782,000 $ 55,356,000
DEPRECIATION AND AMORTIZATION 11,191,000 7,540,000
PROVISION FOR BAD DEBTS 4,885,000 2,244,000
------------- -------------
TOTAL OPERATING EXPENSES $ 92,858,000 $ 65,140,000
Operating expenses for the nine months ended July 31, 2002 increased
approximately $21,426,000, or 39%, compared to the same period last year. Of
this increase, 51% is due to the addition of eight new sites subsequent to July
31, 2001 and the full effect of one site acquired in mid-May 2001, offset by a
2% decrease due to the sale of the VROC facility in second quarter 2001. The
remaining 51% increase in operating expenses is primarily due to an increase in
net revenue at same store centers coupled with an increase in expenditures for
salaries, physician reading fees and other general and administrative expenses
at many of the Company's sites.
Due to a shortage of qualified radiologists in the marketplace, the Company has
recently experienced difficulty in hiring and retaining physicians by its
affiliated medical group [BRMG] at the individual sites. This has required the
engagement of independent contractors and locum tenens (part-time fill-in
physicians) to interpret patient films. The cost of these individuals can be
double the salary of a BRMG full-time physician with additional costs for travel
and lodging required. Recently, BRMG hired a new nationally prominent medical
director who will oversee physician recruitment and staffing. The new director
has already arranged for BRMG to hire 12 new physicians during the third quarter
and the first month of the fourth quarter of fiscal 2002. BRMG is working to
solidify its physicians at the majority of the Company's sites while increasing
the volume of interpretations done by physicians at the Company's main offices
utilizing the Company's computer and PACS systems. In addition, the Company is
reviewing its entire personnel staff and reduced its work force where possible,
incurring severance costs of approximately $92,000 which were recorded in July
2002.
In addition, the Company had increases in its general and administrative
expenses for medical supplies, insurance, business property taxes, travel,
recruiting fees and utilities. With the $34 million increase in net property and
equipment from $52 million as of July 31, 2001 to $86 million as of July 31,
2002, the Company has incurred increased costs for property taxes, general
insurance and utilities. In addition, all of the Company's insurance costs have
risen recently including employee medical, malpractice and workers compensation.
The Company continues its attempt to control insurance costs but most carriers
are increasing fees across the board. With the addition of new medical
equipment, including PET, the Company has incurred medical supply costs over
historical averages.
Included in operating expenses for the nine months ended July 31, 2002 and 2001
is approximately $45,687,000 and $31,717,000, respectively, for salaries and
reading fees, approximately $6,439,000 and $5,351,000, respectively, for
building and equipment rentals, approximately $24,656,000 and $18,288,000,
respectively, in general and administrative expenditures. Compared to the 28%
increase in net revenue, salaries and physician reading fees for the period
increased 44%, building and equipment rentals increased 20%, and general and
administrative expenditures, including those for travel and recruitment fees,
increased 35%.
17
As a result of the Company's increased capital expenditures, depreciation and
amortization for the nine months ended July 31, 2002 increased approximately
$3,651,000, or 48%, compared to the same period last year.
Provision for bad debt for the nine months ended July 31, 2002 increased
approximately $2,641,000, or 118%, compared to the same period last year. Even
with the increase in net revenue, the Company's overall bad debt percentage
increased significantly due to the write-off of approximately $850,000 in net
accounts receivable due primarily to one contract's dissolution and default on
amounts due late in the third quarter. The write-off primarily affected the
Company's Thousand Oaks, Northridge and Tower facilities.
2002 2001
---- ----
INTEREST EXPENSE, NET $ 12,126,000 $ 9,882,000
Net interest expense for the nine months ended July 31, 2002 increased
approximately $2,244,000, or 23%, compared to the same period last year. The
increase is primarily a result of acquisitions and new equipment financing. As
of July 31, 2001, notes payable, capital leases and subordinated debentures were
approximately $131 million compared to approximately $170 million as of July 31,
2002.
2002 2001
---- ----
GAIN (LOSS) ON SALE OR DISPOSAL OF CENTERS $ (300,000) $ 3,538,000
AND EQUIPMENT
Net loss on the sale of center and the sale/disposal of equipment for the nine
months ended July 31, 2002 increased approximately $3,838,000, or 108%, compared
to the same period last year. For the nine months ended July 31, 2002, the
Company sold the land and building at Northridge, and disposed of the MRI at
Vacaville and an x-ray system at its Redondo facility with the replacement of
obsolete medical equipment. During the nine months ended July 31, 2001, the
Company sold Valley Regional Oncology Center ["VROC"] for $4,000,000 and
recognized a gain on the sale of approximately $3,527,000.
