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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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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, 1999 Commission File Number 0-19019
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PRIMEDEX HEALTH SYSTEMS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 13-3326724
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1516 Cotner Avenue
Los Angeles, California 90025
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (310) 478-7808
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Securities registered pursuant to Section 12(b) of the Act: NONE
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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 X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
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The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $2,805,236 on February 1,
2000 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 1,
2000 was 38,932,760 shares (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
NONE
1
PART I
ITEM 1. BUSINESS
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(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 35 California diagnostic
imaging facilities [five of which are wholly-owned by the Company's 90% 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 29 medical imaging centers and is a joint venture
partner in one other imaging center. 23 of the imaging centers are located in
Southern California [with three 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 30 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. 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 $4,000,000 and
represented approximately 31% of the outstanding DIS common stock.
DIS at that time owned and operated 10 imaging centers providing
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 four additional centers in 1996 and 1997.
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. Effective January 1, 1998, DHS
acquired the DIS partnership interest in the Scripps Chula Vista MRI Center in
exchange for 127,250 shares of its Common Stock which were sold in May 1998 for
approximately $1,230,000.
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. 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 acquire 4,130,000 shares of the Company's common stock at
$.60 per share. Since August 1996, the Company has acquired an additional
3,472,137 shares of DIS common stock from certain third parties for $4,181,841
in cash and notes thereby increasing the Company's ownership to approximately
90% of the outstanding DIS common shares as of February 10, 2000 [excluding
2
treasury shares]. In October 1998, the Company purchased DIS's outstanding
preferred stock from DVI Healthcare Operations, Inc. for $5,207,900.
Future Diagnostics
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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. 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 assumption of liabilities].
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
The Company is principally engaged in only one industry segment, the
healthcare services industry.
(c) NARRATIVE DESCRIPTION OF IMAGING BUSINESS
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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 $350,000 to $800,000.
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 $800,000 and $1,600,000.
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
3
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.
4
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.
Mammo- Ultra- Diagnostic Nuclear
Center MRI CT graphy sound Radiology Medicine
------ --- -- ------ ----- --------- --------
Tower Division:
Roxsan * * * * * *
Wilshire * * * *
Women's * *
Antelope Valley *
Camarillo** * * *
Fresno * * * * *
La Habra * *
Lancaster [Two Sites] * * * * * *
Long Beach [Four Sites] * * * * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange [Two Sites] * * * * * *
Oxnard * * * *
Riverside** * * * * *
Sacramento [DRI]
[Two Sites] * * * * *
San Francisco *
Santa Clarita * * * * *
Santa Rosa *
Stockton/Valley * * * * * *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * * *
Vacaville * * *
Ventura [Five Sites] * * * * * *
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.
5
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 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 99% 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 Services Agreement, BRMG has agreed to pay a Management Fee to
RadNet and DIS 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, 23 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, 1999, capital lease obligations totaled approximately $25 million through
October 31, 2006 including current installments totaling approximately $4
million. Also at October 31, 1999, installment notes payable totaled
approximately $72 million through September 30, 2006 including current
installments of approximately $35 million [including line of credit balances of
approximately $21.6 million]. Commitments under equipment operating leases at
October 31, 1999 were approximately $10 million through December 2006 including
current obligations of approximately $1.6 million. 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 nine full-time and one 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
6
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 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
$6,000,000 per occurrence and $8,000,000 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 of $1,000,000 per
occurrence and $5,000,000 in the aggregate. Although management believes that
such levels of insurance are adequate, there can be no assurance in this regard.
In addition, the Company maintains $33,000,000 of blanket general liability
insurance covering each center and its own principal offices as well as all of
its employees. BRMG, DIS, RMIS and Radnet are also named insureds under this
policy.
EMPLOYEES
At October 31, 1999, the Company [including DIS] had a total of 487
full-time employees of whom 11 served in executive positions, 214 supplied
technical and managerial services at the various imaging centers, and 262
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.
7
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 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.
8
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.
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.
9
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
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 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 for Company's %
------------ --------------- ----------------- -----------
of Center Leased Facility Ownership Interest Lease Expiration
--------- --------------- ------------------ ----------------
Tower Division:
[Beverly Hills and Environs]
Roxsan 8,143 $ 220,000 100% March 2001
Women's 3,830 $ 60,000 100% February 2014
Wilshire 13,778 $ 455,000 100% September 2018
Antelope Valley 2,890 $ 39,000 100% June 2000
Fresno 5,360 $ 115,000 100% March 2003
La Habra 3,034 $ 39,000 100% December 2002
Lancaster [two sites] 7,827 $ 170,000 100% July 2002
Long Beach - Redondo [three sites] 6,000 $ 20,000 100% December 1999
Long Beach - Los Coyotes 3,062 $ 62,000 100% August 2004
Northridge 7,500 Owned 100% N/A
Orange [two sites] 5,376 $ 174,000 100% February 2001
Oxnard 5,100 $ 101,000 100% February 2002
Sacramento [DRI] [two sites] 9,727 $ 330,000 100% June 2003
San Francisco 3,380 $ 49,000 100% March 2000
Santa Clarita 5,782 $ 111,000 100% June 2009
Santa Rosa 4,235 $ 129,000 100% July 2001
Stockton/Valley 4,588 $ 77,000 100% December 2001
Tustin 2,139 $ 53,000 100% January 2003
Vacaville 3,984 $ 53,000 100% September 2003
Ventura 9,440 $ 135,000 100% July 2002
Ventura -Loma Vista [Four Sites] 3,585 $ 57,000 100% November 2001
DIS Centers
-----------
Camarillo 2,035 $ 36,000 90% May 2002
North County [San Diego] 2,042 $ 58,000 90% October 2000
Riverside 8,312 $ 121,000 90% July 2006
Temecula 5,824 $ 111,000 90% April 2006
Temecula Oncology 5,418 $ 96,000 90% Pending
Thousand Oaks 8,300 $ 320,000 90% January 2001
Joint Venture
-------------
Westchester 6,763 $ 256,000 50% July 2001
Other Facilities
----------------
RadNet [Corp. office] 11,500 $ 228,000 N/A May 2003
Warehouse/Other 40,657 $ 517,000 N/A Various
11
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
(a) BACKGROUND. 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, Digial 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. 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 settlement with the plaintiff
class in this lawsuit by the payment of $240,000 which was granted final court
approval, in the first quarter of 1999.
(b) An action entitled "Gerald E. Dalrymple, M.D. and Gerald E.
Dalrymple, M.D., Inc. v. Primedex Health Systems, Inc., Howard Berger, M.D.,
Diagnostic Imaging Services, Inc., a Delaware corporation, Diagnostic Imaging
Services, a California corporation, and Diagnostic Health Services, Inc." was
filed in the Los Angeles Superior Court, Case No. SC 047526 on June 3, 1997. The
Complaint alleged that Diagnostic Imaging Services, Inc. ["DIS"]failed to
properly pay plaintiffs' fees for performing professional services to which they
were entitled as well as damages for violation of the implied covenant of good
faith and fair dealing, fraud, conversion, breach of fiduciary duty,
interference with existing and prospective business advantage, negligent and
intentional infliction of emotional distress and defamation, and sought damages
for an unspecified amount in excess of $25,000. The Complaint also alleged that
by virtue of the investment by the Company in DIS and the sale of four of the
DIS imaging centers and its ultrasound business to Diagnostic Health Services,
Inc., that DIS had thereby effected either a reorganization, consolidation,
merger or transfer of all or substantially all of its assets to another entity
thereby permitting plaintiffs to convert a warrant for 319,488 shares of DIS's
common stock, issued in connection with the acquisition of Parkside Radiology,
to either $1,000,000 cash or stock with a market value of $1,000,000 in the
Company, at the election of the Company. A partial settlement was reached in
August 1997. Pursuant to the settlement, Dr. Dalrymple assumed ownership of
Parkside Radiology and assumed responsibility for expenses of the facility in
the future. Additionally, DIS sold certain of its equipment and leasehold
improvements to Dr. Dalrymple for approximately $400,000. Plaintiffs' remaining
claims, as well as the DIS cross-claims against Dr. Dalrymple alleging, among
other things, that Dr. Dalrymple pursued a plan to depress Parkside's business,
and therefore its value, thus enabling him to acquire the facility he previously
sold to DIS at a depressed price, were tried before a jury in Santa Monica,
California, from July 28, 1999 through August 20, 1999. Having abandoned their
claims for defamation and interference with existing and prospective business
advantage prior to trial, plaintiffs went forward with their claim for breach of
plaintiffs' professional services contract with DIS, their claim for breach of
the implied covenant of good faith and fair dealing arising therefrom, their
claims arising from the warrant, as well as their claims for fraud, conversion,
breach of fiduciary duty, and for negligent and intentional infliction of
emotional distress. During the trial, the Court granted verdict in the Company's
favor on the latter claim and dismissed all punitive damages allegations. On the
complaint, the jury awarded a verdict against the Company in the amount of
$1,000,000 on the warrant claim, $259,345 on the claims based upon the
professional services contract, $226,650 on the breach of fiduciary duty and
conversion claims, $445,000 on the claim for negligent infliction of emotional
distress, and interest thereon. On the cross-complaint, DIS was awarded $180,000
for breach of contract on its claim that the plaintiffs failed to deliver a
valid and enforceable assignment of the leasehold premises when DIS purchased
Parkside Radiology in 1994. Additionally, one of the Company's insurance
12
carriers has reimbursed the Company $691,683.42 against its attorney's fees.
Both sides have sought an award of attorney fees and have filed appeals of the
jury's awards against them. The Company intends to vigorously pursue its
appellate rights and remedies.
(c) An action entitled "Sterling Diagnostic Imaging, Inc. v. Primedex
Health Systems, Inc., Radnet Management, Inc. and Diagnostic Imaging Services,
Inc." was filed in New Castle County [Delaware] Superior Court, Case No.
98C-10-112 [HLA], and a separate action entitled "Diagnostic Imaging Services,
Inc. v. Sterling Diagnostic Imaging, Inc." was filed in Contra Costa County
[California] Superior Court bearing Case No. C98-04298. This matter was
initiated on June 5, 1998, when Sterling filed a demand for Arbitration before
the American Arbitration Association in Philadelphia, seeking to enforce a film
purchase agreement between DIS and E.I. du Pont de Nemours and Company
["DuPont"]. In October 1998, both DIS and Sterling commenced civil actions in
state court. Sterling's action, filed in the Delaware Superior Court, sought to
compel arbitration or, in the alternative, sought damages for breach of contract
against DIS, seeking to recover $5,000,000. DIS was also sued for civil
conspiracy, along with defendants Radnet Management, Inc. and the Company, who,
were additionally sued on alternative theories of alter ego [of DIS] and
tortious interference with DIS's alleged contract with Sterling. Following the
filing of a motion to dismiss by DIS, Sterling filed an amended complaint
abandoning its attempt to compel arbitration. DIS and the other defendants filed
motions seeking to either dismiss the action entirely or, alternatively, to stay
the action pending the resolution of the California action. The Delaware court
dismissed the action as to the Company and Radnet Management, Inc. and stayed
the action as to DIS pending the hearing in California. The DIS action against
Sterling sought declaratory relief on claims that Sterling was not a proper
assignee of the DIS contract with DuPont and thus had no standing. Sterling
filed its claims as a cross-complaint in DIS's California action in April 1999.
In the summer of 1999, the parties entered into settlement discussions which
have resulted in a resolution of all actions. The settlement, which is in the
process of being documented, requires DIS to pay Sterling $700,000 over five
years on the following terms: an initial payment of $100,000, a payment of
$100,000 one year later and the remaining $500,000 paid in monthly installments
of $7,066.95 (starting after the first $100,000 payment) including five percent
interest amortized over seven years, with a balloon payment of $161,083.34 at
the end of five years.
