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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-----------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended October 31, 1997 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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 No X
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. ___________
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $6,604,033 on February 27,
1998 based upon the mean between the closing bid and closing ask price for the
common stock in the over-the-counter market on said date.
The number of shares of the registrant's common stock outstanding on February
27, 1998 was 39,132,260 shares (excluding treasury shares).
Documents Incorporated by Reference
NONE
PART I
Item 1. Business
(a) Background. Primedex Health Systems, Inc. ["PHS" or the "Company"]
is a New York corporation organized in 1985 and principally engaged in the
healthcare services industry. Through its 29 California diagnostic imaging
facilities [seven of which are wholly-owned or in partnerships with unaffiliated
parties with the Company's 74% owned Diagnostic Imaging Services, Inc. ["DIS"]
subsidiary and one is in partnership with an unaffiliated party with the
Company's Radnet subsidiary], the Company arranges for the non-medical aspects
of medical imaging offering MRI, CT, ultrasound, mammography, nuclear medicine
and general diagnostic radiology to the public. DIS also operates a cancer care
therapy center. PHS' executive offices are located at 1516 Cotner Avenue, Los
Angeles, California 90025 where its telephone number is [310] 478-7808.
RadNet Management.
The Company's wholly-owned subsidiary, RadNet Management, Inc. ["RadNet"],
owns and operates 21 medical imaging centers and is a joint venture partner in
one other imaging center. Fifteen of the imaging centers are located in Southern
California [with four centers located in Beverly Hills and known as the Tower
Division] with the remaining seven centers located in northern California. At
the wholly-owned centers, RadNet provides the imaging center facilities and
equipment as well as all non-medical operational, management, financial and
administrative services. At the joint venture center, RadNet performs
non-medical management services. At all 22 centers, the medical services and
medical supervision are provided by various independent physicians and physician
groups [at most of the centers, the medical services are provided by Beverly
Radiology Medical Group ["BRMG"] [see "Item 13"]. As compensation for its
management and other services at the various centers, RadNet receives a
management fee. In connection with the imaging centers in which it is a joint
venture partner, RadNet, in addition to a management fee, also shares in joint
venture net income.
Diagnostic Imaging Services
On March 22, 1996, the Company acquired from Diagnostic Imaging Services,
Inc., a Delaware corporation 2,747,493 shares of DIS common stock [ with a
five-year warrant to purchase an additional 1,521,739 shares of DIS common stock
at an exercise price of $1.60 per share] for $3,000,000 and the establishment of
a five-year revolving $1,000,000 line of credit for DIS bearing interest at four
percent greater than the prime rate. The Company also acquired an additional
730,768 shares of DIS common stock from a third party for $1,000,000. The
aggregate purchase price was Four Million Dollars and represented approximately
31% of the outstanding DIS common stock.
DIS at that time owned and operated 10 imaging centers providing high
quality diagnostic imaging services located in the Los Angeles and San Diego
areas, as well as 15 ultrasound laboratories located in hospitals, 13 mobile
ultrasound units servicing hospitals and office buildings, and one mobile MRI
servicing a single hospital. DIS also operates a cancer care therapy center in
Temecula, California. DIS acquired and/or opened three additional centers in
1996. In March and April, 1997, DIS sold four of its imaging centers and its
ultrasound business to Diagnostic Health Services, Inc. ["DHS"], an unrelated
third party for approximately $16 Million and $9 Million, respectively, less
outstanding capital lease obligations and other liabilities. As a part of that
sale the Company retained a management agreement for the MRI facilities sold
whereby the Company will provide certain administrative services for which it
will receive five percent of cash receipts. In February 1998, DHS acquired the
DIS partnership interest in the Scripps Chula Vista MRI Center in exchange for
127,250 shares of its Common Stock. The shares are restricted, nevertheless, the
current market value of such Stock as of February 27, 1998 is approximately
$1,400,000.
As of August 1, 1996, the Company acquired additional shares of DIS's
common stock from the president of DIS and certain parties affiliated with him
thereby bringing the aggregate number of shares of DIS common stock owned by the
Company to 6,706,307 shares representing approximately 59% of the outstanding
shares [8,228,046 shares representing approximately 64% of the outstanding
shares if warrants held by the Company are exercised]. The Company acquired the
shares by issuance of its five-year interest-only promissory notes aggregating
$3,272,046 together with its five-year warrants to
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acquire approximately 4,000,000 shares of the Company's common stock at $.60 per
share. Since August 1996, the Company has acquired an additional 1,821,663
shares of DIS common stock from certain third parties for $2,236,770 in cash
thereby increasing the Company's ownership to approximately 74% of the
outstanding DIS common shares as of February 27, 1998.
Viromedics, Inc. ["VMI"]
VMI is a privately owned development stage enterprise attempting to
acquire and develop a procedure or method utilizing an organic compound [the
"Procedure"] for the treatment of Acquired Immune Deficiency Syndrome ["AIDS"].
VMI was issued U.S. Patent No. 4,880,836 [the "Patent"] with respect thereto
which Patent has not been challenged to date. The Patent Abstract described the
Procedure as an invention related to contacting the HIV virus [the virus which
causes AIDS] or the host cells, with a lower-alkyl-urea [the "compound"] to
prevent viral penetration into the cells, thus preventing viral infection. VMI
assigned its entire interest and rights in the Patent to Albert Einstein College
of Medicine ["AECOM"] [located in New York City] in exchange for (a) the release
from all outstanding financial commitments due AECOM, and (b) a right to 20% of
any monetary consideration received by AECOM for VMI's patent rights and
know-how, as defined.
At October 31, 1997, PHS was a minority [approximately 19%] stockholder
with a passive investment in VMI. PHS had no involvement in VMI's management and
has no ability to verify the present status of the research effort or VMI's
ability to meet its financial obligations. No assurances can be given that PHS
will realize any future return on its investment in VMI [although it has been
repaid all of the cash which it originally invested in VMI].
Future Diagnostics
In November 1995, the Company acquired the outstanding capital stock of
Future Diagnostics, Inc. ["FDI"] in exchange for the Company assuming
approximately $855,000 of FDI liabilities and paying an aggregate $2,345,000 to
the sellers. FDI arranges for the provision of imaging services for large payors
[such as large employers and insurance carriers] through a network of
approximately 250 imaging centers primarily in California and also provides
related utilization review and quality assurance services. On September 8, 1997,
the Company sold FDI to an unrelated third party for $13,500,000 ($9,761,853
cash and a two year 10% interest bearing note for $2,000,000 (paid in full in
December 1997) with the balance of the purchase price consisting of the
asumption of liabilities). The Company retained RadNet Managed Imaging Services,
Inc. ["RMIS"] which still provides utilization review and quality assurance
services.
Tower Imaging
Beginning in January 1999, the Company will relocate three of its Tower
Imaging locations (120 East, 444 San Vicente and 1 West/Women's) from locations
presently on the Cedars Sinai Hospital Campus in Los Angeles to a single
location in Beverly Hills. Fiscal 1997 net revenue from the three sites was
approximately $13,225,000 and while the new site is within the Cedars Sinai
market area, the Company is unable to assess if there will be a negative impact
to revenues as a result of the relocation, although any loss will be reduced by
the annual space lease savings of approximately $1,000,000.
(b) Discontinued Operations
In December 1993, the Company purchased Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to engage in providing
medical/surgical utilization review services for health insurers and other
health service organizations for Six Million Dollars cash and options to
purchase one million shares of PHS at an exercise price of Nine Dollars per
share. AHS subsequently was merged into CareAdvantage Health Systems, Inc.
["CAHS"], a wholly-owned subsidiary of CareAdvantage, Inc. ["CareAd"], a
wholly-owned subsidiary of PHS. On October 28, 1994 pursuant to a planned
separation of PHS and CareAd, the PHS Board of Directors divested PHS of
ownership of approximately 96% of the outstanding CareAd common stock by
declaration of a dividend of 40,026,510 shares of CareAd common stock payable on
a share for share basis to the shareholders of PHS common stock. During fiscal
1995, the Company made a number of cash advances to CareAd as capital
contributions and in April 1995, consummated a Separation Agreement with CareAd.
PHS retained 1,700,000 shares of
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CareAd Common Stock so that upon completion of the distribution, there were
41,726,510 shares of CareAd Common Stock outstanding [See "Item 1" of Form 10-K
for year ended October 31, 1995]. As a result of CareAd activities, the
Company's ownership interest has been reduced to less than 1/2 of 1% of the
total shares outstanding.
Concerning the 1,700,000 shares of CareAd Common Stock [the "Retained
Shares"] to be retained by PHS after the Distribution, pursuant to the Second
Separation Agreement, PHS agreed to file for a registered exchange offer under
the Securities Act with the Securities and Exchange Commission within 18 months
after the June 1995 Distribution of the CareAd stock dividend, offering the
holders of the PHS Debentures the right to exchange the Debentures for the
Retained Shares. CareAd agreed within 18 months after the completion of the
exchange offer and subject to certain conditions, to file a registration
statement under the Securities Act with the Commission registering any of the
Retained Shares not distributed in the exchange offering [the "Remaining
Shares"] for public offer and sale by PHS for PHS' own account, PHS agreed to
sell such shares at such time. PHS agreed that CareAd's Board of Directors will
hold all voting rights with respect to the Retained Shares until transfer of any
such shares pursuant to the exchange offer, and thereafter, will continue to
hold all voting rights with respect to the Remaining Shares until the earlier of
a public sale of such shares or April 21, 2005. In view of the current minimal
market value of the CareAd retained shares, PHS has not attempted to effectuate
the exchange offer.
Workers Compensation Activities
The Company's wholly-owned Primedex Corporation subsidiary ["PC"] acquired
in February, 1992, provided management, administrative and financial services to
four medical corporations which operated eight medical clinics in the greater
Los Angeles area providing medical/legal evaluation services and medical
services to workers' compensation claimants under the California workers'
compensation system. PC provided the entities with the clinic facilities
necessary for providing the medical services and also provided management
services and administration of all of the non-medical functions and services
relating to the operation of the medical practice at the clinics in exchange for
which PC was paid a management fee based upon medical practice billings
received. Due to changes in the California workers' compensation system,
including the enactment by the California State Legislature in July 1993 of new
legislation making significant changes to the system, the Company announced on
July 29, 1993 that PC would phase out its workers' compensation business. At
October 1, 1993, all eight medical clinics had been closed and PC's work force
had been reduced to employees who were primarily engaged in collection of
existing receivables.
On August 4, 1995 pursuant to a Medical Receivables Purchase and Sale
Agreement dated as of July 31, 1995 [the "Agreement"], PC sold its workers'
compensation portfolio of medical receivables [the "Portfolio"] to an
unaffiliated third party, Bristol A/R Inc. ["Bristol"] for a cash purchase price
of $9,448,061 paid in full on the Closing Date. The purchase price was
established in arms-length negotiations between management of both companies and
represented 19% of the face amount of the Portfolio of receivables being sold.
At July 31, 1995 after allowances for doubtful accounts, the net carrying value
of the Portfolio as stated on PC's financial statements was approximately
$22,000,000. The sale was made to Bristol without recourse to PC except in the
event of breach of PC's representations and warranties concerning the Portfolio
made pursuant to the Agreement. The bulk of such representations and warranties
concerning the Portfolio were made "to the best of Seller's knowledge after
reasonable inquiry and investigation." PC agreed to indemnify Bristol for any
damages suffered based upon any misrepresentation or breach of warranty
concerning the Portfolio. However, with respect to a then pending investigation
of PC's operations by the Los Angeles District Attorney's Office and by other
governmental agencies [see "Item 3"], such indemnification was limited to
damages arising from any indictment and conviction for criminal violations of
the matters under investigation. PC's obligations to Bristol have been
guaranteed by the Company.
(c) Financial Information About Industry Segments
The Company is principally engaged in only one industry segment, the
healthcare services industry.
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(d) Narrative Description of Imaging Business
Medical Services
The following are the principle medical diagnostic procedures performed on
patients at the various imaging centers owned or managed by the Company. The
patient is normally referred to the center for such diagnostic procedures by his
or her treatment physician who may be independent or may be affiliated with an
Independent Physician Association ["IPA"], a Health Maintenance Organization
["HMO"], a Preferred Provider Organization ["PPO"], or a similar organization
who has contracted for such services. See "Marketing" herein. Not all of such
procedures are performed at each center.
Computed Axial Tomography [CT] - CT is 100 times more sensitive than
conventional x-ray. It is used to see inside any of the body's organs, including
the brain, to detect disease and damage. CT focuses an x-ray on a specific plane
of the body, processes the image by computer, and constructs a picture on a
monitor, and later on film. Tissues of various density appear as different
shades of gray, bone [the most dense] as white, and air and fluid is black. The
procedure is painless and takes about one-half hour per study; more than one
study is often ordered on each patient. The patient simply lies on a special,
monitored table which is guided into the scanner. Some CT studies involve the
use of an injected contrast agent to better visualize anatomy and pathology. The
Company primarily uses non-ionic CT contrast agents to minimize contrast
reactions. A CT system costs in the range of $400,000 to $700,000.
Diagnostic Radiology- X-ray services, diagnostic tests employing x-ray
radiation on two planes; includes fluoroscopy and endoscopy.
Magnetic Resonance Imaging [MRI] - Diagnostic imaging based on magnetism
rather than radiation or conventional x-ray. MRI has become widely accepted as
the standard diagnostic tool for a wide and fast-growing variety of clinical
applications; MRI is painless, requiring only that the patient lie still on a
motorized table that slides into a long cylinder. On some MRI studies, an
injected contrast agent is used, and some require the use of special "coils,"
permitting highly accurate scanning of a particular part of the body. MRIs are
the single most expensive pieces of equipment at RadNet imaging centers costing
between $900,000 and $1,500,000.
Mammography - Provides an x-ray picture of the breast, and is used to
detect tumors and cysts, and to help differentiate between benign and malignant
tumors.
Nuclear Medicine - Involves the use of a small amount of radioactive
material and is used to obtain information about the anatomy and functioning of
various organs. Nuclear medicine is based on the principle that organs absorb or
concentrate scientific minerals or hormones. These substances are not visualized
on conventional x-ray, but if they are made radioactive by the addition of a
radioisotope, they can be seen. If an organ is not functioning properly, too
little or too much of the substance will be taken up or concentrated in some
parts of the organ, but not other parts. The organ will thus appear different on
a screen. The amount of radiation is extremely low, and the isotope usually
disappears from the body within a day or less.
Ultrasound - A painless imaging technique that uses sound waves and their
echoes to visualize and locate internal organs. It is particularly useful in
looking at soft tissues that does not x-ray well. Ultrasound is used in
pregnancy to avoid x-ray exposure as well as in gynecological, urologic,
vascular, cardiac and breast applications.
Imaging Centers
The following table indicates the principal diagnostic procedures
available at each of the imaging centers in which the Company has a management
and/or ownership interest.
4
Mammo- Ultra- Diagnostic Nuclear
Center MRI CT graphy sound Radiology Medicine
Tower Division:
Roxsan * * * * * *
120 East * * *
444 San Vicente * *
1 West/Women's * *
Antelope Valley *
Camarillo** * * *
Corona** * * * * *
Fresno * * * * *
La Habra * *
Lancaster [Two Sites] * * * * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange * * * * * *
Oxnard * * * *
Riverside** * * * * *
Sacramento [DRI]
[Two Sites] * * * * *
San Francisco * *
Santa Clarita * * * * *
Santa Monica** * *
Santa Rosa *
Stockton/Valley * * * * * *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * * *
Vacaville * * *
Ventura * * * * * *
Westchester * * * * *
*Indicates availability
**Indicates a DIS facility
In addition, cancer care therapy is performed at Valley Regional Oncology
Center, a DIS center located in Temecula, California.
Management Services and Compensation
Radnet has entered into Management Agreements with respect to its
wholly-owned imaging centers with various physicians and physician groups [the
"Physician Group"]. Pursuant to the typical Management Agreement, the Company
makes available the imaging center facilities and all of the furniture and
medical equipment at such facilities for use by the Physician Group and the
Physician Group is responsible for staffing the center with qualified medical
personnel. In addition, the Company provides management services and
administration of the non-medical functions and services relating to the medical
practice at the center including among other functions, provision of clerical
and administrative personnel, bookkeeping and accounting services, billings and
collections, provision of medical and office supplies, secretarial, reception
and transcription services, maintenance of medical records, advertising,
marketing and promotional activities and the preparation and filing of all
forms, reports and returns required in connection with unemployment insurance,
workers' compensation insurance, disability, social security and similar laws.
As compensation for the services furnished under the Management Agreement, the
Company is paid a Management Fee equal to an agreed percentage of the medical
practice billings, as and when collected, varying between 70% to 85% of such
collections.
At the joint venture imaging center, Radnet has entered into a Management
Agreement to provide management, administrative and billing and collection
services for a management fee approximating eight
5
percent of the gross monthly receipts received for services performed at the
center. In addition, as a joint venture partner, the Company is entitled to 50%
of joint venture income after deduction of all expenses including amounts paid
for medical services and medical supervision.
At most of RadNet's and DIS's wholly-owned imaging centers, the medical
services including medical supervision are supplied by Beverly Radiology Medical
Group ["BRMG"]. BRMG is owned by Dr. Howard Berger [see "Items 11,12 and 13"].
RadNet has a Management and Services Agreement with BRMG for a ten-year term
until June 2002, terminable prior thereto at RadNet's election upon the
occurrence of certain events including a change in BRMG's ownership such that
Dr. Berger is no longer an owner in the aggregate of at least 60% of the equity
ownership of BRMG. As compensation for its services furnished under the
Management and Service Agreement, BRMG has agreed to pay a Management Fee to
RadNet equal to 81% of its medical practice receipts at the contracted centers,
as and when collected.
Equipment
The two most expensive types of diagnostic medical equipment found at the
imaging centers owned or managed by the Company are the MRI and the CT systems.
As set forth in the chart under "Imaging Centers" above, 22 centers provide MRI
services and 19 centers provide CT services. A majority of the MRI systems and
CT systems at the Company's imaging centers are manufactured by General Electric
or Siemens. The acquisition of these systems as well as the acquisition of the
other relatively expensive diagnostic medical equipment at the various imaging
centers has been effected through various financing arrangements directly with
the manufacturer involving the use of capital leases with purchase options at
minimal prices at the end of the lease term, the issuance of long term
installment notes and the use of operating leases with purchase options at
substantial prices at the end of the lease term. At October 31, 1997, capital
lease obligations totaled approximately $26 million through September 30, 2004
including current installments totaling approximately $5 million. Also at
October 31, 1997, installment notes payable totaled approximately $46 million
through October 31, 2005 including current installments of approximately $15.4
million. Commitments under equipment operating leases at October 31, 1997 were
approximately $633,000 through October 31, 2002 including current obligations of
approximately $314,000. To the extent additional imaging centers are opened or
acquired, these obligations could materially increase. See the above described
chart as to the other equipment available at each imaging center.
The MRI and CT systems and the other diagnostic medical equipment at the
imaging centers owned or managed by the Company are subject to technological
obsolescence as medical imaging is a field in which there is constant
development of new techniques and technologies.
Marketing
The patients who undergo diagnostic medical imaging procedures at the
various Company owned or managed imaging centers are generally referred by
individual independent physicians, by Independent Physician Associations
["IPAs"] consisting of groups of physicians, and by Health Maintenance
Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar
organizations which enroll subscribers on a contractual basis to whom they
deliver healthcare services. Such organizations attempt to control the cost of
healthcare services by directing their enrollees to participating physicians and
institutions and often through aggressive utilization review and limitations on
access to physician specialists, attempt to further limit the cost of medical
service delivery. Such organizations typically develop on a regional basis where
an appropriate enrollee population and mix of participating physicians and
institutions are available.
The Company currently employs 10 full-time and 3 part-time marketing and
sales personnel who are compensated on a salary or salary plus commission basis
and who periodically inform the medical community including individual
physicians and the administrators of IPAs, HMOs, PPOs, and similar organizations
throughout Southern California as to the services provided at the Company's
owned or managed imaging centers. Patients are obtained by direct referral or
through contract. Some contracts, referred to as "capitation contracts," provide
for a fixed fee per organization member, which is paid to the medical service
provider. Under a "capitation" contract, the provider agrees to provide
specified services to the organization members for a fixed, predetermined
payment per member for a specified time period [usually one year], regardless of
how many times the member uses the service. No assurances can
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be given that any of the current or future "capitation" contracts will be
profitable as there is a possibility that management could underestimate the
number of times the services at its imaging centers will be used by the
contracting organization's members during the contract term.