2002 2001
---- ----
OTHER, NET $ 393,000 $ 204,000
Net other expense for the nine months ended July 31, 2002 increased
approximately $189,000, or 93%, compared to the same period last year. The key
reason for the increase is the recognition of one-time insurance gains for
claims made on the Company's business interruption and general insurance
policies at three of the Company's facilities. For the nine months ended July
31, 2002, the Company recognized professional reading income of approximately
$238K, copy income of approximately $100K, deferred rental income of
approximately $67K, and business insurance reimbursement of approximately $250K
for past claims. The income was offset by $80K in expenses for the write-off of
a prior officer's note receivable and the payment for his stock put,
approximately $85K in amortization of modification fees, approximately $25K in
legal settlements, approximately $17K in losses on investments, and the set up
of a reserve for approximately $55K for expected penalties on a historical
liability
2002 2001
---- ----
MINORITY INTEREST $ (222,000) $ (292,000)
Minority interest in joint venture represents the minority investor's 50% share
of the Westchester Imaging Group's and 25% of Burbank Advanced Imaging Center's
income for the period. Minority interest for the nine months ended July 31, 2002
decreased approximately $70,000, or 24%, compared to the same period last year.
The decrease is due to the losses incurred by the Company's new Burbank Advanced
Imaging Center.
18
2002 2001
---- ----
EXTRAORDINARY ITEM $ 1,000 $ 113,000
Extraordinary gains represent the repurchase of subordinated bond debentures,
the settlement of limited partner notes at a discount and the write-off of
limited partner notes.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 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 JULY 31, (DECREASE)
--------------------------------------- ---------------------
2002 2001 '01 TO '02
------------------- ------------------- ---------------------
Revenue 276.7% 257.3 % 29.9%
Less: Allowances (176.7) (157.3) 35.7
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 20.8
Operating expense
Operating expenses (82.5) (69.6) 43.1
Depreciation and amortization (11.4) (9.4) 47.6
Provision for bad debts (6.6) (2.9) 176.7
------------------- ------------------- ---------------------
Total operating expense (100.5) (81.9) 48.3
------------------- ------------------- ---------------------
(Loss) Income from operations (0.5) 18.1 (103.5)
Interest expense, net (12.2) (11.3) 30.3
Gain (loss) on sale or disposal of (0.6) 0.0 (2,511.1)
centers and equipment
Other (expense) income, net (0.7) 0.6 (243.6)
------------------- ------------------- ---------------------
(Loss) Income before minority (14.0) 7.4 (328.0)
interest and extraordinary item
Minority interest (0.4) (0.3) 43.1
------------------- ------------------- ---------------------
(Loss) Income before extraordinary (14.4) 7.1 (346.2)
item
Extraordinary item 0.0 -- 100.0
------------------- ------------------- ---------------------
Net (loss) income (14.4) 7.1 (346.1)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the three months ended July
31, 2002 compared to the three months ended July 31, 2001. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this quarterly report.
19
2002 2001
---- ----
NET REVENUE $35,580,000 $ 29,464,000
Net revenue increased approximately $6,116,000, or 21%, for the three months
ended July 31, 2002, compared to the same period last year. Of the net revenue
increase, 52% was due to the addition of eight new sites subsequent to July 31,
2001 and the full effect of the acquisition of one new site acquired in mid-May
2001. The remaining 48% increase [same store centers] was due to new contracts,
renegotiation of existing contracts to more favorable rates, and increased
throughput at many sites due to the upgrade of medical equipment.
OPERATING EXPENSES 2002 2001
- ------------------ ---- ----
OPERATING EXPENSES $ 29,361,000 $ 20,521,000
DEPRECIATION AND AMORTIZATION 4,066,000 2,755,000
PROVISION FOR BAD DEBTS 2,338,000 845,000
------------- -------------
TOTAL OPERATING EXPENSES $ 35,765,000 $ 24,121,000
Operating expenses for the three months ended July 31, 2002 increased
approximately $8,840,000, or 43%, compared to the same period last year. Of this
increase, 34% is due to the addition of eight new sites subsequent to July 31,
2001 and the full effect of one new site acquired in mid-May 2001. The remaining
66% increase in operating expenses is primarily due to an increase in net
revenue at same store centers coupled with an increase in expenditures for
salaries, physician reading fees and other general and administrative expenses
at many of the Company's sites.