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.
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, 1999 .27 .08 .29 .09
April 30, 1999 .16 .11 .18 .13
July 31, 1999 .21 .13 .23 .14
October 31, 1999 .15 .09 .17 .11
January 31, 1998 .26 .26 .32 .28
April 30, 1998 .20 .20 .25 .22
July 31, 1998 .14 .13 .16 .15
October 31, 1998 .09 .09 .10 .10
13
_____________
(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 1, 2000, were $.10 and $.11, respectively. As of
February 1, 2000, the number of holders of record of PHS Common Stock was 2,730.
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 2,730.
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. During fiscal 1998, PHS repurchased
$2,205,000 outstanding debentures for a purchase price of $1,484,943. During
fiscal 1999, PHS repurchased an additional $676,000 of its outstanding
debentures for a purchase price of $337,215 from unaffiliated third parties. In
addition, effective December 18, 1998, $5,000 of face value debentures were
converted into 500 shares of the Company's common stock.
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.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ------- ------------------------------------
YEARS ENDED
OCTOBER 31,
--------------------------------------------------------------------------------
(000's except per share amounts)
OPERATING DATA: 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Gross Revenues $ 170,518 $ 132,595 $ 132,569 $ 111,381 $ 88,884
Operating Expenses 70,359 75,329 74,687 58,372 98,124
[Loss] from Investee Transactions -- -- -- (314) --
Income [Loss] from Continuing Operations (9,071) (28,543) (748) (8,361) (57,616)
[Exclusive of Non-Recurring Items] Net of Taxes**
Income [Loss] from Discontinued Operations -- -- -- -- (3,813)
Net [Loss] Income Before Extraordinary Items and (10,627) (29,497) (2,343) (9,511) (62,370)
Change in Accounting Principle
Extraordinary Items- Gain 1,556 955 1,595 1,150 941
Change in Accounting Principle -- (779) -- -- --
[Loss] Income Per Common Share From Continuing (.27) (.75) (.06) (.24) (1.54)
Operations Before Extraordinary Items
[Loss] Income Per Common Share from Discontinued .04 .02 .04 -- (.09)
Operations
[Loss] Income Before Extraordinary Items (.23) (.75) (.06) (.24) (1.63)
Net [Loss] Income Per Common Share (.23) (.75) (.02) (.21) (1.61)
Cash Dividends Per Common Share -- -- -- -- --
BALANCE SHEET DATA: 3 59 130 152 3,929
Cash and Cash Equivalents
Total Assets* 72,247 62,656 86,340 105,931 66,760
Total Long-Term Liabilities 79,023 79,282 76,843 85,464 54,088
Total Liabilities 136,604 118,016 111,270 130,792 82,002
Working Capital [Deficit] (38,007) (20,191) (12,027) (22,627) (4,337)
Stockholders' Equity [Deficit] (64,357) (55,360) (24,930) (24,861) (15,242)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
- -------------
BACKGROUND
Primedex Health Systems, Inc. ["PHS"] [formerly CCC Franchising Corp.] was
incorporated on October 21, 1985.
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
15
party for approximately $9,448,000. The sale resulted in a loss of approximately
$3,800,000.
In November of 1995, the Company formed Radnet Managed Imaging Services, Inc.
["RMIS"] which 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. 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 Company continues to operate RMIS which provides utilization
review services. The statements of operations and cash flows for the years ended
October 31, 1999, 1998 and 1997 reflect the operations and cash transactions
with RMIS.
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. 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 4,130,000 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.
In subsequent purchases through February 10, 2000, the Company acquired or
purchased an additional 3,472,137 shares of DIS common stock for $4,181,841
increasing its total ownership to approximately 90% [excluding treasury shares].
The Statements of Operations and Cash Flows for the years ended October 31,
1999, 1998 and 1997 reflect the operations and cash transactions of DIS.
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
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, future business decisions, and future governmental medical
reimbursement decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the forward
looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward looking statements will be realized. There are 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
16
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.
BASIS OF PRESENTATION
The financial information included in this Form 10-K has been prepared without
audit (refer to report on page F-1 of financial statements included herein). In
the opinion of management, financial information includes all adjustments and
disclosures necessary for a fair presentation in accordance with generally
accepted accounting principles.
DISCUSSION OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1999 VS.
OCTOBER 31, 1998
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,
RMIS and DIS for the year ended October 31, 1999 and 1998.
For the year ended October 31, 1999, the Company had operating income from
continuing operations of $1,898,524 which includes impairment losses of
$478,646. For the year ended October 31, 1998, the Company had operating losses
from continuing operations of $16,508,162 which includes impairment losses of
$12,677,324.
The Company generated gross revenue of $170,517,885 and $132,594,891 and net
revenue of $72,257,665 and $58,820,543 for the years ended October 31, 1999 and
1998, respectively. During the years ended October 31, 1999 and 1998, Radnet
generated gross revenue of $147,533,961 and $111,648,718, respectively, PHS
generated gross billing revenue of $-0- and $215,975, respectively, and DIS
generated gross revenue of $22,983,924 and $20,730,198, respectively [net of
elimination entries]. During the years ended October 31, 1999 and 1998, Radnet
generated net revenue of $59,845,230 and $47,555,149, respectively, RMIS
generated net revenue of $-0- and $37,427, respectively, PHS generated net
billing revenue of $-0- and $215,975, respectively, and DIS generated net
revenue of $12,412,436 and $11,011,992, respectively [net of elimination
entries].
The Company's net revenue increased approximately 23% for the year ended October
31, 1999 primarily due to the addition of new centers, including but not limited
to, Redondo Imaging Center and Loma Vista, the addition or improvement of
medical equipment and the addition of new contracts. In addition, during the
year ended October 31, 1998, the Company began the process of consolidating many
of its internal and external billing systems into two systems company-wide based
upon geographic considerations. With this process, the balances on the Company's
previous systems were sent to collection agencies and the values were
written-down considerably to account for their age and higher one-time
collection fees. In addition, historical workers compensation [pre-1994] and
personal injury files were written-off or adjusted for current trends in
collection yields, increased age and uncollectibility, and bad debts were
recorded on a few of the Company's contracted payors who did not pay or
defaulted on note or payment arrangements. During the year ended October 31,
1998, approximately $4 million in additional contractual adjustments or
provisions for bad debt were recorded for these accounts receivable adjustments.
17
For the years ended October 31, 1999 and 1998, operating expenses totaled
$70,359,141 and $75,328,705, respectively. For the year ended October 31, 1999,
Radnet's operating expenses were $55,841,840, RMIS's operating expenses were
$40,080, DIS's operating expenses were $12,183,666 and PHS's overhead expenses
were $2,293,556 [net of elimination entries]. For the year ended October 31,
1998, Radnet's operating expenses were $51,294,476, RMIS's operating expenses
were $334,293, DIS's operating expenses were $21,313,209 and PHS's overhead
expenses were $2,386,727 [net of elimination entries].
During the years ended October 31, 1999 and 1998, the Company recognized
impairment losses, included in operating expenses, of $478,646 and $12,677,324,
respectively. For the years ended October 31, 1999 and 1998, the Company
incurred expenses for salaries and professional reading fees of $30,991,224 and
$25,919,490, respectively, building and equipment rental expenses of $5,562,000
and $5,412,407, respectively, general and administrative expenses of $22,124,194
and $19,978,762, respectively, provisions for bad debt of $3,110,962 and
$2,698,139, respectively, and depreciation and amortization expense of
$7,708,976 and $8,642,583, respectively.
For the year ended October 31, 1999 and 1998, interest income was approximately
$398,000 and $140,000, respectively. During fiscal 1999, no interest income was
recognized on a related party note receivable in which the due date was extended
to February 2002. For the years ended October 31, 1999 and 1998, interest
expense was approximately $10,713,000 and $9,279,000, respectively.
For the years ended October 31, 1999 and 1998, the gain on sale of subsidiaries
and Divisions was approximately $-0- and $965,000 respectively. Fiscal 1998's
gain primarily consisted of additional proceeds of approximately $595,000 for
the Company's agreement to a IRS Section 338 (h)(10) Election as part of the FDI
sale transaction, a final FDI sale reconciliation adjustment of approximately
$70,000, a gain from the partnership dissolution of LaHabra of approximately
$48,000, and a gain from the sale of SCV of approximately $252,000.
For the year ended October 31, 1999 and 1998, other income was approximately
$398,000 and $394,000, respectively. Other income consisted primarily of
professional fee income, record copy income, net gains on the sale or disposal
of assets, rental income, covenant not-to-compete income and rebates. Other
expenses consisted primarily of modification fee costs, discounts on notes
receivable, net losses on the sale or disposal of assets and write-offs of
offering costs associated with bond repurchases. During fiscal 1998, the Company
also recognized a net gain of approximately $297,000 from the conversion of DHS
common stock [received as payment on the $1,500,000 in post closing payments
from the sales of four of DIS's hospital-based MRI facilities and the sale of
SCV] into cash.
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
For the years ended October 31, 1999 and 1998, the Company had gains on early
extinguishment of debt of $1,556,121 and $954,533, respectively. During the
years ended October 31, 1999 and 1998, gains from the retirement of bonds were
approximately $339,000 and $720,000, respectively, and gains from the settlement
of notes were approximately $1,217,000 and $235,000, respectively. For the year
ended October 31, 1998, the Company wrote-off capitalized fees and organization
18
costs of approximately $780,000 upon the early adoption of Statement of Position
["SOP"] No. 98-5, "Reporting on the Costs of Start-up Activities."
For the years ended October 31, 1999 and 1998, the Company had net losses of
$9,071,221 and $29,321,832, respectively. For the year ended October 31, 1999,
Radnet realized net losses of $841,970, RMIS realized net losses of $40,080, DIS
realized net losses of $3,606,927 and PHS realized net losses of $4,582,244 [net
of elimination entries]. For the year ended October 31, 1998, Radnet realized
net losses of $8,839,831, RMIS generated net losses of $182,136, DIS realized
net losses of $16,699,060 and PHS realized net losses of $3,600,805 [net of
elimination entries].
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased for the years ended October 31, 1999 and 1998 by $56,857 and
$70,022, respectively.
Cash utilized for investing activities for the year ended October 31, 1999 was
$5,865,555. Cash generated from investing activities for the year ended October
31, 1998 was $1,282,607.
During the year ended October 31, 1999, the Company purchased property and
equipment for $6,657,055, acquired an additional 390,100 shares of DIS common
stock for $50,000 in cash [and $437,625 in notes payable], acquired the assets
of Tarzana Imaging Center ["Tarzana"] for $50,000, paid loan fees of $117,500,
made loans to related parties of $80,000 and received proceeds from the sale of
medical equipment of $1,089,000.
During the year ended October 31, 1998, the Company received proceeds of
$595,645 for a IRS Section 338 (h)(10) Election related to the sale of FDI,
$69,393 of additional proceeds from PHM for final reconciling adjustments,
$420,000 from the sale of medical equipment, $2,059,179 from PHM in full payment
of the FDI sale note receivable, $1,232,691 from the sale of SCV in the form of
common stock [which was subsequently sold], and $1,849,936 from the conversion
of a note receivable due from the sale of DIS's MRI facilities into common stock
[which was subsequently sold]. During the year ended October 31, 1998, the
Company acquired an additional 1,788,374 shares of DIS common stock for
$1,739,120 in cash [and approximately $325,000 in notes payable], received
$94,515 from the dissolution of the La Habra partnership, purchased property and
equipment for $3,089,632, made loans of $235,000 to related parties and received
$25,000 in payments from related parties.
Cash generated from financing activities for the years ended October 31, 1999
and 1998 was $4,464,109 and $134,066, respectively. For the year ended October
31, 1999 and 1998, the Company made principal payments on notes payable and
capital lease obligations of $14,527,872 and $8,077,336, respectively. The
fiscal 1999 increase was primarily due to increases in obligations as well as
the settlement of one of the Company's notes payable at a 20% discount utilizing
proceeds borrowed from another lending source. In addition, during fiscal 1998,
the Company restructured its capital lease obligations and notes payable with
its two primary lendors extending terms, reducing monthly payments and skipping
at least one principal payment during the year. For the years ended October 31,
1999 and 1998 the Company received proceeds from borrowings on lines of credit
19
and notes payable of $18,860,523 and $8,180,082, respectively. During fiscal
1999, the Company increased its lines of credit borrowing $9,719,983 from fiscal
1998 and received working capital proceeds from other outside lendors of
$9,140,540. For the years ended October 31, 1999 and 1998, the Company purchased
$676,000 face value subordinated bond debentures for $337,215 and purchased
$2,205,000 debentures for $1,484,943, respectively. For the years ended October
31, 1999 and 1998, the Company increased its cash overdraft by $623,673 and
$1,410,513, respectively. For the year ended October 31, 1999, the Company
distributed $100,000 to its joint venture partner and purchased $55,000 of
treasury stock. For the year ended October 31, 1998, the Company received
proceeds of $30,750 from the issuance of common stock and received joint venture
proceeds of $75,000.
At October 31, 1999 and 1998, the Company had working capital deficits of
$38,007,447 and $20,191,252, respectively. The 1999 increase in working capital
deficit of $17,816,195 was primarily due to the increase in net lines of credit
borrowings of approximately $9,720,000 and the classification of the Company's
$5,225,000 note payable for the acquisition of DIS's preferred stock from DVI
[due October 31, 2000] as a current liability. Included in 1999 and 1998 current
liabilities of the Company are approximately $21.6 million and $11.9 million of
revolving lines of credit liabilities, respectively.
The Company's future payments for debt and equipment under capital leases for
the next five years, excluding operating lines of credit, will be approximately
$46,050,000, $20,900,000, $16,225,000, $15,000,000 and $11,550,000. Interest
expense, excluding interest expense on operating lines of credit, for the
Company for the next five years, included in the above payments, will be
approximately $6,700,000, $4,900,000, $3,425,000, $2,200,000 and $1,025,000,
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 $4,000,000 in annual
payments over the next five years.
The Company estimates interest payments on its bond debentures to be
approximately $1,995,000 for fiscal 2000. 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 10, 2000, the Company purchased $84,000 face value bond
debentures for $43,680. The Company will retire all of these bonds.
The Company's working capital needs are currently provided under three lines of
credit. Under one agreement with Coast Business Credit, due December 31, 2001,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$20,000,000 or the prior 120-days' cash collections. In any scenario, the
Company may borrow up to the aggregate collection of receivables in the prior
120-days as long as the collections in any one month do not decrease by more
than 25% from the prior month. Borrowings under this line are repayable together
with interest at an annual rate equal to the greater of (a) the bank's prime
rate plus 2.5%, or (b) 8%. The lender holds a first lien on substantially all of
Radnet's [Beverly Radiology's] assets, the President and C.E.O. of PHS has
personally guaranteed $6,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the President and C.E.O.
of PHS. At October 31, 1999, approximately $16,100,000 was outstanding under
this line.
Under a second line of credit with DVI Business Credit, due October 31, 2000,
the Company may borrow the lesser of 110% of the eligible accounts receivable or
$5,000,000. The credit line is collateralized by approximately 80% of the Tower
division's accounts receivable. Borrowings under this line are repayable
together with interest at an annual rate equal to the bank's prime rate plus
1.0%. At October 31, 1999, approximately $2,200,000 was outstanding under this
line.
20
The Company entered into an additional line of credit agreement with DVI
Business Credit, due October 31, 2000, where the Company may borrow up to
$3,500,000 to either (a) pay off in full the promissory note dated 10/1/94
issued to Tower Radiology, et. al. ["Tower Goodwill"], or (b) purchase, on the
open market, the subordinated debentures of the Company at a price not to exceed
60% of the face value of such debentures. Borrowings under this line are
repayable monthly, at the rate of 1.4% of the line balance, including principal
and interest, at an annual rate equal to the bank's prime rate plus 1.0%. This
line is also collateralized by the Tower division's accounts receivable. At
October 31, 1999, approximately $3,300,000 was outstanding under this line.
As of October 31, 1999, the bank's prime rate was 8.25%. Under the various
formulas, total funds available for borrowing under the three lines of credit
was approximately $4.2 million at October 31, 1999.
OPERATING PLANS
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
experienced recurring losses from operations and has a deficiency in equity of
$64,357,000 and a working capital deficiency of $38,007,000, which raise
substantial doubt about its ability to continue as a going concern. Over the
past several years, management has been addressing the issues that have led to
these deficiencies. Results of management's plans and efforts have been
positive, as indicated by recent improvement in operating income, however,
continued effort is planned in the future to allow the Company to continue to
operate and ultimately return the Company to profitability. Such actions and
plans include:
- - Increase revenue by selectively opening imaging centers in areas currently
not served by the Company. In November 1999, the Company opened a new
center in Long Beach, California, which has experienced favorable
performance in its initial months of operations.
- - Increase revenue by negotiating new and existing managed care contracts for
additional services and more favorable terms. In January 2000, the Company
entered into three new capitation contracts that will significantly
increase business in at least four Southern California facilities.
- - Increase revenue through new fee for service arrangements where
opportunities exist. In January 2000, the Company was successful in
negotiating a new fee for service arrangement that will substantially
increase patient volume in four Southern California facilities.
- - Consolidate underperforming facilities to reduce operating cost duplication.
- - Continue to evaluate all facilities' operations and trim excess operating
costs as well as general and administrative costs where it is feasible to
do so.
- - Continue to selectively acquire new medical equipment and replace old and
obsolete equipment in order to increase service volume and throughput at
many facilities. In 1999, this was done in many of the facilities,
resulting in increased revenue.
- - Selectively seek opportunities to hire physicians who have the requisite
skills and knowledge to deliver new and additional services where
deficiencies have been identified in underperforming facilities.
- - Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements and
upon the expiration of leases and notes. The company has demonstrated
success doing so in the past, and in December 1999, successfully refinanced
a portion of existing notes and obtained additional working capital.
21
DISCUSSION OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1998 VS.
OCTOBER 31, 1997
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,
RMIS and DIS for the year ended October 31, 1998. The discussion of the results
of continuing operations includes PHS, Radnet, RMIS, DIS and FDI for the year
ended October 31, 1997.
For the years ended October 31, 1998 and 1997, the Company had operating losses
from continuing operations of $16,508,162 and $7,668,385, respectively, which
included impairment losses of $12,677,324 and $4,553,783, respectively.
The Company generated gross revenue of $132,594,891 and $132,569,387 and net
revenue of $58,820,543 and $67,018,507 for the years ended October 31, 1998 and
1997, respectively. The Company's net revenue decreased approximately 12% for
the year ended October 31, 1998. During the years ended October 31, 1998 and
1997, Radnet generated gross revenue of $111,648,718 and $100,169,718,
respectively, FDI generated gross revenue of $0 and $7,103,525, respectively,
PHS generated gross billing revenue of $215,975 and $225,701, respectively, and
DIS generated gross revenue of $20,730,198 and $25,070,443, respectively [net of
elimination entries]. During the years ended October 31, 1998 and 1997, Radnet
generated net revenue of $47,555,149 and $44,952,132, respectively, FDI and RMIS
generated net revenue of $37,427 and $7,010,470, respectively, PHS generated net
billing revenue of $215,975 and $225,701, respectively, and DIS generated net
revenue of $11,011,992 and $14,830,204, respectively [net of elimination
entries]. The decrease in net revenue is primarily attributable to the sale of
FDI which during fiscal 1997 generated net revenue of $7,010,470 which was
billed at net and required minor contractual adjustments. Even though Radnet's
gross revenue increased approximately $11.5 million during fiscal 1998,
contractual adjustments on those charges were approximately $6.5 million.
In addition, during the year ended October 31, 1998, the Company began the
process of consolidating many of its internal and external billing systems into
three systems company-wide based upon geographic considerations. With this
process, the balances on the Company's previous systems were sent to collection
agencies and the values were written-down considerably to account for their age
and higher one-time collection fees. In addition, historical workers
compensation [pre-1994] and personal injury files were written-off or adjusted
for current trends in collection yields, increased age and uncollectibility, and
bad debts were recorded on a few of the Company's contracted payors who did not
pay or defaulted on note or payment arrangements. During the year ended October
31, 1998, approximately $4 million in additional contractual adjustments or
provisions for bad debt were recorded for these accounts receivable adjustments.
For the years ended October 31, 1998 and 1997, operating expenses totaled
$75,328,705 and $74,686,892, respectively. For the year ended October 31, 1998,
Radnet's operating expenses were $51,294,476, RMIS's operating expenses were
$334,293, DIS's operating expenses were $21,313,209 and PHS's overhead expenses
were $2,386,727 [net of elimination entries]. For the year ended October 31,
1997, Radnet's operating expenses were $44,880,065, FDI's and RMIS'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].
22
During the years ended October 31, 1998 and 1997, the Company recognized
impairment losses, included in operating expenses, of $12,677,324 and
$4,553,783, respectively. For the years ended October 31, 1998 and 1997, the
Company incurred expenses for salaries and professional reading fees of
$25,919,490 and $26,328,082, respectively, building and equipment rental
expenses of $5,412,407 and $6,226,423, respectively, general and administrative
expenses of $19,978,762 and $21,915,419, respectively, provisions for bad debt
of $2,698,139 and $1,962,837, respectively, and depreciation and amortization
expense of $8,642,583 and $8,783,419, respectively. In addition, during the year
ended October 31, 1997, the Company incurred restructuring costs of $662,026 and
FDI vendor site costs of approximately $4,254,903. Even with the Company
incurring an increase in 1998 impairment losses of approximately $8.1 million,
overall operating expenses only increased approximately $650,000 due primarily
to the sale of FDI, the sales of DIS's Ultrasound Division and five of its
hospital-based MRI facilities during fiscal 1997 [Tarzana, SMIC, SGV and Chino]
and 1998 [SCV] and the closures of Parkside and West L.A..
For the year ended October 31, 1998 and 1997, interest income was approximately
$140,000 and $295,000, respectively. During fiscal 1997, the Company recorded
interest income of approximately $131,000 related to the sale of DIS's four
hospital-based MRI facilities to DHS. For the years ended October 31, 1998 and
1997, interest expense was approximately $9,279,000 and $9,845,000,
respectively.
For the years ended October 31, 1998 and 1997, the gain on sale of subsidiaries
and Divisions was approximately $965,000 and $16,000,000 respectively. Fiscal
1998's gain primarily consisted of additional proceeds of approximately $595,000
for the Company's agreement to a IRS Section 338 (h)(10) Election as part of the
FDI sale transaction, a final FDI sale reconciliation adjustment of
approximately $70,000, a gain from the partnership dissolution of LaHabra of
approximately $48,000, and a gain from the sale of SCV of approximately
$252,000. 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.
For the year ended October 31, 1998, other income was approximately $394,000.
For the year ended October 31, 1997, other expense was approximately $640,000.
Fiscal 1998's increase in other income was primarily due to the conversion of
DHS common stock received as payment on the $1,500,000 in post closing payments
from the sales of four of DIS's hospital-based MRI facilities, and the sale of
SCV into cash generating a net gain of approximately $297,000. In addition,
during the year ended October 31, 1997, the Company wrote-off a large portion of
its deposits and disposed of fixed assets.
For the years ended October 31, 1998 and 1997, the Company had gains on early
extinguishment of debt of $954,533 and $1,595,106, respectively. For the year
ended October 31, 1998, the Company wrote-off capitalized fees and organization
costs of approximately $780,000 upon the early adoption of Statement of Position
["SOP"] No. 98-5, "Reporting on the Costs of Start-up Activities."
23
NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it its designated, for example, gain or losses related to
changes in the fair value of a derivative not designated as a hedging instrument
is recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive income
[outside earnings] until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
YEAR 2000
The Company prepared its systems and applications for the year 2000 (Y2K)
through its Company wide Y2K program. The issue the Y2K program addressed was
the use of a two-digit year field instead of a four digit year field in computer
systems. If computer systems cannot distinguish between the year 1900 and the
year 2000, system failures or other computer errors could result. To date, the
Company is not aware of the occurrence of any significant Y2K problems being
reported.
The Company estimates it expended somewhat less than the $100,000 it estimated
it might incur in connection with Y2K expenses. Any further expenditures
necessary would likely be in connection with verification of third party
interface with the Company's systems.
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 on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------- ---------------------------------------------
See Form 8-K and Amendment No. 1 to From 8-K filed for the event of
December 1, 1999 with respect to information concerning the change in the
Company's Accountants.
24
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 1, 2000:
Name Age Director or Officer Since Position with Company
- ---- --- ------------------------- ---------------------
Howard G. Berger, M.D.* 54 1992 President, Treasurer, Chief
Executive and Financial
Officer, and Director
Norman R. Hames 42 1996 Vice President, Secretary, Chief
Operating Officer and Director
Jaana Shellock* 37 1996 Director
Michael J. Krane, M.D. 55 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. is the President and Chief Executive Officer of
PHS. Dr. Berger is the 99% 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.) Dr. Berger also serves as a director of Diagnostic Imaging Services,
Inc.
NORMAN R. HAMES, was a founder of Diagnostic Imaging Services, Inc. and
has since 1986, served as the president and a director of that entity.
JAANA 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, 1999, while the Board of
Directors held numerous meetings, they took board action by unanimous written
consent, which was done on one occasion. All directors participated in all such
action.
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.
25
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, 1999 by any individual
serving as the Company's Chief Executive Officer at any time during fiscal 1999
and by any other executive officer of the Company who earned at least $100,000
during fiscal 1999.
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long-Term Compensation
----------------------------------------------- ------------------------------------------------------
Other Securities Restricted
Name and Year Ended Annual Underlying Stock LTIP All Other
Principal Position 10/31 Salary($)(2) Bonus($) Comp.($) Options (#) Awards($) Pay-outs($) Comp($)
- ------------------ ----- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Howard G. Berger, M.D. 1999 $ 75,000 -- -- -- -- -- --
Chief Executive Officer 1998 $ 100,000 -- -- -- -- --
[beginning 9/1/96] 1997 $ 78,000 -- -- -- -- -- --
Norman Hames
Vice President, Secretary 1999 $ 150,000 -- -- -- -- --
and Chief Operating Officer 1998 $ 139,000 -- -- -- -- --
of PHS and President of DIS 1997 $ 150,000 -- -- -- -- -- --
Michael J. Krane, M.D. 1999 $ 100,000 -- -- -- -- -- --
Vice President 1998 $ 96,000 -- -- -- -- -- --
1997 $ 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) Does not include $300,000 per annum received from Beverly Radiology Medical
Group (see "Employment Contracts").
26
EMPLOYMENT CONTRACTS
As of January 1, 1994, Beverly Radiology Medical Group entered into an
eight year Management Consulting Agreement with Howard G. Berger, M.D. whereby
Dr. Berger agreed to serve as the chief executive for the partnership entities
for $300,000 per year.
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.
STOCK OPTIONS
During the fiscal year ended October 31, 1999, 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.
At October 31, 1999, the Company had an Incentive Stock Option Plan in
force. Under the Plan, an aggregate 2,000,000 shares of Common Stock are
reserved for issuance upon exercise of outstanding incentive stock options.
Outstanding options are held by eight Company employees at exercise prices
ranging from $.15 to $.53 per share.
Other than the warrants held by Norman Hames (see "Item 13. Certain
Relationships and Related Transactions") there are no options outstanding at
October 31, 1999, held by the individuals named in the Summary Compensation
Table.
DIRECTOR COMPENSATION
Directors do not receive a fee for their services as a director.
27
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999 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 1999 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" herein in this Item 11 and Item
13 herein as to transactions involving the Company and Dr. Berger and Mr. Hames.
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 1, 2000, 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.* 12,809,428(2) 26.6%
Jaana Shellock* 500,000(3) 1.0%
Norman Hames* 2,913,550(4) 6.1%
Michael J. Krane, M.D. 2,216,228 4.6%
All directors and executive
officers of the Company as
a group [four persons] 18,439,206(5) 38.3%
- -----------
*The address of all of the Company's officers and directors is c/o the
Company, 1516 Cotner Avenue, Los Angeles, California 90025.
(1) Subject to applicable community property statutes and except as
otherwise noted, each holder named in the table has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned.
(2)Includes 343,200 shares issuable 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. The purchase price for the shares was $.14 per share or
$1,400,000 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 had 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
28
sale of such shares. On August 7, 1995, Mr. Brennan filed for bankruptcy under
Chapter 11. On June 10, 1998, the trustees in the bankruptcy proceeding
commenced a legal action to impose a trust over the PHS common stock and to
require the Company to pay the estate $1,000,000 plus interest from August 1994.
In September 1999, all rights of Mr. Brennan were terminated in exchange for Dr.
Berger's payment of $488,872.34 and the Company's delivery of all 283,334 shares
of CareAd Common Stock owned by the Company.
(3)Represents options exercisable at $.15 per share.
(4)Represents options exercisable at $.60 per share.
(5)See the above footnotes. Includes 12,216,228 shares owned of record
and 3,756,750 shares issuable upon exercise of presently exercisable options and
convertible debentures.
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 a
controlling person of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Howard G. Berger, M.D. [see "Items 10 and 12"] is the 99% owner of
Beverly Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc.,
who together have formed the partnership known as Beverly Radiology Medical
Group, which has executed a Management and Services Agreement with RadNet and
DIS pursuant to which it supplies the professional medical services at most of
the Company's 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
1999, Dr. Berger was paid $ 300,000 and Dr. Krane was paid $150,000 by BRMG.
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 has been extended to February 28, 2002.
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 2,913,550
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.
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 Auditor's Report....................................................................... F-1
Consolidated Balance Sheets........................................................................ F-2
29
Consolidated Statements of Operations.............................................................. F-3
Consolidated Statements of Stockholders' Deficit................................................... F-4
Consolidated Statements of Cash Flows.............................................................. F-5 to F-7
Notes to Consolidated Financial Statements......................................................... F-8 to F-27
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
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)
30
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)
31
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 (I)
- ------------------
(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 10-K for the year
ended October 31, 1996.
(H) Incorporated by reference to exhibit filed with Form 8-K report for
September 8, 1997.
(I) Incorporated by reference to exhibit filed with Form 10-K for the year
ended October 31, 1997.
32
22 Subsidiaries PHS % Ownership State of Incorporation
------------ --------------- ----------------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging Services, Inc. 100% California
RadNet Sub, Inc. (1) California
Diagnostic Imaging Services, Inc. 90% Delaware
--
(1) Wholly-owned subsidiary of RadNet Management, Inc.
(c) REPORTS ON FORM 8-K No reports on Form 8-K were filed
during the quarter ended October 31, 1998.
33
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
We have audited the accompanying consolidated balance sheets of Primedex Health
Systems, Inc. and affiliates as of October 31, 1999 and the related consolidated
statement of operations, stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Primedex Health Systems, Inc.
and affiliates as of October 31, 1999, and the consolidated results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 18 the
Company has experienced recurring losses from operations, and has a substantial
deficit of capital and working capital. These matters raise substantial doubt
about the company's ability to continue as a going concern. Management's plans
with regard to these matters are also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The accompanying consolidated balance sheet as of October 31, 1998, and the
consolidated statements of operations, stockholders' deficit, and cash flows for
the years ended October 31, 1998 and 1997 were previously reported upon by other
auditors, whose report dated January 15, 1999 expressed an unqualified opinion
on those statements. In March 1999, the Securities and Exchange Commission ruled
that the auditors were not independent and therefore not in compliance with the
requirements of the federal securities laws and Rule 2-01 of Regulation S-X, and
that the financial statements reported upon are considered to be unaudited. We
have not audited the 1998 and 1997 financial statements and, accordingly,
express no opinion or other form of assurance on them.
MOSS ADAMS LLP
Los Angeles, California
January 28, 2000
- --------------------------------------------------------------------------------
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 1999
- -----------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,495 $ 2,638
Accounts receivable, net 15,429,057 16,694,368
Unbilled receivables and other receivables 58,545 441,208
Due from related party 140,000 206,200
Other 1,940,230 1,628,999
------------- -------------
Total current assets 17,627,327 18,973,413
------------- -------------
PROPERTY AND EQUIPMENT, net 26,970,584 37,666,620
------------- -------------
OTHER ASSETS
Accounts receivable, net 3,713,956 3,040,416
Due from related parties 133,260 87,795
Goodwill, net 11,313,907 10,594,678
Other 2,897,380 1,883,917
------------- -------------
Total other assets 18,058,503 15,606,806
------------- -------------
$ 62,656,414 $ 72,246,839
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash overdraft $ 1,729,994 $ 2,353,667
Accounts payable, accrued expenses and other 11,500,158 15,085,479
Current portion of notes and leases payable 24,388,427 39,341,714
Deferred revenue 200,000 200,000
------------- -------------
Total current liabilities 37,818,579 56,980,860
LONG-TERM LIABILITIES
Subordinated debentures payable 20,718,000 20,037,000
Notes payable to related party 2,553,854 2,553,854
Notes and leases payable, net of current portion 54,143,158 54,882,513
Accrued expenses 399,872 283,024
Deferred revenue 1,466,666 1,266,666
------------- -------------
Total long-term liabilities 79,281,550 79,023,057
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 676,114 440,063
REDEEMABLE STOCK 240,000 160,000
STOCKHOLDERS' DEFICIT (55,359,829) (64,357,141)
------------- -------------
$ 62,656,414 $ 72,246,839
============= =============
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
REVENUE
Revenue $132,569,387 $132,594,891 $170,517,884
Less: Allowances 65,550,880 73,774,348 98,260,219
------------- ------------- -------------
Net revenue 67,018,507 58,820,543 72,257,665
OPERATING EXPENSES
Operating expenses 58,724,827 51,310,658 59,060,558
Depreciation and amortization 8,783,419 8,642,584 7,708,976
Provision for bad debts 1,962,837 2,698,139 3,110,961
Restructuring costs 662,026 - -
Impairment loss on long-lived assets 4,553,783 12,677,324 478,646
------------- ------------- -------------
Total operating expenses 74,686,892 75,328,705 70,359,141
------------- ------------- -------------
Income (loss) from operations (7,668,385) (16,508,162) 1,898,524
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense, net (9,549,337) (9,138,911) (10,674,256)
Financing costs - (5,207,900) -
Loss on legal judgments and settlements - - (2,455,995)
Gain on sale of subsidiaries, divisions and assets 16,082,302 965,616 70,214
Other (637,850) 393,898 398,119
------------- ------------- -------------
Total other income (expense) 5,895,115 (12,987,297) (12,661,918)
------------- ------------- -------------
LOSS BEFORE MINORITY INTEREST, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (1,773,270) (29,495,459) (10,763,394)
------------- ------------- -------------
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (569,931) (1,612) 136,052
------------- ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (2,343,201) (29,497,071) (10,627,342)
EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT
OF DEBT (NET OF INCOME TAXES OF $-0-) 1,595,106 954,533 1,556,121
------------- ------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (748,095) (28,542,538) (9,071,221)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES OF $-0-) - (779,294) -
------------- ------------- -------------
NET LOSS $ (748,095) $(29,321,832) $ (9,071,221)
============= ============= =============
BASIC EARNINGS PER SHARE
Loss before extraordinary gain and change in
accounting principle $ (0.06) $ (0.75) $ (0.27)
Extraordinary gain 0.04 0.02 0.04
Change in accounting principle - (0.02) -
------------- ------------- -------------
BASIC NET LOSS PER SHARE $ (0.02) $ (0.75) $ (0.23)
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 38,853,904 39,069,178 38,973,908
============= ============= =============
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
-----------------------------
100,000,000 shares authorized Treasury Stock, at cost
----------------------------- Paid-in ----------------------------
Shares Amount Capital Shares Amount
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1996 40,232,260 $ 402,322 $ 99,411,150 (1,300,000) $ (481,727)
(unaudited)
Issuance of common stock 200,000 2,000 23,000 - -
Amortization and write-off of
deferred compensation - - - - -
Purchase of treasury stock - - - (325,000) (133,220)
Net loss - - - - -
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1997 40,432,260 404,322 99,434,150 (1,625,000) (614,947)
(unaudited)
Issuance of common stock 325,000 3,250 57,500 - -
Common stock subscribed - - - - -
Issuance of stock put - - (240,000) - -
Reclass due from related party - - - - -
Net loss - - - - -
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1998 40,757,260 407,572 99,251,650 (1,625,000) (614,947)
(unaudited)
Conversion of subordinated
debentures to common stock 500 5 4,995 - -
Purchase of stock put - - 80,000 (200,000) (80,000)
Discounted note, net - - - - -
Net loss - - - - -
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1999 40,757,760 $ 407,577 $ 99,336,645 (1,825,000) $ (694,947)
============= ============== ============= ============= =============
(CONTINUED BELOW)
Stock Total
Deferred Accumulated Due from Subscription Stockholders'
Compensation Deficit Related Party Receivable Deficit
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1996 $ (788,025) $(123,405,034) $ - $ - $(24,861,314)
(unaudited)
Issuance of common stock - - - - 25,000
Amortization and write-off of
deferred compensation 788,025 - - - 788,025
Purchase of treasury stock - - - - (133,220)
Net loss - (748,095) - - (748,095)
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1997 - (124,153,129) - - (24,929,604)
(unaudited)
Issuance of common stock - - - - 60,750
Common stock subscribed - - - (30,000) (30,000)
Issuance of stock put - - - - (240,000)
Reclass due from related party - - (899,143) - (899,143)
Net loss - (29,321,832) - - (29,321,832)
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1998 - (153,474,961) (899,143) (30,000) (55,359,829)
(unaudited)
Conversion of subordinated
debentures to common stock - - - - 5,000
Purchase of stock put - - - - -
Discounted note, net - - 68,909 - 68,909
Net loss - (9,071,221) - - (9,071,221)
------------- -------------- ------------- ------------- -------------
BALANCE - OCTOBER 31, 1999 $ - $(162,546,182) $ (830,234) $ (30,000) $(64,357,141)
============= ============== ============= ============= =============
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (748,095) $(29,321,832) $ (9,071,221)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,783,419 8,642,584 7,708,976
Amortization of management fee modification 143,296 161,070 181,049
Write-off offering costs 187,524 138,811 34,818
Amortization of purchase discount (889,083) (946,542) (378,600)
Minority interest in income (loss) of subsidiaries 569,931 1,612 (136,052)
Provision for bad debts and allowance adjustments 1,505,344 1,346,272 2,039,434
Loss (gain) on sale of assets, subsidiaries and divisions (15,257,769) (743,493) (70,214)
Provision for restructuring 662,026 - (55,000)
Imputed interest (income) expense (96,247) (131,918) 190,823
Deferred revenue - covenant not-to-compete (133,334) (200,000) (200,000)
Write-off of deposits and other assets 258,748 37,849 -
Gain of sale of marketable securities - (297,376) -
Write down of long-lived assets 4,553,783 12,677,324 478,646
Financing costs - 5,207,900 -
Loss on legal judgments and settlements - - 2,455,995
Loss on write down of related party receivable - - 68,909
Extraordinary gain, change in accounting principle, and
discontinued operations (1,752,198) (175,239) (1,555,588)
Changes in assets and liabilities:
Other assets (218,731) (648,269) 253,738
Accounts receivable 479,918 1,696,031 (2,593,204)
Unbilled receivables (402,682) 683,172 (407,314)
Due to/from related parties (88,567) - -
Accounts payable, accrued expenses and other liabilities (426,795) 385,349 2,196,955
------------- ------------- -------------
Net cash from operating activities (2,869,512) (1,486,695) 1,142,150
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of imaging centers - net of cash acquired (2,131,498) (1,739,120) (100,000)
Purchase of property and equipment (3,098,179) (3,089,632) (6,657,055)
Proceeds from sale of divisions, centers, and equipment 26,001,073 3,144,217 1,089,000
Loan fees - - (117,500)
Proceeds from sale of marketable securities - 3,082,627 -
Proceeds from dissolution of partnership - 94,515 -
Loans to related parties (30,000) (235,000) (80,000)
Receipts from related parties - 25,000 -
------------- ------------- -------------
Net cash from investing activities 20,741,396 1,282,607 (5,865,555)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft 68,689 1,410,513 623,673
Principal payments on notes and leases payable (17,741,045) (8,077,336) (14,325,433)
Proceeds from short and long-term borrowings 2,373,554 8,180,082 18,860,523
Purchase of treasury stock (133,220) - (55,000)
Purchase of subordinated debentures (1,984,093) (1,484,943) (337,215)
Proceeds from issuance of common stock - 30,750 -
Joint venture proceeds - 75,000 -
Joint venture distributions (478,122) - (100,000)
------------- ------------- -------------
Net cash from financing activities (17,894,237) 134,066 4,666,548
------------- ------------- -------------
NET DECREASE IN CASH (22,353) (70,022) (56,857)
CASH, beginning of period 151,870 129,517 59,495
------------- ------------- -------------
CASH, end of period $ 129,517 $ 59,495 2,638
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 10,070,345 $ 9,290,539 $ 10,719,283
============= ============= =============
Income taxes $ - $ - $ -
============= ============= =============
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCIAL ACTIVITIES -
The Company entered into capital leases or financed equipment through notes
payable for approximately $12,000,000, $4,780,000 and $5,965,000 for the years
ended October 31, 1999, 1998 and 1997, respectively.
During the year ended October 31, 1999, the Company acquired the assets
of an entity for $72,500 and recorded the liability as accrued expenses.
During the year ended October 31, 1998, the Company wrote-off
approximately $1,565,000 in net property and equipment, $285,000 in net accounts
receivable, $735,000 in net goodwill, $19,000 in other assets, $865,000 in notes
and lease obligations, $160,000 in other current liabilities and $398,000 of
minority interest related to the sale of a joint venture.
During the year ended October 31, 1998, the Company dissolved a
partnership and upon the dissolution, the Company wrote-off approximately
$270,000 of accounts receivable, $365,000 in net property, $155,000 of accrued
expenses and $435,000 in minority interests.
During the year ended October 31, 1998, the Company wrote-off
approximately $4,008,000 in net property and equipment, $13,840,000 in net
goodwill, $37,000 in other tangible assets and recorded an impairment loss of
$17,885,000.
During the year ended October 31, 1997, the Company wrote-off
approximately $1,515,000 in net property and equipment, $2,875,000 in net
goodwill, $230,000 in other assets and $785,000 in deferred compensation related
to the closure of a service facility. The Company recorded an impairment loss of
approximately $4,550,000 during the year ended October 31, 1997 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 an entity, and the Company recorded approximately
$2,075,000 in net property and equipment, $725,000 in other receivables, and
$2,600,000 in notes payable and capital leases related to the sale of the
Ultrasound Division and four of its hospital-based MRI facilities.
During the year ended October 31, 1999, $5,000 face value subordinated
bond debentures were converted into 500 shares of the Company's common stock.
During the year ended October 31, 1998, the Company issued 300,000 shares of
common stock and recorded $30,000 as due from related parties.
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997, 1998 AND 1999
- --------------------------------------------------------------------------------
During the year ended October 31, 1997, the Company issued 200,000
shares of common stock and recorded $25,000 as due from employee.
During the year ended October 31, 1999, a prior employee exercised his
stock put for 200,000 shares of the Company's common stock at $.40 per share. As
part of the transaction, $25,000 in prior loans due from this related party were
utilized as payment.
During the year ended October 31, 1998, the Company received medical
equipment of approximately $730,000 in lieu of cash rebates from a vendor.
During the year ended October 31, 1998, the Company issued a stock put
and recorded $240,000 as redeemable stock and a decrease to paid-in capital.
During the years ended October 31, 1999 and 1998, the Company recorded
goodwill and notes payable of approximately $429,000 and $325,000, respectively,
to acquire shares of a subsidiary's common stock.
During the year ended October 31, 1999, the Company financed $688,410
of accounts payable and accrued liabilities as long-term debt.
During the year ended October 31, 1999, the Company received $942,645
in credits for equipment returns and trade-ins which was offset against the
outstanding debt.
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THE ACCOMPANYING FINANCIAL STATEMENTS FOR 1998 AND 1997 AND RELATED
FOOTNOTES HAVE BEEN PREPARED WITHOUT AUDIT. IN THE OPINION OF MANAGEMENT, SUCH
FINANCIAL STATEMENTS INCLUDE ALL ADJUSTMENTS AND DISCLOSURES NECESSARY FOR
PRESENTATION IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
NOTE 1 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985,
provides diagnostic imaging services in the state of California.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION - The consolidated financial statements
include the accounts of Primedex Health Systems, Inc.; Radnet Management, Inc.;
Diagnostic Imaging Services, Inc.["DIS"]; Primedex Corporation and Radnet
Managed Imaging Services, Inc.["Radnet"] (collectively referred to as "the
Company"). Radnet Management, Inc. is combined with Beverly Radiology Medical
Group III ["BRMG"] and consolidated with Radnet Sub, Inc., Woodward Park Imaging
Center and Westchester Imaging Group (a joint venture).
Diagnostic Imaging Services is consolidated with a joint venture
Scripps Chula Vista Imaging Center, L.P, which was sold during the year ended
October 31, 1998. Radnet Managed Imaging Services, Inc is consolidated with
Future Diagnostics, Inc, which was sold during the year ended October 31, 1997.
Operating activities of subsidiary entities are included in the accompanying
financial statements from the date of acquisition. All intercompany transactions
and balances have been eliminated in consolidation and combinations.
Medical services and supervision at most of the Company's imaging
centers are provided through BRMG and through other independent physicians and
physician groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc.
and Beverly Radiology Medical Group, both of which are 99% owned by a
shareholder and president of Primedex Health Systems, Inc. Radnet and DIS
provide non-medical, technical and administrative services to BRMG for which
they receive a management fee.
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. The carrying amount of cash and
cash equivalents approximates their fair market value.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost,
less accumulated depreciation and amortization and valuation impairment
allowances. Depreciation and amortization of property and equipment are provided
using the straight-line method over the estimated useful lives, which range from
3 to 39 years. Leasehold improvements are amortized over their estimated useful
life, which range from 10 to 20 years.
- --------------------------------------------------------------------------------
F-8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 36 months, with most personal injury cases having the longest collection
cycle. The current portion of accounts receivable are the amounts which are
reasonably expected to be collected within one year, based upon historical
collection data.
Accounts receivable as of October 31, 1999, are shown net of
contractual allowances and allowances for doubtful accounts totaling
$30,099,367, of which $25,304,788 has been deducted from current receivables and
$4,794,579 has been deducted from noncurrent receivables. Accounts receivable as
of October 31, 1998, are shown net of contractual allowances and allowances for
doubtful accounts of $24,790,058, of which $19,980,513 has been deducted from
current receivables and $4,809,545 has been deducted from noncurrent
receivables.
INTANGIBLES - Goodwill is recognized in certain business combinations
and represents the excess of the purchase price over the fair value of net
assets acquired. Goodwill is amortized using the straight-line method over
twenty years. Offering costs, loan fees, covenants not to compete and management
fee reduction buyout are recorded at cost and amortized over the estimated
useful lives which range from one to twenty years.
REVENUE RECOGNITION -
NET PATIENT SERVICE REVENUE - Net patient service revenue is
reported at the estimated net realizable amounts from patients, third-party
payors, and others for services in the period in which services are provided.
Billing is usually completed by the following month. Gross revenue for the
period ending October 31, 1999 was approximately $159,978,000.
PREPAID PLAN REVENUE - The company contracts with health
maintenance organizations and other third parties to provide health care
services to plan enrollees. Under the various contracts, the Company receives a
per enrollee amount (capitated payment) each month covering all contracted
services needed by the plan enrollees. Capitation payments are recognized as
premium revenue during the period in which the Company is obligated to provide
services to the plan enrollees. Gross revenue for the period ending October 31,
1999 was approximately $10,540,000.
INCOME TAXES - Income tax expense is computed using an asset and
liability method, using expected annual effective tax rates. Under this method,
deferred income taxes are recorded resulting from differences in the financial
reporting basis and the income tax reporting basis of assets and liabilities.
Income tax are further explained in Note 9.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to credit risk are primarily cash equivalents and accounts
receivable. The Company has placed its cash and cash equivalents with one major
financial institution. At times, the cash in the financial institution is
temporarily in excess of the amount insured by the Federal Deposit Insurance
Corporation (FDIC).
- --------------------------------------------------------------------------------
F-9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
With respect to accounts receivable, 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. Gross charges by payor for the year ended October 31,
1999 were:
Capitation contracts 25.2%
Special group contract 19.1%
HMO/PPO/Managed care 15.2%
Medicare 13.8%
Blue Cross/Sheild/Champus 9.5%
Commercial insurance 6.7%
Workers Comp 4.4%
MEDI-CAL 2.5%
Other 3.6%
Management believes that its accounts receivable credit risk exposure,
beyond allowances that have been provided, is limited.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
IMPAIRMENT ON LONG-LIVED ASSETS - Certain long-lived assets of the
Company are reviewed at least annually as to whether their carrying values have
become impaired in accordance with Statement of Financial Accounting Standards
(SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the undiscounted projected cash flows from operations. If
impairment exists, the assets are written down to fair value or the projected
cash flows from related operations. As of October 31, 1999, the Company expects
the remaining carrying value of assets to be fully recoverable.
STOCK OPTIONS - The Company has elected not to adopt SFAS 123,
"Accounting for Stock-Based Compensation" and continues to apply APB Opinion No.
25 (APB 25) and related Interpretations in accounting for its option plans.
Under SFAS 123, a fair value method is used to determine compensation cost for
stock options or similar equity instruments. Compensation is measured at the
grant date and is recognized over the service or vesting period. Under APB 25,
compensation cost is the excess, if any, of the quoted market price of the stock
at the measurement date over the amount that must be paid to acquire the stock.
The new standard allows the Company to continue to account for stock-based
compensation under APB 25, with disclosure of the effects of the new standard.
The proforma effect on income as if the Company had adopted SFAS 123 is
disclosed in Note 10.
- --------------------------------------------------------------------------------
F-10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. These changes have no effect on
net earnings.
CHANGE IN ACCOUNTING PRINCIPLE - During the year ended October 31,
1998, the Company elected early adoption of Statement of Position (SOP) No.
98-5, "Reporting on the Costs of Start-up Activities" which required that
organization costs be expensed as they are incurred. As a result the Company
reduced historical net organizational costs and capitalized fees by
approximately $780,000. The net effect of this change was to decrease net income
for the year ended October 31, 1998 by $.02 per share.
EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding, net of common stock held in treasury.
NEW ACCOUNTING PRONOUNCEMENTS - During 1999, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standard No. 135
("Rescission of FASB Statement No. 75 and Technical Corrections"), No. 136
("Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That
Raises or Holds Contributions to Others"), and No. 137 ("Accounting for
Derivative Instruments and Hedging Activities"), which were effective for years
after fiscal 1999. Management believes these pronouncements will not have a
material effect on the Company's financial statements or disclosures.
NOTE 3 - BUSINESS COMBINATIONS - ACQUISITIONS, SALES AND DIVESTITURES
During fiscal 1997 the Company sold all of the outstanding capital
stock of a wholly owned subsidiary, Future Diagnostics, Inc. for approximately
$13,500,000 in cash, notes receivable and buyer-assumed liabilities. The sale
resulted in a gain of approximately $10,400,000. During fiscal 1998 the Company
received an additional $595,000 by agreeing to an IRS Section 388 (h)(10)
election for "Corporations Making Qualified Stock Purchases."
During the year ended October 31, 1997 the Company purchased 1,293,663
shares of DIS outstanding common stock for approximately $1,640,000. During the
year ended October 31, 1998 the Company purchased 1,788,374 shares of DIS
outstanding common stock for approximately $2,063,000. During the year ended
October 31, 1999 the Company purchased 390,100 shares of DIS outstanding common
stock for approximately $480,000, receiving 390,100 warrants to purchase common
stock of the Company at $.25 per share. The Company has a 90% ownership interest
in DIS at October 31, 1999.
- --------------------------------------------------------------------------------
F-11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - BUSINESS COMBINATIONS -ACQUISITIONS, SALES AND DIVESTITURES (CONTINUED)
In October 1998, the Company purchased all 4,482,000 shares of DIS
outstanding preferred stock, which carried a liquidation preference of
$4,482,000 plus accrued and unpaid dividends of $725,900 by issuing a $5,207,900
note payable to the preferred stock holder. The Company recorded financing costs
of $5,207,900, which were charged to operations during the year ended October
1998 as a result of this transaction.
In March 1997, the Company sold the assets and related liabilities of
four MRI facilities and its ultrasound division for approximately $16,000,000 in
cash including $2,000,000 in ten year covenants not-to-compete. The covenants
have been classified as deferred revenue and are being amortized over the
covenant period. The Company recognized a gain on the sale of approximately
$5,600,000. In addition the Company recorded a discounted receivable of
approximately $1,190,000 utilizing an imputed interest rate of 11.75% for
post-closing payments of $500,000 each to be made on the first, second and third
anniversaries of the closing date. During the year ended October 31, 1998 the
Company exercised its option to receive these payments in the form of 200,000
shares of the purchasers common stock, which were sold for approximately
$1,850,000 yielding a gain of approximately $496,000.
In June 1997 the Company decided to close its Santa Monica facility. At
that time, the Company recognized an impairment loss of approximately
$4,550,000, which included the write-off of $1,530,000 of acquisition goodwill.
The Company sold the assets of the facility for approximately $465,000.
In January 1998, the Company sold the its interest in Scripps Chula
Vista MRI, L.P. for 127,250 shares of the purchasers stock which was valued at
approximately $1,431,000 resulting in a gain of approximately $252,000. The
Company sold the stock in May 1998 for approximately $1,230,000 and recorded a
loss of approximately $202,000.
In February 1998, the Company dissolved its partnership with Friendly
Hills Healthcare Network, Inc. and wrote-off approximately $45,000 of net assets
including $435,000 in minority interests. The Company received $95,000 from
Friendly Hills upon dissolution and recognized a gain of approximately $50,000.
- --------------------------------------------------------------------------------
F-12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization as
of October 31, 1999 and 1998 are:
1998 1999
------------- -------------
Land $ 1,763,773 $ 1,763,773
Building 1,876,144 1,876,144
Medical equipment 10,367,312 12,281,617
Office equipment, furniture and fixtures 4,071,029 4,451,288
Leasehold improvements 5,721,582 9,935,266
Equipment under capital lease 24,775,274 30,564,702
------------- -------------
48,575,114 60,872,790
Accumulated depreciation and amortization (21,604,530) (23,206,170)
------------- -------------
$ 26,970,584 $ 37,666,620
============= =============
Depreciation and amortization expense on property and equipment for the
year ended October 31, 1999, 1998 and 1997 was approximately $6,680,000,
$6,725,000 and $4,300,000, respectively. Accumulated amortization under capital
leases for the year ended October 31, 1999 and 1998 was approximately
$10,668,000 and $12,200,000, respectively. Amortization expense under capital
leases for the year ended October 31, 1999, 1998 and 1997 was
approximately$3,000,000, $3,000,000 and $3,300,000, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consists of goodwill recorded at cost of $14,604,195,
less accumulated amortization of $4,009,517 and $3,290,288 for the year ended
October 31, 1999 and 1998, respectively. Amortization expense of approximately
$1,030,000, $1,915,000 and $2,130,000 was recognized for the years ended October
31, 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
F-13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS (CONTINUED)
During the year ended October 31, 1999 and 1998, the Company recorded
goodwill in connection with the acquisition of additional shares of DIS stock of
approximately $478,000 and $2,063,000, respectively which were written off as
impairment losses.
During the year ended October 31, 1998, net goodwill of $735,036 was
written off in connection with the sale of a joint venture. During the year
ended October 31, 1997, the Company recorded $614,375 in goodwill related to the
acquisition of additional units of two centers, and the Company recorded
goodwill of $92,382 in connection with the acquisition of a subsidiary.
Effective September 3, 1997, the Company wrote-off $2,925,312 of goodwill in
connection with the sale of a subsidiary.
During the year ended October 31, 1998, pursuant to SFAS No. 121, the
Company recorded an impairment loss of $12,677,324 consisting of net goodwill of
$8,631,944, net property and equipment of $4,007,880 and other net long-lived
assets of $37,500. 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
several facilities. During the same year, the Company recorded an impairment
loss of $4,553,783 from writing down goodwill, property and equipment and other
long-lived assets.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1998 1999
------------- -------------
Accounts payable $ 5,747,988 $ 5,569,911
Accrued expense 3,535,840 5,126,527
Accrued professional fees 2,153,859 1,897,364
Accrued loss on legal judgments - 2,455,995
Other 462,343 318,706
------------- -------------
11,900,030 15,368,503
Less long-term portion of accrued
professional fees (399,872) (283,024)
------------- -------------
$ 11,500,158 $ 15,085,479
============= =============
Accrued professional fees consist of outside professional agreements,
which are paid out of net cash collections. The long-term portion relates to the
accounts receivable classified as long-term.
- --------------------------------------------------------------------------------
F-14
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
Notes payable, long-term debt and capital lease obligations at October
31, 1999 and 1998 consists of the following:
1998 1999
------------- -------------
Revolving lines of credit $ 11,911,416 $ 21,631,399
Note payable bearing interest at the bank's
prime rate plus 1%, due October 2000,
collateralized by certain accounts receivable 5,225,000 5,225,000
Various notes payable at interest rates ranging
between 7.5% and 11%, due through 2006,
collateralized by medical equipment 34,544,543 40,381,029
Note payable bearing interest at 9.25%, due in
2005, collateralized by real estate 1,697,948 1,517,055
Obligations from a Company acquisition bearing
interest at 8%, due through 2002 5,407,706 668,766
Various obligations under capital leases at
interest rates ranging between 8.4% and 13.2%,
due through 2006, collateralized by medical and
office equipment originally costing approximately
$30,565,000 and $29,150,000, in 1999 and 1998,
respectively. 19,744,972 24,800,978
------------- -------------
78,531,585 94,224,227
Less current portion (24,388,427) (39,341,714)
------------- -------------
$ 54,143,158 $ 54,882,513
============= =============
The Company's working capital needs are provided under three lines of
credit. Under one line of credit, the Company may borrow the lesser of 75% to
80% of eligible accounts receivable, the prior four months' cash collections, or
$20,000,000. Interest on outstanding borrowings is payable monthly at the
greater of 8% or the bank's prime rate plus 2.5%, with a minimum interest paid
each month of $60,000. At October 31, 1999 approximately $16,115,000 was
outstanding under this line and is due December 31, 2001. The lender holds a
first lien position on substantially all of Radnet's assets. The president and
C.E.O of the Company has personally guaranteed $6,000,000 of line and the line
is collateralized by a $5,000,000 life insurance policy of the president and
C.E.O.
- --------------------------------------------------------------------------------
F-15
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
Under the second line of credit, the Company may borrow the lesser of
110% of eligible accounts receivable or $5,000,000. Interest on the outstanding
balance is payable monthly at the bank's prime rate plus 1%. At October 31,
1999, approximately $2,220,000 was outstanding on this line and is due October
31, 2000. Under the third line with the same lender, the Company may borrow up
to $3,500,000 to either pay off in full the promissory note issued to Tower
Radiology et.al. or purchase, on the open market, the subordinated debentures of
the Company at a price not to exceed 60% of their face value. Borrowings under
this line are repayable monthly at a rate of 1.4% of the line balance, including
principal and interest at the bank's prime rate plus 1%. Theses credit lines are
collateralized by approximately 80% of the Tower division's eligible accounts
receivable.
The banks prime rate at October 31, 1999 was 8.25%. The total funds
available for borrowing under the three lines were approximately $4 million at
October 31, 1999. For the year ended October 31, 1999 and 1998, the weighted
average interest rate on short-term borrowings was 10.2% and 11.4%,
respectively.
Annual principal maturities of long-term obligations exclusive of
capital leases, for future years ending October 31, are:
2000 $ 35,158,195
2001 9,019,782
2002 8,377,306
2003 8,303,237
2004 6,462,657
Thereafter 2,102,072
-------------
$ 69,423,249
=============
- --------------------------------------------------------------------------------
F-16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
The Company leases equipment under capital lease arrangements. Future
minimum lease payments under capital leases as of October 31, 1999 are:
2000 $ 6,380,627
2001 6,194,619
2002 5,762,341
2003 5,400,645
2004 4,558,821
Thereafter 3,483,022
-------------
Total minimum payments 31,780,075
Amount representing interest (6,979,097)
-------------
Present value of net minimum lease payments 24,800,978
Current portion (4,183,519)
-------------
Long-term portion $ 20,617,459
=============
At October 31, 1999, the Company is in default on approximately
$835,000 under various note agreements, pertaining to the acquisition of imaging
centers, for non-payment of principal and interest. These notes have been
classified as currently payable.
During the year ended October 31, 1999, 1998 and 1997, the Company paid
off and renegotiated various obligations at discounts resulting in extraordinary
gains of $1,217,336, $234,475 and $673,199, respectively.
NOTE 8 - SUBORDINATED DEBENTURES
In June of 1993, the Company's registration 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 $3,000,000 associated with the
original offering are being amortized over ten years to result in a constant
yield. The unamortized portion is classified as other assets. The debentures are
convertible into shares of common stock at any time before maturity into $1,000
principal amounts at a conversion price of $10 per share through June 1999 and
$12 per share thereafter. As debentures are being converted or retired, a
pro-rata share of the offering costs are written-off.
Amortization expense of the offering costs for the years ended October
31, 1999, 1998 and 1997 was $233,271, 244,650 and $298,545, respectively.
Interest expense for the years ended October 31, 1999, 1998 and 1997 was
approximately $2,040,000, $2,125,000 and $2,525,000, respectively. During the
year ended October 31, 1999, debentures totaling $5,000 were converted into 500
shares of common stock. There were no conversions during the year ended October
31, 1998 or 1997.
- --------------------------------------------------------------------------------
F-17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES (CONTINUED)
During the years ended October 31, 1999, 1998 and 1997, the Company
repurchased debentures with face amounts of $676,000, $2,205,000 and $2,906,000,
for $337,215, $1,484,943 and $1,984,093, respectively, resulting in gains on
early extinguishments of $338,785, $720,058 and $921,907, respectively. In
connection with these transactions, $34,818, $138,811 and $187,524 of net
offering costs were written-off during the years ended October 31, 1999, 1998
and 1997, respectively.
NOTE 9 - INCOME TAXES
Income taxes have been recorded under SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the net tax effects of temporary
difference between carrying amounts of assets and liabilities for financial
reporting purposes and operating loss carryforwards. At October 31, 1999 and
1998, the Company's deferred tax assets are comprised of the following items:
October 31,
----------------------------
1998 1999
------------- -------------
DEFERRED TAX ASSETS, noncurrent
Net operating loss carryforward $ 39,000,000 $ 43,400,000
Tax basis of intangible assets in
excess of books 12,400,000 11,300,000
Other - 1,100,000
------------- -------------
51,400,000 55,800,000
DEFERRED TAX LIABILITY, noncurrent
Book basis of fixed assets in excess
of tax basis 9,500,000 1,500,000
------------- -------------
41,900,000 54,300,000
Valuation allowance (41,900,000) (54,300,000)
------------- -------------
NET DEFERRED TAX ASSET $ - $ -
============= =============
The valuation allowance of $54,300,000 and $41,900,000 at October 31,
1999 and 1998, respectively, represents increases of $12,400,000 and
$11,300,000, respectively, over the preceding year.
Reconciliation between the effective tax rate and the statutory tax
rates for the years ended October 31, 1999, 1998 and 1997 are as follows:
1997 1998 1999
---------- ---------- ----------
Federal tax at 34% (34.0)% (34.0)% (34.0)%
Earnings on unconsolidated
subsidiaries, joint ventures and
affiliates 22.0 8.0 -
Change in valuation allowance 12.0 26.0 34.0
---------- ---------- ----------
Effective tax rate - % - % - %
========== ========== ==========
- --------------------------------------------------------------------------------
F-18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforward of approximately
$108,500,000 which expire as follows:
2002 $ 200,000
2003 600,000
2004 1,000,000
2005 800,000
2006 4,100,000
2007 4,100,000
2008 23,100,000
2009 16,200,000
2010 13,400,000
2011 16,800,000
2012 1,700,000
2018 15,800,000
2019 10,700,000
-------------
Total $108,500,000
=============
As of October 31, 1999, $26,500,000 the Company's federal net operating
loss carryforwards are subject to limitations related to their utilization under
Section 382 of the Internal Revenue Code.
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS
PREFERRED STOCK
The Company authorized 10,000,000 shares of preferred stock with a par
value of $.01 per share. There are no preferred shares issued or outstanding at
October 31, 1999, 1998 or 1997. Shares may be issued in one or more series.
REDEEMABLE STOCK
In January 1998, the Company entered into a five-year agreement with a
former officer of the Company whereby the Company agreed to purchase up to
600,000 shares of the Company's stock from the former officer at $.40 per share,
in minimum increments of 100,000 shares, upon his election any time prior to
February 28, 2003. In January 1999, the Company repurchased 200,000 shares under
this agreement.
- --------------------------------------------------------------------------------
F-19
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
STOCK OPTION PLANS
The Company has an incentive stock option plan which reserves 2,000,000
shares of common stock. The options granted under the plan are intended to
quality 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 for the three years ended October 31, 1999:
Outstanding Options
----------------------------
Exercise
Number Price
------------- -------------
Balance, October 31, 1996 2,995,060 $ 4.49
Granted 200,000 0.43
Exercised (200,000) 0.13
------------- -------------
Balance, October 31, 1997 2,995,060 4.51
Granted 295,000 0.25
Exercised (325,000) 0.19
Canceled or expired (635,000) 2.78
------------- -------------
Balance, October 31, 1998 2,330,060 5.04
Granted 500,000 0.15
Canceled or expired (1,368,197) 8.42
------------- -------------
Balance, October 31, 1999 1,461,863 $ 0.21
============= =============
The following summarizes information about stock options outstanding at
October 31, 1999:
Outstanding Options
------------------------------------------------------------
Range of exercise Number Weighted average remaining Weighted average
prices outstanding contractual life exercise price
----------------- ------------- -------------------------- -----------------
$.15 - $.30 1,236,863 2.66 years $ 0.17
$.31 - $.60 225,000 1.76 years 0.78
-------------
1,461,863 2.52 years $ 0.21
=============
- --------------------------------------------------------------------------------
F-20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
Had compensation cost for the Company's options granted been determined
consistent with SFAS 123, the Company's net loss and loss per share would be
affected as follows:
Year Ended October 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
Net loss
As reported $ (748,095) $(29,321,832) $ (9,071,221)
============= ============= =============
Pro Forma $ (793,390) $(29,355,049) $ (9,134,051)
============= ============= =============
Loss per share:
As reported $ (.02) $ (.75) $ (.23)
============= ============= =============
Pro Forma $ (.02) $ (.75) $ (.23)
============= ============= =============
The fair value of each option granted is estimated on grant date using
the Black-Scholes option pricing model which takes into account as of the grant
date the exercise price and expected life of the option, the current price of
the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The following
is the average of the data used for to calculate the fair value:
Risk-free Expected Expected Expected
October 31, interest rate life volatility dividends
- ------------------------- ------------------- ------------ ------------- ------------------
1999 5.42% 4 years 134.01% N/A
1998 5.51% 5 years 60.37% N/A
1997 6.35% 5 years 61.47% N/A
The following table summarizes the activity in common shares subject to
warrants:
Outstanding warrants
----------------------------
Shares Price range
------------- -------------
Balance, October 31, 1996 and 1997 9,014,000 $0.60 - $7.43
Granted 530,000 0.25
Canceled or expired (4,932,000) 0.60 - 7.43
------------- -------------
Balance, October 31, 1998 4,612,000 0.25 - 0.60
Granted 390,000 0.25
------------- -------------
Balance, October 31, 1999 5,002,000 $0.25 - $0.60
============= =============
Warrants outstanding at October 31, 1999 expire at various times
through December 2003.
- --------------------------------------------------------------------------------
F-21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
CAPITAL TRANSACTIONS
During the year ended October 31, 1999, debentures totaling $5,000 were
converted into 500 shares of common stock.
During the year ended October 31, 1998, a former officer of the
Company, who had existing options for 200,000 shares of the Company's common
stock, was granted options for an additional 100,000 shares at $.30 per share as
part of his contract buyout and renegotiation. In January 1998, he exercised all
of the remaining options for 300,000 shares of the Company's common stock at a
weighted average price of $.183 per share. In connection with the transaction,
the Company lent the former officer $30,000, with interest at 6.5%, which is
classified as stock subscription receivable on the Company's financial
statements. During the year ended October 31, 1999, the Company repurchased
200,000 shares from the former officer at $.40 per share under a stock
repurchase agreement.
During the year ended October 31, 1997, the Company purchased 325,000
shares of its stock for an aggregate purchase price of $133,220. During the same
year, an officer of the Company exercised his options for 200,000 shares of
Company's common stock at $.125 per share. In connection with the transaction,
the Company lent the officer $25,000, with interest at 6%, which was paid in
full in February 1998.
During the year ended October 31, 1998, a former employee of the
Company exercised his options for 25,000 shares of the Company's common stock at
$.23 per share.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments as
follows:
1998 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Accounts Receivable, current $ 15,429,057 $ 15,429,057 $ 16,694,368 $ 16,694,368
Accounts Receivable, long term $ 3,713,956 $ 3,713,956 $ 3,040,416 $ 3,040,416
Due from related party -
long-term $ 1,062,403 $ 1,062,403 $ 948,029 $ 948,029
Debt maturing within one year $(21,083,111) $(21,083,111) $ 35,158,192 $ 35,158,192
Long-term debt $(37,703,502) $(31,679,349) $ 36,818,910 $ 31,227,238
Notes payable related parties
long-term $ (2,553,854) $ (2,164,305) $ (2,553,854) $ (2,315,081)
Subordinated debentures $(20,718,000) $(13,445,982) $(20,037,000) $(14,479,533)
- --------------------------------------------------------------------------------
F-22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, accounts
receivable, current, 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 long term amounts for accounts receivable, due from related party, notes
payable related parties and debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The fair value of the
subordinated debentures is the estimated value of debentures available to
repurchase at current market rates over the bond term including an estimated
interest payment stream.
NOTE 12 - MARKETABLE SECURITIES
During the year ended October 31, 1998, the Company sold available for
sale securities for approximately $3,080,000 resulting in a gain of
approximately $297,000. The Company had no marketable securities at October 31,
1999 or 1998.
NOTE 13 - RELATED PARTY TRANSACTIONS
The amount due from related party relates to a $6,000,000 note
receivable issued in connection with the acquisition of Radnet. The outstanding
balance of $1,500,000 on the note was originally due in February 1997, but in
consideration for an advance payment of $500,000, the Company offered to extend
the remaining $1,000,000 through February 1998. During the year ended October
31, 1998 the note was extended through February 2000, which was discounted at 8%
resulting in a discounted value of $899,143. The note was reclassified to
stockholders' equity. During the year ended October 31, 1999 the note was
extended through February 2001 and rediscounted at 8% resulting in a new
discounted value of $830,234 and a charge to miscellaneous expense of $68,909.
The note is secured by the stock of the Company, which was issued in connection
with the Radnet acquisition.
During the year ended October 31, 1999, 1998 and 1997, the Company
advanced $80,000 $85,000 and $30,000, respectively, to an officer of the
Company, which will be repaid within the next year. During the year ended
October 31, 1998, the Company lent a former officer of the Company $180,000 of
which $30,000 was used to purchase Company stock and classified as stock
subscription receivable. During the year ended October 31, 1999, $25,000 was due
and $50,000 has been forgiven in exchange for consulting services. The remaining
balance of $105,000 is due within four years with interest at 6.5%. As of
October 31, 1999, approximately $24,000 of interest has been accrued on these
loans.
The notes payable related parties of $2,553,854 are due to an
employees and officers of the Company. The notes bear interest at 6.58% annually
and the outstanding principal is due June 2001. During the Years ended October
31, 1999, 1998, and 1997 interest expense was approximately $168,000 each year,
respectively.
- --------------------------------------------------------------------------------
F-23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases various operating facilities and certain
medical equipment under operating leases expiring through 2018. Certain leases
contain renewal options from two to ten years and escalation based primarily on
the consumer price index. Future minimum annual payments under noncancellable
operating leases are as follows:
Year ending October 31, Facilities Equipment Total
----------------------- ------------- ------------- -------------
2000 $ 4,158,664 $ 1,550,882 $ 5,709,546
2001 3,069,204 1,514,918 4,584,122
2002 2,243,673 1,489,755 3,733,428
2003 1,605,832 1,426,559 3,032,391
2004 1,185,443 1,410,305 2,595,748
Thereafter 11,250,272 2,063,716 13,313,988
------------- ------------- -------------
$ 23,513,088 $ 9,456,135 $ 32,969,223
============= ============= =============
Total rent expense, including equipment rentals, for the years ended
October 31, 1999, 1998 and 1997 amounted to approximately $5,562,000, $5,410,000
and $6,225,000, respectively.
SALARIES AND CONSULTING 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 29%, fixed
amounts per periods and combinations thereof.
The Company also has employment agreements with officers and key
employees at annual compensation rates ranging from $50,000 to $150,000 and for
periods extending up to four years. Total commitments under the agreements are
approximately $2,100,000 as of October 31, 1999, of which $650,000 is due to a
related party.
The Company renegotiated and bought out the remaining years of an
employment contract with one officer. Terms of the settlement include the
establishment of a legal consulting arrangement which expires February 2003. The
remaining commitment under this agreement is approximately $200,000.
Additionally, the Company is required to repurchase, at the former officer's
option, up to 600,000 shares of Common stock at $.40 per share any time through
February 2003. During the year ended October 31, 1999, the Company repurchased
200,000 shares under this agreement.
PURCHASE COMMITMENT - On February 19, 1999 the Company entered into a
five year purchase agreement with an imaging film provider whereby the Company
must purchase $9,990,000 of film at a rate of approximately $1,800,000 annually
over the term of the agreement.
- --------------------------------------------------------------------------------
F-24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION - The Company is currently in settlement negotiations with a
former vendor of the Company alleging, among other matters, breach of contract.
The settlement would require the Company to pay the vendor $700,000 over five
years with an initial payment of $100,000, a payment of $100,000 in one year and
the remaining paid in monthly installments of $7,067 starting after the first
$100,000 payment including interest at 5% amortized over seven years, with a
balloon payment of $161,083 due at the end of five years. The Company has
accrued the full amount of the potential settlement in accrued liabilities.
The Company is currently appealing a judgment between the Company and a
former professional service provider. The jury awarded a verdict in the net
amount of $1,750,995 on the complaint. Both parties have sought an award of
attorney fees, and the Company has filed an appeal of the jury's awards against
it. The Company plans to vigorously pursue its appellate rights and remedies.
The Company has accrued the full amount of the jury award in accrued liabilities
and has also posted a letter of credit in accordance with the requirements of
the judgment (Note 17).
A former employee filed a complaint against the Company for damages
for, among other matters, employment discrimination, emotional distress, and
violation of civil rights. There is no trial date set and discovery has not yet
commenced. The Company intends to defend vigorously against the plaintiffs claim
and believes the suit is without merit.
NOTE 15 - EMPLOYEE BENEFIT PLAN
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 under tax law. Employee contributions
vest immediately. The plan does not require a matching contribution by the
Company. There was no expense for the years ended October 31, 1999, 1998 or
1997.
NOTE 16 - MALPRACTICE INSURANCE
The Company and physicians employed by the Company are insured by First
Insurance Funding Corp. of California. The Company's financial obligation is
limited to its premiums for malpractice insurance coverage. First Insurance
Funding Corp. of California provides claims-based malpractice insurance coverage
which covers only asserted malpractice claims within policy limits. The Company
purchases tail insurance coverage when necessary and includes the cost of the
premiums in the year the tail is purchased. Management does not believe there
are material uninsured malpractice costs at October 31, 1999 and 1998.
- --------------------------------------------------------------------------------
F-25
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS
In December 1999, the Company obtained a $2,000,000 loan through one of
the line of credit providers by obtaining an increase in the borrowing base. The
loan is due June 2000 and bears interest at the bank's prime rate plus 2.5%. The
president and C.E.O of the Company increased his personal guarantee on the line
of credit to $8,000,000.
In December 1999, the Company refinanced approximately $3,714,000 of
its capital leases and obtained additional long-term financing of approximately
$2,360,000, of which approximately $1,870,000 was applied to a line of credit.
In November 1999, the Company borrowed $3,000,000 on a line of credit
to issue a letter of credit. The letter of credit was issued to secure a bond
posted in connection with a judgment and jury award for $1,750,995, which the
Company is currently appealing (See Note 14).
NOTE 18 - 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
experienced recurring losses from operations and has a deficiency in equity of
$64,357,000 and a working capital deficiency of $38,007,000, which raise
substantial doubt about its ability to continue as a going concern. Over the
past several years, management has been addressing the issues that have lead to
these deficiencies. Results of management's plans and efforts have been
positive, as indicated by recent improvement in operating income; however,
continued effort is planned in the future to allow the Company to continue to
operate and ultimately return the Company to profitability.
Such actions and plans include:
- Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In November 1999, the Company
opened a new center in Long Beach, California, which has
experienced favorable performance in its initial months of
operations.
- Increase revenue by negotiating new and existing managed care
contracts for additional services and more favorable terms. In
January 2000, the Company entered into 3 new capitation contracts
that will significantly increase business in at least 4 Southern
California facilities.
- Increase revenue through new fee for service arrangements where
opportunities exist. In January 2000, the Company was successful
in negotiating a new fee for service arrangement that will
substantially increase patient volume in 4 Southern California
facilities.
- --------------------------------------------------------------------------------
F-26
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - GOING CONCERN (CONTINUED)
- Consolidate underperforming facilities to reduce operating cost
duplication.
- Continue to evaluate all facilities' operations and trim excess
operating costs as well as general and administrative costs where
it is feasible to do so.
- Continue to selectively acquire new medical equipment and replace
old and obsolete equipment in order to increase service volume and
throughput at many facilities. In 1999, this was done in many of
the facilities, resulting in increased revenue.
- Selectively seek opportunities to hire physicians who have the
requisite skills and knowledge to deliver new and additional
services where deficiencies have been identified in
underperforming facilities.
- Continue to work with lessors and lenders to extend terms of
leases and financing to accommodate cash flow requirements for
ongoing agreements and upon the expiration of leases and notes.
The company has demonstrated success doing so in the past, and in
December 1999, successfully refinanced a portion of existing notes
and obtained additional working capital.
- --------------------------------------------------------------------------------
F-27
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
Our report on the consolidated financial statements of Primedex Health Systems,
Inc. and its affiliates, as of October 31, 1999 and for the year then ended is
included on page F-1 of this Form 10-K. In connection with our audit of such
financial statements, we have also audited the related accompanying financial
statements Schedule II Valuation and Qualifying Accounts for the year ended
October 31, 1999. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
Los Angeles, California MOSS ADAMS LLP
January 28, 2000
- --------------------------------------------------------------------------------
S-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Additions
-------------- Deductions
Beginning of Charged from Reserves Balance at End
Year Against Income (a) of Year
-------------- -------------- -------------- --------------
YEAR ENDED OCTOBER 31, 1999:
Accounts receivable allowances - current $ 19,980,513 $ 85,753,552 $ 80,429,277 $ 25,304,788
============== ============== ============== ==============
Accounts receivable allowances - noncurrent $ 4,809,545 $ 15,617,630 $ 15,632,596 $ 4,794,579
============== ============== ============== ==============
Goodwill amortization $ 3,290,288 $ 719,229 $ - $ 4,009,517
============== ============== ============== ==============
YEAR ENDED OCTOBER 31, 1998:
Accounts receivable allowances - current $ 19,637,802 $ 61,635,980 $ 61,293,269 $ 19,980,513
============== ============== ============== ==============
Accounts receivable allowances - noncurrent $ 6,752,507 $ 14,836,507 $ 16,779,469 $ 4,809,545
============== ============== ============== ==============
Goodwill amortization $ 3,160,715 $ 1,463,268 $ 1,333,695 $ 3,290,288
============== ============== ============== ==============
Other intangibles amortization $ 412,500 $ 110,000 $ 522,500 $ -
============== ============== ============== ==============
YEAR ENDED OCTOBER 31, 1997:
Accounts receivable allowances - current $ 18,386,423 $ 54,835,973 $ 53,584,594 $ 19,637,802
============== ============== ============== ==============
Accounts receivable allowances - noncurrent $ 6,871,881 $ 13,502,744 $ 13,622,118 $ 6,752,507
============== ============== ============== ==============
Goodwill amortization $ 3,077,716 $ 1,405,911 $ 1,322,912 $ 3,160,715
============== ============== ============== ==============
Other intangibles amortization $ 1,172,317 $ 196,726 $ 956,543 $ 412,500
============== ============== ============== ==============
(a) Deductions include sales and divestitures
- --------------------------------------------------------------------------------
S-2
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: February 15, 2000 /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., Director
Date: February 15, 2000
By /s/ Jaana Shellock
-----------------------------------------
Jaana Shellock, Director
Date: February 15, 2000
By /s/ Norman Hames
-----------------------------------------
Norman Hames, Director
Date: February 15, 2000
34