Competition
All of the imaging centers owned or managed by the Company compete with a
substantial number of imaging centers and hospitals in California. Although no
assurances can be given, management believes the imaging centers will be able to
successfully compete with such other centers because of the up-to-date imaging
equipment maintained at the Company's centers, the quality of the medical
personnel affiliated with its centers and the fact that for widespread potential
customer groups, it has locations throughout the area.
Insurance
BRMG maintains a medical malpractice insurance policy in the amount of
$1,000,000 per occurrence and $3,000,000 in the aggregate covering each
physician obtained by it pursuant to its medical staffing obligations at the
various imaging centers. The policy provides ongoing coverage from any claims
made by patients seen by the physicians as well as coverage for all of the
Company's non-medical personnel at each center against medical malpractice
claims. RadNet, DIS and PHS are also named insureds under the policy. All other
physicians who perform medical services at the various imaging centers are
required to maintain medical malpractice insurance coverage with similar limits.
Although management believes that such levels of insurance are adequate, there
can be no assurance in this regard. In addition, the Company maintains
$32,000,000 of blanket general liability insurance covering each center and its
own principal offices as well as all of its employees. BRMG, DIS, FDI and PHS
are also named insureds under this policy. The Company also maintains two
medical equipment repair and maintenance policies covering each center with
aggregate annual limits of approximately $10.6 million.
Employees
At October 31, 1997, the Company [including DIS] had a total of 410
full-time employees of whom 12 served in executive positions, 127 supplied
technical and managerial services at the various imaging centers, and the
balance provided administrative, transcription, clerical and similar services.
None of the Company's employees are subject to a collective bargaining
agreement nor had the Company experienced any work stoppages. The Company
believes that its employee relations are good.
Government Regulation
Substantially all of the Company's current operating revenues are
attributable to its operations in the health care services industry through
RadNet and DIS. The health care services industry in which the Company operates
is subject to a wide range of federal and state governmental regulatory
requirements and prohibitions affecting all aspects of the Company's operations.
Government regulation of the health care services industry in general, and the
occupational health care industry in particular, may adversely affect the
Company's business through, among other things, potential reduction in payment
for health care services.
Government regulation of the Company's health care service operations fall
into the following general areas: licensing, reimbursement, fraud/abuse,
corporate practice of medicine, and environmental.
Licensing - Health care facilities are subject to federal, state and local
regulation, and periodic inspection by licensing agencies to determine whether
the standards of medical care provided therein comply with licensing standards.
California law requires that professional health care services be provided only
by licensed physicians, a licensed facility, or a facility that qualifies for a
statutory exemption from licensure. The Company periodically verifies that the
physician providers at each of its centers maintain valid licenses to furnish
services, although the Company is to some extent dependent upon the physician
providers to which it furnishes management services to maintain such licensure.
Third Party Reimbursement - Providers of health care services, including
physicians, laboratories, and suppliers, receive payment for medical services
from their patients, from third party
7
payors, or from a combination of both, but third party reimbursement constitutes
the great majority of revenues for most health care providers. Third party
payors include insurance companies, government agencies, health maintenance
organizations, preferred provider organizations, and third party administrators
for self-insured companies.
A significant portion of the Company's revenues is derived from the
operation or management of facilities that furnish diagnostic imaging services
to patients for which payment is made by third party payors such as the
government-sponsored health care programs, Medicare and Medicaid, the workers'
compensation program, and private insurers. The scope and amount of third party
reimbursement has become increasingly unpredictable during the past several
years due to changes in reimbursement formulas, utilization review mechanisms,
and administrative procedures effectuated by third party payors as part of their
cost-containment efforts, such as radiology fee schedules and a resource-based
relative value scale payment system for physician services.
Under most participation arrangements with governmental or third party
payors, including Medicare, Medicaid, Blue Cross/Blue Shield plans, and most
health maintenance organizations, health care providers are required to accept
as payment in full, amounts which may be less than established charges. Nearly
all governmental and third party payors require patients to pay a portion of the
approved payment amount in the form of deductibles and co-payments for services
received. Health care providers are often unable to collect deductibles and
co-payments at the time services are rendered, and in some cases not at all.
Claims submitted to third party payors for reimbursement may be denied,
returned, or reduced for many reasons, including ineligible beneficiary status,
non-covered services, lack of medical necessity, failure to provide sufficient
services to support the claim, secondary payor liability, failure to submit
required information and submission of incorrect billing information.
Coordination of benefits and subrogation rights also require special handling.
Corrections and resubmission of claims add to the cost of operations for health
care facilities.
Third party payors also usually engage in utilization review of claims to
verify that services are medically necessary and eligible for coverage. This
process further complicates and delays collections. Third party payors are, with
increasing frequency, replacing prospective [prior to services being rendered]
utilization review with retrospective [after services are delivered] review.
Such audits, which can relate to claims for service furnished several years
earlier, often result in efforts by the payor to recoup payments previously
approved.
Fraud and Abuse Issues - Federal and state laws establish a large number
of prohibitions against billing and referral practices in the health care
services industry and impose criminal and civil penalties upon health care
providers found to have violated them.
Billing and Assignment - Under the Medicare and Medicaid programs,
patients usually assign their rights to payment to health care providers in
exchange for certain assurances from the health care providers, e.g., an
agreement not to collect for more than the Medicare approved amount. Health care
providers are generally restricted in their ability to reassign rights to
Medicare or Medicaid payment to third parties; an exception exists for billing
and collection services under specified conditions. Violation of the
requirements for assignment or reassignment can subject the health care provider
to a range of criminal and civil penalties, including fines and exclusion from
the program.
Health care providers and management companies are also subject to
criminal and civil penalties under federal and state law prohibitions against
submitting false claims for payments. Generally, criminal penalties subjecting
participants to fines and imprisonment require that the entity act knowingly or
willfully, or with fraudulent intent. Civil statutes provide penalties for
submitting claims with "reckless disregard" of the truth or falsely submitting
information. The federal civil penalties statute provides for civil penalties
against anyone who presents or causes to be presented a false or improper claim
under Medicare or Medicaid, including billing agents. Liability is imposed on
persons who "know or should know" that a claim is "false," "fraudulent," or for
services "not provided as claimed."
In addition, health care providers and management companies are subject to
various other laws that provide for monetary sanctions for technical billing
violations and for failure to disclose known Medicare or Medicaid overpayments.
8
Health care providers and management companies are also subject to certain
federal and state credit collection agency laws and regulations and federal and
state anti-trust laws which, among other penalties, provide criminal penalties
for conspiring to fix prices. The Federal Fair Debt Collection Practices Act
[the "Federal Fair Debt Act"] sets forth various provisions designed to
eliminate abusive, deceptive, and unfair debt collection practices by debt
collectors. The Federal Fair Debt Act also provides for a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states, including California, also have promulgated laws and regulations
that govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties, injunctions and jail terms for collection
agencies and collection agency personnel who fail to comply with such laws and
regulations. Although the Company does not provide past due or delinquent credit
collection services, the management services that it furnishes to its health
care providers may subject it to regulation as a "debt collector" under the
Federal Fair Debt Act and as a "collection agency" under certain state
collection agency laws and regulations.
Referral Arrangements - The Social Security Act [governing Medicare and
Medicaid] and many state laws impose civil and criminal penalties upon persons
who make or receive kickbacks, bribes, or rebates in connection with the
provision of health care services.
The federal anti-kickback rules prohibit individuals and entities from
knowingly and willfully soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for (a) referring someone for a good,
facility, service or item, (b) purchasing, leasing, ordering or arranging for a
good, facility, service or item or (c) recommending that an individual purchase,
lease or order a good, facility, service or item reimbursable under the Medicare
or Medicaid programs. In addition to other penalties, violation of the
prohibitions can lead to exclusion from participation in the Medicare and
Medicaid programs, which would preclude a health care provider or health care
clients of a management company from receiving reimbursement for services
furnished by the excluded entity. The Company believes that arrangements for the
management of medical practices such as it has established have in fact become
common in California, and have not generally been challenged with regard to
these issues. However, the Company cannot substantiate its belief. There can be
no assurance that the Company's present arrangements will not be challenged,
and, if challenged, that it will not be found to violate such prohibitions, thus
subjecting the Company to potential damages, injunction and/or civil and
criminal penalties.
California Business and Professions Code Section 650 sets forth a
comprehensive prohibition against the payment of compensation by or to a
physician or other health professional in exchange for patient referrals. An
even more broadly worded prohibition on payments for referrals is found in
California Health and Safety Code Section 445, which applies by its terms to all
persons, not only physicians and other health care professionals, and prohibits
referrals for profit to "health-related facilities". The imaging centers
operated or managed by the Company are deemed "health-related facilities" under
the statute. However, the Company does not believe that its present arrangements
violate the prohibition against referrals for profit contained in the statutes.
All of the payment relationships under the management agreements entered
into by the Company are subject to review under the above statutes, as to
whether any portion of the payments is being made in exchange for the referral
of patients. Moreover, payment relationships with other persons and entities
providing goods or services to the Company, BRMG or the Company's other medical
service providers are also subject to review under the above statute as to
whether any of the payments for the goods or services are being made at least in
part in exchange for the referral of patients. Even if the Company were deemed
to be referring patients to the providers, the Company does not believe that any
portion of its management fee is being paid for such referrals, but rather
constitutes reasonable compensation for the services provided by the Company to
the providers pursuant to the management agreements. However, there can be no
assurance that the relationship between the Company and the health care
providers with which it contracts will not be characterized as violating the
statutes.
Future judicial, legislative or administrative action which interprets
state and federal "kickback" prohibitions could have a materially adverse effect
on the Company and its assets. Further, new legislation or regulations are
proposed periodically relating to referral patterns in the health care services
9
industry and there can be no assurance that the Company will be able to operate
in conformity with such laws and regulations or will be able to do so
profitably.
Both federal and California law prohibit referrals of patients by
physicians to a medical facility [including a diagnostic imaging center] in
which the physician or the physician's immediate family has a financial
interest. The federal law [the so-called "Stark Law"] applies to referrals of
Medicare and Medicaid patients. The California version [the so-called "Speier
Law"] extends the referral prohibition to all patients. The Company believes it
is in substantial compliance with these laws.
Corporate Practice of Medicine - In California, a lay person or any entity
other than a professional corporation is not allowed to practice any of the
healing arts including by employing professional persons or have any ownership
interest or profit participation in or control over any healing arts
professional practice. This doctrine is commonly referred to as the prohibition
on the "corporate practice" of medicine. The Company believes that arrangements
for the management of medical practices have in fact become quite common in
California, and have not generally been challenged with regard to the corporate
practice issue. However, because these types of arrangements are not required to
be reported, the Company cannot substantiate its belief. There can be no
assurance that the Company's present arrangements with BRMG or the physicians
providing medical services and medical supervision at the Company's imaging
centers will not be challenged, and, if challenged, that they will not be found
to violate the corporate practice prohibition, thus subjecting the Company to
potential damages, injunction and/or civil and criminal penalties.
The Company has not received a legal opinion from counsel with regard to
the effect of the corporate practice prohibition on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the lack of court cases relevant to the issue.
Environmental - The facilities operated or managed by the Company generate
hazardous and medical waste subject to federal and state requirements regarding
handling and disposal.
The Company believes that the facilities that it operates and manages are
currently in compliance in all material respects with applicable federal, state
and local statutes and ordinances regulating the handling and disposal of such
materials. The Company does not believe that it will be required to expend any
material amounts in order to remain in compliance with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
The Company has not received a legal opinion from counsel with regard to
the effect of the prohibitions discussed above on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the fluid interpretation of the law relevant to the issue.
10
Item 2. Properties
All of the imaging centers owned or managed by the Company are located in
leased facilities with the exception of La Habra joint venture imaging center
where the joint venture owns the building in which the center is located,
subject to a land lease, and the Northridge imaging center where the Company
owns the building and the land. Certain information with respect to the imaging
centers is as follows:
Center
Wholly-Owned Approx. Sq. Ft.Annual Rental forCompany's %
of Center Leased FacilityOwnership InterestLease Expiration
Tower Division:
[Beverly Hills and Environs]
Roxsan 8,143 $ 205,000 100% October 2001
120 East 5,350 $ 281,000 100% June 1999
444 San Vicente 9,900 $ 669,000 100% January 1999
1 West/Women's 4,600 $ 324,000 100% June 1999
Wilshire [New Tower]1 13,778 $ 454,674 100% June 2018
Antelope Valley 2,900 $66,200 100% June 2000
Fresno 3,807 $78,600 100% January 2003
La Habra 3,034 $36,400 100% January 2003
Lancaster 2 7,827 $156,125 100% July 2002
Northridge 7,500 Owned 100% N/A
Orange 4,200 $131,900 100% February 2001
Oxnard 5,100 $101,000 100% February 2002
Sacramento [DRI]2 9,771 $312,500 100% February 2003
San Francisco 3,380 $111,500 100% March 2000
Santa Clarita 4,833 $93,300 100% December 1998
Santa Rosa 4,235 $125,700 100% July 2001
Stockton/Valley 6,800 $138,000 100% Pending
Tustin 5,310 $98,500 100% April 2003
Vacaville 1,743 $48,000 100% March 2001
Ventura 9,440 $130,300 100% July 2002
DIS Centers
Camarillo 1,200 $36,000 74% August 2001
Corona 5,328 $90,000 74% October 1998
North County [San Diego] 2,042 $51,900 74% October 2000
Riverside 8,312 $156,000 74% July 2001
Santa Monica [Parkside
Womens] 3,103 $105,600 74% June 2000
Temecula 4,247 $141,000 74% June 1998
Temecula Oncology 5,418 $94,400 74% August 1998
Thousand Oaks 8,300 $281,000 74% January 2001
Joint Venture
Westchester 6,763 $230,000 50% July 2001
Other Facilities
RadNet [Corp. office]1990 11,500 $199,000 N/A May 2003
Warehouse/Other various 30,183 $413,810 N/A Various
(1)The Company has leased space consolidating all three locations to a new
facility in Beverly Hills.
(2) Includes two locations
11
Item 3. Legal Proceedings
(a) At November 1, 1993, the Company was a defendant in a putative class
action pending in the United States District Court for the District of New
Jersey entitled "In re Hibbard Brown & Company Securities Litigation. The
plaintiffs subsequently amended the Consolidated Class Action Complaint and in
July 1994, filed a Second Amended and Consolidated Class Action Complaint [the
"Second Consolidated Complaint"] in the matter. In the Second Consolidated
Complaint, the plaintiff identified certain alleged "control" companies
including among others, the Company, ITI, Digital Products Corporation and Site
and alleged that the defendants violated the federal securities laws and the
Racketeer Influenced Corrupt Organizations Act ["RICO"] by initiating and/or
joining in a conspiracy and course of conduct designed to manipulate and
artificially inflate the market prices of the stocks of the various "control"
companies [allegedly controlled by the Company, the Company's former principal
stockholder and others] in order to permit the defendants to sell "large"
amounts of the "control" companies' securities to the public at manipulated
prices and reap "huge" profits. The Second Consolidated Complaint claimed
damages as well as punitive damages [including a trebling of damages pursuant to
the RICO statute], interest, attorneys' fees and costs, all of which were
unspecified in amount. In September 1994, the Court certified the matter as a
class action. Subsequent thereto, certain of the defendants, including the
Former Principal Stockholder, FNW, WFG and Hibbard filed for protection from
creditors pursuant to the federal bankruptcy laws. See Part II, Item 1 of the
Company's Form 10-Q for the quarter ended January 31, 1996.
Management contended that the Company was not a party to any conspiracy
and did not engage in any illegal course of conduct. The Company entered into a
preliminary settlement with the plaintiff class in this lawsuit by the payment
of $240,000 in April 1996. Although the settlement between the Company and the
plaintiff class was granted preliminary court approval, the settlement is
subject to final approval by the class and to final court approval, which has
not yet been obtained.
(b) In connection with the cessation of operations at its Beverly Hills
MRI location, lawsuits were filed against RadNet by the lessor of the property
for past due rent, future rent and damage to the premises plus costs. The
lessor's lawsuit against RadNet was settled in November 1997, with RadNet paying
the lessor $669,000.
The Company's subsidiaries are currently parties to other litigation, none
of which is deemed by management to be material in nature.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
12
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters
PHS Common Stock is traded in the over-the-counter market on the OTC
Bulletin Board [symbol, "PMDX"]. The following table indicates the high and low
bid and asked prices for PHS Common Stock for the periods indicated based upon
information supplied by the National Quotation Bureau, Inc. Such quotations
reflect interdealer prices without adjustment for retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Bid Price(1) Asked Price(1)
Quarter Ended High Low High Low
January 31, 1996 .25 .12 .52 .21
April 30, 1996 .50 .20 .81 .32
July 31, 1996 .54 .52 .77 .61
October 31, 1996 .41 .36 .71 .54
January 31, 1997 .49 .33 .50 .48
April 30, 1997 .54 .34 .56 .36
July 31, 1997 .40 .31 .42 .33
October 31, 1997 .61 .29 .63 .31
- - - - - - - - - - - - - - --------------
(1) The above information reflects inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
The last reported bid and asked prices for PHS Common Stock on the OTC
Bulletin Board on February 27, 1998, were $.24 and $.26, respectively. As of
February 27, 1998, the number of holders of record of PHS Common Stock was
2,705. However, a substantial number of PHS' outstanding shares of Common Stock
were owned of record on said date by "Cede & Co.," the nominee for Depository
Trust Company, the clearing agency for most broker-dealers. Management believes
that these shares are beneficially owned by customers of these broker-dealers
and that the number of beneficial owners of PHS Common Stock is substantially
greater than 2,705.
During fiscal 1997, PHS repurchased an aggregate of 325,000 shares of its
outstanding common stock for an aggregate $133,220 and repurchased $2,906,000 of
its outstanding debentures for a purchase price of $1,984,093 in open market
purchases from unaffiliated third parties. Subsequent to fiscal 1997, PHS
repurchased an additional $1,736,000 of its outstanding debentures for a
purchase price of $1,207,050 from unaffiliated third parties.
Recent Sales of Unregistered Securities
In reliance upon Section 4(2) of the Securities Act of 1933, as amended, the
Company issued its common stock to two individuals in connection with the
exercise of outstanding options aggregating 325,000 shares.
13
Item 6. Selected Consolidated Financial Data
[In thousands, except per share data]
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5 [A] 1 9 9 4 [A] 1 9 9 3
------- ------- ------- ------- -------
Operating Data:
Gross Revenues $132,569 $111,381 $ 88,884 $ 69,942 $ 70,122
Operating Expenses $ 74,687 $ 58,372 $ 98,124 $ 50,289 $ 50,414
[Loss] from Investee Transactions $ -- $ (314) $ -- $ (26) $ (648)
Income [Loss] from Continuing
Operations [Exclusive of Non-
Recurring Items] -Net of
Taxes ** $ (748) $ (8,361) $(57,616) $(20,476) $(16,004)
Income [Loss] from Discontinued
Operations $ -- $ -- $ (3,813) $(3,371) $(39,646)
Net [Loss] Income Before
Extraordinary Items $ (2,343) $ (9,511) $(62,370) $(20,912) $(47,787)
Extraordinary Items - Gain $ 1,595 $ 1,150 $ 941 $ -- $ --
[Loss] Income Per Common Share
From Continuing Operations
Before Extraordinary Items $ (.06) $ (.24) $ (1.54) $ (.44) $ (.21)
[Loss] Income Per Common Share from
Discontinued Operations $ -- $ -- $ (.09) $ (.08) $ (1.04)
[Loss] Income Before Extraordinary
Items $ (.06) $ (.24) $ (1.63) $ (.52) $ (1.25)
Net [Loss] Income Per Common Share$ (.02) $ (.21) $ (1.61) $ (.52) $ (1.25)
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 130 $ 152 $ 3,929 $ 5,649 $ 24,557
Total Assets * $ 86,340 $105,931 $ 66,760 $153,551 $188,151
Total Long-Term Liabilities $ 76,843 $ 85,464 $ 54,088 $ 67,666 $ 58,668
Total Liabilities $111,270 $130,792 $ 82,002 $104,522 $107,698
Working Capital [Deficit] $(12,027) $(22,627) $ (4,337) $ 528 $ 16,970
Stockholders' Equity [Deficit] $(24,930) $(24,861) $(15,242) $ 49,029 $ 80,452
14
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
[GRAPHIC OMITTED]
[In thousands, except per share]
[A] The operating data for October 31, 1994, gives effect to the spin off
of the Care Advantage, Inc. subsidiary as of October 31, 1994.
* At October 31, 1997, 1996, 1995 and 1994, includes $20,169, $31,822,
$15,383 and $58,725 of net goodwill, respectively.
** Reconciliation of Income from Continuing Operations - Net of Taxes
O c t o b e r 3 1,
----------------------------------------
1 9 9 5 1 9 9 4
------------------- -------------------
Net [Loss] $ (61,429) $(20,912)
Loss from Discontinued Operations 3,813 3,371
--------- --------
[Loss] from Continuing Operations
[Inclusive of Non-Recurring Items] - Net of Taxes (57,616) (17,541)
Less: Nonoperating Gain from Investee Stock
Transactions [See Note 2] $ -- $ 2,935
Net of Approximate Taxes -- -- -- 2,935
-------- --------- -------- --------
[Loss] from Continuing Operations [Exclusive of
Non-Recurring Items] - Net of Taxes $ (57,616) $(20,476)
========= ========
15
ITEM 7.
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Background
Primedex Health Systems, Inc. ["PHS"] [formerly CCC Franchising Corp.] was
incorporated on October 21, 1985.
On November 1, 1990, the Company acquired a 51% interest in Viromedics, Inc.
["VMI"] for $700,000. On February 18, 1992, Future Medical Products, the parent
corporation of VMI, exercised its right to repurchase one-half of the VMI stock
from PHS at a price of $700,000. The Company owns approximately 19% of VMI's
outstanding capital stock at October 31, 1997, which is accounted for using the
cost method at $-0-.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of ImmunoTherapeutics, Inc. ["ITI"]. As of October 31, 1995, the Company owned
approximately 19% of ITI and accounted for this investment using the cost
method, which was $-0-. In November of 1995, this investment was sold for
$143,750.
As of January 31, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. I, entered into an asset purchase agreement with Primedex
Corporation ["PC"] for approximately $46,250,000. On July 29, 1993, the Company
announced its plans to restructure its Primedex subsidiary and to wind down its
involvement in the California worker's compensation industry. Accordingly, the
operating results of this subsidiary were reclassified as a discontinued
operation and the appropriate prior period amounts were restated. Effective
August 1, 1995, substantially all of the assets of PC were sold to an unrelated
party for approximately $9,448,000 [See Note 20]. The sale resulted in a loss of
approximately $3,800,000.
As of April 30, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. II, entered into a purchase agreement with Radnet Management,
Inc. and certain related companies ["Radnet"] for approximately $66,000,000. The
Statements of Operations and Cash Flows for the years ended October 31, 1997 and
1996 reflect the operations and cash transactions of Radnet.
On December 23, 1993, the Company acquired Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to provide medical and surgical
utilization reviews for major providers of health insurance, for $6,000,000 in
cash. On August 26, 1994, the Company announced a plan to spin-off its
subsidiary, Care Advantage, Inc. ["CareAd"] which owns AHS [See Note 21].
On November 1, 1995, the Company acquired most of the assets of Future
Diagnostics, Inc. ["FDI"] by purchasing 100% of its outstanding stock for
approximately $3.2 million consisting of cash, notes and assumed assets and
liabilities. Founded in 1989, FDI is a leading Radiology management service
organization providing network development and management along with diagnostic
imaging cost containment and utilization review services. Effective September 3,
1997, 100% of the outstanding capital stock of FDI was sold to Preferred Health
Management, Inc. ["PHM"] for approximately $13,500,000 in cash, notes and
assumed liabilities. The sale resulted in a gain of approximately $10,400,000.
The Statements of Operations and Cash Flows for the years ended October 31, 1997
and 1996 reflect the operations and cash transactions with FDI.
16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Background [Continued]
On March 25, 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ["DIS"] for $4,000,000 and acquired a
five-year warrant to purchase an additional 1,521,739 shares of DIS stock at
$1.60 per share. The $4 million was borrowed by the Company from a primary
lending source. In addition, the Company established a five-year $1 million
revolving loan with DIS. During the four-month period ended July 31, 1996, the
investment yielded a loss to the Company of $313,649. Effective August 1, 1996,
the Company issued a five-year promissory note for $3,272,046, and five-year
warrants to purchase approximately 4,000,000 shares of PHS common stock at $.60
per share, to acquire an additional 3,228,046 shares of DIS common stock. The
purchase made PHS the majority shareholder in DIS with approximately 59%
ownership.
During fiscal 1997, the Company purchased an additional 1,293,663 shares of DIS
common stock from various unrelated parties for $1,639,623 increasing its total
ownership to approximately 70%. In subsequent purchases through February 27,
1998, the Company purchased an additional 528,000 shares of DIS common stock for
$597,144 increasing its total ownership to approximately 74%. In connection with
the DIS common stock purchases, the Company recorded goodwill of $8,832,843 of
which $1,555,154 was written off in conjunction with the disposal of Parkside
and $2,744,474 was written off in conjunction with the sale of the ultrasound
division and four of DIS's hospital-based MRI facilities to Diagnostic Health
Services, Inc. ["DHS"] during fiscal 1997. The Statements of Operations and Cash
Flows for the years ended October 31, 1997 and 1996 reflect the operations and
cash transactions of DIS; during fiscal 1996, DIS was consolidated with PHS
effective August 1st.
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 that 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 and future business 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 a
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 Annual Report on Form 10-K, 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.
Discussion of Operations for the Year Ended October 31, 1997 vs.
October 31, 1996
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc..
Results of Operations
The discussion of the results of continuing operations includes PHS, Radnet, FDI
and DIS for the years ended October 31, 1997 and 1996.
For the years ended October 31, 1997 and 1996, the Company had operating losses
from continuing operations of $7,668,385 and $1,833,120, respectively.
17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1997 vs.
October 31, 1996
Results of Operations [Continued]
The Company generated net revenue of $67,018,507 and $56,538,507 for the years
ended October 31, 1997 and 1996, respectively. The increase in net revenue in
1997 is primarily attributable to the acquisition of DIS. During the year ended
October 31, 1997, Radnet generated net revenue of $44,952,132, FDI generated net
revenue of $7,010,470, PHS generated net billing revenue of $225,701 and DIS
generated net revenue of $14,830,204 [net of elimination entries]. During the
year ended October 31, 1996, Radnet generated net revenue of $43,439,338, FDI
generated net revenue of $7,482,487 and DIS generated net revenue of
approximately $5,616,682 [for the partial period from August to October 1996]
[net of elimination entries].
For the years ended October 31, 1997 and 1996, operating expenses totaled
$74,686,892 and $58,371,627, respectively. For the year ended October 31, 1997,
Radnet's operating expenses were $44,880,065, FDI's operating expenses were
$6,090,612, DIS's operating expenses were $20,753,338 and PHS's overhead
expenses were $2,962,877 [net of elimination entries]. For the year ended
October 31, 1996, Radnet's operating expenses were $43,754,174, FDI's operating
expenses were $6,332,934, DIS's operating expenses were $5,687,219 [for the
partial period from August to October 1996] and PHS's overhead expenses were
$2,597,300 [net of elimination entries]. The increase in fiscal 1997 operating
expenses is primarily attributable to DIS given its fiscal 1996 operating
expenses included only three months of consolidated financial information. In
addition, DIS recognized an impairment loss on the closure of Parkside during
the twelve months ended October 31, 1997.
For the years ended October 31, 1997 and 1996, the Company incurred expenses for
salaries and professional reading fees of $26,328,082 and $22,563,519,
respectively, FDI vendor site costs of $4,254,903 and $4,433,907, respectively,
building and equipment rental expenses of $6,226,423 and $5,535,652,
respectively, general and administrative expenses of $21,915,419 and
$17,266,956, respectively, provisions for bad debt of $1,962,837 and $2,531,337,
respectively, and depreciation and amortization expense of $8,783,419 and
$6,040,256, respectively. In addition, during fiscal 1997, the Company incurred
restructuring costs of $662,026 and recorded an impairment loss on the closure
of Parkside of $4,553,783.
For the year ended October 31, 1997 and 1996, interest income was approximately
$295,000 and $258,000, respectively. For the years ended October 31, 1997 and
1996, interest expense was approximately $9,845,000 and $7,893,000,
respectively. For the consolidated three month period ended October 31, 1996,
DIS's interest expense was approximately $855,000; for the twelve months ended
October 31, 1997, DIS's interest expense was approximately $2,505,000. The
remaining increase in interest expense is primarily attributable to PHS
promissory notes payable issued with the August 1996 acquisition of DIS common
stock.
For the year ended October 31, 1997 and 1996, the gain on sale of subsidiaries
and Divisions was $16,082,302 and $143,750, respectively. Fiscal 1997's gain
primarily consisted of the sale of DIS's ultrasound division and four of its
hospital-based MRI facilities to DHS in March 1997 and the sale of FDI to PHM in
September 1997. The Company recognized gains from the sales of DIS's sites and
FDI of approximately $5,600,000 and $10,400,000, respectively. Fiscal 1996's
gain was the result of the sale of ITI stock.
For the year ended October 31, 1997, other income [expense] was an expense of
approximately $640,000. For the year ended October 31, 1996, other income
[expense] was income of approximately $935,000. Fiscal 1997's other expense
primarily consisted of the sale, disposal and abandonment of fixed assets of
approximately $825,000. Fiscal 1996's other income primarily consisted of
$335,000 of pre-consolidation DIS management fee income and a $500,000 legal
settlement gain.
For the years ended October 31, 1997 and 1996, the Company had gains on early
extinguishment of debt of $1,595,106 and $1,149,817, respectively.
18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1997 vs.
October 31, 1996
Results of Operations [Continued]
For the years ended October 31, 1997 and 1996, the Company had net losses of
$748,095 and $8,361,096, respectively. For the year ended October 31, 1997,
Radnet realized net losses of $4,138,831, FDI generated net income of
$11,283,923, DIS realized net losses of $2,747,775 [including write-offs of net
acquisition goodwill of $4,193,662], and PHS realized net losses of $5,145,412
[net of elimination entries]. For the year ended October 31, 1996, Radnet
realized net losses of $2,596,218, FDI generated net income of $241,545, DIS
realized net losses of $1,494,829 [including the investment loss for the interim
period of $313,649], and PHS realized net losses of $4,511,594 [net of
elimination entries].
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1997 and 1996 by $22,353 and
$3,776,962, respectively.
Cash generated from investing activities for the year ended October 31, 1997 was
$20,741,396. Cash utilized for investing activities for the year ended October
31, 1996 was $77,638. During the year ended October 31, 1997, the Company
received proceeds of $9,761,853 from the sale of FDI to PHM, $266,500 from the
sale of certain medical equipment and other assets, and $15,972,720 from the
sale of DIS's Ultrasound Division and four of its hospital based MRI facilities
to DHS. The DHS sale proceeds were as follows: $6,519,475 from the sale of the
Ultrasound Division, $7,453,245 from the sale of the MRI facilities and
$2,000,000 in covenant not-to-compete income split equally between PHS and DIS.
During the year ended October 31, 1997, the Company acquired an additional
1,293,663 shares of DIS common stock for $1,639,623, purchased the outstanding
limited partnership units in Valley Regional Oncology Center ["VROC"] for
$260,000, purchased additional limited partnership units in Temecula Valley
Imaging Center ["TVIC"] for $196,875, and purchased the assets of Las Posas
Medical Imaging for $35,000. During the year ended October 31, 1996, the Company
paid $1,100,000 in modification of its management fee [See Note 7], received
proceeds from the sale of its marketable securities of $1,998,458, received
proceeds from the sale of ITI stock of $143,750, acquired imaging centers for
$732,160, advanced approximately $1,640,000 to DIS prior to the Company's
consolidation in August 1996 and was repaid $1,937,500 on notes due from related
parties. During the years ended October 31, 1997 and 1996, the Company purchased
property and equipment of $3,098,179 and $682,472, respectively.
Cash utilized for financing activities for the years ended October 31, 1997 and
1996 was $17,894,237 and $2,726,305, respectively. For the year ended October
31, 1997 and 1996, the Company made principal payments on notes payable and
capital lease obligations of $17,741,045 and $7,515,599, respectively. The
fiscal 1997 increase was primarily due to the Company reducing its lines of
credit by $6,938,183 with proceeds from the sales of certain assets, facilities
and divisions. The remaining increase is primarily attributable to DIS and its
first full year of consolidated operating activity. In addition, fiscal 1996
principal payments were lower than average primarily due to the deferral of
payments while renegotiating balances and terms, and the arrangements of new
notes and leases with interest-only payments or deferred principal payments
during the first year. For the years ended October 31, 1997 and 1996, the
Company received proceeds from borrowings on notes payable of $2,373,554 and
$5,460,229, respectively. In fiscal 1996, a large portion of the borrowings were
from revolving lines or credit paid down or eliminated in fiscal 1997. For the
year ended October 31, 1997, the Company repurchased $2,906,000 face value
subordinated bond debentures for $1,984,093, repurchased 325,000 shares of
Company stock for $133,220 and distributed $478,122 to its joint venture
partners. For the year ended October 31, 1996, $481,727 was utilized to
repurchase 1,300,000 shares of Company stock and $440,000 was paid to joint
venture partners.
At October 31, 1996, the Company had a working capital deficit of $22,626,649;
at October 31, 1997, the Company had a working capital deficit of $12,027,033, a
decrease of $10,599,616. A primary reason for the improvement was due to the
proceeds from the sale of FDI and DIS's Ultrasound Division and its MRI sites
during the fiscal year. Included in current liabilities of the Company is
$7,679,837 of revolving line of credit liabilities.
19
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1997 vs.
October 31, 1996
Liquidity and Capital Resources [Continued]
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $25,945,000, $15,825,000, $15,585,000, $14,400,000 and
$12,200,000. Interest expense [assuming lines of credit are paid in full] for
the Company for the next five years, included in the above payments, will be
approximately $5,605,000, $4,285,000, $3,135,000, $1,895,000 and $915,000,
respectively. Interest on subordinated bond debentures is excluded. In addition,
the Company has noncancellable operating leases for use of its facilities and
certain medical equipment which will average approximately $3,300,000 in annual
payments over the next five years.
At three of the Company's Tower locations [120 East, 444 San Vicente and 1
West/Womens], the Company was unable to extend the respective leases which
expire at various times beginning in January 1999. Due to this, the Company has
entered into a new lease agreement for space in Beverly Hills ["Wilshire"] and
will consolidate the assets and business of these three Tower locations to the
new space during fiscal 1999. The Company cannot predict whether the move will
negatively impact the volume of business previously obtained from these three
centers, but the new site will reduce respective average building rental
disbursements by approximately $1,015,000 per year [including note payment
disbursements assumed upon the acquisition of Tower in October 1994]. Fiscal
1997 net revenue for these three sites was approximately $13,225,000.
The Company estimates interest payments on its bond debentures to be
approximately $2,100,000 for fiscal 1998. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year. Subsequent to year-end,
as of February 27, 1998, the Company repurchased $1,736,000 face value bond
debentures for $1,207,050. The Company has or will retire all of these bonds.
The Company's working capital needs are currently provided under two lines of
credit. A third line of credit for DIS was paid in full and terminated, at the
Company's request, in September 1997. Under one agreement with Coast Business
Credit, due December 31, 1998, the Company may borrow the lesser of 75% to 80%
of eligible accounts receivable, $10,000,000 or the prior 120-days' cash
collections. 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 3%, or (b)
10%. The lender holds a first lien on substantially all of Radnet's assets. At
October 31, 1997, approximately $6,452,000 was outstanding under this line. A
second line of credit with DVI Business Credit was obtained in December of 1994
subsequent to the acquisition of the Tower Imaging Group. Under this agreement,
originally due December 1997 and extended on a month-to-month basis, the Company
may borrow the lesser of 75% of the eligible accounts receivable, $4,000,000 or
the prior 120-days' cash collections. 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 3.5%. At October 31, 1997, approximately $1,228,000 was
outstanding under this line. As of October 31, 1997, the bank's prime rate was
8.50%. Under the various formulas, total funds available for borrowing under the
two lines of credit was approximately $5.8 million at October 31, 1997.
In connection with ceasing operations at certain of the Company's imaging
centers, selling certain divisions and the restructure of Corporate operations,
the Company set up an additional restructuring reserve of $662,026 during the
year ended October 31, 1997. During fiscal 1997, $495,622 of the Company's
reserves were utilized or paid. Total accrued restructuring costs of $1,062,026
as of October 31, 1997 include $500,000 remaining on the Company's books from
October 31, 1996 for estimated legal and settlement costs associated with one
final building lessor. This final lessor settled with the Company and was paid
in full $669,000 in November 1997.
20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1997 vs.
October 31, 1996
New Authoritative Pronouncements
The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. Management is in the process of evaluating
the disclosure requirements. SFAS No. 131 is not expected to have a material
impact on the Company.
Inflation
To date, inflation has not had a material effect on the Company's operations.
21
ITEM 7.
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Year Ended October 31, 1996 vs.
October 31, 1995
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc.
Results of Operations
The discussion of the results of continuing operations includes PHS and Radnet
for the year ended October 31, 1995. The discussion of the results of continuing
operations includes PHS, Radnet, FDI and DIS for the year ended October 31,
1996.
For the years ended October 31, 1996 and 1995, the Company had operating losses
from continuing operations of $1,833,120 and $52,779,293, respectively.
The Company generated net revenue of $56,538,507 and $45,344,879 for the years
ended October 31, 1996 and 1995, respectively. The increase in net revenue in
1996 is primarily attributable to the acquisitions of FDI and DIS; Radnet
generated net revenue of $43,439,338, FDI generated net revenue of $7,482,487,
and DIS generated net revenue of approximately $5,616,682 for the partial period
from August to October 1996 [net of elimination entries]. Radnet was the sole
generator of revenue for the year ended October 31, 1995.
For the years ended October 31, 1996 and 1995, operating expenses totaled
$58,371,627 and $98,124,172, respectively. For the year ended October 31, 1996,
Radnet's operating expenses were $43,754,174, FDI's operating expenses were
$6,332,934, DIS's operating expenses were $5,687,219 and PHS's overhead expenses
were $2,597,300 [net of elimination entries]. For the year ended October 31,
1995, Radnet's operating expenses were $95,883,525 and PHS's overhead expenses
were $2,240,647. Fiscal 1995 operating expenses were higher due to Radnet's
recognition of an impairment loss of $47,744,453 with the implementation of FASB
121 [See Note 6 to the financial statements]. In addition, Radnet's depreciation
and amortization expense decreased from $8,321,841 to $4,474,614 in 1996 due
primarily to the writedown in assets. Increases in operating expenses were
primarily attributable to the acquisitions of FDI and DIS.
For the years ended October 31, 1996 and 1995, interest income was approximately
$258,000 and $296,000, respectively. For the years ended October 31, 1996 and
1995, interest expense was approximately $7,900,000 and $6,200,000,
respectively. Approximately $915,000 of interest expense in 1996 is related to
the acquisitions. PHS's interest expense increased from $1,677,311 in fiscal
1995 to $2,901,643 in fiscal 1996 due primarily to approximately $8.2 million in
promissory notes used to fund the acquisition of DIS. In addition, for the year
ended October 31, 1995, PC recognized a portion of the parent company's interest
expense as part of discontinued operations.
For the years ended October 31, 1996 and 1995, the Company had net losses from
continuing operations of $8,361,096 and $57,615,465, respectively. For the year
ended October 31, 1996, Radnet realized net losses of $2,596,218, FDI generated
net income of $241,545, DIS realized net losses of $1,494,829 (including the
investment loss for the interim period of $313,649), and PHS realized net losses
of $4,511,594 [net of elimination entries]. For the year ended October 31, 1995,
Radnet realized net losses of $53,786,375 and PHS realized net losses of
$3,829,090. For the years ended October 31, 1996 and 1995, the Company had net
losses from discontinued operations of $ -0- and $3,813,314, respectively.
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1996 and 1995 by $3,776,962 and
$1,720,398, respectively.
Cash utilized for investing activities for the years ended October 31, 1996 and
1995 was $77,638 and $3,623,510, respectively. In fiscal 1995, the Company
utilized approximately $2 million buying and selling marketable securities. In
fiscal 1996, all of the marketable securities were converted into cash. In
addition, in fiscal 1996, the Company received approximately $1.9 million in
payments on notes due from related parties and advanced approximately $1,640,000
to DIS prior to the Company's acquisition of additional shares in August 1996.
22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
Liquidity and Capital Resources [Continued]
Cash utilized for financing activities for the years ended October 31, 1996 and
1995 was $2,726,305 and $9,980,884, respectively. For the year ended October 31,
1996, $481,727 was utilized to repurchase Company stock and $440,000 was paid to
joint venture partners. For the years ended October 31, 1996 and 1995, debt and
lease payments were $7,515,599 and $8,268,319, respectively. The fiscal 1996
decrease was primarily due to the deferral of payments while renegotiating
balances and terms, and the arrangement of new notes and leases with
interest-only payments or deferred principal payments during the first year. In
addition, during fiscal 1995, many of the Company's acquisition notes were paid
in full. For the years ended October 31, 1996 and 1995, $5,460,229 and
$1,784,067 was advanced from short-term borrowings, respectively. During fiscal
1995, the Company had use of the proceeds from the sale of PC's assets to invest
in marketable securities and reduce short-term borrowings.
At October 31, 1996, the Company had a working capital deficit of $22,626,649 as
compared to working capital deficit of $4,337,438 at October 31, 1995, a
decrease of $18,289,211. A primary reason for the decrease was the acquisition
of DIS which had a working capital deficit of $11,358,169 as of October 31,
1996. DIS's working capital deficit increased from its calendar 1995 year-end
due to the reclassification of its line of credit and many of its limited
partner acquisition notes as current liabilities. Included in current
liabilities for both Radnet and DIS are approximately $10.7 million and $3.9
million, respectively, of line of credit payables. At fiscal year-end, Radnet's
working capital deficit was $9,142,010, FDI's working capital deficit was
$1,112,118 and PHS's working capital deficit was $1,014,353 after the
elimination of all intercompany transactions.
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $34,855,000, $16,655,000, $16,600,000, $16,860,000 and
$14,255,000. Radnet's, FDI's and PHS's future payments will be approximately
$20,185,000, $9,975,000, $9,580,000, $11,300,000 and $10,125,000. DIS's future
payments will be approximately $14,670,000, $6,680,000, $7,020,000, $5,560,000
and $4,130,000. The October 31, 1996 lines of credit balances are approximately
$14,620,000 which includes $3,875,000 with DIS. Interest expense [assuming lines
of credit are paid in full] for the Company for the next five years, included in
the above payments, will be approximately $6,650,000, $4,790,000, $3,620,000,
$2,415,000 and $1,140,000, respectively. In addition, the Company has
noncancellable operating leases for use of its facilities and certain medical
equipment which will average approximately $4,070,000 in annual payments over
the next five years.
In fiscal 1995, the Company successfully renegotiated the majority of its
equipment under capital lease liabilities and some notes payable with a major
outside lender deferring all payments until February 1996, standardizing
favorable interest rates, eliminating large balloon payments, and extending
remaining lease terms to seven to ten years from October 31, 1995. In addition,
during fiscal 1996, the Company settled a dispute with an outside lendor that
required that approximately $5.2 million in notes to be classified as a current
liability at October 31, 1995.
The Company acquired Future Diagnostics, Inc. for approximately $3,200,000 in
cash, notes and assumed liabilities on November 1, 1995. During fiscal 1996,
approximately $1,050,000 in principal payments were made on the note.
23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
[GRAPHIC OMITTED]
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
Liquidity and Capital Resources [Continued]
In late March 1996, the Company purchased 2,747,493 shares of DIS common stock
for $3,000,000 with a five-year warrant to acquire an additional 1,521,739
shares of DIS stock at $1.60 per share. In addition, the Company established a
five-year $1 million revolving loan with DIS. At the same time, the Company
purchased 730,768 shares of DIS common stock from DVI for $1,000,000. The
combined transactions gave the Company approximately 31% interest in DIS. Out of
the total of $5 million for the purchase price and loan, the Company used
$500,000 of cash and borrowed $4.5 million from DVI. The notes accrue interest
at 10% annually and require interest-only payments during the first year.
Thereafter, monthly payments of principal and interest are required with final
payments due in April and May of 2002. The $3 million purchase price was used by
DIS to retire debt owed to DVI. The notes are collateralized by the assets of
certain subsidiaries. In August 1996, the Company purchased an additional
3,228,046 shares of DIS common stock from the President of DIS and other related
parties and five-year warrants to acquire approximately 4,000,000 shares of PHS
common stock at $.60 per share. The Company issued a five-year interest only
promissory note for $3,272,046 at 6.58%. The principal is due in June 2001 and
interest is paid annually. The March and August purchases made PHS the largest
shareholder of DIS with approximately 59% of the outstanding common stock.
The Company estimates interest payments on its bond debentures to be
approximately $2,582,900 for fiscal 1997. The quarterly payments of
approximately $645,725 are paid on January 1, April 1, July 1 and October 1 of
each year.
The Company's working capital needs are currently provided under three lines of
credit. Under one agreement with Coast Business Credit, due December 31, 1998,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$10,000,000 or the prior 120-days' cash collections. 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 3%, or (b) 10%. The lender holds a first lien on
substantially all of Radnet's and FDI's assets. At October 31, 1996,
approximately $7,470,000 was outstanding under this line. A second line of
credit with DVI Business Credit was obtained in December of 1994 subsequent to
the acquisition of the Tower Imaging Group. Under this agreement, due December
1997, the Company may borrow the lesser of 75% of the eligible accounts
receivable, $4,000,000 or the prior 120-days' cash collections. 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 3.5%. At October 31, 1996,
approximately $3,275,000 was outstanding under this line. A third line of
credit, also with DVI Business Credit, was obtained by DIS in June of 1994 and
is due in June of 1997. Under the agreement, the Company may borrow the lesser
of $4,000,000 or approximately 53% of the eligible accounts receivable.
Borrowings under this line are repayable together with interest at an annual
rate equal to the bank's prime rate plus 3.5%. At October 31, 1996,
approximately $3,875,000 was outstanding under this line. As of October 31, 1996
and April 30, 1997, the bank's prime rates were 8.25% and 8.0%, respectively.
Under the various formulas, total funds available for borrowing under the three
lines of credit was approximately $1.8 million at October 31, 1996.
In connection with ceasing operations at certain of the Company's imaging
centers, lawsuits have been filed against the Company by three of Radnet's
property lessors for past due rent, future rent and damages to the properties
plus other costs. In 1995 and 1996, two lawsuits were settled. One lawsuit was
settled for $425,000 in 1995, and the second lawsuit was settled for $950,000 in
July 1996. As of October 31, 1996, accrued restructuring costs include
approximately $396,000 of the second settlement remaining to be paid as well as
an additional $500,000 reserved for the third remaining lawsuit.
24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board [APB] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial statement note disclosure purposes in any event. The
accounting requirements of SFAS No. 123, if adopted by the Company, will be
effective for transactions entered into in fiscal years that begin after
December 15, 1995; the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995.
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. Earlier
application is not allowed. The provisions of SFAS No. 125 must be applied
prospectively; retroactive application is prohibited. Adoption
on January 1, 1997 is not expected to have a material impact on the Company.
The FASB deferred some provisions of SFAS No. 125, which are not expected to be
relevant to the Company.
The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
Inflation
To date, inflation has not had a material effect on the Company's operations.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements are attached hereto and begin at page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
25
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
INDEX
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report..................................... F-1.....
Consolidated Balance Sheets...................................... F-2..... F-3
Consolidated Statements of Operations........................... F-4..... F-5
Consolidated Statements of Stockholders' Equity [Deficit]....... F-6.....
Consolidated Statements of Cash Flows............................ F-7..... F-9
Notes to Consolidated Financial Statements....................... F-10.... F-29
Independent Auditor's Report on Supplemental Schedule............ S-1.....
Schedule II - Valuation and Qualifying Accounts.................. S-2..... S-4
. . . . . . . . . . . . . . .
26
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Primedex Health Systems, Inc. and its affiliates as of October 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity [deficit], and cash flows for each of the three fiscal years in the
period ended October 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Primedex Health Systems, Inc. and its affiliates as of October 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 31, 1997,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 24 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has negative working capital which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 24. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey February 6, 1998, Except as to Note 24[C] for Which the
Date is February 25, 1998, Note 24[D] for Which the Date is February 26,1998,
and Notes 24 [A] and [B] for Which the Date is February 27, 1998
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
October 31,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
Cash and Cash Equivalents $ 129,517 $ 151,870
Accounts Receivable - Net 16,933,340 19,751,419
Unbilled Receivables 693,847 532,138
Other Receivables - Current 2,390,755 --
Due from Related Party 55,568 --
Due from Employee -- 100,333
Other 765,467 826,826
----------- -----------
Total Current Assets 20,968,494 21,362,586
----------- -----------
Property and Equipment - Net 33,401,161 38,737,846
----------- -----------
Other Assets:
Accounts Receivable - Net 5,810,814 6,104,012
Due from Related Parties 897,133 899,143
Other Receivables 899,896 --
Goodwill - Net 20,168,729 31,821,606
Other 4,193,696 7,005,979
----------- -----------
Total Other Assets 31,970,268 45,830,740
----------- -----------
Total Assets $86,339,923 $105,931,172
=========== ============
See Notes to Consolidated Financial Statements.
F-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
October 31,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 319,481 $ 250,792
Accounts Payable 4,010,861 5,743,410
Accrued Expenses - Current 5,270,787 4,594,585
Accrued Expense - Professional Fees - Current 1,596,916 3,025,049
Notes and Leases Payable - Current 20,341,372 28,200,547
Accrued Estimated Closing Costs - Current -- 157,092
Accrued Restructuring Costs 1,062,026 895,622
Deferred Revenue - Covenant not-to-compete - Current 200,000 --
Due to Related Party -- 88,567
Other 194,084 1,033,571
----------- -----------
Total Current Liabilities 32,995,527 43,989,235
----------- -----------
Long-Term Liabilities:
Subordinated Debentures Payable 22,923,000 25,829,000
Notes and Leases Payable 51,445,256 57,199,989
Deferred Revenue - Covenant not-to-compete 1,666,666 --
Accrued Expenses 225,292 1,448,226
Accrued Expenses - Professional Fees 582,998 987,057
----------- -----------
Total Long-Term Liabilities 76,843,212 85,464,272
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Minority Interest 1,430,788 1,338,979
----------- -----------
Stockholders' Equity [Deficit]:
Common Stock - $.01 Par Value, 100,000,000 Shares
Authorized; 40,432,260 and 40,232,260 Shares Issued;
38,807,260 and 38,932,260 Shares Outstanding at
October 31, 1997 and 1996, Respectively 404,322 402,322
Paid-in Capital 99,434,150 99,411,150
Deferred Compensation - Net -- (788,025)
Retained Earnings [Deficit] (124,153,129) (123,405,034)
------------ ------------
Totals (24,314,657) (24,379,587)
Less: Treasury Stock - 1,625,000 and 1,300,000 Shares
at Cost at October 31, 1997 and 1996, Respectively (614,947) (481,727)
----------- -----------
Total Stockholders' Equity [Deficit] (24,929,604) (24,861,314)
----------- -----------
Total Liabilities and Stockholders' Equity [Deficit] $86,339,923 $105,931,172
=========== ============
See Notes to Consolidated Financial Statements.
F-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenue:
Revenue $132,569,387 $111,380,904 $88,884,136
Less: Allowances 65,550,880 54,842,397 43,539,257
------------ ----------- -----------
Net Revenue 67,018,507 56,538,507 45,344,879
------------ ----------- -----------
Operating Expenses:
Operating Expenses 58,724,827 49,800,034 40,599,493
Depreciation and Amortization 8,783,419 6,040,256 8,625,336
Provision for Bad Debts 1,962,837 2,531,337 1,154,890
Restructuring Costs 662,026 -- --
Impairment Loss of Long-Lived Assets 4,553,783 -- 47,744,453
------------ ----------- -----------
Total Operating Expenses 74,686,892 58,371,627 98,124,172
------------ ----------- -----------
Loss from Operations (7,668,385) (1,833,120) (52,779,293)
------------ ----------- -----------
Other [Expenses] and Revenue:
Interest Expense (9,844,505) (7,892,653) (6,184,302)
Interest Income 295,168 258,390 295,609
Gain on Sale of Subsidiaries and Divisions 16,082,302 143,750 --
Other [Expense] Income (637,850) 934,505 409,741
------------ ----------- -----------
Total Other Income [Expenses] 5,895,115 (6,556,008) (5,478,952)
------------ ----------- -----------
Loss Before Minority Interest in [Income]
Loss of Subsidiaries, Equity in Loss of
Investees, and Extraordinary Item (1,773,270) (8,389,128) (58,258,245)
Minority Interest in [Income] of Subsidiaries (569,931) (808,136) (298,104)
Equity in Loss of Investees -- (313,649) --
------------ ----------- -----------
Loss from Continuing Operations (2,343,201) (9,510,913) (58,556,349)
Discontinued Operation:
Loss from Operations of Discontinued Business
Segments [Net of Income Taxes of $-0- for the
Year Ended October 31, 1995] -- -- (3,813,314)
------------ ----------- -----------
Loss Before Extraordinary Item (2,343,201) (9,510,913) (62,369,663)
Extraordinary Item - Gains from Extinguishment
of Debt [Net of Income Taxes of $-0- for the
Years ended October 1997, 1996 and 1995] 1,595,106 1,149,817 940,884
------------ ----------- -----------
Net Loss $ (748,095) $(8,361,096) $(61,428,779)
============ =========== ============
See Notes to Consolidated Financial Statements.
F-4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Loss Per Share:
Loss from Continuing Operations $ (.06) $ (.24) $ (1.54)
Loss from Operations of Discontinued
Business Segment [Net of Income Taxes] -- -- (.09)
------------ ----------- -----------
Loss Before Extraordinary Item [Net of Income
Taxes] (.06) (.24) (1.63)
Extraordinary Item .04 .03 .02
------------ ----------- -----------
Net Loss Per Share $ (.02) $ (.21) $ (1.61)
============ =========== ===========
Weighted Average Common Shares Outstanding 38,853,904 39,176,281 40,031,461
============ =========== ===========
See Notes to Consolidated Financial Statements.
F-5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Total
Common Stock Retained Stockholders'
Number of Par Value Treasury Paid-in Deferred Earnings Equity
Shares Amount Stock Capital Compensation [Deficit] [Deficit]
Balance - October 31, 1994 40,026,510 400,265 -- 102,243,835 -- (53,615,159) 49,028,941
Capitalization of Additional
Advances - CareAd -- -- -- (2,896,628) -- -- (2,896,628)
Issuance of Common Stock 200,000 2,000 -- 18,000 -- -- 20,000
Conversion of Subordinated
Debentures to Common Stock 4,250 42 -- 33,958 -- -- 34,000
Net [Loss] for the Year Ended
October 31, 1995 -- -- -- -- -- (61,428,779) (15,242,466)
-------- -------- ---------- ---------- ---------- ----------- -----------
Balance - October 31, 1995 40,230,760 402,307 -- 99,399,165 -- (115,043,938) (15,242,466)
Conversion of Subordinated
Debentures to Stock 1,500 15 -- 11,985 -- -- 12,000
Acquisition of DIS--Deferred
Compensation -- -- -- -- (796,653) -- (796,653)
Amortization of Deferred
Compensation -- -- -- -- 8,628 -- 8,628
Purchase of Treasury Stock -- -- (481,727) -- -- -- (481,727)
Net [Loss] for the Year Ended
October 31, 1996 -- -- -- -- -- (8,361,096) (8,361,096)
-------- -------- ---------- ---------- ---------- ---------- -----------
Balance - October 31, 1996 40,232,260 402,322 (481,727) 99,411,150 (788,025) (123,405,034 (24,861,314)
Issuance of Common Stock 200,000 2,000 -- 23,000 -- -- 25,000
Amortization of Deferred
Compensation -- -- -- -- 5,752 -- 5,752
Write-off Deferred Compensation -- -- -- -- 782,273 -- 782,273
Purchase of Treasury Stock -- -- (133,220) -- -- -- (133,220)
Net [Loss] for the Year Ended
October 31, 1997 -- -- -- -- -- (748,095) (748,095)
-------- -------- ---------- ---------- ---------- ---------- -----------
Balance - October 31, 1997 40,432,260 $404,322 $ (614,947) $99,434,150 $ -- $(124,153,129) $(24,929,604)
========== ======== ========== =========== ========== ============= ============
See Notes to Consolidated Financial Statements.
F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Operating Activities:
Net [Loss] $ (748,095) $(8,361,096) $(61,428,779)
------------ ----------- ------------
Adjustments to Reconcile Net [Loss] to Net Cash
Provided [Used] by Continuing Operations:
Discontinued Operations -- -- 3,813,314
Equity in Loss of Investees -- 313,649 --
Depreciation and Amortization 8,783,419 6,040,256 8,625,336
Amortization of Management Fee Modification 143,296 102,449 --
Write-off Offering Costs-Bond Retirement 187,524 -- --
Amortization of Purchase Discount (889,083) -- --
Minority Interest in Income of Subsidiaries 569,931 808,136 298,104
Provision for Bad Debts and Allowance
Adjustments 1,505,344 2,531,337 1,154,890
Loss [Gain] on Sale of Assets 824,533 (365,728) 279,646
Provision for Restructuring 662,026 -- --
Imputed Interest Income (96,247) (95,981) (206,734)
Gain on Sale of Subsidiaries and Divisions (16,082,302) (143,750) --
Deferred Revenue - Covenant Not-to-Compete (133,334) -- --
Write-off Deposits and Other Assets 258,748 -- --
Write Down of Long-Lived Assets 4,553,783 -- 47,744,453
Extraordinary Gain from Extinguishment
of Debt (1,595,106)(1,149,817) (940,884)
Compensation from Sale of Stock -- -- 18,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Other Current Assets (39,767) (171,621) 57,934
Accounts Receivable 479,918 407,455 (2,272,574)
Unbilled Receivables (402,682) (227,267) 641,299
Due from Employee -- 100,333 --
Other Assets (178,964) 669,591 348,104
Increase [Decrease] in:
Due to/from Related Parties (88,567) (178,392) (337,121)
Accounts Payable and Accrued Expenses (179,971) 756,204 (610,490)
Accrued Restructuring Costs (395,622) -- --
Other Current Liabilities 148,798 (1,434,699) (146,187)
------------ ----------- ------------
Total Adjustments (1,964,325) 7,962,155 58,467,090
------------ ----------- -----------
Cash [Used] by Continuing Operations (2,712,420) (398,941) (2,961,689)
Cash [Used] Provided by Discontinued
Operations (157,092) (574,078) 14,845,685
---------- ----------- -----------
Net Cash - Operating Activities - Forward $ (2,869,512) $ (973,019) $11,883,996
See Notes to Consolidated Financial Statements.
F-7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Net Cash - Operating Activities - Forwarded$ (2,869,512) $ (973,019) $11,883,996
------------ ------------ -----------
Investing Activities:
Acquisitions of Imaging Centers - Net of Cash
Acquired (2,131,498) (732,160) (1,076,096)
Purchase of Property and Equipment (3,098,179) (682,472) (592,707)
Proceeds from Sale of Unconsolidated Subsidiary -- 143,750 --
Proceeds - Sale of Divisions, Centers and
Equipment 26,001,073 -- --
Payment for Modification of Management Fee -- (1,100,000) --
Purchase of Marketable Securities -- -- (2,478,707)
Sale of Marketable Securities -- 1,998,458 522,000
Proceeds from Sale of Stock -- -- 2,000
Loans to Related Parties (30,000) -- --
Loans to Unconsolidated Subsidiary -- (1,642,714) --
Receipts on Notes from Related Parties -- 1,937,500 --
------------ ----------- -----------
Net Cash - Investing Activities 20,741,396 (77,638) (3,623,510)
------------ ----------- -----------
Financing Activities:
Cash Overdraft 68,689 250,792 --
Principal Payments on Capital Leases
and Notes (17,741,045) (7,515,599) (8,268,319)
Proceeds from Short-Term Borrowings
on Notes Payable 2,373,554 5,460,229 1,784,067
Purchase of Treasury Stock (133,220) (481,727) --
Purchase of Subordinated Bond Debentures (1,984,093) -- --
Advances - Care Advantage -- -- (2,896,632)
Payments on Stockholder Notes Payable -- -- (500,000)
Joint Venture Distribution (478,122) (440,000) (100,000)
------------ ----------- ------------
Net Cash Financing Activities (17,894,237) (2,726,305) (9,980,884)
------------ ----------- -----------
Net [Decrease] in Cash and Cash Equivalents (22,353) (3,776,962) (1,720,398)
Cash and Cash Equivalents - Beginning of Years 151,870 3,928,832 5,649,230
----------- ----------- -----------
Cash and Cash Equivalents - End of Years $ 129,517 $ 151,870 $ 3,928,832
============ =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 10,070,345 $ 7,133,723 $ 5,957,981
Income Taxes $ -- $ -- $ --
See Notes to Consolidated Financial Statements.
F-8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company entered into capital leases or financed equipment through notes
payable for approximately $5,965,000, $3,500,000 and $1,156,000 for the years
ended October 31, 1997, 1996 and 1995, respectively.
During fiscal 1996 and 1995, subordinated debentures totaling $12,000 and
$34,000, respectively, were converted into 1,500 and 4,250 shares, respectively,
of the Company's common stock.
During the year ended October 31, 1997, the Company's DIS subsidiary
wrote-off approximately $1,515,000 in net property and equipment, approximately
$2,875,000 in net goodwill, approximately $230,000 in other assets and
approximately $785,000 in deferred compensation related to the Parkside closure.
The Company recorded a net impairment loss of approximately $4,550,000 during
the twelve months ended October 31, 1997 [See Note 2] after receiving $400,000
in exchange for the assets subsequent to closing the center.
During the year ended October 31, 1997, the Company acquired the assets and
related liabilities of Woodward Park Imaging Center ["WWP"] in Fresno,
California; with the acquisition, the Company recorded approximately $2,075,000
in net property and equipment, approximately $725,000 in other receivables,
approximately $2,600,000 in notes payable and capital leases and approximately
$300,000 in accrued expenses [See Note 2].
During fiscal 1996, the Company acquired medical equipment of approximately
$21,000,000 as part of the FDI and DIS acquisitions along with the issuance of
notes payable and assumption of liabilities thereon [See Note 2].
During the year ended October 31, 1997, the Company issued 200,000 shares of
common stock and recorded $25,000 as due from employee.
See Notes to Consolidated Financial Statements.
F-9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
[A] Organization, Business and Basis of Presentation - Primedex Health Systems,
Inc. ["PHS"] was incorporated on October 21, 1985 and is principally engaged in
the diagnostic imaging business in the state of California.
The accompanying combined and consolidated financial statements include the
accounts of PHS, Radnet Management, Inc. ["Radnet"], Diagnostic Imaging
Services, Inc. ["DIS"], Primedex Corporation ["PC"] and Radnet Managed Imaging
Services, Inc. ["RMIS"] [Collectively "the Company"]. Radnet is combined and
consolidated with Beverly Radiology Medical Group III ["BRMG"], Radnet Sub, Inc.
["Tower"], Woodward Park Imaging Center ["WWP"] and three joint ventures:
Imaging Center of La Habra ["La Habra"], Westchester Imaging Group ["WIG"] and
Wilshire Imaging Group ["Downtown L.A."], which was closed in late 1994. DIS is
combined and consolidated with one joint venture, Scripps Chula Vista Imaging
Center, L.P. ["SCV"]. RMIS is combined and consolidated with Future
Diagnostics, Inc. ["FDI"] which was sold in September 1997 to an unrelated
party. Acquired entities are included in operations from the date of
acquisition onward. All intercompany transactions and balances have been
eliminated.
Medical services and supervision at most of the Company's wholly-owned imaging
centers are provided through BRMG and through other various independent
physicians and physician groups. BRMG is combined and consolidated with Pronet
Imaging Medical Group, Inc. ["PN"] and Beverly Radiology Medical Group ["BRMG1"]
which is owned by a shareholder of PHS. Radnet and DIS provide non-medical,
technical and administrative services including operation of medical equipment,
facility maintenance, marketing, advertising, billing and collection, and other
financial and administrative services. As compensation for their management and
other services at the various centers, Radnet receives a management fee. In
connection with the imaging centers in which it is a joint venture partner,
Radnet and DIS also share in joint venture income.
For many of the patients serviced at the Company's centers, the cost of the
service is borne by third party payors. The difference between the Company's
list price for such services and the amount the Company receives from such third
party payors results in contractual adjustments.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of ImmunoTherapeutics, Inc. ["ITI"]. For fiscal 1993, the investment was
accounted for using the equity method due to the decline in percentage of
ownership during the year to 42%. As of October 31, 1995, the Company owned
approximately 19% of ITI and accounted for this investment using the cost
method, which was $-0-. In November 1995, this investment was sold for $143,750.
The Company owns 19% of the outstanding capital stock of Viromedics, Inc.
["VMI"] at October 31, 1997. This investment is accounted for using the cost
method, which at October 31, 1997 and 1996 was $-0-.
[B] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
carrying amount of cash and cash equivalents approximates their fair value.
[C] Property and Equipment and Depreciation and Amortization - Property and
equipment are stated at cost, less accumulated depreciation and amortization,
and includes equipment held under capital lease agreements. Depreciation, which
includes amortization of leased equipment, is computed by the straight-line
method and is based on the estimated useful lives of the various assets ranging
from three to forty years. Leasehold improvements are amortized over the shorter
of the life of the lease or their estimated useful life, using the straight-line
method.
F-10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[D] Accounts Receivable and Allowances - Accounts receivable are stated at gross
amounts billed less allowances. A significant portion of the Company's accounts
receivable involve third party payors, primarily insurance companies. The
collection cycle on accounts receivable from continuing operations extends up to
thirty-six months with most personal injury cases having the longer collection
cycle. The current portion of accounts receivable are the amounts which are
reasonably expected to be collected within a year, based upon historical
collection data.
Accounts receivable as of October 31, 1997 are shown net of allowances for
doubtful accounts of $26,390,309 of which $19,637,802 has been deducted from
current receivables and $6,752,507 has been deducted from noncurrent
receivables. Accounts receivable as of October 31, 1996 are shown net of
allowances for doubtful accounts of $25,258,304 of which $18,386,423 has been
deducted from current receivables and $6,871,881 has been deducted from
noncurrent receivables.
[E] Intangibles - Goodwill is recognized in business combinations accounted for
under the purchase method of accounting and represents the excess of the
purchase price over the fair value of identifiable net assets acquired. Goodwill
is amortized on a straight-line basis over twenty years which is the period
during which the Company expects to receive benefits. Organization costs,
offering costs, loan fees, covenants-not-to compete and management fee reduction
buyout are recorded at cost and amortized on a straight-line basis over their
estimated useful lives which range from one to twenty years.
[F] Long-Term Accrued Expenses - Long-term accrued expenses consist primarily of
outside professional services and billing fees related to the accounts
receivable classified as long-term.
[G] Revenue Recognition and Accrued Revenues - Revenue is recognized at the time
services are provided. Accrued revenues consist primarily of services performed
prior to period end, which were not billed. Billing is usually completed within
the following month.
[H] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these estimates.
[I] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and cash
equivalents and accounts receivable arising from its normal business activities.
The Company routinely assesses the financial strength of its customers and third
party payors and, based upon factors surrounding their credit risk, establishes
an allowance for uncollectible accounts, and as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is limited. The
Company places its cash and cash equivalents with high credit quality financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. The Company had $515,424 and
$559,757 as of October 31, 1997 and 1996, respectively, with financial
institutions subject to a credit risk beyond the insured amount. The Company has
not experienced any losses in such accounts. The Company does not require
collateral or other security to support financial instruments subject to credit
risk.
[J] Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also reevaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives. As of October 31, 1997, management expects these
assets to be fully recoverable.
F-11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[K] Stock Options Issued to Employees - The Company adopted SFAS No. 123 on
November 1, 1996 for financial note disclosure purposes and will continue to
apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion
No. 25 for financial reporting purposes.
[L] Reclassifications - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform to the current year presentation.
[2] Business Combinations - Acquisitions, Sales and Divestitures
The Company acquired certain assets and liabilities of Primedex Corporation
["PC"] in January 1992 for $46,250,000 consisting of cash and stock. PC was a
southern California based medical management company that provided services to
four medical corporations, which in turn provided medical/legal evaluation
services and medical services to worker's compensation claimants. The
acquisition was accounted for under the purchase method and resulted in goodwill
of approximately $7,300,000, which was written off in July 1993 in connection
with the discontinuance of PC's operations [See Note 20]. In August 1995,
substantially all of the discontinued operation's remaining assets were sold to
an unrelated party for approximately $9,448,000. The sale resulted in a loss of
approximately $3,800,000.
In April of 1992, the Company acquired certain assets and liabilities of Radnet
for approximately $66,000,000 consisting of stock, cash and a note payable. The
Company also loaned $6,000,000 to the sellers [See Note 7]. The acquisition was
accounted for under the purchase method resulting in goodwill of approximately
$51,500,000. The majority of this goodwill was written off in fiscal 1995 when
the Company adopted Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" [See Note 6].
In November of 1995, the Company acquired all of the outstanding capital stock
of Future Diagnostics, Inc. ["FDI"] for $2,345,000 consisting of cash, notes,
and assumed liabilities of approximately $855,000 resulting in goodwill of
approximately $3,200,000. The acquisition was accounted for as a purchase. FDI
arranges for the provision of imaging services for large payors [such as large
employers and insurance carriers] through an approximately 250 imaging center
network primarily in California. Effective September 3, 1997, the Company sold
100% of the outstanding capital stock of FDI to an unrelated party for
approximately $13,500,000 in cash, notes receivable and buyer-assumed
liabilities.
The sale resulted in a gain of approximately $10,400,000.
In March of 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ["DIS"] for $4,000,000 with a five-year
warrant to acquire an additional 1,521,739 shares of DIS stock at $1.60 per
share. In addition, the Company established a five-year $1 million revolving
loan with DIS. The Company utilized $500,000 in cash and borrowed approximately
$4.5 million from DVI Financial Services, Inc. ["DVI"] to finance the
transaction. At that time, DIS owned and operated ten imaging centers providing
high quality diagnostic imaging services located in the Los Angeles and San
Diego areas, as well as 15 ultrasound laboratories located in hospitals, 13
mobile ultrasound units servicing hospitals and office buildings, and one mobile
MRI servicing a single hospital. DIS also operates a cancer care therapy center
in Temecula, California. During the four-month period ended July 31, 1996, the
investment yielded a loss to the Company of $313,649. In August 1996, the
Company issued a five-year interest-only promissory note for $3,272,046 plus
five-year warrants to purchase approximately 4,000,000 shares of PHS common
stock at $.60 per share to acquire an additional 3,228,046 shares of DIS common
stock. The purchase made PHS the majority shareholder in DIS with approximately
59% ownership. The acquisitions were accounted for as a purchase resulting in
goodwill of approximately $7.2 million.
During fiscal 1997, the Company acquired an additional 1,293,663 shares of DIS
common stock from various unrelated parties for approximately $1,640,000
increasing its total ownership to approximately 70%. Subsequent to year-end, in
various transactions through February 27, 1998, the Company acquired
approximately 528,000 additional shares of DIS common stock for $597,144
increasing its ownership to approximately 74%.
F-12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[2] Business Combinations - Acquisitions, Sales and Divestitures [Continued]
The following pro forma unaudited information presents the results of the
combined operations of Primedex Health Systems, Inc. and affiliates, FDI and
DIS, treating FDI and DIS as if they were subsidiaries for the entire years
ended October 31, 1996 and 1995 with pro forma adjustments as if the
acquisitions had been consummated as of November 1, 1994. This pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been made as of November 1, 1994 or results which may occur in
the future.
[Unaudited]
Years ended
October 31,
1 9 9 6 1 9 9 5
------- -------
Net Revenues $ 74,301,315 $ 78,165,692
Net [Loss] $(12,361,971) $(62,765,184)
Net Income Per Share $ (.32) $ (1.57)
Effective March 1, 1997, the Company sold the assets and related liabilities of
four of DIS's hospital-based MRI facilities and its ultrasound division to
Diagnostic Health Services, Inc. ["DHS"] for $15,972,720 in cash including
$2,000,000 in ten-year covenants not-to-compete. The covenants not-to-compete
were split equally between PHS and DIS and are classified as "Deferred Revenue"
on the Company's financial statements. The Company recognized a gain on the sale
of approximately $5,600,000 which included the write-off of approximately
$2,660,000 of net acquisition goodwill. In addition, a discounted receivable of
approximately $1,190,000 utilizing a 11.75% interest rate was recorded on the
Company's books for post-closing payments of $500,000 each to be made by DHS to
DIS on the first, second and third anniversaries of the closing date. The
Company has an option to receive these payments in the form of DHS common stock
valued at the mean average of the reported closing price of such common stock as
reported on the NASDAQ National Market for the five consecutive trading days
ending on the third day immediately prior to the closing date ["the Agreed
Value"].
As a result of a continuing deteriorating business climate and other business
reasons at DIS's Santa Monica ["Parkside"] facility, on June 25, 1997, the
Company decided to close substantially all of its operations at the facility on
or about August 29, 1997. Due to this decision, the Company recognized an
impairment loss of approximately $4,550,000 which included the write-off of
approximately $1,530,000 of net acquisition goodwill. In May 1997, the Company
sold the facility's MRI for $65,000 to an unrelated party; in August 1997, the
Company's remaining assets were sold for approximately $400,000 to another party
who also assumed the centers building lease. The Company still operates a
separate entity, Parkside Radiology Women's Center ["Parkside Womens"], which
provides ultrasound, mammography, stereotactic breast biopsy and bone
densitometry services.
The Company has acquired various percentage interests in imaging centers and
other business ventures in transactions accounted for as purchases generally
involving a mixture of cash, notes, common stock and warrants as follows:
In a series of transactions during fiscal 1993, 1994 and 1995, Radnet acquired
the Santa Clarita Imaging Center Limited Partnership for $102,000 cash.
F-13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[2] Business Combinations - Acquisitions, Sales and Divestitures [Continued]
In November of 1994, Radnet acquired the remaining 50% interest in the Lancaster
Radiology Medical Group Joint Venture for $872,194 consisting of cash and a note
and resulting in goodwill of approximately $900,000.
In January of 1995, the remaining 50% interest of the Antelope Valley MRI, L.P.
was acquired for $1,700,000 consisting of cash and a note resulting in goodwill
of approximately $2,800,000 which was subsequently written off [See Note 6].
In January of 1995, Radnet acquired the assets of Women's Diagnostic Medical
Group for cash of $200,000. The transaction resulted in goodwill of $425,000.
Effective August 1, 1996, DIS acquired HealthCare Imaging Center ["HCI"] for
$200,000 and assumed liabilities resulting in goodwill of $10,000.
Effective October 1, 1996, DIS acquired substantially all of the assets of
Corona Imaging Center by assuming liabilities of $434,500. No goodwill was
recorded in this transaction.
Effective January 1, 1997, the Company's DIS subsidiary opened its Scripps Chula
Vista MRI, L.P. ["SCV"] servicing patients in San Diego. The Company and Scripps
Health are equal partners with the Company serving as managing partner.
Effective March 1, 1997, the Company acquired the assets and related liabilities
of Woodward Park Imaging Center ["WWP"] in Fresno for approximately $200,000 in
notes payable and assumed liabilities resulting in goodwill of approximately
$90,000. WWP is a full service, multi-modality imaging center providing MRI, CT,
mammography, ultrasound and general diagnostic radiology services.
During the year ended October 31, 1997, the Company acquired the assets of Las
Posas Medical Imaging for $35,000 in cash and relocated DIS's Camarillo facility
to its location. No goodwill was recorded in this transaction.
[3] Marketable Securities
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at cost which approximates fair value.
The Company had no marketable securities at October 31, 1997 and 1996.
During the years ended October 31, 1997, 1996 and 1995, the Company converted
available for sale securities held during the year into cash of $-0-, $1,998,458
and $522,000, respectively. Gains on sale of securities are insignificant. The
Company uses specific identification as the basis on which cost was determined
in calculating realized gains and losses.
F-14
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[4] Fair Value of Financial Instruments
Estimated fair value of the Company's financial instruments are as follows:
1 9 9 7 1 9 9 6
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
Due from Related Party - Long-Term $ 897,133 $ 897,133 $ 899,143 $ 899,143
Debt Maturing within One Year (14,372,462) (14,372,462) (21,435,965) (21,435,965)
Long-Term Debt (31,817,836) (25,684,102) (28,011,177) (25,088,478)
Subordinated Debentures (22,923,000) (18,521,708) (25,829,000) (23,631,592)
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, cash overdraft, due from/to related parties and
current and short-term debt, it was assumed that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturities. The fair value of the amounts due from related party -
long-term and long-term debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The fair value of the
subordinated debentures is the estimated value of debentures available to
repurchase at current market rates over the bond term including an estimated
interest payment stream.
[5] Property and Equipment and Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of
October 31, 1997 and 1996 are as follows:
1 9 9 7 1 9 9 6
------- -------
Land $ 1,763,773 $ 1,763,773
Building 2,371,822 3,354,880
Medical Equipment 15,055,818 9,927,006
Office Equipment and Furniture and Fixtures 3,025,180 2,425,521
Leasehold Improvements 5,461,420 5,538,761
Property Held Under Capital Leases 27,954,039 35,944,280
----------- ----------
Totals 55,632,052 58,954,221
Less: Accumulated Depreciation and Amortization (22,230,891) (20,216,375)
Property and Equipment - Net $33,401,161 $38,737,846
---------------------------- =========== ===========
Depreciation expense for fiscal 1997, 1996 and 1995 was approximately
$6,650,000, $4,300,000 and $4,200,000, respectively.
For property held under capital leases, amortization expense for the years ended
October 31, 1997, 1996 and 1995 was approximately $3.3 million, $2.8 million and
$2.0 million and the accumulated amortization was approximately $9.7 million and
$10.9 million, respectively.
Certain assets were written down during fiscal 1997 and 1995 [See Note 6].
F-15
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[6] Intangible Assets
A breakdown of intangible assets is as follows:
Accumulated
Cost Amortization Net
October 31, 1997:
Goodwill $ 23,329,444 $ 3,160,715 $20,168,729
===========
Covenants Not-to-Compete $ 550,000 $ 412,500 $ 137,500
===========
October 31, 1996:
Goodwill $ 34,899,322 $ 3,077,716 $31,821,606
===========
Covenants Not-to-Compete $ 2,005,196 $ 1,172,317 $ 832,879
===========
Covenants not-to-compete are included in the caption "Other Assets" on the
balance sheet.
Amortization expense of approximately $2,130,000, $1,700,000 and $4,400,000 was
recognized for the years ended October 31, 1997, 1996 and 1995, respectively.
On October 31, 1995, the Company adopted SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company recorded an impairment loss of $47,744,453 from writing down
goodwill, property and equipment and covenants not-to-compete. Facts and
circumstances leading to the impairment loss consist principally of the
application of the measurement techniques of SFAS No. 121 to the cash flows of
the Company's individual imaging centers as it relates to projections of cash
flows which are insufficient to justify the carrying values of certain
long-lived assets. Fair value was determined for individual centers primarily
through estimating the fair value of their property, plant and equipment
consisting primarily of medical equipment. The impairment loss recorded is the
difference between these estimated fair values and the carrying values of all
centers, including goodwill allocated to individual centers in connection with
the Radnet acquisition, based on pro-rata estimated fair values at the date of
the acquisition. Significant assumptions for the cash flow forecast are a ten
year period and insignificant changes to revenues and costs over the projected
period.
During the years ended October 31, 1997 and 1996, the Company recorded goodwill
of $1,659,623 and $7,173,220, respectively, for the acquisition of DIS common
stock from various parties.
During the year ended October 31, 1997, net goodwill of $9,688,034 was
written-off in connection with the closure and eventual sale of Parkside, the
sale to DHS and the closing of Murrieta [See Note 2].
During the year ended October 31, 1997, the Company's DIS subsidiary recorded
$614,375 in goodwill relating to its acquisition of additional units of Valley
Regional Oncology Center ["VROC"] and Temecula Valley Imaging Center ["TVIC"],
and the Company recorded goodwill of $92,382 upon its acquisition of Woodward
Park Imaging Center ["WWP"].
Effective September 3, 1997, the Company sold its FDI subsidiary and wrote-off
net goodwill of $2,925,312.
F-16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[7] Due from Related Parties
The amount due from related parties originally consisted of a $6,000,000 loan to
the sellers of Radnet [See Note 2] discounted at a 7% interest rate. In October
1993, the installment note due February 1994 was extended until August 1994. In
August of 1994, the Company and the two former owners agreed to offset
approximately $3,000,000 of the loan against $2,500,000 due to them by PHS and
the waiver of rights to payments aggregating $500,000. The remaining $3,000,000
of receivables were further extended in October of 1994 from February 1, 1995 to
February 1, 1997 in consideration for the two individuals agreeing to utilize
their personal assets as collateral for future loans. A discount of
approximately $500,000 was recorded in fiscal 1994 on the transaction which was
reflected as a reduction to interest income. In April 1996, one of the two
individuals, who is currently an employee of the Company, repaid his portion of
the notes valued at $1,400,000 and renegotiated his employment contract for a
reduction in his compensation and an extension of his employment term. In August
1996, the remaining note holder repaid $500,000 of his $1,500,000 note due in
February 1997. In consideration for the advance payment, the Company offered to
extend the remaining $1,000,000 due to February 1998. The note was further
extended in January 1998 to February 1999, which was discounted at an 8%
interest rate resulting in a discounted value of $897,133 as of October 31,
1997, and a charge to earnings of $68,453. The note is secured by stock of PHS,
which was issued in connection with the Radnet acquisition.
In April 1996, the Company renegotiated the existing management and service
agreement with BRMG which provides medical services and supervision at several
of the Company's imaging centers. BRMG is a partnership between Pronet Imaging
Medical Group, Inc. ["PN"] and Beverly Radiology Medical Group ["BRMG1"] which
is owned by an officer/stockholder of the Company. The Company's management fee
was increased from 79% to 81% of Practice Billing Receipts in consideration for
which the Company paid $1,100,000 to BRMG, which amount is being amortized over
the approximate six-year remaining term of the agreement. The $1,100,000 amount
was arrived at by negotiation between the parties based upon the discounted
value of the estimated additional benefit to the Company over the remaining term
of the agreement taking into account recent past and future estimated Practice
Billing Receipts at the imaging centers managed by BRMG.
During fiscal 1996, the Company loaned $100,000 to an employee of the Company
which was to be repaid within two years. At October 31, 1997, as part of the
restructuring provision [see Note 9], the $100,000 was expensed as consulting
fees.
DIS had a related party loan payable of approximately $90,000 due, without
interest, to an officer/stockholder which was paid in full during fiscal 1997.
During the year ended October 31, 1997, the Company advanced $30,000 to an
officer of the Company, at no interest, which will be repaid within the next
year. In addition, the Company loaned another officer of the Company $25,000,
with interest at 6%, which was repaid in February 1998. Interest income in the
amount of $568 was recorded on this loan during the year ended October 31, 1997.
Included in other income for the year ending October 31, 1996 are management
fees amounting to $335,000 charged to DIS prior to PHS acquiring a majority
interest in DIS in August 1996.
F-17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[8] Income Taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset as of October 31, 1997 and 1996 are as
follows:
October 31,
1 9 9 7 1 9 9 6
Tax Basis of Intangible Assets in Excess of Book
Basis $13,600,000 $15,200,000
Book Basis of Fixed Assets in Excess of Tax Basis (10,500,000) (12,000,000)
Net Operating Loss Carryforwards 27,500,000 26,400,000
Deferred Tax Asset 30,600,000 29,600,000
Valuation Allowance for Deferred Tax Asset (30,600,000) (29,600,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
---------------------- =========== ===========
The valuation allowance of $30,600,000 and $29,600,000 at October 31, 1997 and
1996, respectively, represent increases of $1,000,000 and $3,600,000,
respectively, over the preceding years.
The Company has net operating loss carryforwards of approximately $68,800,000
which expire as follows:
Years ended
2007 $ 1,500,000
2008 21,900,000
2009 16,900,000
2010 17,200,000
2011 8,600,000
2012 2,700,000
-----------
Total $68,800,000
A reconciliation between the statutory federal income tax rate and the effective
rate of income tax expense for each of the three years during the period ended
October 31, 1997 follows:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Statutory Federal Income Tax Rate (34%) (34%) (34%)
Earnings [Loss] of Unconsolidated Subsidiaries, Joint
Ventures and Affiliate 22% (11%) (1%)
Other -- (2%) --
Change in Valuation Allowance 12% 47% 35%
--------- --------- ---------
Effective Income Tax Rate -- -- --
------------------------- ========= ========= =========
F-18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[9] Provision for Closed and Restructured Imaging Centers
At October 31, 1996, approximately $900,000 remained on the Company's books for
legal and settlement costs related to leases for two closed centers. One
center's outstanding obligation with its building lessor was settled in fiscal
1996 for $950,000 of which approximately $400,000 remained to be paid as of
October 31, 1996. During fiscal 1997, the $400,000 was paid in full settlement
of that building lessors outstanding liability. The other closed site's legal
and settlement costs were estimated to be approximately $500,000.
During the year ended October 31, 1997, the Company recorded an additional
restructuring provision of $662,026 which included the write-off of $100,000 of
loans made by the Company to an employee [See Note 7], an increase in the
reserve for a closed imaging center and severance and contract buy-out costs
related to the restructuring of the Parent Company's management. As of October
31, 1997, a $1,062,026 provision remains on the Company's books, which includes
$669,000 for final settlement costs associated with a lease which was paid in
full in November 1997, and $393,206 for severance and contract buyout costs for
four employees.
[10] Stock Options and Warrants
[A] Stock Options - An incentive stock option plan, which was adopted by the
Company and approved by the shareholders, in November of 1992, reserves
2,000,000 shares of the Company's common stock. Options granted under the plan
are intended to qualify as incentive stock options under existing tax
regulations.
In addition, the Company has issued non-qualified stock options from time to
time in connection with acquisitions and for other purposes.
The following table summarizes the activity in common shares subject to
incentive stock options and non-qualified options for the three years ended
October 31, 1997:
Weighted Average
Number of SharesExercise Price
[Thousands]
October 31, 1994 - Balance 5,192 $ 7.25
Granted 800 $ .125
Exercised -- $ --
Canceled or Expired 3,256 $ 6.60
------------- ---------
October 31, 1995 - Balance 2,736 $ 6.06
Granted 859 $ .34
Exercised -- $ --
Canceled or Expired 600 $ 1.31
------------- ---------
October 31, 1996 - Balance 2,995 $ 4.49
Granted 200 $ .43
Exercised 200 $ .125
Canceled or Expired -- $ --
------------- ---------
Options Outstanding and Exercisable at
October 31, 1997 2,995 $ 4.51
-------------------------------------- ============= =========
F-19
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[10] Stock Options and Warrants [Continued]
[A] Stock Options [Continued] - The following table summarizes information about
stock options outstanding at October 31, 1997:
Options Outstanding
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
[Thousands]
$ .01 - $ 3.00 1,260 2.67 $ .24
$3.01 - $ 6.00 486 .65 $ 3.50
$6.01 - $ 9.00 1,062 1.19 $ 8.94
$9.01 - $ 12.00 187 1.17 $ 10.67
-------
2,995 1.72 $ 4.51
=======
The exercise prices of the options outstanding at October 31, 1997 range between
$.125 and $12.00 with a weighted average contractual life of 1.72.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been reduced as
follows:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Net Loss:
As Reported $ (748,095) $(8,361,096) $(61,428,779)
Pro Forma $ (793,390) $(8,494,101) $(61,497,693)
Loss Per Share:
As Reported $ (.02) $ (.21) $ (1.61)
Pro Forma $ (.02) $ (.22) $ (1.61)
The fair value of each option granted is estimated on the grant date using an
option pricing model which took into account as of the grant date, the exercise
price and the expected life of the option, the current price of the underlying
stock and its expected volatility, expected dividends on the stock and the
risk-free interest rate for the expected term of the option. The following is
the average of the data used for the following items:
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
1997 6.19% 5 Years 61.47% N/A
1996 6.35% 5 Years 132.66% N/A
1995 6.50% 5 Years 80.59% N/A
F-20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[10] Stock Options and Warrants [Continued]
[B] Warrants - The following table summarizes the activity in common shares
subject to warrants for the two years ended October 31, 1997:
Shares Warrant Price
[Thousands]
October 31, 1994 - Balance 4,884 $3.50 - $7.43
Granted -- $ --
Exercised -- $ --
Canceled or Expired -- $ --
----------- ------------
October 31, 1995 - Balance 4,884 $3.50 - $ 7.43
Granted 4,130 $ .60
Exercised -- $ --
Canceled or Expired -- $ --
----------- --------------
October 31, 1996 - Balance 9,014 $ .60 - $ 7.43
Granted -- $ --
Exercised -- $ --
Canceled or Expired -- $ --
----------- --------------
Warrants Outstanding and Exercisable to October 31, 1997 9,014 $ .60 - $ 7.43
--------------------------------------------------------====== ==============
Warrants outstanding at October 31, 1997 expire at various times through August
2001.
[11] Long-Term Debt and Capital Leases
Long-term debt at October 31, 1997 and 1996 consisted of the following:
1 9 9 7 1 9 9 6
------- -------
Revolving lines of credits: one due December 1998 at
the bank's prime rate plus 3% [minimum 10%] one due
December 1997 [extended on a month-to-month basis] at
the bank's prime rate plus 3-1/2% and one due June
1997, paid in full at the bank's prime rate plus
3-1/2%. Each of the credit lines are collateralized
by the Company's assets as defined. $ 7,679,837 $14,618,021
Notes payable fixed at 7.5% to 12.75%, due through 2003,
collateralized by medical equipment. 30,230,175 25,386,411
Note payable bearing interest at 9.25% due in 2005
collateralized by real estate. 1,862,918 2,013,366
Obligation from the Tower Acquisition, due date
dependent upon cash receipts. Principal payments
are payable monthly at the rate of 8% of the Tower
cash receipts plus 5% interest. The rate of principal
payment was increased from 6.9% of cash receipts in
February of 1996. 6,417,368 7,429,344
Totals - Forward $ 46,190,298 $49,447,142
F-21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[11] Long-Term Debt and Capital Leases [Continued]
1 9 9 7 1 9 9 6
------- -------
Totals - Forwarded $ 46,190,298 $49,447,142
Obligations under capital leases, collateralized
by medical equipment and office equipment
originally costing approximately $31,800,000
and $39,800,000, respectively, payable in various
monthly installments including interest at
various rates from 8.9% to 12.75% through 2004. 25,596,330 35,953,394
------------- -----------
Totals 71,786,628 85,400,536
Less: Current Portion 20,341,372 28,200,547
------------- -----------
Totals $ 51,445,256 $57,199,989
------ ============= ===========
Under one of the revolving line of credit agreements which is due December 1998,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$10,000,000 or the prior 120 days' cash collections. The lender holds a first
lien on substantially all of Radnet's assets. The President and CEO of PHS has
personally guaranteed $3,000,000 of the loans. In addition, this credit line is
collateralized by a $5,000,000 life insurance policy on the president and CEO of
PHS. At October 31, 1997, by formula, the Company had approximately $3.5 million
in available credit under this line. Under the second revolving line of credit
agreement due December 1997, the Company may borrow the lesser of 75% of the
eligible accounts receivable, $4,000,000 or the prior 120 days' cash collection.
This line was extended on a month-to-month basis in January 1998. This credit
line is collateralized by approximately 80% of Tower's accounts receivable. At
October 31, 1997, the Company had approximately $2.3 million in available credit
under this line. A third line of credit was paid in full and closed at the
Company's request in September 1997. All of the lines of credit are classified
as current liabilities.
The prime rate at October 31, 1997 and 1996 was 8.50% and 8.25%, respectively.
At October 31, 1997 and 1996, the weighted average interest rate on short-term
borrowings was 12.03% and 12.19%, respectively.
The following schedule shows the future maturities of long-term debt exclusive
of capital leases:
Years ended
October 31,
1998 $ 15,372,462
1999 6,168,036
2000 6,525,111
2001 6,855,690
2002 8,774,350
Thereafter 2,494,649
-------------
Total $ 46,190,298
----- =============
F-22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[11] Long-Term Debt and Capital Leases [Continued]
The Company leases property under capital leases. The following schedule shows
the minimum lease payments under capital leases as of October 31, 1997:
Years ended
October 31,
1998 $ 7,357,825
1999 7,228,330
2000 7,208,358
2001 6,319,514
2002 2,749,182
Thereafter 1,255,322
-------------
Total 32,118,531
Less: Amount Representing Interest 6,522,201
Total 25,596,330
Less: Current Portion 4,968,910
Total $ 20,627,420
----- =============
The Company has been in default under various of its capital lease agreements,
and has from time to time either made agreements to resolve the defaults or
brought the past due debt current by payment. At October 31, 1997, the Company
was not in default under any of the capital lease arrangements.
At October 31, 1997, the Company is in default on approximately $1,845,000 under
various note agreements, pertaining to the acquisition of centers, for non-
payment of principal and interest. These notes have been classified as current.
[12] Commitments and Contingencies
[A] Leases - The Company and its subsidiaries have noncancellable operating
leases for use of their facilities and certain medical equipment. The leases
require payment of various expenses as additional rent and expire at various
times from 1998 through 2018. Certain leases contain renewal options from two to
ten years and escalation based primarily on the consumer price index. Minimum
annual rentals under the leases are as follows:
Total Equipment Facilities
October 31,
1998 $ 5,175,586 $ 313,926 $ 4,861,660
1999 4,027,774 129,977 3,897,797
2000 3,323,321 80,106 3,243,215
2001 2,340,652 71,596 2,269,056
2002 1,587,426 37,408 1,550,018
Thereafter 9,755,071 -- 9,755,071
------------ ----------- -----------
Total $ 26,209,830 $ 633,013 $25,576,817
----- ============ =========== ===========
Total rent expense, including equipment rentals, for the years ended October 31,
1997, 1996 and 1995 amounted to approximately $6,225,000, $5,400,000 and
$4,500,000, respectively.
At three of the Company's Tower locations, the Company was unable to extend its
leases which expire at various times beginning in January 1999. The Company has
acquired new space in Beverly Hills ["Wilshire"] with a twenty-year lease and
two five-year options to extend.
F-23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[12] Commitments and Contingencies [Continued]
[B] Salary and Consulting Contractor Agreements - The Company has a variety of
arrangements for payment of professional and employment services. The agreements
provide for the payment of professional fees to physicians under various
arrangements including a percentage of revenue collected from 15% to 20%, fixed
amounts per periods, and combinations thereof.
The Company also has employment agreements with officers and key employees at
annual compensation rates ranging from $75,000 to $200,000 and for periods
extending up to five years. Total commitments under the agreements are
approximately $1,530,000 as of October 31, 1997.
The Company renegotiated and bought out the remaining years of an employment
contract with one officer of the Company during fiscal 1997. Terms of the
settlement include severance pay, the issuance of additional options, and the
establishment of a legal consulting arrangement for the future.
[C] Purchase Commitment - On July 23, 1996, the Company entered into a four year
purchase agreement with FUJI Medical Systems, USA, Inc. whereby the Company must
purchase $10 million of FUJI Medical Imaging Film at the rate of approximately
$2.5 million annually over the term of the agreement. Purchases under the
agreement are at a discount which is received in advance annually and is
amortized over the respective film purchase period. In addition, the Company has
agreed to purchase a minimum of $1.5 million of Fuji Equipment at the best
available price over the term of the agreement.
[D] Stock Put - In January 1998, the Company entered into a five year agreement
with a former officer of the Company whereby the Company agreed to purchase from
the former officer up to 600,000 shares of the Company's common stock owned by
him at a price of $.40 per share, in minimum increments of 100,000 shares, upon
his election anytime subsequent to December 31, 1998 and prior to February 28,
2003.
[13] Litigation
The Company is a defendant in a class action pending in the United States
District Court for the District of New Jersey entitled "In re Hibbard Brown &
Company Securities Litigation" [No. 93 CV 1150]. The Company entered into a
preliminary settlement with the plaintiff class in the lawsuit by the payment of
$240,000 in April 1996. Although the settlement between the Company and the
plaintiff class was granted preliminary court approval in April 1996, the
settlement is subject to final approval by the class and to final court approval
which has not yet been obtained. Management expects there will be no additional
costs to settle the case beyond the $240,000. The lawsuit continues with respect
to the other defendants. The Company remains convinced that it has not engaged
in any inappropriate conduct in this matter.
The Company is currently a party to other litigation, none of which is deemed
material in nature.
[14] Deferred Compensation
In connection with DIS's acquisition of Advanced Diagnostic Imaging, L.P.
["ADI-LP"], DIS issued a stock purchase warrant to the general partner and
radiologist of ADI-LP contingent upon the merger of DIS and IPS. The warrant was
issued as consideration for certain liabilities due form ADI-LP to the general
partner and radiologist which were assumed by DIS and in consideration for
entering into a 25- year radiology and management services agreement. The
Company had accounted for the amount attributable to the radiology and
management services agreement as deferred compensation and was amortizing that
amount as a charge to income over the term of the agreement. As a result of the
Company's decision to close substantially all of its operations at the facility
on or about August 29, 1997 [See Note 2], net deferred compensation of $782,273
was written-off.
F-24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[15] Capital Transactions
[A] During fiscal 1995, debentures totaling $34,000 were converted into 4,250
shares of common stock. During fiscal 1996, debentures totaling $12,000 were
converted into 1,500 shares of common stock [See Note 25].
[B] In October of 1995, the Company sold 200,000 shares at $.01 per share to two
officers of the Company. In connection with the sale, compensation of $18,000
was recorded.
[C] During fiscal 1996, the Company purchased 1,300,000 shares of its common
stock for an aggregate purchase price of $481,727.
[D] During fiscal 1997, the Company purchased 325,000 shares of its common stock
for an aggregate purchase price of $133,220.
[E] On June 17, 1997, an officer of the Company exercised his options for
200,000 shares of the Company's common stock at $.125 per share. In connection
with the transaction, the Company loaned the officer $25,000, with interest at
6%, which was paid in full in February 1998.
[16] Loss Per Share
Net loss per share is based on the weighted average number of shares of common
stock outstanding during each period of 38,853,904, 39,176,281 and 40,031,461
for fiscal 1997, 1996 and 1995, respectively. The effect of common stock
equivalents are excluded as they would be antidilutive.
[17] New Authoritative Pronouncements
The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. When adopted, SFAS No. 128 will require restatement of all
prior-period EPS data presented; however, the Company has determined that SFAS
No. 128 will not have a material effect on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
F-25
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. Management is in the process of evaluating
the disclosure requirements. SFAS No. 131 is not expected to have a material
impact on the Company.
[18] Subordinated Debenture Offering
In June of 1993, the Company's registration statement for a total of
$25,875,000, of 10% Series A Convertible subordinated debentures due 2003 was
declared effective by the Securities and Exchange Commission. The net proceeds
to the Company were approximately $23,000,000. Costs of approximately $3,000,000
associated with the original offering are being amortized over ten years and are
classified as other assets. As debentures are converted or retired a pro-rata
share of the offering costs are written-off.
The amortization expense for each of fiscal 1997, 1996 and 1995 was $298,545.
Interest expense for fiscal 1997, 1996 and 1995 was $2,524,697, $2,583,500 and
$2,584,100, respectively. During fiscal 1996 and 1995, debentures totaling
$12,000 and $34,000, respectively were converted into 1,500 and 4,250 shares of
common stock, respectively.
During fiscal 1997, $2,906,000 face value debentures were repurchased by the
Company for $1,984,093 resulting in a gain on early extinguishment of $921,907.
With the repurchase and subsequent bond retirements, $187,524 of net offering
costs were written-off during fiscal 1997. Subsequent to year-end, through
February 27, 1998, an additional $1,736,000 face value debentures were
repurchased for $1,207,050.
[19] Notes Payable - Stockholders
On January 28, 1993, the Company's four principal shareholders agreed to lend an
aggregate $12,500,000 to the Company for working capital purposes in
consideration for secured notes issued, either directly for cash, for the
release of debt obligations owed to the Company in connection with the Radnet
acquisition or for the application of funds escrowed in connection with the PC
acquisition.
Each secured note was due in eighteen months with interest at 10%. In July of
1994, one shareholder was paid $3,500,000 and agreed to accept the $4,000,000
balance in twelve equal installments, plus interest at 10%. In August of 1994,
this shareholder accepted a $3,000,000 lump sum payment in full settlement of
the balance. The difference of $1,000,000 was credited to paid-in-capital. In
consideration of this agreement, the other three noteholders agreed to defer
amounts due them on similar terms. Two shareholders who were owed a total of
$2,500,000, agreed to offset this liability against monies owed by them to
Radnet [See Note 7]. In November of 1994, the fourth shareholder, who was owed
$2,500,000 and who had a contingent right to receive an additional $2,500,000
held in escrow in connection with the PC acquisition [See Note 2], entered into
an agreement with the Company whereby his liability was satisfied by a payment
to him of $500,000, and the release of the $2,500,000 held in escrow. The
difference of $2,000,000 was credited to accrued estimated closing costs and
subsequently written off in connection with the sale of PC [Note 20]. Interest
expense relating to these notes for fiscal 1997, 1996 and 1995 was $-0- for each
year.
F-26
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[20] Discontinued Operations - Primedex [PC]
On July 29, 1993, the Company commenced its plans to restructure PC and to wind
down its involvement in the California worker's compensation industry.
Effective July 31, 1995, the Company sold substantially all of the assets of PC
to an unrelated party for approximately $9,448,000 cash resulting in a loss of
$3,813,314. The assets of PC which were sold consisted primarily of net accounts
receivable of $22,087,072 and net property and equipment of $605,138. Accrued
estimated closing costs of $9,100,000 were written-off in connection with the
sale.
Net revenue applicable to the discontinued operations for the years ended
October 31, 1997, 1996 and 1995 amounted to $-0-, $-0- and $266,412,
respectively.
The accrued estimated closing costs as of October 31, 1997 and 1996, which were
estimated through the final disposition date of PC, consist of the following:
1 9 9 7 1 9 9 6
------- -------
Rent and Occupancy Costs $ -- $ 68,800
Other Expenses -- 88,292
---------- -----------
Total $ -- $ 157,092
----- ========== ===========
[21] Acquisition and Discontinued Operations - Spin-Off of Care Advantage, Inc.
On December 23, 1993, the Company acquired Care Advantage Health Systems
["CAHS"] [formerly known as Advantage Health System, Inc.], a newly organized
corporation formed to provide medical and surgical utilization review for
providers of health insurance. The purchase price was paid for with $6,000,000
cash and options exercisable to purchase an aggregate 1,000,000 shares of PHS
common stock at an exercise price of $9.00 per share. In August of 1994, Care
Advantage, Inc., ["Care Ad"] a wholly-owned subsidiary of PHS, was incorporated
in Delaware as a holding company to own all of the issued and outstanding common
stock of CAHS.
On October 28, 1994, the Company declared a dividend of 40,026,510 shares of the
common stock of CareAd to stockholders of record at the close of business on
November 7, 1994, a rate of one share of Care Advantage common stock for each
share of PHS common stock owned. An additional 1,700,000 shares of Care
Advantage common stock was retained by the Company. As a result of CareAd
activities, the Company's ownership interest has been reduced to less than 1/2
of 1% of the total shares outstanding.
In January of 1995, the Company and CareAd executed a Separation Agreement
concerning additional financial support to be provided by the Company, the
transfer of certain Company senior management, and the disposition of the
1,700,000 shares of CareAd common stock retained by the Company. The separation
agreement was amended on April 24, 1995 [the "Revised Separation Agreement"]. As
part of the Revised Separation Agreement, the Company agreed to a capital
contribution of $9,699,973 of past and future advances. Concerning the 1,700,000
shares of CareAd common stock, the Company agreed to file for a registered
exchange offer under the Securities Act of 1933 with the Securities and Exchange
Commission within eighteen months after the June 1995 distribution of the CareAd
stock dividend, offering the holders of the Company's debentures the right to
exchange the debentures for the 1,700,000 shares. CareAd agreed, within eighteen
months after the completion of the exchange offer and subject to certain
conditions, to file a registration statement under the Securities Act of 1933
with the Securities and Exchange Commission registering any of the shares not
distributed, and the Company has agreed to sell such shares. The Company has
agreed that CareAd's Board of Directors will hold all voting rights of the
shares until final disposition.
F-27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #19
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[22] Employee Benefit Plans
The Company adopted a profit-sharing/savings plan pursuant to Section 401(k) of
the Internal Revenue Code, that covers substantially all employees. Eligible
employees may contribute on a tax deferred basis a percentage of compensation,
up to the maximum allowable amount under the tax law. Employee contributions
vest immediately. The plan does not require a matching contribution by the
Company.
[23] Extraordinary Item
During fiscal 1997, the Company settled various notes payable and repurchased
subordinated bond debentures at a discount resulting in a gain on early
extinguishment of debt of $1,595,106. During fiscal 1996, the Company settled or
renegotiated various notes payable resulting in a gain of $1,149,817. During
fiscal 1995, the Company settled a note payable with a lump sum payment that
resulted in a $228,485 gain and restructured other debt that resulted in a
$712,399 gain. There was no income tax effect on these transactions.
[24] Going Concern
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.
The Company has suffered recurring losses from operations and has negative
working capital which raises substantial doubt about its ability to continue as
a going concern. During fiscal 1997, the Company improved its working capital
significantly with the sales of various assets [See Note 2]. The proceeds on the
sale were used to pay down current lines of credit and settle other obligations
at discount.
In March 1998, effective January 1, 1998, the Company sold its interest in
Scripps Chula Vista, L.P. ["SCV"] to Diagnostic Health Services, Inc. ["DHS"]
for 127,250 shares of DHS stock. As of March 9, 1998, the current stock value
was approximately $11 per share, or approximately $1,400,000.
Management has taken additional steps to revise its operating and financial
condition, which it believes are sufficient to provide the Company with the
ability to continue in existence.
During 1997, the Company continued to streamline and economize its operations
and make changes to enhance revenues. The Company entered into two healthcare
equipment insurance policy service arrangements where the Company's exposure to
medical equipment repairs and maintenance expense would be limited, and in the
worst case scenario still offer the Company significant savings. The policy
includes stop loss limits on the annual aggregate loss expectancies of the
medical equipment contained on each policy. The Company is adding MRI's at its
Stockton and Oxnard sites in April 1998. Equipment at other sites has been or
will be upgraded if market conditions dictate the necessity of enhanced
equipment.
The Company has restructured its Corporate salary costs through renegotiating
and buying out employment contracts, reducing staffing, and by eliminating its
in-house legal department while retaining formerly employed lawyers with
separate consulting fee arrangements at significant savings overall [See Note
9].
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
F-28
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #20
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
[25] Subsequent Events
[A] As of February 27, 1998, the Company purchased an additional 528,000 shares
of DIS common stock from various parties for an aggregate purchase price of
$597,144 bringing the Company's total ownership to approximately 74%.
[B] As of February 27, 1998, the Company repurchased an additional $1,736,000
face value of subordinated bond debentures for $1,207,050. The bonds have or
will be retired.
[C] In February 1998, the Company dissolved its partnership in LaHabra Imaging
Group with Friendly Hills Healthcare Network, Inc. ["Friendly Hills"] effective
December 31, 1997. Upon the dissolution, the Company received accounts
receivable of approximately $79,000, equipment of approximately $121,000, a
receivable from Friendly Hills of approximately $95,000, cash of approximately
$453,000 and assumed accounts payable and accrued expenses of approximately
$249,000, representing half of the net assets of LaHabra. The Company continues
to operate the center as a wholly-owned center.
[D] In March 1998, effective January 1, 1998, the Company sold its interest in
Scripps Chula Vista, L.P. ["SCV"] to Diagnostic Health Services, Inc. ["DHS"]
for 127,250 shares of DHS stock. As of March 9, 1998, the current stock value
was approximately $11 per share, or approximately $1,400,000.
. . . . . . . . . . . . .
F-29
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
New York, New York
Our report on the consolidated financial statements of Primedex
Health Systems, Inc. and its affiliates is included on page F-1 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related accompanying financial statement Schedule II -Valuation and
Qualifying Accounts.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
February 6, 1998
S-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Additions
Balance at Charged Charged toDeductions Balance at
Beginning Against Other from Close
of Period Income Accounts [AReserves [B] of Period
For the period ended October 31, 1997:
Allowances [Deducted from Accounts
Receivable Short-Term] $18,386,423 $54,010,973 $ 825,000 $53,584,594 $19,637,802
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $6,871,881 $13,502,744 $ -- $13,622,118 $6,752,507
========== =========== ========== =========== ==========
Amortization of Goodwill [See Not$ 6]3,077,71$1,405,911 $ -- $ 1,322,912 $3,160,715
= ================== ========== =========== ==========
Amortization of Other Intangibles
[See Note 6] $1,172,317 $ 196,726 $ -- $ 956,543 $ 412,500
========== ========== ========== =========== ==========
[A] Addition due to acquisitions.
[B] Deductions include sales and divestitures.
S-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Additions
Balance at Charged Charged toDeductions Balance at
Beginning Against Other from Close
of Period Income Accounts [AReserves [B] of Period
For the period ended October 31, 1996:
Allowances [Deducted from Accounts
Receivable Short-Term] $15,633,140 $40,161,614 $1,971,693 $39,380,024 $18,386,423
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $4,353,102 $17,212,120 $ 845,011 $15,538,352 $6,871,881
========== =========== ========== =========== ==========
Amortization of Goodwill [See Note $] 960,998 $1,170,025 $ 946,693 $ -- $3,077,716
= ======== ========== ========== =========== ==========
Amortization of Other Intangibles
[See Note 6] $ -- $ 93,378 $1,078,939 $ -- $1,172,317
========== ========== ========== =========== ==========
[A] Addition due to acquisitions.
S-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- - - - - - - - - - - - - - ------------------------------------------------------------------------------
Additions
Balance at Charged Charged toDeductions Balance at
Beginning Against Other from Close
of Period Income Accounts [AReserves [B] of Period
For the period ended October 31, 1995:
Allowances [Deducted from Accounts
Receivable Short-Term] $11,786,427 $32,177,329 $ 72,022 $28,402,638 $15,633,140
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $5,051,326 $11,361,928 $ 25,431 $12,085,583 $4,353,102
========== =========== ========== =========== ==========
Amortization of Goodwill [See Not$ 6]6,947,81$3,851,567 $ -- $ 9,838,388 $ 960,998
= ================== ========== =========== ==========
Amortization of Other Intangibles
[See Note 6] $ 326,113 $ 193,780 $ -- $ 519,893 $ --
========== ========== ========== =========== ==========
[A] Addition due to acquisitions.
S-4
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to each
of the directors and those executive officers of the Company performing a
policy-making function for PHS as of February 28, 1998:
Name Age Director or Officer SincePosition with Company
Howard G. Berger, M.D.* 53 1992 President, Treasurer, Chief Executive
and Financial Officer, and Director
Norman R. Hames 41 1996 Vice President, Chief Operating
Officer and Director
Jaana Shellock* 36 1996 Secretary and Director
Michael J. Krane, M.D. 54 1992 Vice President, Director of Medical
Operations
- - - - - - - - - - - - - - --------
*Member of the Stock Option Committee
The following is a brief account of the business experience of each PHS
director and executive officer during the past five years.
Howard G. Berger, M.D. was elected a director of PHS in July 1992 and
in September 1996 was appointed President and Chief Executive Officer of PHS.
Dr. Berger is the owner of BRMG which supplies the medical services at a number
of the Company's imaging centers. Dr. Berger has been principally engaged since
1987 in the same capacities for the predecessor entities. See Item 13.
Norman R. Hames was appointed as an officer and director in 1996. Mr.
Hames, a founder of Diagnostic Imaging Services, Inc. has since 1986, served as
the president and a director of that entity.
Jaana Shellock was appointed an officer and director in 1996. Ms.
Shellock has, since 1989, served as the president and a director of Future
Diagnostics, Inc.
Michael J. Krane, M.D. is the vice president and director of medical
operations at RadNet. Dr. Krane has been principally engaged since 1987 in the
same capacities for the predecessor entities.
None of the Company's directors serve as directors of any other
corporation with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 or subject to the requirements of Section 15(d)
of that Act, except Dr. Berger and Mr. Hames who serve as officers and directors
of Diagnostic Imaging Services, Inc. Furthermore, none of the events described
in Item 401(f) of Regulation S-K involving a director or an executive officer of
the Company occurred during the past five years.
The officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors. During the fiscal year ended October 31, 1997, while the Board of
Directors held numerous meetings, they took board action by unanimous written
consent, which was done on two occasions. All directors were present and
participated in all such actions.
The Board of Directors intends to establish an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, and a compensation committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company.
27
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of Forms 3 and 4 and any amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange
Act of 1934, or representations that no Forms 5 were required, the Company
believes that with respect to fiscal 1997, all Section 16(a) filing requirements
applicable to its officers, directors and beneficial owners of more than 10% of
its equity securities were complied with.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation
earned during the three years ended on October 31, 1997 by any individual
serving as the Company's Chief Executive Officer at any time during fiscal 1997
and by any other executive officer of the Company who earned at least $100,000
during fiscal 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long-Term Compensation
Other Securities Restricted
Name and Year Ended Annual Underlying Stock LTIP All Other
Principal Position 10/31 Salary($) Bonus($) Comp.($) Options(#) Awards($) Pay-outs($) Comp($)
Howard G. Berger, M.D. 1997 $ 78,000 -- -- -- -- -- --
Chief Executive Officer
[beginning 9/1/96] 1996 $ 75,000 -- -- -- -- -- --
Steven R. Hirschtick 1997 $294,230 -- -- $47,000(2) -- -- --
Senior Vice President
and General Counsel 1996 $275,000 -- -- -- -- -- --
1995 $320,000 -- -- 400,000(3) -- -- --
Jaana Shellock 1997 $180,000 -- -- -- -- -- --
Vice President
1996 $194,000 -- -- 500,000(3) -- -- --
Norman Hames 1997 $150,000(4) -- -- -- -- -- --
Chief Operating Officer
and President of DIS 1996 $150,000 -- -- -- -- -- --
Michael J. Krane, M.D. 1997 $103,846 -- -- -- -- -- --
Vice President 1996 $103,846 -- -- -- -- -- --
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the named executive officers was less than the reporting thresholds
established by the Securities and Exchange Commission.
(2) Represents the difference between the option exercise price and average bid
and asked price in the public market on the date the option was exercised.
(3) At the date of the awards, the Closing Bid and Closing Asked prices for the
PHS common stock in the over-the counter market according to the National
Quotation Bureau was, as to Mr. Hirschtick's option, $.14 and $.16 and as to Ms.
Shellock's option was $.11 and $.135.
(4) Mr. Hames deferred $50,000 of his annual compensation under his employment
agreement.
28
Employment Contracts
Drs. Berger and Krane each executed a five-year employment agreement as
of June 12, 1992 with RadNet to serve as President and chief executive officer
and as Vice President and Director of Medical Operations, respectively, at
annual salaries of $100,000. Each employment agreement provided that it could be
terminated by the employee after two years on 30 days prior notice and contains
certain restrictive covenants designed to prevent the employee from competing
with RadNet's business prior to the later of termination of employment or June
11, 1997. In addition, each was granted options to purchase an aggregate 762,500
shares of PHS Common Stock at an exercise price of $8.00 per share at any time
during the five-year period commencing June 12, 1992. On October 13, 1993, the
board of directors authorized the reduction in the number of these options and a
reduction in the exercise price. Dr. Berger and Dr. Krane each subsequently
agreed to the assignment of 200,000 of these options to Steven R. Hirschtick
thereby reducing the ownership of each to options to purchase an aggregate
281,250 shares of PHS Common Stock at an exercise price of $3.50 per share. In
July 1995, in connection with an extension of his employment contract with
RadNet through July 14, 1999, Dr. Krane's options were canceled. In April 1996,
Dr. Krane's contract was revised to provide for annual compensation of $250,000
with its term ending June 11, 1999. Dr. Berger, who currently has no employment
contract with the Company, is also paid substantial amounts for his services by
BRMG of which he is the sole owner [See "Item 13"].
RadNet and Steven R. Hirschtick had executed an employment agreement
effective November 1, 1993 through October 31, 1997, employing Mr. Hirschtick as
RadNet's Senior Vice President and General Counsel at an annual salary of
$320,000. On July 21, 1995, the PHS board of directors authorized a new
employment agreement for Mr. Hirschtick, granted him five-year options
exercisable to purchase an aggregate 400,000 shares of common stock at $.125 per
share and also agreed, assuming his execution of a new employment contract on
acceptable terms, to sell him 100,000 shares of PHS common stock at par [$.01
per share]. On July 21, 1995, the Closing Bid and Closing Asked Prices for PHS
common stock in the over-the-counter market according to the National Quotation
Bureau were $.09375 and $.15625 respectively. On September 14, 1995, PHS and Mr.
Hirschtick executed a new employment agreement, superseding the November 1, 1993
agreement with RadNet and employing Mr. Hirschtick as General Counsel and Senior
Vice President of PHS. The term of the new agreement commenced on November 1,
1995 and expires on October 31, 2000. The new agreement provides for an annual
salary of $275,000. In connection with the new agreement and the grant of the
new options, Mr. Hirschtick purchased the 100,000 shares of PHS common stock at
par. On said date, the Closing Bid and Closing Asked Prices for PHS common stock
in the over-the-counter market according to the National Quotation Bureau were
$.09 and $.11 respectively. As of February 27, 1998, effective October 31, 1997,
the parties agreed to terminate the new agreement in consideration of Mr.
Hirschtick receiving a payment of $100,000 and entry into a five year consulting
agreement providing for compensation of $50,000 per year. Additionally, the
Company loaned Mr. Hirschtick $125,000 all due and payable in five years
together with interest at the rate of 6.5% per annum.
Norman Hames has an employment agreement with Diagnostic Imaging
Services, Inc. ending in 2001 whereby he serves as president of that company and
receives annual compensation of $150,000.
29
Stock Options
During the fiscal year ended October 31, 1997, no options were granted
to a person who served as chief executive officer of PHS during such year or to
a PHS executive officer, or chief executive officer of a PHS subsidiary, who
earned at least $100,000 in compensation during such year.
During fiscal 1997 options to purchase 200,000 shares were exercised at
$.125 per share by Steven R. Hirschtick. At October 31, 1997, the Company had an
Incentive Stock Option Plan in force. Under the Plan, an aggregate 2,000,000
shares of Common Stock were reserved for issuance upon exercise of outstanding
incentive stock options held by 11 Company employees at exercise prices ranging
from $.125 to $3.50 per share.
The following table indicates the outstanding options held at October
31, 1997 by the individuals named in the Summary Compensation Table. All of such
options were exercisable at such date.
Value of Unexercised
Number of Unexercised In-The-Money Options
Name Options at Fiscal Year-End at October 31, 1997(1)
- - - - - - - - - - - - - - ---- -------------------------- ----------------------
Howard G. Berger, M.D. 281,250 $ --(2)
Steven R. Hirschtick 200,000 $ 65,000
Jaana Shellock 500,000 $ 150,000
- - - - - - - - - - - - - - ---------------
(1)Based upon the difference between the market price for PHS common stock
in the over-the-counter market on October 31, 1997 [the mean between the closing
bid price and the closing asked price] and the option exercise price.
(2) The option exercise price exceeds the share market price.
Director Compensation
Directors do not receive a fee for their services as a director.
30
Compensation Committee Interlocks and Insider Participation
During fiscal 1997 all executive compensation has been determined by
the three member board of directors of PHS, Howard G. Berger, M.D., Norman Hames
and Jaana Shellock. In addition, no individual who served as an executive
officer of the Company during fiscal 1997, served during fiscal 1997 on the
board of directors or compensation committee of another entity where an
executive officer of the other entity also served on the board of directors of
the Company, except that Howard G. Berger, M.D., chairman and president of
RadNet and Norman Hames, vice president and a director of the Company serves as
a director and as president and a director of Diagnostic Imaging Services, Inc.,
respectively. See "Summary Compensation Table" and "Stock Options" herein in
this Item 11 and Item 13 herein as to transactions involving the Company and Dr.
Berger.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of PHS Common Stock as of February 28, 1998, by (i) each
holder known by the Company to beneficially own more than five percent of the
outstanding Common Stock, (ii) each of the Company's directors and executive
officers [including officers listed in the Summary Compensation Table] as a
group. The percentages set forth in the table have been calculated on the basis
of treating as outstanding, for purposes of computing the percentage ownership
of a particular holder, all shares of PHS Common Stock outstanding at such date
and all shares of Common Stock purchasable upon exercise of options and warrants
owned by such holder which are exercisable at or within 60 days after such date.
Name of Shares of Common Stock
Beneficial Owner Beneficially Owned(1) Percent of Class
Howard G. Berger, M.D.* 13,090,678(2) 24.6%
Jaana Shellock* 500,000(3) **
Norman Hames* 2,807,350(4) 5.0%
The Family Investment Trust 4,000,000(5) 7.1%
340 North Avenue
Cranford, New Jersey 07016
Michael J. Krane, M.D. 2,216,228 3.9%
Steven R. Hirschtick* 544,900(6) **
All directors and executive officers of
the Company as a group [five persons]19,156,956(7) 33.9%
- - - - - - - - - - - - - - -----------
*The address of all of the Company's officers and directors is c/o the
Company, 1516 Cotner Avenue, Los Angeles, California 90025.
**Less than 1%
(1) Subject to applicable community property statutes and except as
otherwise noted, each holder named in the table has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned.
(2)Includes 281,250 shares issuable upon exercise of options at an
exercise price of $3.50 per share and 343,200 upon conversion of PHS outstanding
convertible debentures convertible at $10 per share. On June 5, 1995, Howard G.
Berger, M.D. president and a director of PHS consummated the purchase of
10,000,000 shares of PHS' common stock from Robert E. Brennan, PHS' then
principal shareholder. In connection with the purchase, John J. Petillo, the
former chairman as well as the former chief executive officer of PHS, waived his
rights to vote the shares pursuant to an irrevocable proxy previously granted by
Mr. Brennan. The purchase price for the shares was $.14 per share or $1,400,000
31
in the aggregate consisting of (a) a $300,000 cash payment paid by Dr. Berger
using personal funds, (b) Dr. Berger's five-year 8% promissory note in the
principal amount of $700,000 and (c) the assignment by Dr. Berger of rights to
receive 2,466,228 shares of CareAd Common Stock upon the Distribution of same.
Mr. Brennan also has the right to receive additional payments based upon future
market prices for PHS' common stock equal to 25% of the difference between the
market price for the shares sold and the initial $.14 purchase price per share,
payable at various times over a nine-year period. As Dr. Berger was granted the
right to make "additional payments" in cash or in shares of PHS' common stock
[or combination thereof], Mr. Brennan was granted certain rights to register any
stock so transferred to him as additional payments under the Securities Act of
1933, at PHS' expense, so as to permit the public offer and sale of such shares.
As a result of the purchase, Dr. Berger was the beneficial owner of
12,720,975 shares representing approximately 32% of PHS' common stock.
(3)Represents options exercisable at $.15 per share.
(4)Represents options exercisable at $.60 per share.
(5)These 4,000,000 shares are issuable upon exercise of Warrants at an
exercise price of $3.50 per share owned by The Family Investment Trust, a trust
established by Robert E. Brennan, the beneficiaries of which are his three adult
sons. Mr. Brennan is a former principal stockholder of the Company who in June
1995, sold the bulk of his holdings of PHS common stock [10,000,000 shares] to
Howard G. Berger, M.D. [See Footnote 2 herein above] Mr. Brennan's brother,
Henry F. Brennan III, is the sole Trustee of The Family Investment Trust with
sole voting and investment power with respect to such Warrants and the
underlying shares. Robert E. Brennan disclaims beneficial ownership with respect
to these Warrants and the underlying shares.
(6)Includes 200,000 shares issuable upon exercise of options at an
exercise price of $.125 per share.
(7)See the above footnotes. Includes 12,916,128 shares owned of record
and 6,240,828 shares issuable upon exercise of presently exercisable options.
As a result of his stock ownership and his positions as president and a
director of the Company, Howard G. Berger, M.D. may be deemed to be the
controlling person of the Company.
Item 13. Certain Relationships and Related Transactions
Howard G. Berger, M.D. [see "Items 10 and 12"] is the sole stockholder
of Beverly Radiology Medical Group, Inc. ["BRMG"] which has executed a
Management and Service Agreement with RadNet and DIS pursuant to which it
supplies the medical services at most of the Company's imaging centers and the
DIS Thousand Oaks, Corona and Riverside imaging centers and Temecula Oncology
Center [see "Item 1] through 2002. In April 1996, the Company renegotiated the
Agreement with BRMG whereby the management fees paid to the Company by BRMG were
increased from 79% of collections to 81% in consideration of the Company's
payment to BRMG of $1,100,000. The amount paid was determined based upon the
discounted value of the estimated additional benefit to the Company over the
remaining term of the agreement of the increased percentage to be received by
the Company. In fiscal 1997, Dr. Berger was paid $294,000 and Dr. Krane was paid
$150,000 by BRMG.
See Footnote 2 herein above as to Dr. Berger's purchase of 10,000,000
shares of PHS common stock from Robert E. Brennan in June 1995 and in connection
therewith, the grant to Mr. Brennan of rights to register certain of these
shares under the Securities Act of 1933, at PHS' expense, to the extent Dr.
Berger transfers any such shares back to Mr. Brennan. See Item 11 herein as to
Dr.
Berger and Dr. Krane's employment agreements with RadNet.
32
At October 31, 1995 Howard G. Berger and Michael J. Krane were each
indebted to PHS in the amount of $1,500,000 based on loans extended to Drs.
Berger and Krane at the time of the Company's acquisition of RadNet in June
1992. In April 1996, Dr. Krane discharged his obligation by paying the Company
$1,400,000 and agreeing to renegotiate his employment contract with the Company
to provide for reduced compensation and a reduced time commitment. Dr. Berger,
in August 1996, paid $500,000 against his obligation. In consideration of the
early payment the Company offered to extend the remaining one million dollars
due to February 1998. The note was further extended in January 1998 to February
1999, which was discounted at an 8% interest rate resulting in a discounted
value of $897,133 as of October 31, 1997.
On August 1, 1996, the Company acquired from Norman Hames, [not then an
officer or director of the Company] all of his common stock and warrants to
purchase shares of common stock of Diagnostic Imaging Services, Inc., a Delaware
corporation [3,042,704 shares] which then represented 21.6% of the outstanding
shares of that entity in exchange for five year warrants to purchase 3,000,000
shares of the Company's common stock at $.60 per share as well as the Company's
five year promissory note, payable interest only annually at 6.58% for
$2,448,862.
In January 1998, the Company entered into an agreement with Steven R.
Hirschtick, former senior vice president of the Company whereby the Company
agreed to purchase from Mr. Hirschtick up to 600,000 shares of the Company's
common stock owned by him at a price of $.40 per share, in minimum increments of
100,000 shares, upon his election anytime subsequent to December 31, 1998 and
prior to February 28, 2003.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)Financial Statements - The following financial statements are filed herewith:
Page No.
Independent Auditors Report........................................ F-1
Consolidated Balance Sheets........................................ F-2...F-3
Consolidated Statements of Operations.............................. F-4...F-5
Consolidated Statements of Stockholders' Equity [Deficit].......... F-6
Consolidated Statements of Cash Flows.............................. F-7...F-9
Notes to Consolidated Financial Statements......................... F-10..F-29
Schedules - The Following financial statement schedules are filed
herewith:
Independent Auditor's Report on Supplemental Schedule.............. S-1
Schedule II - Valuation and Qualifying Accounts.................... S-2...S-4
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
(b)Exhibits - The following exhibits are filed herewith or incorporated by
reference herein:
Incorporated by
Exhibit No. Description of Exhibit Reference to
3.1.1 Certificate of Incorporation as amended (A)
3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A)
3.2 By-laws
4.1 Form of Common Stock Certificate (AA)
4.2 Form of Indenture between Registrant and American Stock
Transfer and Trust Company as Incorporated by Indenture Trustee
with respect to the 10% Series A Convertible Subordinated
Debentures due 2003(B)
4.3 Form of 10% Series A Convertible Subordinated Debenture Due 2003
[Included in Exhibit 4.2] (B)
10.1 Agreement and Plan of Reorganization, dated as of April 30, 1992 by
and among PHS, CCC Franchising Acquisition Corp. II ["New RadNet"],
RadNet Management, Inc., Beverly Hills MRI, Dr. Berger and
Dr. Krane (C)
10.2 Partnership Purchase Agreement, dated as of April 30, 1992 by and
among PHS, New RadNet and Dr. Berger and Dr. Krane (C)
34
10.3 Promissory Note dated June 12, 1992 ["Purchaser Note"] issued by
New RadNet in the principal amount of $10,000,000 payable to
Dr. Berger ["Purchaser Note"]. [An identical note payable to
Dr. Krane was issued to him.] (C)
10.4 PHS Guarantee, dated as of June 12, 1992, of payment of the
Purchaser Notes (C)
10.5 Stock Pledge Agreement, dated as of June 12, 1992 pursuant to which
PHS as pledgor pledged the outstanding capital stock of New RadNet
to Drs. Berger and Krane to secure its guarantee (C)
10.6 Secured Promissory Note, dated June 12, 1992 ["Sellers' Note"]
issued by Drs. Berger and Krane, jointly in the principal amount of
$6,000,000 payable to New RadNet (C)
10.7 Stock Pledge Agreement dated as of June 12, 1992 pursuant to which
Drs. Berger and Krane as pledgors pledged the 5,000,000 shares of
PHS Common Stock issued to them in the acquisition, to PHS to
secure repayment of the Sellers' Note (C)
10.8 Employment Agreement dated as of June 12, 1992 between New
RadNet and Howard G. Berger. [Dr. Krane executed a substantially
identical employment agreement with New RadNet on said date.] (C)
10.11 Asset Purchase Agreement dated as of October 1, 1994 between the
Tower Group and RadNet Sub (D)
10.12 Management Agreement dated as of October 1, 1994 between the Tower
Group and RadNet Sub (D)
10.15 Stock Purchase Agreement dated as of November 9, 1993 for the
acquisition of Advantage Health Systems, Inc. ["AHS"] between PHS,
John T. Lincoln and Paul G. Shoffeitt (D)
10.16 Employment Services Agreement dated November 9, 1993 between
AHS and Paul G. Shoffeitt [John T. Lincoln executed a similar
employment services agreement with AHS on the same date] (D)
10.17 Deposit Agreement for stock dividend of CareAd common stock dated
October 31, 1994 and Midlantic bank, N.A., PHS and CareAd (D)
10.18 Separation Agreement dated January 31, 1995 between PHS and CareAd (D)
10.19 Separation Agreement dated April 20, 1995 between PHS and CareAd (E)
10.20 Stock Purchase Agreement made as of June 2, 1995 among PHS,
CareAd, Howard G. Berger and Robert E. Brennan (E)
10.21 Medical Receivable Purchase and Sale Agreement made as of July 31,
1995 between Bristol A/R and Primedex Corporation [relating to the
sale of the Primedex Corporation portfolio of workers' compensation
receivables] (F)
10.22 Employment Agreement dated as of September 14, 1995 between
PHS and Steven R. Hirschtick (G)
10.24 Incentive Stock Option Agreement dated as of July 21, 1995
between PHS and Steven R. Hirschtick (G)
35
10.25 Stock Purchase Agreement dated as of November 14, 1995 among
PHS, RadNet Managed Imaging Services, Inc. ["RMIS"], Future
Diagnostics, Inc. ["FDI"] and the shareholders of FDI relating to
the purchase by RMIS of all of the outstanding stock of FDI (G)
10.26 Securities Purchase Agreement dated March 22, 1996, between the
Company and Diagnostic Imaging Services, Inc. (G)
10.27 Stockholders Agreement by and among the Company, Diagnostic
Imaging Services, Inc. and Norman Hames (G)
10.28 Securities Purchase Agreement dated June 18, 1996 between the
Company and Norman Hames (G)
10.29 Stock Purchase Agreement dated September 3, 1997 between the
Company and Preferred Health Management, Inc. whereby the
Company sold its Future Diagnostics, Inc. subsidiary (H)
10.30 Consulting Agreement and Stock Put with Steven R. Hirschtick *
- - - - - - - - - - - - - - ------------------
(A) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-1 [File No. 33-51870].
(AA) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File 33- 73150].
(B) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File No. 33-59888].
(C) Incorporated by reference to exhibit filed in an amendment to Form 8-K
report for June 12, 1992. (D) Incorporated by reference to exhibit filed with
PHS' annual report on Form 10-K for the year ended
October 31, 1994.
(E) Incorporated by reference to exhibit filed with PHS' Form 8-K report for
June 5, 1995. (F) Incorporated by reference to exhibit filed with PHS' Form
8-K report for August 4, 1995. (G) Incorporated by reference to exhibit filed
with Form 10K for the year ended October 31, 1996. (H) Incorporated by
reference to exhibit filed with Form 8-K report for September 8, 1997.
(*) Filed herewith.
36
22 Subsidiaries PHS % Ownership State of Incorporation
-- ------------ --------------- ----------------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging Services, Inc.100% California
RadNet Sub, Inc. (a) California
Diagnostic Imaging Services, Inc. 74% Delaware
- - - - - - - - - - - - - - ---------------
(a)Wholly-owned subsidiary of RadNet Management, Inc.
PHS also owns approximately 19% of the outstanding common stock of
Viromedics, Inc. a Delaware corporation and approximately 4% of the outstanding
common stock of CareAdvantage, Inc., a Delaware corporation.
(c) Reports on Form 8-K - During the quarter ended October 31, 1997. The
Company filed a Form 8-K relating to the Item 2 event of September 8, 1997,
whereby the Company sold its Future Diagnostics, Inc. subsidiary.
37
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as
of this __ day of January, 1998, by and between PRIMEDEX HEALTH SYSTEMS, INC., a
New York corporation qualified to do business in California ("PRIMEDEX"), with
its principal place of business at 1516 Cotner Avenue, Los Angeles, California
90025 and STEVEN R. HIRSCHTICK, an individual ('CONSULTANT").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and intending to be legally bound hereby, the parties hereto agree as
follows.
1. Retention and Extent of Service. PRIMEDEX hereby retains CONSULTANT
to begin his consulting services on March 1, 1998. During the term of this
Agreement, CONSULTANT shall provide consulting services in his areas of
expertise as reasonably requested from time to time by PRIMEDEX. Any such
consulting services shall always occupy substantially less than all of
CONSULTANT'S full professional and business time. PRIMEDEX acknowledges and
understands that all of CONSULTANT'S services shall be rendered from geographic
locations outside of California. CONSULTANT shall never be required to
personally attend any meetings in California or the United States as a result of
this Agreement, as PRIMEDEX understands that all of CONSULTANT'S services shall
be communicated to PRIMEDEX and its representatives via telephone, facsimile,
and/or e-mail.
2. The term of this Agreement shall begin on March 1, 1998 and expire
on February 28, 2003.
3. Compensation. CONSULTANT shall be paid Fifty Thousand Dollars
($50,000) per year for services rendered under this Agreement. CONSULTANT shall
be paid this amount in the following manner. A gross and net amount of $25,000
shall be paid by PRIMEDEX to CONSULTANT on each March 1 and September 1 that
this Agreement remains in effect. As CONSULTANT is operating as an independent
contractor under this Agreement, there shall be no withholdings or deductions
from any such payments unless specifically directed in advance by CONSULTANT.
4. Business Expenses. All business expenses incurred by CONSULTANT in
performing services under this Agreement shall be the responsibility of
CONSULTANT, except for the following: (1) PRIMEDEX shall pay
telephone/communication charges incurred by CONSULTANT up to a maximum of $400
per month; and (2) any other expenses agreed to by PRIMEDEX.
5. Termination.
a. Death. If CONSULTANT dies during the term of this Agreement, then
PRIMEDEX shall promptly pay $50,000 to CONSULTANT'S Spouse and then this
Agreement shall terminate.
b. This Agreement may be terminated at any time by mutual consent.
c. This Agreement may be terminated without any cause whatsoever
other than the desire to terminate this Agreement by PRIMEDEX at any time after
either of the following has occurred: (1) the common stock of PRIMEDEX has
traded on the open market at or above $.80 per share for at least thirty (30)
consecutive days; or (2) PRIMEDEX has been sold for a cash or cash equivalent
price in excess of $.80 per share. If the PRIMEDEX stock does not attain such
price levels, then PRIMEDEX may not terminate this Agreement prior to its
expiration date.
d. This Agreement may be terminated without any cause whatsoever
other than the desire to terminate this Agreement at any time after CONSULTANT
has caused PRIMEDEX to purchase an aggregate of more than 200,000 shares of
PRIMEDEX common stock under the Stock Put Agreement of the same date and between
the same parties as this Agreement.
e. At any time after December 31, 1999, PRIMEDEX may buy out the
remaining term of this Agreement at any time by paying to CONSULTANT an amount
equal to $50,000 multiplied by the number of years (including fractions thereof)
remaining on the unexpired term of this Agreement less twenty-five percent (25%)
of the product of that multiplication.
38
6. Attorney-Client Privilege. PRIMEDEX recognizes that CONSULTANT is an
attorney and has in the past, and may again in the future, render services for
numerous clients in the same industry and possibly the same market as PRIMEDEX.
PRIMEDEX also recognizes and accepts that there is an attorney-client privilege
of the utmost confidentiality that is required with respect to any confidential
information that CONSULTANT has previously received or may receive in his
capacity as an attorney. Nothing in this Agreement shall be construed to require
CONSULTANT to divulge any such information or utilize any such information for
the benefit of PRIMEDEX. CONSULTANT'S refusal to divulge and/or utilize any such
information shall not constitute a breach of this Agreement.
7. Indemnification. PRIMEDEX hereby indemnifies and shall hold
CONSULTANT harmless for any and all expenses, including travel expenses,
judgments, awards, and/or legal fees (with an attorney of CONSULTANT'S choice)
relating to any litigation or other legal proceedings in which CONSULTANT is
named as a party in such litigation or other legal proceeding because of some
alleged act or activity alleged to have been conducted by CONSULTANT in any
capacity in which he is or ever has been connected with PRIMEDEX.
8. Independent Contractor. PRIMEDEX and CONSULTANT both agree and
acknowledge that CONSULTANT is at all times acting as an independent contractor
when providing services under this Agreement. PRIMEDEX shall have no control
whatsoever over CONSULTANT'S location while he is providing services under this
Agreement, or the manner in which he provides services under this Agreement.
PRIMEDEX shall take no deductions whatsoever or withholdings whatsoever from any
payment due to CONSULTANT under this Agreement, and CONSULTANT shall be solely
responsible for any and all income taxes due because of CONSULTANT'S receipt of
such payments.
9. Any notices to be provided under this Agreement shall be provided in
writing and shall be provided to PRIMEDEX at the address shown at the beginning
of this Agreement, and shall be provided to CONSULTANT at the following address:
Steven R. Hirschtick, Esq.
c/o Robert E. Hirschtick, M.D.
306 West Marion Avenue
Arlington Heights, Illinois 60004
10.Governing Law. This Agreement shall be governed by and interpreted
and enforced in accordance with the laws of the State of California, without
reference to the principles governing the conflicts of laws applicable in that
or any other jurisdiction.
11.Cost of Controversies. The prevailing party shall be entitled to
recover its or his actual attorneys fees and costs (including travel expenses)
incurred in connection with any action or proceeding that is maintained under
this Agreement.
IN WITNESS WHEREOF, the undersigned has each duly executed this
Agreement as of the date first above written.
PRIMEDEX HEALTH SYSTEMS, INC.
By: ______________________________
Howard G. Berger, M.D.
Its President and CEO
CONSULTANT:
-----------------------------------
Steven R. Hirschtick
39
STOCK PUT
THIS STOCK PUT (the "Agreement") is made and entered into as of this __
day of January, 1998, by and between PRIMEDEX HEALTH SYSTEMS, INC., a New York
corporation qualified to do business in California ("PRIMEDEX"), with its
principal place of business at 1516 Cotner Avenue, Los Angeles, California 90025
and STEVEN R. HIRSCHTICK, an individual ('STOCKHOLDER").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and intending to be legally bound hereby, the parties hereto agree as
follows.
1. Stock Put. STOCKHOLDER presently owns 600,000 or more shares of
common stock of PRIMEDEX. At any time after December 31, 1998 and prior to
February 28, 2003, STOCKHOLDER may cause PRIMEDEX to purchase up to 600,000
shares of PRIMEDEX common stock at a price of $.40 per share. STOCKHOLDER may
cause this purchase in one transaction for all 600,000 shares or a series of
smaller transactions (minimum of 100,000 shares per transaction) at different
times, provided that the total number of shares that STOCKHOLDER causes PRIMEDEX
to purchase from him does not exceed a total of 600,000. None of the shares
which may be tendered to PRIMEDEX by STOCKHOLDER under this Agreement need be
registered with the Securities Exchange Commission or California equivalent.
2. Adjustments. The 600,000 share total referred to in Paragraph 1 of
this Agreement shall be appropriately adjusted to reflect any stock splits,
stock dividends or other such transactions. The intention of the parties is that
the STOCKHOLDER shall have the right to cause PRIMEDEX to pay a total of
$240,000 for the number of shares of PRIMEDEX that is the equivalent of 600,000
such shares today.
3. Procedure. To exercise his rights hereunder, STOCKHOLDER shall give
written notice of such exercise of rights, and such notice shall specify the
number of shares that STOCKHOLDER is selling to PRIMEDEX. Within five (5) days
of the receipt of such notice by PRIMEDEX, STOCKHOLDER shall deliver the
appropriate number of shares to PRIMEDEX, and PRIMEDEX shall present STOCKHOLDER
with a check in the appropriate amount for the shares tendered.
4. Should STOCKHOLDER die prior to February 28, 2003, any and all of
his rights hereunder may be fully exercised by his Spouse.
5. The rights granted to STOCKHOLDER by PRIMEDEX under this Agreement
are in partial consideration for STOCKHOLDER'S agreement (in other documents) to
relinquish certain rights to which he is entitled under his Employment Agreement
with PRIMEDEX.
IN WITNESS WHEREOF, the parties hereto have signed this document on the
first date written above.
PRIMEDEX HEALTH SYSTEMS, INC.
By: ______________________________
Howard G. Berger, M.D.
Its President and CEO
STOCKHOLDER
-----------------------------------
Steven R. Hirschtick
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIMEDEX HEALTH SYSTEMS, INC.
Date: March 26, 1998 /s/ Howard G. Berger, M.D.
--------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By /s/ Howard G. Berger, M.D.
Howard G. Berger, M.D.
Date: March 26, 1998
By /s/ Jaana Shellock
Jaana Shellock
Date: March 26, 1998
By /s/ Norman Hames
Norman Hames
Date: March 26, 1998
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