Due to a shortage of qualified radiologists in the marketplace, the Company has
recently experienced difficulty in hiring and retaining physicians by its
affiliated medical group [BRMG] at the individual sites. This has required the
engagement of independent contractors and locum tenens (part-time fill-in
physicians) to interpret patient films. The cost of these individuals can be
double the salary of a BRMG full-time physician with additional costs for travel
and lodging required. Recently, BRMG hired a new nationally prominent medical
director who will oversee physician recruitment and staffing. The new director
has already arranged for BRMG to hire 12 new physicians during the third quarter
and the first month of the fourth quarter of fiscal 2002. BRMG is working to
solidify its physicians at the majority of the Company's sites while increasing
the volume of interpretations done by physicians at the Company's main offices
utilizing the Company's computer and PACS systems. In addition, the Company is
reviewing its entire personnel staff and reduced its work force where possible,
incurring severance costs of approximately $92,000 which were recorded in July
2002.
In addition, the Company had increases in its general and administrative
expenses for medical supplies, insurance, business property taxes, travel,
recruiting fees and utilities. With the $34 million increase in net property and
equipment from $52 million as of July 31, 2001 to $86 million as of July 31,
2002, the Company has incurred increased costs for property taxes, general
insurance and utilities. In addition, all of the Company's insurance costs have
risen recently including employee medical, malpractice and workers compensation.
The Company continues its attempt to control insurance costs but most carriers
are increasing fees across the board. With the addition of new medical
equipment, including PET, the Company has incurred medical supply costs over
historical averages.
Included in total operating expenses for the three months ended July 31, 2002
and 2001 is approximately $16,984,000 and $11,800,000, respectively, for
salaries and reading fees, approximately $2,255,000 and $1,951,000,
respectively, for building and equipment rentals, and approximately $10,122,000
and $6,770,000, respectively, in general and administrative expenditures.
Compared to the 21% increase in net revenue, salaries and physician reading fees
for the period increased 44%, building and equipment rentals increased 16%, and
general and administrative expenditures, including those for travel and
recruitment fees, increased 50%.
20
As a result of the Company's increased capital expenditures, depreciation and
amortization for the three months ended July 31, 2002 increased approximately
$1,311,000, or 48%, compared to the same period last year.
Provision for bad debt for the three months ended July 31, 2002 decreased
approximately $1,493,000, or 177%, compared to the same period last year. Even
with the increase in net revenue, the Company's overall bad debt percentage
increased significantly due to the write-off of approximately $850,000 in net
accounts receivable due primarily to one contract's dissolution and default on
amounts due late in the third quarter. The write-off primarily affected the
Company's Thousand Oaks, Northridge and Tower facilities.
2002 2001
---- ----
INTEREST EXPENSE, NET $ 4,341,000 $ 3,332,000
Net interest expense for the three months ended July 31, 2002 increased
approximately $1,009,000, or 30%, compared to the same period last year. The
increase is primarily a result of acquisitions and new equipment financing. As
of July 31, 2001, notes payable, capital leases and subordinated debentures were
approximately $131 million compared to approximately $170 million as of July 31,
2002.
2002 2001
---- ----
GAIN (LOSS) ON SALE OR DISPOSAL OF CENTERS $ (217,000) $ 9,000
AND EQUIPMENT
Loss on the disposal of equipment for the three months ended July 31, 2002
increased approximately $226,000, or 2511%, compared to the same period last
year. For the three months ended July 31, 2002, the Company disposed of the MRI
at Vacaville and an x-ray system at its Redondo facility with the replacement of
obsolete medical equipment.
2002 2001
---- ----
OTHER $ (234,000) $ 163,000
Net other expense for the three months ended July 31, 2002 increased
approximately $397,000, or 244%, compared to the same period last year. For the
three months ended July 31, 2002, the primary reasons for the expense increase
was the recognition of approximately $60K for the forgiveness of a note
receivable from a former officer and repurchase of his stock put, the write-off
approximately $60K for business insurance reimbursements which were less than
anticipated, the write-off $60K in other current assets deemed uncollectible,
the set up of a reserve for approximately $55K for expected penalties on a
historical liability, a loss on investment of approximately $10K and the
recognition of modification fee amortization of approximately $30K Coupled with
the expense increases were decreases in professional reading income by
approximately 37% for the three month period.
2002 2001
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY $ 146,000 $ 102,000
Minority interest expense for the three months ended July 31, 2002 increased
approximately $44,000, or 43%, 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 increase was the positive earnings of Westchester Imaging Group.
21
2002 2001
---- ----
EXTRAORDINARY ITEM $ 1,000 $ --
Extraordinary gains represent the repurchase of subordinated bond debentures at
a discount.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased for the nine months ended July 31, 2002 and 2001 by $10,000 and
$11,000, respectively.
Cash used by investing activities for the nine months ended July 31, 2002 was
$4,767,000 compared to $132,000 for the same period in 2001. For the nine months
ended July 31, 2002 and 2001, the Company purchased property and equipment for
approximately $6,428,000 and $3,867,000, respectively, received proceeds from
the sale of centers or property for $1,700,000 and $4,000,000, respectively, and
loaned $171,000 and $105,000, respectively, to related parties. During the nine
months ended July 31, 2002, the Company received payments from related parties
of approximately $132,000. During the nine months ended July 31, 2001, the
Company invested $100,000 in VROC, purchased 59,000 shares of DIS common stock
for approximately $29,000, and acquired some of the assets of Sadler Radiology
for approximately $31,000.
Cash used for financing activities for the nine months ended July 31, 2002 was
$4,864,000 compared to $8,859,000 for the same period in 2001. For the nine
months ended July 31, 2002 and 2001, the Company made principal payments on
capital leases and notes payable of approximately $14,504,000 and $12,836,000,
respectively, received proceeds from borrowing under existing lines of credit
and refinancing arrangements of approximately $9,572,000 and $2,351,000,
respectively, paid loan fees of $15,000 in each period, repurchased subordinated
debentures for approximately $9,000 and $37,000, respectively, received proceeds
from the issuance of common stock of $4,000 and $22,000, respectively, received
joint venture proceeds of $125,000 and $400,000, respectively, and increased its
cash disbursements in transit by approximately $238,000 and $1,256,000,
respectively. In addition, during the nine months ended July 31, 2002, the
Company distributed $275,000 to its Westchester joint venture partner.
At July 31, 2002, the Company had a working capital deficit of $39,351,000 as
compared to a working capital deficit of $26,987,000 at October 31, 2002,
representing a increased deficit of $12,364,000. Included in current liabilities
are revolving lines of credit liabilities of approximately $4.7 million and
$20.7 million as of July 31, 2002 and October 31, 2001, respectively. In June
2002, the Company's subordinated debentures of $16,293,000 and related party
note payable of $1,173,000, both due in June 2003, became current liabilities on
the Company's financial statements. Due to this, the Company obtained $17
million in working capital from DVI to provide a secured source of financing in
advance of the June 30, 2003 date for retirement. Initially, the funds were
utilized to reduce outstanding revolving credit lines improving the negative
effect on the Company's working capital position when the Subordinated
Debentures became current liabilities. With the DVI restructure, the $17 million
working capital loan was added to a group of existing debt schedules
reamortizing principal and interest beginning in July 2002. The current portion
of this debt as well as additional notes and capital leases added during fiscal
2002 increased the Company's working capital deficit. The deficit was further
increased with the growth in accounts payable and accrued expenses with the
increase in business and building of new facilities, and the reclassification of
$3,000,000 in deferred tax assets as long-term.
The Company's future obligations for debt and equipment under capital lease for
the next five years, excluding lines of credit, will be approximately
$44,092,000, $37,376,000, $35,660,000, $39,906,000 and $21,777,000,
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 $14,385,000, $11,680,000, $8,969,000,
$5,790,000 and $3,084,000, 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 $7,150,000 in annual
payments over the next five years.
22
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 nine
months ended July 31, 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
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 July 31, 2002, $4,190,000 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 July 31, 2002, $487,000 was outstanding under this line.
23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
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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 three months ended July 31, 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:
On June 30, 2002, the Company issued one individual a
five-year warrant exercisable at a price of $1.10 per share to
purchase 100,000 shares of the Company's common stock.
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
24
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.
---------------------------------------------
(Registrant)
September 20, 2002 By: Howard G. Berger, M.D.
-----------------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer