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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, 2000 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. ______
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $13,023,425 on January 29,
2001 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,
2001 was 40,125,644 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 37 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 31 medical imaging centers and is a joint venture
partner in one other imaging center. 25 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 32 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
---------------------------
DIS owns and operates five imaging centers providing diagnostic imaging
services located in the Los Angeles and San Diego areas and also operates a
cancer care therapy center near Temecula, California.
On March 22, 1996, the Company acquired 3,478,261 shares of DIS common
stock representing 31% of the then outstanding shares from DIS and a third party
for $4,000,000.
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 1, 2001 [excluding
treasury shares]. In October 1998, the Company purchased DIS's outstanding
preferred stock from DVI Healthcare Operations, Inc. for $5,207,900.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is principally engaged in only one industry segment, the
healthcare services industry.
2
(c) NARRATIVE DESCRIPTION OF IMAGING BUSINESS
MEDICAL SERVICES
The following are the principle medical diagnostic procedures performed
on patients at the various imaging centers owned or managed by the Company. The
patient is normally referred to the center for such diagnostic procedures by his
or her treatment physician who may be independent or may be affiliated with an
Independent Physician Association ["IPA"], a Health Maintenance Organization
["HMO"], a Preferred Provider Organization ["PPO"], or a similar organization
who has contracted for such services. See "Marketing" herein. Not all of such
procedures are performed at each center.
DIAGNOSTIC RADIOLOGY- X-ray services, diagnostic tests employing x-ray
radiation on two planes; including fluoroscopy and endoscopy.
COMPUTED AXIAL TOMOGRAPHY [CT] - CT is 100 times more sensitive than
conventional x-ray. It is used to view 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 $300,000 to $800,000.
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 the 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
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 viewing soft tissues that do not x-ray well. Ultrasound is used in pregnancy
to avoid x-ray exposure as well as in gynecological, urologic, vascular, cardiac
and breast applications.
IMAGING CENTERS
On June 6, 2000, the Company acquired three medical resonance imaging
centers located in Tarzana, Chino and San Gabriel Valley, California from
Diagnostic Health Services, Inc. ("DHS"), a company in a bankruptcy
reorganization proceeding, for $11,925,000, plus assumption of the equipment
lease having an approximately $2.2 million liability. The three MRI centers were
previously owned and operated by the Company and sold (with one other MRI
center) to DHS in 1997 for approximately $16,000,000 plus assumed liabilities.
3
The Company's wholly-owned subsidiary borrowed the $11,925,000 from a primary
lending source. In December 2000, the Company entered into a new lease
arrangement for 2,400 square feet of additional space in Tarzana, California in
which it intends to expand its Tarzana presence by adding an additional MRI and
offering CT and other imagining services not available in the existing Tarzana
site.
As of September 1, 2000, the Company purchased the assets of two
existing and operating open MRI centers located in San Francisco and Emeryville,
California from an unrelated third party. The purchase price for the two centers
was $3,300,000 including equipment debt assumption. The Company relocated and
consolidated its then existing San Francisco site at the location of the
purchased site and increased its Northern California presence with the
acquisition of the Emeryville site.
Additionally, in January 2001, the Company consolidated its two
facilities in Sacramento, California into a single site.
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** * * *
Chino *
Emeryville *
Fresno * * * * *
La Habra * *
Lancaster [Two Sites] * * * * * *
Long Beach [Four Sites] * * * * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange [Two Sites] * * * * * *
Oxnard * * * *
Riverside** * * * * *
Sacramento * * * * * *
San Francisco *
San Gabriel Valley * *
Santa Clarita * * * * *
Santa Rosa *
Stockton/Valley * * * * * *
Tarzana *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * *
Vacaville * * * * *
Ventura [Four Sites] * * * * * *
Westchester * * * * *
*Indicates availability
**Indicates a DIS facility
In addition, cancer care therapy is performed at Valley Regional Oncology
Center, a DIS center located near Temecula, California.
4
MANAGEMENT SERVICES AND COMPENSATION
Radnet has entered into Management Agreements with respect to its
wholly-owned imaging centers with various physicians and physician groups [the
"Physician Group"]. Pursuant to the typical Management Agreement, the Company
makes available the imaging center facilities and all of the furniture and
medical equipment at such facilities for use by the Physician Group and the
Physician Group is responsible for staffing the center with qualified medical
personnel. In addition, the Company provides management services and
administration of the non-medical functions and services relating to the medical
practice at the center including among other functions, provision of clerical
and administrative personnel, bookkeeping and accounting services, billings and
collections, provision of medical and office supplies, secretarial, reception
and transcription services, maintenance of medical records, advertising,
marketing and promotional activities and the preparation and filing of all
forms, reports and returns required in connection with unemployment insurance,
workers' compensation insurance, disability, social security and similar laws.
As compensation for the services furnished under the Management Agreement, the
Company is paid a Management Fee equal to an agreed percentage of the medical
practice billings, as and when collected, varying between 70% to 85% of such
collections.
At the joint venture imaging center, Radnet has entered into a
Management Agreement to provide management, administrative and billing and
collection services for a management fee approximating eight 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 74% 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, 27 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, 2000, capital lease obligations totaled approximately $25 million through
July 31, 2007 including current installments totaling approximately five million
dollars. Also at October 31, 2000, installment notes payable totaled
approximately $91 million through August 31, 2007 including current installments
of approximately $46 million [including line of credit balances of approximately
$26.5 million]. Commitments under equipment operating leases at October 31,
2000, were approximately ten million dollars through July 2007, including
current obligations of approximately $1.8 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.
5
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 12 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 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 per doctor and $8,000,000 in the aggregate covering
each physician at the various imaging centers. The policy provides ongoing
coverage from any claims made by patients seen by the physicians as well as
coverage for all of the Company's non-medical personnel at each center against
medical malpractice claims. RadNet, DIS and PHS are also named insureds under
the policy. All other physicians who perform medical services at the various
imaging centers are required to maintain medical malpractice insurance coverage
with similar limits. Although management believes that such levels of insurance
are adequate, there can be no assurance in this regard. In addition, the Company
maintains property and equipment insurance coverage of $49,965,000 and business
interruption insurance of $21,780,000. General liability insurance coverage of
$1,000,000 per occurrence and $2,000,000 in the aggregate with $5,000,000
umbrella coverage is also maintained by the Company.
EMPLOYEES
At October 31, 2000, the Company [including DIS] had a total of 568
full-time employees of whom 13 served in executive positions, 248 supplied
technical and managerial services at the various imaging centers, and 307
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.
6
GOVERNMENT REGULATION
Substantially all of the Company's current operating revenues are
attributable to its operations in the health care services industry through
RadNet and DIS. The health care services industry in which the Company operates
is subject to a wide range of federal and state governmental regulatory
requirements and prohibitions affecting all aspects of the Company's operations.
Government regulation of the health care services industry in general, and the
occupational health care industry in particular, may adversely affect the
Company's business through, among other things, potential reduction in payment
for health care services.
Government regulation of the Company's health care service operations
fall into the following general areas: licensing, reimbursement, fraud/abuse,
corporate practice of medicine, and environmental.
LICENSING - Health care facilities are subject to federal, state and
local regulation, and periodic inspection by licensing agencies to determine
whether the standards of medical care provided therein comply with licensing
standards. California law requires that professional health care services be
provided only by licensed physicians, a licensed facility, or a facility that
qualifies for a statutory exemption from licensure. The Company periodically
verifies that the physician providers at each of its centers maintain valid
licenses to furnish services, although the Company is to some extent dependent
upon the physician providers to which it furnishes management services to
maintain such licensure.
THIRD PARTY REIMBURSEMENT - Providers of health care services,
including physicians, laboratories, and suppliers, receive payment for medical
services from their patients, from third party 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]
7
utilization review with retrospective [after services are delivered] review.
Such audits, which can relate to claims for service furnished several years
earlier, often result in efforts by the payor to recoup payments previously
approved.
FRAUD AND ABUSE ISSUES - Federal and state laws establish a large
number of prohibitions against billing and referral practices in the health care
services industry and impose criminal and civil penalties upon health care
providers found to have violated them.
BILLING AND ASSIGNMENT - Under the Medicare and Medicaid programs,
patients usually assign their rights to payment to health care providers in
exchange for certain assurances from the health care providers, e.g., an
agreement not to collect for more than the Medicare approved amount. Health care
providers are generally restricted in their ability to reassign rights to
Medicare or Medicaid payment to third parties; an exception exists for billing
and collection services under specified conditions. Violation of the
requirements for assignment or reassignment can subject the health care provider
to a range of criminal and civil penalties, including fines and exclusion from
the program.
Health care providers and management companies are also subject to
criminal and civil penalties under federal and state law prohibitions against
submitting false claims for payments. Generally, criminal penalties subjecting
participants to fines and imprisonment require that the entity act knowingly or
willfully, or with fraudulent intent. Civil statutes provide penalties for
submitting claims with "reckless disregard" of the truth or falsely submitting
information. The federal civil penalties statute provides for civil penalties
against anyone who presents or causes to be presented a false or improper claim
under Medicare or Medicaid, including billing agents. Liability is imposed on
persons who "know or should know" that a claim is "false," "fraudulent," or for
services "not provided as claimed."
In addition, health care providers and management companies are subject
to various other laws that provide for monetary sanctions for technical billing
violations and for failure to disclose known Medicare or Medicaid overpayments.
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
8
clients of a management company from receiving reimbursement for services
furnished by the excluded entity. The Company believes that arrangements for the
management of medical practices such as it has established have in fact become
common in California, and have not generally been challenged with regard to
these issues. However, the Company cannot substantiate its belief. There can be
no assurance that the Company's present arrangements will not be challenged,
and, if challenged, that it will not be found to violate such prohibitions, thus
subjecting the Company to potential damages, injunction and/or civil and
criminal penalties.
California Business and Professions Code Section 650 sets forth a
comprehensive prohibition against the payment of compensation by or to a
physician or other health professional in exchange for patient referrals. An
even more broadly worded prohibition on payments for referrals is found in
California Health and Safety Code Section 445, which applies by its terms to all
persons, not only physicians and other health care professionals, and prohibits
referrals for profit to "health-related facilities". The imaging centers
operated or managed by the Company are deemed "health-related facilities" under
the statute. However, the Company does not believe that its present arrangements
violate the prohibition against referrals for profit contained in the statutes.
All of the payment relationships under the management agreements
entered into by the Company are subject to review under the above statutes, as
to whether any portion of the payments is being made in exchange for the
referral of patients. Moreover, payment relationships with other persons and
entities providing goods or services to the Company, BRMG or the Company's other
medical service providers are also subject to review under the above statute as
to whether any of the payments for the goods or services are being made at least
in part in exchange for the referral of patients. Even if the Company were
deemed to be referring patients to the providers, the Company does not believe
that any portion of its management fee is being paid for such referrals, but
rather constitutes reasonable compensation for the services provided by the
Company to the providers pursuant to the management agreements. However, there
can be no assurance that the relationship between the Company and the health
care providers with which it contracts will not be characterized as violating
the statutes.
Future judicial, legislative or administrative action which interprets
state and federal "kickback" prohibitions could have a materially adverse effect
on the Company and its assets. Further, new legislation or regulations are
proposed periodically relating to referral patterns in the health care services
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 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.
9
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.
ITEM 2. PROPERTIES
- ------- ----------
All of the imaging centers owned or managed by the Company are located
in leased facilities or in owned facilities on leased land 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 Lease Ownership Interest Lease Expiration
--------- ----- ------------------ ----------------
Tower Division:
[Beverly Hills and Environs]
Roxsan 8,143 $258,000 100% January 2002
Women's 3,830 $70,000 100% February 2014
Wilshire 13,778 $475,000 100% September 018
Antelope Valley 2,890 $66,000 100% In negotiation
Chino 2,700 $90,000 100% April 2007
Emeryville 2,086 $34,000 100% June 2003
Fresno 5,360 $169,000 100% March 2003
La Habra 3,034 $41,000 100% December 2002
Lancaster [two sites] 7,827 $177,000 100% July 2002
Long Beach - Redondo [three sites] 6,000 $122,000 100% December 2001
Long Beach - Los Coyotes 3,062 $63,000 100% August 2004
Northridge 7,500 Owned 100% N/A
Orange [two sites] 5,376 $204,000 100% February 2001
Oxnard 5,100 $101,000 100% February 2002
Sacramento 8,083 $295,000 100% June 2003
San Francisco 1,240 $27,000 100% October 2001
San Gabriel Valley 3,871 $50,000 100% December 2002
Santa Clarita 5,782 $110,000 100% June 2009
Santa Rosa 4,235 $129,000 100% July 2001
Stockton/Valley 4,588 $81,000 100% December 2001
Tarzana [two sites] 5,200 $210,323 100% December 2007
Tustin 2,139 $54,000 100% January 2003
Vacaville 3,984 $83,000 100% September 2003
Ventura 9,440 $139,000 100% July 2002
Ventura -Loma Vista [three sites] 3,327 $51,000 100% November 2001
DIS Centers
-----------
Camarillo 2,035 $37,000 90% May 2002
North County [Oceanside/San Diego] 2,314 $44,000 90% November 2005
Riverside 8,312 $126,000 90% July 2006
Temecula 5,824 $145,000 90% April 2006
Temecula Oncology 5,418 $117,000 90% September 2003
Thousand Oaks 8,300 $233,000 90% November 2007
Joint Venture
-------------
Westchester 6,763 $195,000 50% July 2006
Other Facilities
----------------
RadNet [Corp. office] 11,500 $213,000 N/A May 2003
Warehouse/Other 22,200 $189,000 N/A Various
10
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
In the ordinary course of the Company's business from time to time it
becomes involved in certain legal proceedings, the majority of which are covered
by insurance. As of the date of this Form 10-K, the Company is not a party to
any pending material legal proceedings.
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, 2000 .11 .07 .12 .08
April 30, 2000 .52 .09 .54 .11
July 31, 2000 .69 .26 .71 .28
October 31, 2000 .66 .35 .68 .37
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
- -------------
(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 January 29, 2001, were $.47 and $.49, respectively. As of
January 29, 2001, 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 2000, PHS repurchased an aggregate $2,507,000 of its
outstanding debentures for a purchase price of $1,014,869 of which $234,000
represented open market purchases from unaffiliated third parties with the
balance having been acquired from Howard G. Berger, M.D. president and a
director of the Company (See "Item 13"). During fiscal 1999, PHS repurchased an
additional $676,000 of its outstanding debentures for a purchase price of
$337,215 from unaffiliated third parties. During fiscal 1998, PHS repurchased
$2,205,000 outstanding debentures for a purchase price of $1,484,943. 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
---------------------------------------
(1) In reliance upon Section 4(2) of the Securities Act of 1933, as
amended, the Company issued its common stock to seven individuals in connection
with the exercise of outstanding warrants and options aggregating 1,192,884
shares.
(2) In December 2000, in reliance upon Section 4(2) of the Securities
Act of 1933, as amended, the Company issued 5,542,018 shares of its Series A
Non-Voting Convertible Preferred Stock to its major lender in exchange for
cancellation of $5,542,018 of outstanding debt. The preferred stock is
11
convertible into the Company's common stock on a share for share basis. Each
converted share receives a five year warrant to purchase an additional share of
common stock at an exercise price of $1.20 per share and increasing by $.20 per
year for five years based upon the year of conversion.
(3) In December, 2000, in reliance upon Section 4(2) of the Securities
Act of 1933, as amended, the Company issued its five year warrant to purchase
778,655 shares of the Company's common stock at a price per share of $1.00 to a
major lender to the Company in exchange for the lender accepting a new
promissory note from the Company for $3,130,296.80 of existing debt which under
the new note will not be due and payable (together with accrued interest) until
December 1, 2005.
(4) In January 2001, in reliance upon Section 4(2) of the Securities
Act of 1933, as amended, in consideration of five individuals or entities
agreeing to extend the term of Company obligations and to utilize a portion of
those obligations to exercise previously outstanding warrants the Company agreed
to issue five year warrants to purchase up to an additional 150,000 shares of
the Company's common stock at an exercise price of $1.00 per share.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ------- ------------------------------------
YEARS ENDED
OCTOBER 31,
--------------------------------------------------------------------
(000's except per share amounts)
OPERATING DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Gross Revenues $229,598 $170,518 $132,595 $132,569 $111,381
Net Revenues after Contractual Allowances 87,965 72,258 58,821 67,019 56,539
Operating Expenses 73,368 70,359 75,329 74,687 58,372
[Loss] from Investee Transactions -- -- -- -- (314)
Income [Loss] from Continuing Operations 2,614 (9,071) (28,543) (748) (8,361)
[Exclusive of Non-Recurring Items] Net of Taxes
Income [Loss] Before Extraordinary Items and 1,102 (10,627) (29,497) (2,343) (9,511)
Change in Accounting Principle
Extraordinary Items- Gain 1,512 1,556 955 1,595 1,150
Change in Accounting Principle -- -- (779) -- --
Income [Loss] Per Common Share From Continuing .03 (.27) (.75) (.06) (.24)
Operations Before Extraordinary Items
[Loss] Income Per Common Share from .04 .04 .02 .04 --
Discontinued Operations
[Loss] Income Before Extraordinary Items .07 (.23) (.75) (.06) (.24)
Net [Loss] Income Per Common Share .07 (.23) (.75) (.02) (.21)
BALANCE SHEET DATA:
Cash and Cash Equivalents 36 3 59 130 152
Total Assets 90,625 72,247 62,656 86,340 105,931
Total Long-Term Liabilities 82,693 79,023 79,282 76,843 85,464
Total Liabilities 151,538 136,604 118,016 111,270 130,792
Working Capital [Deficit] (44,588) (38,007) (20,191) (12,027) (22,627)
Stockholders' Equity [Deficit] (60,913) (64,357) (55,360) (24,930) (24,861)
Dividends Declared -- -- -- -- --
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- ------------------------------------------------------------------------
OF OPERATIONS
-------------
BACKGROUND
Primedex Health Systems, Inc. ["PHS"] was incorporated on October 21, 1985.
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
13
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 continued to operate RMIS which provided utilization
review services until the fiscal year ended October 31, 2000, when it was
consolidated with the RadNet Management, Inc. ("RadNet") subsidiary.
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 January 26, 2001, 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,
2000, 1999 and 1998 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. Effective December
13, 2000, DVI agreed to convert the note payable into a new series of non-voting
Company convertible preferred stock on the basis of one share of preferred stock
for each one dollar of debt cancelled. The preferred stock accrues dividends at
the rate of 5% per annum.
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
significant uncertainties inherent in forward-looking information included in
14
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 October 31, 1998 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, 2000 vs. OCTOBER
31, 1999
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 and
DIS for the year ended October 31, 2000 and 1999.
For the year ended October 31, 2000 and 1999, the Company had operating income
from continuing operations of $14,596,198 and $1,898,524, respectively.
The Company generated gross revenue of $229,597,926 and $170,517,884 and net
revenue of $87,964,616 and $72,257,665 for the years ended October 31, 2000 and
1999, respectively. During the years ended October 31, 2000 and 1999, RadNet
generated gross revenue of $198,695,250 and $147,533,960, respectively, and DIS
generated gross revenue of $30,902,676 and $22,983,924, respectively. During the
year ended October 31, 2000 and 1999, RadNet generated net revenue of
$74,411,903 and $59,845,230, respectively, and DIS generated net revenue of
$13,552,713 and $12,412,435, respectively [net of elimination entries].
The Company's net revenue increased approximately 22% for the year ended October
31, 2000 primarily due to the addition of new centers, including but not limited
to, Chino Valley MRI, San Gabriel Valley MRI, Tarzana MRI, San Francisco Open
MRI and Emeryville Open MRI, the addition or improvement of medical equipment,
the addition of new contracts, and the renegotiation of existing contracts
improving reimbursement and net yields.
For the years ended October 31, 2000 and 1999, operating expenses totaled
$73,368,418 and $70,359,141, respectively. For the years ended October 31, 2000
and 1999, RadNet's operating expenses were $61,319,795 and $55,841,840,
respectively, DIS' operating expenses were $9,637,282 and $12,183,666,
respectively, RMIS' operating expenses were $-0- and $40,080, respectively, and
PHS' operating expenses were $2,411,341 and $2,293,555, respectively [net of
elimination entries].
For the years ended October 31, 2000 and 1999, the Company incurred expenses for
salaries and professional reading fees of $35,402,039 and $30,991,224,
respectively, building and equipment rental expenses of $6,334,374 and
$5,945,141, respectively, general and administrative expenses of $20,470,988 and
$22,124,193, respectively, depreciation and amortization of $8,579,573 and
$7,708,976, respectively, provisions for bad debt of $2,581,444 and $3,110,961,
respectively, and impairment losses of $-0- and $478,646, respectively.
15
A primary reason for the decrease in general and administrative expenses during
the year ended October 31, 2000 was the reduction in legal expenditures of
approximately $1.4 million due to the settlement of the majority of the
Company's outstanding litigation coupled with the insurance reimbursement of a
portion of previously paid legal fees. In addition, during the year ended
October 31, 2000, the Company reduced its repair and maintenance expenses
approximately 23%. The primary reasons for the reduction was the addition of new
equipment with lower service requirements and a new vendor service arrangement
entered into to control and stabilize monthly repair and maintenance
expenditures. Effective March 1, 2000, the Company entered into a multi-vendor
service agreement with GE Medical Systems effective through October 2003 for the
majority of its medical equipment for a fee based upon a percentage of net
revenues with minimum aggregate net revenue requirements. The service fee ranges
from 2.82% to 3.67% of net revenue and the aggregate minimum net revenue ranges
from $85,000,000 to $95,000,000 during the term of the agreement.
For the years ended October 31, 2000 and 1999, interest expense [net of interest
income] was $13,139,706 and $10,674,256, respectively, and other income [net of
other expense] was $239,343 and $398,119, respectively. Other income consisted
primarily of professional fee income, record copy income, rental income and
covenant not-to-compete income. Other expense consisted primarily of
modification fee costs and write-offs of offering costs associated with bond
repurchases.
During the year ended October 31, 2000, the Company recorded net losses on the
sale and disposal of assets of $335,116. The majority of these losses were
attributable to the closure of the Company's facility in San Francisco [450
Sutter] and the move of the North County facility from Vista to Oceanside,
California with the related upgrade of equipment and abandonment of leasehold
improvements. During the year ended October 31, 1999, the Company had net gains
form the sale and disposal of assets of $70,214 and recorded a loss on legal
judgments and settlements of $2,455,995.
During the years ended October 31, 2000 and 1999, the Company recorded gains
from the early extinguishment of debt of $1,512,053 and $1,556,121,
respectively, which included gains from the retirement of bonds of $1,492,131
and $338,785, respectively and gains from the settlement of notes of $19,922 and
$1,217,336, respectively.
During the year ended October 31, 2000, the Company had net income of
$2,614,031. During the year ended October 31, 1999, the Company had a net loss
of $9,071,221. For the year ended October 31, 2000, RadNet realized net income
$3,507,783, DIS realized net income of $1,545,339 and PHS realized net losses of
$2,439,091. During 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased for the year ended October 31, 2000 by $33,454. Cash decreased
for the year ended October 31, 1999 by $56,857.
Cash utilized in investing activities for the years ended October 31, 2000 and
1999 was $3,294,198 and $5,865,555, respectively.
During the year ended October 31, 2000, the Company purchased property and
equipment for $4,558,698, paid loan fees of $70,000, made loans to related
parties of $205,000, received proceeds from the sale of medical equipment of
$1,439,500, and received proceeds for tenant improvements of $100,000. During
16
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.
Cash utilized for financing activities for the year ended October 31, 2000 was
$4,778,013. Cash generated from financing activities for the year ended October
31, 1999 were $4,666,548.
For the year ended October 31, 2000, the Company made principal payments on
notes payable and capital lease obligations of $11,651,574, decreased its cash
overdraft by $321,485, purchased $234,000 face value subordinated bond
debentures for $121,681, distributed $200,000 to its joint venture partner,
received proceeds from its lines of credit borrowings of $4,865,665 and received
working capital proceeds from other outside lenders of $2,650,062.
For the year ended October 31, 1999, the Company made principal payments on
notes payable and capital lease obligations of $14,325,433, increased its cash
overdraft by $623,673, purchased $676,000 face value subordinated bond
debentures for $337,215, distributed $100,000 to its joint venture partner,
purchased treasury stock for $55,000, received proceeds from its lines of credit
borrowings of $10,642,738 and received working capital proceeds from other
outside lenders of $8,217,785.
A primary reason for the reduction in principal payments on notes payable and
capital lease obligations is that during the year ended October 31, 2000, the
Company successfully renegotiated a portion of its outstanding notes and capital
leases reducing monthly payments, obtaining additional financing and extending
payment terms.
At October 31, 2000 and 1999, the Company had working capital deficits of
$44,587,808 and $38,007,447, respectively. The 2000 increase in working capital
deficit of $6,580,361 was primarily due to the increase in lines of credit
borrowings of $4,865,665. Included in the year 2000 and 1999 current liabilities
of the Company are approximately $26.5 million and $21.6 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, including operating lines of credit, will be approximately
$58,090,000, $21,620,000, $20,630,000, $17,230,000 and $10,010,000. 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 $7,350,000, $5,840,000, $4,200,000, $2,590,000 and $1,415,000,
respectively. Interest on subordinated debentures is excluded. In addition, the
Company has noncancellable operating leases for use of its facilities and
certain medical and office equipment which will average approximately $4,465,000
in annual payments over the next five years.
The Company estimates interest payments on its bond debentures to be
approximately $1,753,000 for fiscal 2001. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year.
The Company's working capital needs are currently provided under two lines of
credit. Under one agreement with Coast Business Credit, due December 31, 2003,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$22,000,000 or the prior 120-days cash collections. In any scenario, the Company
may borrow up to the aggregate collection of receivables in the prior 120-days
17
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) 8.0%. The lender holds a first lien on substantially all of
Radnet's [Beverly Radiology's] assets, the President and C.E.O. of PHS has
personally guaranteed $10,000,000 of the loans, and the credit line is
collateralized by a $5,000,000 life insurance policy on the President and C.E.O.
of PHS. At October 31, 2000, approximately $18.2 million was outstanding under
this line.
Under a second line of credit with DVI Business Credit, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. The line,
originally due October 31, 2000, is currently on a month-to-month basis pending
renegotiation. The credit line is collateralized by approximately 80% of the
Tower division's accounts receivable. Borrowings under this line are repayable
together with interest at an annual rate equal to the bank's prime rate plus
1.0%. At October 31, 2000, approximately $4.7 million was outstanding under this
line.
As of October 31, 2000, the bank's prime rate was 9.5%. Under the various
formulas, total funds available for borrowing under the two lines of credit was
approximately $4.1 million at October 31, 2000.
A third line of credit, with DVI Business Credit, was eliminated subsequent to
year-end by restructuring two of DVI's existing notes payable with the Company
distributing the combined balances over 72 months. As of October 31, 2000,
approximately $3.6 million was outstanding under this line.
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 a
deficiency in equity of $60,912,876 and a working capital deficiency of
$44,587,808 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 improvements in operating
income and continued effort is planned in the future to allow the Company to
continue to operate and maintain profitability. Such actions and plans include:
o Increase revenue by selectively acquiring imaging centers in areas
currently not served by the Company. In June 2000, the Company acquired
three hospital-based MRI facilities in Tarzana, Chino and San Gabriel
Valley, and in September 2000, the Company acquired two Open MRI facilities
in San Francisco and Emeryville.
o Increase revenue by negotiating new and existing managed care contracts for
additional services and more favorable terms. During the year ended October
31, 2000, the Company successfully renegotiated a majority of its existing
capitation contracts improving reimbursement and subsequent to year-end,
signed a new capitation agreement which will significantly improve the
operations at its Riverside facility.
o Consolidate underperforming facilities to reduce operating cost
duplication. During the year ended October 31, 2000, the Company closed its
operations in San Francisco [450 Sutter] and transferred its business to
its newly acquired site [Post Street], and closed one of its smaller Buena
Ventura sites in Camarillo, California. Subsequent to October 31, 2000, the
18
Company closed one of its Sacramento sites [Auburn] and consolidated its
business into one Sacramento facility [Scripps].
o Continue to evaluate all facilities operations and trim excess operating
costs as well as general and administrative costs where it is feasible to
do so. During the year ended October 31, 2000, the Company significantly
reduced their outside legal expenditures and repair and maintenance costs.
o Continue to selectively acquire new medical equipment and replace old and
obsolete equipment in order to increase service volume and throughput at
many facilities. The Company has replaced and upgraded a large portion of
its medical equipment over the last two years thereby improving revenues.
o Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements and
upon the expiration of leases and notes. The Company has enjoyed success in
these endeavors and subsequent to year-end, successfully renegotiated six
capital lease obligations and various notes payable with outside lenders
reducing or eliminating monthly payments, extending repayment periods,
creating balloon payments to improve current cash flows, converting a
current line of credit into a term note, and an additional note into
preferred stock.
DISCUSSION OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1999 v. 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
19
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, 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 $5,945,141
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 years ended October 31, 1999 and 1998, interest expense (net of interest
income) was approximately $10,674,000 and $9,139,000, respectively.
For the years ended October 31, 1999 and 1998, the gain on sale of subsidiaries
and Divisions was approximately $70,000 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
20
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
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 $4,666,548 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 $14,325,433 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
and notes payable of $18,860,523 and $8,180,082, respectively. During fiscal
1999, the Company increased its lines of credit borrowing $10,642,738 from
fiscal 1998 and received working capital proceeds from other outside lendors of
$8,217,785. For the years ended October 31, 1999 and 1998, the Company purchased
$676,000 face value subordinated bond debentures for $337,215 and purchased
21
$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.
NEW AUTHORITATIVE PRONOUNCEMENTS
During 2000, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standard No. 136 ("Transfers of Assets to Not-for-Profit
Organizations of Charitable Trust That Raise or Holds Contributions for
Others"), No. 137 ("Accounting for Derivative Instruments and Hedging
Activities"), No. 138 ("Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment to FASB Statement No. 133"), No. 139
("Rescission of FASB Statement No. 53 Financial Reporting by Producers and
Distributors of Motion Picture Films and amendments to FASB Statements No. 63,
89, and 121"), and No. 140 ("Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities - a replacement of FASB Statement No.
125") which are effective for fiscal 2000. Management believes these
pronouncements will not have a material effect on the Company's financial
statements or disclosures.
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
- ------- ---------------------------------------------
Inapplicable.
22
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 the Company as of February 1, 2001:
Name Age Director or Officer Since Position with Company
- ---- --- ------------------------- ---------------------
Howard G. Berger, M.D.* 55 1992 President, Treasurer, Chief Executive and
Financial Officer, and Director
Norman R. Hames 43 1996 Vice President, Secretary, Chief
Operating Officer and Director
John V. Crues, III, M.D.* 51 2000 Vice President, Director of Medical
Operations and Director
Michael J. Krane, M.D. 56 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 the Company. Dr. Berger is the 99% owner of Beverly Radiology Medical Group
("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.
JOHN V. CRUES, III, M.D. has, since 1996, served as medical director
of the Company and of BRMG and has been a medical doctor since 1982.
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. 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, 2000, while the Board of
Directors held numerous meetings, they took board action by unanimous written
consent, which was done on three occasions. All directors participated in all
such action.
At present the Board of Directors acts as an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, and as a compensation committee, which
determines salaries and incentive compensation for employees of and consultants
to the Company. The Company intends for such committees to be composed of
23
independent directors at such time as it is able to locate qualified individuals
willing and able to serve on the Company's Board of Directors.
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 2000, 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, 2000 by any
individual serving as the Company's Chief Executive Officer at any time during
fiscal 2000 and by any other executive officer of the Company who earned at
least $100,000 during fiscal 2000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long-Term Compensation
---------------------- ----------------------
Other Securities Restricted
Name and Year Ended Annual Underlying Stock LTIP All Other
Principal Position 10/31 Salary($)(2) Bonus($) Comp.($) Options (#) Awards($) Pay-outs($) Comp($)
- ------------------ ----- ------------ -------- -------- ----------- --------- ----------- -------
Howard G. Berger, M.D. 2000 $ 75,000 -- -- -- -- -- --
Chief Executive Officer 1999 $ 75,000 -- -- -- -- -- --
1998 $ 100,000 -- -- -- -- --
Norman R. Hames 2000 $ 150,000 -- -- -- -- -- --
Vice President, Secretary and 1999 $ 150,000 -- -- -- -- -- --
Chief Operating Officer of 1998 $ 139,000 -- -- -- -- -- --
PHS and President of DIS
Michael J. Krane, M.D. 2000 $ 100,000 -- -- -- -- -- --
Vice President 1999 $ 100,000 -- -- -- -- -- --
1998 $ 96,000 -- -- -- -- -- --
John V. Crues, III, M.D. 2000 $ 145,000(3) -- 500,000 -- -- -- --
--
Vice President, Director 1999 $ 125,000(4) -- 500,000 -- -- -- --
of Medical Operations 1998 $ 125,000(4) -- 100,000 -- -- -- --
(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").
(3) Does not include $145,000 per annum received from Beverly Radiology Medical
Group.
(4) Does not include $125,000 per annum received from Beverly Radiology Medical
Group.
24
COMPENSATION PURSUANT TO STOCK OPTIONS
The following table sets forth information on option grants in fiscal
2000 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Number of Percent of Total Exercise or Assumed Annual Rates of
Shares Underlying Options Granted to Base Price Expiration Stock Price Appreciation
Name Options Granted(1) Employees in 2000 Per Share Date for Option Term(2)
- ---- -------------------- ----------------- --------- ---- ------------------
5% 10%
-- ---
John V. Crues, III, M.D. 500,000 100% .40 3/9/05 $105,000 $160,000
- -----------------
(1) The option listed was granted pursuant to the 1992 Stock Option Plan-Option
exercise prices were at the market price when granted. The option vested
immediately and has a term of five years.
(2) These columns represent hypothetical future values of the Company's common
stock obtainable upon exercise of stock options, net of the options exercise
price, assuming that the market price of the Company's common stock appreciates
at a five and ten percent compound annual rate over the five year term of the
options. The five and ten percent rates of stock price appreciation are
presented as examples pursuant to the rules and regulations of the Securities
and Exchange Commission and do not necessarily reflect management's assessment
of the Company's future stock price performance.
25
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table provides information on option exercises in
fiscal 2000 by the Named Executive Officers and the value of such officer's
unexercised options at October 31, 2000:
Number of Shares Value of
Shares Underlying Unexercised Unexercised In-the
Acquired on Value Options at Money Options at
Name Exercise (#) Realized ($) Fiscal Year End (#) Fiscal Year End ($)
- ---- ------------ ------------ ------------------- -------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------------- -------------------------
Howard G. Berger, M.D. 0 0 343,200 0 0 0
Norman R. Hames 0 0 2,913,550 0 0 0
John V. Crues, III, M.D. 200,000 $62,000 800,000 0 $123,000 0
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 R. 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.
John V. Crues, III, M.D. has renewable one year employment agreements
with the Company and with Beverly Radiology Medical Group which began in 1996
and require him to devote one-half of his time to each entity in exchange for
annual remuneration from each entity of $150,000. Dr. Crues is the medical
director of each entity.
STOCK PLANS
The Company has two stock incentive plans. The 1992 Incentive Stock
Option Plan under which no further options will be issued and the recently
adopted 2000 Long-Term Incentive Plan pursuant to which 2,000,000 shares of
Common Stock have been reserved for issuance. The material features of the 2000
Plan are as follows:
ADMINISTRATION
The Plan is presently administered by the Board of Directors, but upon the
Company locating non-employee directors who have the requisite qualifications
will then be administered by a committee appointed by the Board which will
consist of two or more non-employee Directors (the "Compensation Committee").
Subject to the terms of the Plan, the Board (and the Committee, if established)
has full authority to administer the Plan in all respects, including: (i)
selecting the individuals who are to receive Awards under the Plan; (ii)
determining the specific form of any Award; and (iii) setting the specific terms
and conditions of each Award. The Company's senior legal and human resources
representatives are also authorized to take ministerial actions as necessary to
implement the Plan and Awards issued under the Plan.
ELIGIBILITY
Employees, directors and other individuals who provide services to the Company,
its affiliates and subsidiaries who, in the opinion of the Board (or its
26
appointed Committee), are in a position to make a significant contribution to
the success of the Company, its affiliates and subsidiaries are eligible for
Awards under the Incentive Plan.
AMOUNT OF AWARDS
The value of shares or other Awards to be granted to any recipient under the
Incentive Plan are not presently determinable. However, the Plan restricts the
number of shares and the value of Awards not based on shares which may be
granted to any individual during a calendar year or performance period. In order
to facilitate the Company's compliance with Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), which deals with the
deductibility of compensation for any of the chief executive officer and the
four other most highly-paid executive officers, the Plan limits to 500,000 the
number of shares for which options, stock appreciation rights or other stock
Awards may be granted to an individual in a calendar year and limits to
$1,000,000 the value of non-stock-based Awards that may be paid to an individual
with respect to a performance period. These restrictions were adopted by the
Board of Directors as a means of complying with Code section 162(m) and are not
indicative of historical or contemplated Awards made or to be made to any
individual under the Plan.
STOCK OPTIONS
The Plan authorizes the grant of options to purchase shares of common stock,
including options to employees intended to qualify as incentive stock options
within the meaning of Section 422 of the Code, as well as non-statutory options.
The term of each option will not exceed ten years and each option will be
exercisable at a price per share not less than 100% of the fair market value of
a share of common stock on the date of the grant. Generally, optionees will pay
the exercise price of an option in cash or by check, although the Board (and the
Committee, if established) may permit other forms of payment including payment
through the delivery of shares of common stock. Options granted under the Plan
are generally not transferable (except at death or as gifts to certain Family
Members (as defined in the Plan)). At the time of grant or thereafter, the Board
(and the Committee, if established) may determine the conditions under which
stock options vest and remain exercisable.
Unless otherwise determined by the Board (and the Committee, if established),
unexercised options will terminate if the holder ceases for any reason to be
associated with the Company, its affiliates and subsidiaries. Options generally
remain exercisable for a specified period following termination for reasons
other than for Cause (as defined in the Plan), particularly in circumstances of
death, Disability and Retirement (as defined in the Plan). In the event of a
Change in Control or Covered Transaction (as defined in the Incentive Plan) of
the Company, options become immediately exercisable and/or are converted into
options for securities of the surviving party as determined by the Board (and
the Committee, if established).
OTHER AWARDS
The Board (and the Committee, if established) may grant stock appreciation
rights which pay, in cash or common stock, an amount generally equal to the
difference between the fair market values of the common stock at the time of
exercise of the right and at the time of grant of the right. In addition, the
Board (and the Committee, if established) may grant Awards of shares of common
stock at a purchase price less than fair market value at the date of issuance,
including zero. A recipient's right to retain these shares may be subject to
conditions established by the Board (and the Committee, if established), if any,
such as the performance of services for a specified period or the achievement of
individual or Company performance targets. The Board (and the Committee, if
27
established) may also issue shares of common stock or authorize cash or other
payments under the Plan in recognition of the achievement of certain performance
objectives or in connection with annual bonus arrangements.
PERFORMANCE CRITERIA
The Board (and the Committee, if established) may condition the exercisability,
vesting or full enjoyment of an Award on specified Performance Criteria. For
purposes of Performance Awards (as defined in the Plan) that are intended to
qualify for the performance-based compensation exception under Code Section
162(m), Performance Criteria means an objectively determinable measure of
performance relating to any of the following as specified by the Board (and the
Committee, if established) (determined either on a consolidated basis or, as the
context permits, on a divisional, subsidiary, line of business, project or
geographical basis or in combinations thereof): (i) sales; revenues; assets;
liabilities; costs; expenses; earnings before or after deduction for all or any
portion of interest, taxes, depreciation, amortization or other items, whether
or not on a continuing operations or an aggregate or per share basis; return on
equity, investment, capital or assets; one or more operating ratios; borrowing
levels, leverage ratios or credit rating; market share; capital expenditures;
cash flow; working capital requirements; stock price; stockholder return; sales,
contribution or gross margin, of particular products or services; particular
operating or financial ratios; customer acquisition, expansion and retention; or
any combination of the foregoing; or (ii) acquisitions and divestitures (in
whole or in part); joint ventures and strategic alliances; spin-offs, split-ups
and the like; reorganizations; recapitalizations, restructurings, financings
(issuance of debt or equity) and refinancings; transactions that would
constitute a change of control; or any combination of the foregoing. Performance
Criteria measures and targets determined by the Board (and the Committee, if
established) need not be based upon an increase, a positive or improved result
or avoidance of loss.
AMENDMENTS
The Board (and the Committee, if established) may amend the Plan or any
outstanding Award for any purpose permitted by law, or may at any time terminate
the Plan as to future grants of Awards. The Board (and the Committee, if
established) may not, however, increase the maximum number of shares of common
stock issuable under the Plan or change the description of the individuals
eligible to receive Awards. In addition, no termination of or amendment to the
Plan may adversely affect the rights of a Participant with respect to any Award
previously granted under the Plan without the Participant's consent, unless the
Compensation Committee expressly reserves the right to do so in writing at the
time the Award is made. To the extent the Board (and the Committee, if
established) desires the Plan to qualify under the Code, certain amendments may
require shareholder approval.
DIRECTOR COMPENSATION
Directors do not receive a fee for their services as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2000 all executive compensation has been determined by
the three member board of directors of PHS, Howard G. Berger, M.D., Norman R.
Hames and John V. Crues, III, M.D. In addition, no individual who served as an
executive officer of the Company during fiscal 2000, served during fiscal 2000
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. 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.
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 1, 2001, 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.* 12,582,128(2) 26.3%
John V. Crues, III, M.D. * 1,050,000 (3) 2.2%
Norman R. 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] 18,761,906(5) 39.2%
- -----------
*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 115,900 shares issuable upon conversion of the Company's
outstanding convertible debentures convertible at $10 per share.
(3)Includes options for 300,000 shares exercisable at $.15 per share
and for 500,000 shares exercisable at $.40 per share.
(4)Represents options exercisable at $.60 per share.
(5)See the above footnotes. Includes 12,416,228 shares owned of
record and 4,079,450 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
29
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. On January
1, 2000, the fees paid to the Company were reduced to 74% in consideration of
BRMG assuming economic responsibility for the technicians employed at the
various centers. In fiscal 2000, 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. The note had been extended
to February 28, 2002 but was discharged as of October 2000, as a result of Dr.
Berger delivering to the Company $2,273,000 face amount of the Company's 10%
Series A Convertible Subordinated Debentures then having an estimated market
value of $1,000,000.
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 of common stock] 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.
At October 31, 2000, the Company had loaned to Norman R. Hames
$18,750 repayable in one year together with interest at the rate of 6.5% per
annum. 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
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-29
SCHEDULES - The Following financial statement schedules
are filed herewith:
Independent Auditor's Report on Supplemental Schedule.................................... S-1
Schedule II - Valuation and Qualifying Accounts.......................................... S-2
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:
30
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)
3.1.3 December 27, 2000 amendment to the Certificate of Incorporation (H)
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 Employment Agreement dated as of June 12, 1992 between RadNet
and Howard G. Berger. [Dr. Krane executed a substantially
identical employment agreement with New RadNet on said date.] (C)
10.2 Separation Agreement dated January 31, 1995 between PHS and CareAd (D)
10.3 Separation Agreement dated April 20, 1995 between PHS and CareAd (E)
10.4 Stock Purchase Agreement made as of June 2, 1995 among PHS,
CareAd, Howard G. Berger and Robert E. Brennan (E)
10.5 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 (F)
10.6 Securities Purchase Agreement dated March 22, 1996, between the
Company and Diagnostic Imaging Services, Inc. (F)
10.7 Stockholders Agreement by and among the Company, Diagnostic
Imaging Services, Inc. and Norman Hames (F)
10.8 Securities Purchase Agreement dated June 18, 1996 between the
Company and Norman Hames (F)
10.9 Stock Purchase Agreement dated September 3, 1997 between the
Company and Preferred Health Management, Inc. whereby the
Company sold its Future Diagnostics, Inc. subsidiary (G)
10.10 DVI Securities Purchase Agreement (H)
10.11 General Electric Note Purchase Agreement (H)
10.12 Securities Purchase Agreement between the Company and
Howard G. Berger, M.D. (H)
10.13 2000 Long-Term Incentive Plan (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].
31
(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 Form 10-K for the year
ended October 31, 1996.
(G) Incorporated by reference to exhibit filed with Form 8-K report for
September 8, 1997.
(H) Filed herewith.
(I) Incorporated by reference to exhibit filed with PHS' Form 10-Q for the
quarter ended January 31, 2000.
22 Subsidiaries PHS % Ownership State of Incorporation
------------ --------------- ----------------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging Services, Inc. 100% California
Diagnostic Imaging Services, Inc. 90% Delaware
(c) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the
quarter ended October 31, 2000.
32
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 14, 2001 /s/ Howard G. Berger
-----------------------------------------
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
-------------------------------------
Howard G. Berger, M.D., Director
Date: February 14, 2001
By /s/ John V. Crues
-------------------------------------
John V. Crues, III, M.D., Director
Date: February 14, 2001
By /s/ Norman Hames
-------------------------------------
Norman Hames, Director
Date: February 14, 2001
33
INDEPENDENT AUDITORS' 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, 2000 and 1999 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 2000 and 1999, and the consolidated results of
their operations and cash flows for the years 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 losses from operations in prior years 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 statements of operations, stockholders' deficit,
and cash flows for the year ended October 31, 1998 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 determined 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 financial statements
and, accordingly, express no opinion or other form of assurance on them.
/s/ Moss Adams LLP
Los Angeles, California
January 19, 2001
- --------------------------------------------------------------------------------
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 2000
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,638 $ 36,092
Accounts receivable, net 16,694,368 20,365,065
Unbilled receivables and other receivables 441,208 1,688,543
Due from related party 206,200 432,814
Other 1,628,999 1,075,384
------------- -------------
Total current assets 18,973,413 23,597,898
------------- -------------
PROPERTY AND EQUIPMENT, net 37,666,620 44,358,216
------------- -------------
OTHER ASSETS
Accounts receivable, net 3,040,416 2,109,657
Due from related parties 87,795 96,750
Goodwill, net 10,594,678 19,337,869
Other 1,883,917 1,124,705
------------- -------------
Total other assets 15,606,806 22,668,981
------------- -------------
$ 72,246,839 $ 90,625,095
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursement in transit $ 2,353,667 $ 2,032,182
Accounts payable and accrued expenses 15,085,479 15,415,538
Notes payable to related party - 2,553,854
Current portion of notes and leases payable 39,341,714 48,184,132
Deferred revenue 200,000 -
------------- -------------
Total current liabilities 56,980,860 68,185,706
LONG-TERM LIABILITIES
Subordinated debentures payable 20,037,000 17,530,000
Notes payable to related party 2,553,854 -
Notes and leases payable, net of current portion 54,882,513 65,041,680
Accrued expenses 283,024 121,781
Deferred revenue 1,266,666 -
------------- -------------
Total long-term liabilities 79,023,057 82,693,461
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 440,063 498,804
REDEEMABLE STOCK 160,000 160,000
STOCKHOLDERS' DEFICIT (64,357,141) (60,912,876)
------------- -------------
$ 72,246,839 $ 90,625,095
============= =============
- --------------------------------------------------------------------------------
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, 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------
(unaudited)
REVENUE
Revenue $132,594,891 $170,517,884 $229,597,926
Less: Allowances 73,774,348 98,260,219 141,633,310
------------- ------------- -------------
Net revenue 58,820,543 72,257,665 87,964,616
OPERATING EXPENSES
Operating expenses 51,310,658 59,060,558 62,207,401
Depreciation and amortization 8,642,584 7,708,976 8,579,573
Provision for bad debts 2,698,139 3,110,961 2,581,444
Impairment loss on long-lived assets 12,677,324 478,646 -
------------- ------------- -------------
Total operating expenses 75,328,705 70,359,141 73,368,418
------------- ------------- -------------
Income (loss) from operations (16,508,162) 1,898,524 14,596,198
------------- ------------- -------------
OTHER EXPENSE
Interest expense, net (9,138,911) (10,674,256) (13,139,706)
Financing costs (5,207,900) - -
Loss on legal judgments and settlements - (2,455,995) -
Gain/(loss) on sale of subsidiaries, divisions and assets 965,616 70,214 (335,116)
Other 393,898 398,119 239,343
------------- ------------- -------------
Total other expense (12,987,297) (12,661,918) (13,235,479)
------------- ------------- -------------
INCOME/(LOSS) BEFORE MINORITY INTEREST, EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (29,495,459) (10,763,394) 1,360,719
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (1,612) 136,052 (258,741)
------------- ------------- -------------
INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (29,497,071) (10,627,342) 1,101,978
EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT
OF DEBT (NET OF INCOME TAXES OF $0) 954,533 1,556,121 1,512,053
------------- ------------- -------------
INCOME/(LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (28,542,538) (9,071,221) 2,614,031
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAXES OF $0) (779,294) - -
------------- ------------- -------------
NET INCOME (LOSS) $(29,321,832) $ (9,071,221) $ 2,614,031
============= ============= =============
BASIC AND DILUTED EARNINGS PER SHARE
Income/(loss) before extraordinary gain and change
in accounting principle $ (0.75) $ (0.27) $ 0.03
Extraordinary gain 0.02 0.04 0.04
Change in accounting principle (0.02) - -
------------- ------------- -------------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (0.75) $ (0.23) $ 0.07
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 39,069,178 38,973,908 38,992,323
============= ============= =============
Diluted 39,069,178 38,973,908 39,843,422
============= ============= =============
- ------------------------------------------------------------------------------------------------------------
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, 1998, 1999 AND 2000
- ------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value,
------------------------------
100,000,000 shares authorized Treasury Stock, at cost
------------------------------ Paid-in ------------------------------
Shares Amount Capital Shares Amount
-------------- -------------- -------------- -------------- --------------
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) - -
Reclassify 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)
Issuance of common stock 200,000 2,000 28,000 - -
Discounted note, used to retire
subordinated debentures - - - - -
Net income - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2000 40,957,760 $ 409,577 $ 99,364,645 (1,825,000) $ (694,947)
============== ============== ============== ============== ==============
(CONTINUED)
Stock Total
Accumulated Due from Subscription Stockholders'
Deficit Related Party Receivable Deficit
-------------- -------------- -------------- --------------
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)
Reclassify 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)
Issuance of common stock - - (30,000) -
Discounted note, used to retire
subordinated debentures - 830,234 - 830,234
Net income 2,614,031 - - 2,614,031
-------------- -------------- -------------- --------------
BALANCE - OCTOBER 31, 2000 $(159,932,151) $ - $ (60,000) $ (60,912,876)
============== ============== ============== ==============
- -----------------------------------------------------------------------------------------------------------------
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, 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $(29,321,832) $ (9,071,221) $ 2,614,031
Adjustments to reconcile net income/(loss) to net cash
from operating activities:
Depreciation and amortization 8,642,584 7,708,976 8,579,573
Amortization of management fee modification 161,070 181,049 193,017
Write-off offering costs 138,811 34,818 75,738
Amortization of purchase discount (946,542) (378,600) -
Minority interest in income (loss) of subsidiaries 1,612 (136,052) 258,741
Provision for bad debts and allowance adjustments 1,346,272 2,039,434 (25,104)
Gain on sale of assets, subsidiaries and divisions (743,493) (70,214) -
Provision for restructuring - (55,000) -
Imputed interest (income) expense (131,918) 190,823 1,169,117
Deferred revenue - covenant not-to-compete (200,000) (200,000) (116,667)
Write-off of deposits and other assets 37,849 - (70,000)
Gain of sale of marketable securities (297,376) - -
Write down of long-lived assets 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 -
Loss on sale or disposal of assets - - 335,116
Extraordinary gain and change in accounting principle (175,239) (1,555,588) (1,512,053)
Changes in assets and liabilities:
Other assets (648,269) 253,738 (457,811)
Accounts receivable 1,696,031 (2,593,204) (1,797,590)
Unbilled receivables 683,172 (407,314) (1,270,554)
Accounts payable and accrued expenses 385,349 2,196,955 131,111
------------- ------------- -------------
Net cash provided (used) by operating activities (1,486,695) 1,142,150 8,106,665
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of imaging centers - net of cash acquired (1,739,120) (100,000) -
Purchase of property and equipment (3,089,632) (6,657,055) (4,558,698)
Proceeds from sale of divisions, centers, and equipment 3,144,217 1,089,000 1,439,500
Loan fees - (117,500) (70,000)
Proceeds from sale of marketable securities 3,082,627 - -
Proceeds from dissolution of partnership 94,515 - -
Proceeds from related party-repayment of note 25,000 - -
Proceeds from landlord for tenant improvements - - 100,000
Loans to related parties (235,000) (80,000) (205,000)
------------- ------------- -------------
Net cash provided (used) by investing activities 1,282,607 (5,865,555) (3,294,198)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft 1,410,513 623,673 (321,485)
Principal payments on notes and leases payable (8,077,336) (14,325,433) (11,651,574)
Proceeds from short and long-term borrowings 8,180,082 18,860,523 7,515,727
Purchase of treasury stock - (55,000) -
Purchase of subordinated debentures (1,484,943) (337,215) (121,681)
Proceeds from issuance of common stock 30,750 - -
Joint venture proceeds 75,000 - -
Joint venture distributions - (100,000) (200,000)
------------- ------------- -------------
Net cash provided (used) by financing activities 134,066 4,666,548 (4,779,013)
------------- ------------- -------------
NET INCREASE/(DECREASE) IN CASH (70,022) (56,857) 33,454
CASH, beginning of year 129,517 59,495 2,638
------------- ------------- -------------
CASH, end of year $ 59,495 $ 2,638 36,092
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest $ 9,290,539 $ 10,719,283 $ 12,980,885
============= ============= =============
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
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES -
The Company entered into capital leases or financed equipment through notes
payable for approximately $4,780,000, $12,000,000 and $5,135,000 for the years
ended October 31, 1998, 1999 and 2000, respectively.
During the year ended October 31, 2000, the Company acquired the assets
of two open MRI facilities in Northern California for approximately $3.3 million
in notes payable. As part of the transaction, the Company recorded net property
and equipment of approximately $1,900,000 and goodwill of approximately
$1,400,000.
During the year ended October 31, 2000, the Company acquired three
hospital-based MRI centers, previously sold to Diagnostic Health Services, Inc.
["DHS"] in 1997, for approximately $14.2 million in notes payable. As part of
the transaction, the Company recorded net accounts receivable of approximately
$917,000, net property and equipment of approximately $3,380,000 and goodwill of
approximately $8,240,000. In addition, the Company wrote-off deferred revenue
related to covenants-not-to-compete with DHS of approximately $1,350,000 and
other liabilities of approximately $305,000.
During the year ended October 31, 2000, an officer of the Company
exercised his stock options to acquire 200,000 shares of the Company's common
stock at $.15 per share, or $30,000. The entire amount was borrowed from the
Company, bears interest at 7.0% and is due on or before May 3, 2002. 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.
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, 2000 , the Company exchanged a
$893,189 note receivable from a related party for $2,273,000 in subordinated
debentures. The Company recorded a $1,379,811 extraordinary gain as a result of
this transaction.
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.
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998, 1999 AND 2000
- --------------------------------------------------------------------------------
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 a stock put
and recorded $240,000 as redeemable stock and a decrease to paid-in capital.
During the year ended October 31, 1999, a former 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 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 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. Imaging
services include MRI, CT, Ultrasound, mammography, nuclear medicine and general
diagnostic radiology. The Operations of the Company comprise a single segment
for financial reporting purposes.
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.
["Radnet"]; Diagnostic Imaging Services, Inc.["DIS"]; Primedex Corporation and
Radnet Managed Imaging Services, Inc.["RMIS"] (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, Westchester Imaging Group (a joint venture), Radnet Management I, Inc.,
and SoCal MR Site Management, Inc.
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. 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, 2000, are shown net of
contractual allowances and allowances for doubtful accounts totaling
$32,113,985, of which $29,099,511 has been deducted from current receivables and
$3,014,474 has been deducted from noncurrent receivables. Accounts receivable as
of October 31, 1999, are shown net of contractual allowances and allowances for
doubtful accounts of $30,099,367, of which $25,304,788 has been deducted from
current receivables and $4,794,579 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 20
years. Offering costs, loan fees and management fee reduction buyout are
recorded at cost and amortized over the estimated useful lives which range from
1 to 20 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. Premium revenue, net of
prepaid plan revenue, for the year ended October 31, 2000 was approximately
$163,093,000.
Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided in the period the related services are rendered. Differences
between the estimated amounts accrued and interim and final settlements are
reported in operations in the year of settlement.
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 year ended October 31,
2000 was approximately $66,505,000. Net revenue for the year ended October 31,
2000 was approximately $16,919,000.
- --------------------------------------------------------------------------------
F-9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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).
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,
2000 were:
Capitation contracts 28.9%
Special group contract 19.0%
HMO/PPO/Managed care 16.8%
Medicare 11.1%
Blue Cross/Shield/Champus 9.1%
Commercial insurance 5.2%
Workers Comp 3.6%
MEDI-CAL 2.4%
Other 3.9%
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, 2000, the Company expects
the remaining carrying value of assets to be fully recoverable.
- --------------------------------------------------------------------------------
F-10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS - As permitted by SFAS 123, "Accounting for Stock-Based
Compensation", the Company 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.
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. For the year ended October
31, 1998 and 1999, the Company has not included the effect of assumed
conversions and exercises of stock options and warrants since the effect of such
an inclusion would be antidilutive. For the year ended October 31, 2000, the
Company has included 2,571,963 of options and warrants in the calculation of
dilutive earnings per share. Common stock equivalents, which are exercisable
into 4,156,790 shares of common stock at October 31, 2000, have been excluded
because their effect would be antidilutive. However, these instruments could
potentially dilute earnings per share in future years.
NEW ACCOUNTING PRONOUNCEMENTS - During 2000, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standard No. 136
("Transfers of Assets to Not-for-Profit Organizations of Charitable Trust That
Raise or Holds Contributions for Others"), No. 137 ("Accounting for Derivative
Instruments and Hedging Activities"), No. 138 ("Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment to FASB
Statement No. 133"), No. 139 ("Rescission of FASB Statement No. 53 Financial
Reporting by Producers and Distributors of Motion Picture Films and amendments
to FASB Statements No. 63, 89, and 121"), and No. 140 ("Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities - a
replacement of FASB Statement No. 125") which are effective for fiscal 2000.
Management believes these pronouncements will not have a material effect on the
Company's financial statements or disclosures.
- --------------------------------------------------------------------------------
F-11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES
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, 2000.
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 stockholder. 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 and 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 January 1998, the Company sold its interest in Scripps Chula Vista
MRI, L.P. for 127,250 shares of the purchaser's 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.
In November 1999, the Company opened Los Coyotes Imaging in Long Beach,
California, a start-up facility providing MRI, CT, nuclear medicine and
diagnostic x-ray services.
In June 2000, the Company formed SoCal MR Site Management, Inc. and
acquired the operating sites and some of the assets of three hospital-based MRI
facilities; Tarzana MRI, Chino Valley MRI, and San Gabriel Valley MRI, (formerly
sold to Diagnostic Health Services, Inc. in 1997), for $14.2 million in notes
payable.
On August 30, 2000, the Company's subsidiary Radnet Management I, Inc.
acquired the assets of two open MRI centers in San Francisco and Emeryville,
California for $3.3 million in notes payable. In conjunction with the
transaction, the Company closed its other site in San Francisco at 450 Sutter
Street and consolidated its business at the new center.
- --------------------------------------------------------------------------------
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 2000 are:
1999 2000
------------- -------------
Land $ 1,763,773 $ 1,763,773
Buildings 1,876,144 2,476,144
Medical equipment 12,281,617 17,784,288
Office equipment, furniture and fixtures 4,451,288 4,964,733
Leasehold improvements 9,935,266 12,950,564
Equipment under capital lease 30,564,702 32,123,205
------------- -------------
60,872,790 72,062,707
Accumulated depreciation and amortization (23,206,170) (27,704,491)
------------- -------------
$ 37,666,620 $ 44,358,216
============= =============
Depreciation and amortization expense on property and equipment for the
year ended October 31, 1998, 1999 and 2000 was approximately $6,725,000,
$6,680,000 and $7,315,000, respectively. Accumulated amortization under capital
leases for the years ended October 31, 1999 and 2000 was approximately
$10,668,000 and $13,470,000, respectively. Amortization expense under capital
leases for the years ended October 31, 1998, 1999 and 2000 was approximately,
$3,000,000, $3,000,000, and $3,530,000 respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of goodwill recorded at cost of $14,604,195
and $24,250,019, less accumulated amortization of $4,009,517 and $4,912,150 for
the years ended October 31, 1999 and 2000, respectively. Amortization expense of
approximately $1,915,000, $1,030,000 and $903,000 was recognized for the years
ended October 31, 1998, 1999 and 2000, respectively.
During the year ended October 31, 2000, the Company recorded goodwill
of $8,241,740 in connection with the acquisition of three hospital-based MRI
facilities in Tarzana, San Gabriel Valley and Chino, California and $1,404,084
in connection with the acquisition of two open MRI facilities in San Francisco
and Emeryville, California.
- --------------------------------------------------------------------------------
F-13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - INTANGIBLE ASSETS (Continued)
During the years ended October 31, 1998 and 1999, the Company recorded
goodwill in connection with the acquisition of additional shares of DIS stock of
approximately $2,063,000 and $478,000, 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, 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.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1999 2000
------------- -------------
Accounts payable $ 5,569,911 $ 7,099,876
Accrued expense 5,126,527 5,566,806
Accrued professional fees 1,897,364 2,062,251
Accrued loss on legal judgments 2,455,995 574,873
Other 318,706 233,513
------------- -------------
15,368,503 15,537,319
Less long-term portion of accrued
professional fees (283,024) (121,781)
------------- -------------
$ 15,085,479 $ 15,415,538
============= =============
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 2000 consists of the following:
1999 2000
------------- -------------
Revolving lines of credit. $ 21,631,399 $ 26,497,064
Note payable bearing interest at the bank's prime rate
plus 1%, due October 2000, collateralized by certain
accounts receivable, subsequently converted to
preferred stock (See Note 17). 5,225,000 5,493,946
Various notes payable at interest rates ranging
between 7.5% and 11%, due through 2006, collateralized
by medical equipment. 40,381,029 54,581,659
Note payable bearing interest at 9.25%, due in 2005,
collateralized by real estate. 1,517,055 1,509,708
Obligations from a Company acquisition bearing
interest at 8%, due through 2002. 668,766 481,121
Various obligations under capital leases at interest
rates ranging between 8.4% and 13.2%, due through
2006, collateralized by medical and office equipment. 24,800,978 24,662,314
------------- -------------
94,224,227 113,225,812
Less: current portion (39,341,714) (48,184,132)
------------- -------------
$ 54,882,513 $ 65,041,680
============= =============
The Company's working capital needs currently are provided under two
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 $22,000,000. 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, 2000 approximately
$18,195,000 was outstanding under this line and is due December 31, 2003. 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 $10,000,000 of the
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,
2000, approximately $4,741,000 was outstanding on this line and is currently
being renegotiated and is on a month-to-month basis. A third line with the same
lender was eliminated subsequent to October 31, 2000 by restructuring two of
DVI's existing notes payable with the Company distributing the combined balances
over 72 months. As of October 31, 2000, approximately $3.6 million was
outstanding under this line (See Note 17). This credit line is collateralized by
approximately 80% of the Tower division's eligible accounts receivable.
The banks prime rate at October 31, 2000 was 9.5%. The total funds
available for borrowing under the two lines are approximately $4,100,000 at
October 31, 2000. For the year ended October 31, 1999 and 2000, 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:
2001 $ 43,268,937
2002 10,809,355
2003 11,352,162
2004 9,905,442
2005 5,449,192
Thereafter 7,778,410
-------------
$ 88,563,498
=============
- --------------------------------------------------------------------------------
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, 2000 are:
2001 $ 7,108,791
2002 6,676,319
2003 6,301,022
2004 5,465,482
2005 3,499,082
Thereafter 1,923,269
-------------
Total minimum payments 30,973,965
Amount representing interest (6,311,651)
-------------
Present value of net minimum lease payments 24,662,314
Current portion (4,915,195)
-------------
Long-term portion $ 19,747,119
=============
At October 31, 2000, the Company is in default on approximately
$475,000 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 years ended October 31, 1998, 1999 and 2000, the Company
paid off and renegotiated various obligations at discounts resulting in
extraordinary gains of $234,475, $1,217,336 and $19,922, 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, 1998, 1999 and 2000 was $244,650, $233,271 and $230,304, respectively.
Interest expense for the years ended October 31, 1998, 1999 and 2000 was
approximately $2,125,000, $2,040,000 and $1,984,000, 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, 2000.
- --------------------------------------------------------------------------------
F-17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES (CONTINUED)
During the years ended October 31, 1998, 1999 and 2000, the Company
repurchased debentures with face amounts of $2,205,000, $676,000 and $234,000,
for $1,484,943, $337,215 and $121,680, respectively, resulting in gains on early
extinguishments of $720,058, $338,785 and $112,320, respectively. During the
year ended October 31, 2000 , the Company exchanged a $893,189 note receivable
from a related party for $2,273,000 in subordinated debentures. The Company
recorded a $1,379,811 extraordinary gain as a result of this transaction. In
connection with these transactions, $138,811, $34,818 and $75,738,of net
offering costs were written-off during the years ended October 31, 1998, 1999
and 2000, 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
differences between carrying amounts of assets and liabilities for financial
reporting purposes and operating loss carryforwards. At October 31, 1999 and
2000, the Company's deferred tax assets are comprised of the following items:
1999 2000
------------- -------------
DEFERRED TAX ASSETS, noncurrent
Net operating loss carryforward $ 43,502,000 $ 46,243,000
Tax basis of intangible assets in excess of books 11,238,000 9,681,000
Other 1,049,000 327,000
------------- -------------
55,789,000 56,251,000
DEFERRED TAX LIABILITY, noncurrent
Book basis of fixed assets in excess of tax basis 2,142,000 3,654,000
------------- -------------
53,647,000 52,597,000
Valuation allowance (53,647,000) (52,597,000)
------------- -------------
NET DEFERRED TAX ASSET $ - $ -
============= =============
The valuation allowance of $53,647,000 and $52,597,000 at October 31,
1999 and 2000, respectively, represents an increase of $11,747,000 and a
decrease of $1,050,000, respectively, over the preceding year.
Reconciliation between the effective tax rate and the statutory tax
rates for the years ended October 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
------------- ------------- -------------
Federal tax at 34% (34.0)% (34.0)% 34.0 %
State taxes net of federal benefit- (5.8) 5.8
Earnings on unconsolidated
subsidiaries, joint ventures and
affiliates 8.0 - -
Change in valuation allowance 26.0 39.8 (39.8)
------------- ------------- -------------
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 carryforwards of approximately
$115,608,000 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 10,900,000
2020 6,900,000
-------------
Total $115,600,000
=============
As of October 31, 2000, $26,500,000 of 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 has authorized the issuance of 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, 1998, 1999 or 2000. Shares may be
issued in one or more series. Subsequent to October 31, 2000 the Company issued
5,542,018 preferred shares in settlement of certain debt obligations (See Note
17).
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 common 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)
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 common 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.
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 qualify as incentive stock options under existing tax regulations.
In addition, the Company has issued non-qualified stock options from time to
time in connection with acquisitions and for other purposes. The following table
summarizes the activity for the three years ended October 31, 2000:
Outstanding Options
------------------------------
Number Exercise Price
-------------- --------------
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
Granted 500,000 0.40
Canceled or expired (235,000) 0.15
-------------- --------------
Balance, October 31, 2000 1,726,863 $ 0.28
============== ==============
- --------------------------------------------------------------------------------
F-20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
The following summarizes information about stock options outstanding
at October 31, 2000:
Outstanding Options
-----------------------------------------------------------------------------
Range of exercise Number Weighted average remaining Weighted average
prices outstanding remaining contractual life exercise price
- ---------------------------- ------------------ ---------------------------- --------------------------
$.15 - $.30 1,001,863 1.33 years $ 0.17
$.31 - $.60 725,000 3.24 years $ 0.41
------------------
1,726,863 2.13 years $ 0.28
==================
Had compensation cost for the Company's options granted been
determined consistent with SFAS 123, the Company's earnings per share would be
affected as follows:
Year Ended October 31,
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
Net income (loss)
As reported $(29,321,832) $ (9,071,221) $ 2,614,031
============= ============= =============
Pro Forma $(29,355,049) $ (9,134,051) $ 2,454,990
============= ============= =============
Income (loss) per share (basic and diluted):
As reported $ (.75) $ (.23) $ .07
============= ============= =============
Pro Forma $ (.75) $ (.23) $ .06
============= ============= =============
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 to calculate the fair value:
Risk-free Expected Expected
October 31, interest rate Expected life volatility dividends
------------- ------------- ------------- ------------- -------------
2000 6.60% 5 years 104.60% N/A
1999 5.42% 4 years 134.01% N/A
1998 5.51% 5 years 60.37% N/A
- --------------------------------------------------------------------------------
F-21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
The following table summarizes the activity in outstanding stock
purchase warrants:
Outstanding warrants
------------------------------
Shares Price range
-------------- --------------
Balance, October 31, 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
Granted - -
-------------- --------------
Balance, October 31, 2000 5,002,000 $0.25 - $0.60
============== ==============
Warrants outstanding at October 31, 2000 expire at various times
through December 2003.
CAPITAL TRANSACTIONS
During the year ended October 31, 2000, an employee of the Company
exercised his options for 200,000 shares of the Company's common stock of $.15
per share. The Company issued a note receivable in connection with this
purchase.
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, 1998, a former employee of the
Company exercised his options for 25,000 shares of the Company's common stock at
$.23 per share.
- --------------------------------------------------------------------------------
F-22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments as of
October 31, follows:
1999 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Accounts receivable, current $ 16,694,368 $ 16,694,368 $ 20,365,065 $ 20,365,065
Accounts receivable, long term $ 3,040,416 $ 3,040,416 $ 2,109,657 $ 2,109,657
Due from related party -
long-term $ 948,029 $ 948,029 $ 156,750 $ 156,750
Debt maturing within one year $ 35,158,192 $ 35,158,192 $ 43,268,937 $ 43,268,937
Long-term debt $ 36,818,910 $ 31,227,238 $ 45,294,561 $ 38,273,606
Notes payable related parties $ 2,553,854 $ 2,315,081 $ - $ -
Subordinated debentures $ 20,037,000 $ 14,479,533 $ 17,530,000 $ 10,195,886
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, current
accounts receivable, 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 2000.
NOTE 13 - RELATED PARTY TRANSACTIONS
The amount due from a 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.
During the year ended October 31, 2000, the note was used as consideration for
the repurchase of $2,273,000 in subordinated debentures at a discount of
$1,379,811 which has been recorded as an extraordinary gain.
- --------------------------------------------------------------------------------
F-23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended October 31, 1998, 1999, and 2000, the Company
advanced $85,000, $80,000 and $205,000, respectively, for a total outstanding
balance of $400,000, to an officer of the Company, which will be repaid within
the next year. During the year ended October 31, 2000, the Company advanced
$30,000 to an officer of the Company, which was used to exercise stock options
and has been classified as stock subscription receivable. The note bears
interest at 7% and is due May 2002. 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 was classified as stock subscription receivable.
During the year ended October 31, 1999, $25,000 was paid and $50,000 has been
forgiven in exchange for consulting services. The remaining balance of $105,000
is due within three years with interest at 6.5%. As of October 31, 2000,
approximately $54,500 of interest has been accrued on these loans.
The notes payable to related parties of $2,553,854 are due to
employees and officers of the Company. The notes bear interest at 6.58% annually
and the outstanding principal is due June 2001. During each of the years ended
October 31, 1998, 1999, and 2000, interest expense was approximately $168,000.
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
----------------------- ------------- ------------- -------------
2001 $ 4,220,000 $ 1,804,000 $ 6,024,000
2002 3,429,000 1,705,000 5,134,000
2003 2,648,000 1,634,000 4,282,000
2004 1,956,000 1,633,000 3,589,000
2005 1,672,000 1,624,000 3,296,000
Thereafter 11,047,000 1,061,000 12,108,000
------------- ------------- -------------
$ 24,972,000 $ 9,461,000 $ 34,433,000
============= ============= =============
Total rent expense, including equipment rentals, for the years ended
October 31, 1998, 1999 and 2000 amounted to approximately $5,410,000, $5,945,000
and $6,334,000, 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.
- --------------------------------------------------------------------------------
F-24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company also has employment agreements with officers and key
employees at annual compensation rates ranging from $40,000 to $250,000 and for
periods extending up to four years. Total commitments under the agreements are
approximately $2,200,000 as of October 31, 2000, 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 $2,000,000 annually
over the term of the agreement.
EQUIPMENT SERVICE CONTRACTS - On March 1, 2000, the Company entered
into an equipment maintenance service contract through October 2004, with GE
Medical Systems to provide maintenance on the majority of its medical equipment
for a fee based upon a percentage of net revenues with minimum aggregate net
revenue requirements. The percent of revenue to be billed ranges from 2.82% to
3.67% and the aggregate minimum net revenue ranges from $85,000,000 to
$95,000,000 during the term of the agreement.
LITIGATION - The Company is currently involved in litigation in which
Diagnostic Imaging of Riverside ("DIR") seeks damages of $507,000 for an alleged
breach of contract. The Company has filed a cross-complaint to recover
approximately $250,000 in unpaid radiological services. The proceedings have not
commenced. The Company intends to defend vigorously against the claim. The
Company has accrued approximately $440,000 for past fees due to DIR.
NOTE 15 - EMPLOYEE BENEFIT PLAN
The Company has 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, 1998, 1999 or 2000.
- --------------------------------------------------------------------------------
F-25
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 2000.
NOTE 17 - SUBSEQUENT EVENTS
Effective January 19, 2001, the Company settled five of its outstanding
notes payable relating to the historical acquisition of DIS common stock from
unrelated third parties. Warrants issued with the notes were exercised for
920,100 shares of the Company's common stock at $.25 per share or $230,025. The
remaining balance due of $567,569 is payable in four monthly installments
beginning on January 19, 2001. As part of the settlement, the Company issued
50,000 warrants at $1.00 per share with the first installment; in the subsequent
installments, 100,000 warrants at $1.00 per share will be issued in equal
installments if and only if the Company elects not to pay the entire residual
balance due before the next installment's due date. If the Company defaults on
any of the subsequent installment, common stock will be issued for the penalty
at a rate of 500,000 shares on the first installment default, 333,333 shares on
the second default installment and 166,667 shares on the third installment
default.
Subsequent to October 31, 2000, the Company continued to settle notes
payable at a discount finalizing agreements with three note holders and
realizing a gain on extinguishments of debt (including accrued interest) of
approximately $22,000.
Effective December 13, 2000, the Company's major lender, DVI Business
Credit Corporation, agreed to convert a $5,542,018 note payable (current) into a
new series of non-voting convertible preferred stock on the basis of one share
of preferred stock for each one dollar of debt canceled. The preferred stock is
convertible into the Company's common stock on a share for share basis and
accrues cumulative dividends at the rate of five percent per annum. Each
converted share of common stock receives a five year warrant to purchase an
additional share of the Company's common stock with exercise prices depending on
the year of exercise beginning at $1.00 per share and increasing by $.20 each
year for five years. The Company retains the right to redeem the preferred stock
at a price beginning at $1.15 per share and increasing by $.10 per year for five
years. At the end of five years the lender has the right to require the Company
to purchase all unconverted shares of preferred stock at a price of $2.00 per
share. The sale of securities is exempt from registration as a private placement
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
- --------------------------------------------------------------------------------
F-26
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS (Continued)
On December 29, 2000, the Company renegotiated two of its existing
notes payable with General Electric Company aggregating $3,130,297 into a new
promissory note with interest at 8.0% paid in 60 monthly installments of
principal and interest with the first 59 payments at $0 and payment 60 at
$4,663,6599. As part of the renegotiation, the Company issued five-year warrants
to purchase 778,655 shares of the Company's common stock at a price of $1.00 per
share.
Effective December 2000, the Company successfully renegotiated four of
its existing capital leases with General Electric Company reducing monthly
payments, extending payment terms (with the addition of balloon payments). This
restructuring will reduce the Company's debt service requirements by $410,000 in
fiscal 2001.
Effective December 1, 2000, the Company eliminated its second line of
credit with DVI Business Credit by restructuring two of its existing notes
payable with DVI distributing the combined balances due over 72 months. As of
December 1, 2000, $3,591,816 was outstanding under the line of credit which was
included in current liabilities. With the restructure, working capital will
improve by approximately $4,210,000.
In December 2000, the Company entered into a new lease arrangement for
2,400 square feet of additional space in Tarzana, California to open an imaging
center offering MRI, CT and P.E.T. scan services. The annual rent expenditure
will be approximately $66,000 with the lease term expiring in December 2007. The
center is expected to open by May 2001.
In January 2001, the Company consolidated its two facilities in
Sacramento, California [DRI] into one site at the Scripps location. The closed
site's building lease was a month-to-month agreement and notice was given to
exit the facility by the end of January.
The following consolidated condensed proforma balance gives effect to
these subsequent events as if they had taken place on October 31, 2000:
Balance
As reported at Proforma October
October 31, 2000 Effect 31, 2000
------------- ------------- ------------
Current assets $ 23,598,000 $ - $ 23,598,000
Non-Current assets 67,027,000 - 67,027,000
------------- ------------- ------------
Total Assets $ 90,625,000 $ - $ 90,625,000
============= ============= =============
Current Liabilities $ 68,186,000 $ (5,542,000)(a) $ 57,209,000
(4,210,000)(b)
(1,225,000)(c)
Long-term liabilites 82,693,000 4,210,000 (b) 88,128,000
1,225,000 (c)
Minority interest 499,000 - 499,000
Redeemable stock 160,000 5,542,000 (a) 5,702,000
Stockholders' deficit (60,913,000) - (60,913,000)
------------- ------------- ------------
Total liabilities and equity $ 90,625,000 - $ 90,625,000
============= ============= =============
F-27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS (Continued)
(a) To reflect refinancing of DVI Business Credit Corporation debt
(b) To reflect refinancing of DVI Business Credit Corporation line of
credit and certain notes payable
(c) To reflect refinancing of certain notes payable and capital leases
with General Electric Company.
NOTE 18 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally 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 had experienced a
period of recurring losses from operations and has a deficiency in equity of
$60,912,876 and a working capital deficiency of $44,587,808, which raise 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,
and the results of management's plans and efforts have been positive as
indicated by recent improvements in operating income and fiscal 2000
profitability. However, continued effort is planned in the future to allow the
Company to continue to operate profitably. Such actions and plans include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In June 2000, the Company acquired
three hospital-based MRI centers in southern California, and in
September 2000, the Company acquired two open MRI facilities in northern
California. All five centers have experienced favorable performance in
their initial months of operations.
- --------------------------------------------------------------------------------
F-28
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 - GOING CONCERN (Continued)
o Increase revenue by negotiating new and existing capitation and managed
care contracts for additional services and more favorable terms. During
the year ended October 31, 2000, the Company renegotiated many of its
existing capitation contracts increasing its monthly rates. In January
2001, the Company successfully renegotiated an additional capitation
contract for its Long Beach facilities increasing the contracted
reimbursement approximately 26%.
o Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursement
falls short of the Company's costs. In January 2001, the Company stopped
providing services for one capitation contract which will improve
profitability in the Company's Tower facility.
o Consolidate underperforming facilities to reduce operating cost
duplication and improve operating income. In September 2000, the Company
consolidated its operation at 450 Sutter in San Francisco with its newly
acquired San Francisco site. In January 2001, the Company consolidated
its Auburn facility with its Scripps site in Sacramento.
o Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is feasible to
do so.
o Continue to selectively acquire new medical equipment and replace old
and obsolete equipment in order to increase service volume and
throughput at many facilities. During the last few fiscal years, the
Company has had continued success in these endeavors with significant
increases in volume at most of its facilities.
o Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements
and upon the expiration of leases and notes. The Company has
demonstrated continued success in renegotiation of many of its existing
notes payable and capital lease obligations by extending payment terms,
reducing interest rates, reducing or eliminating monthly payments and
creating long-term balloon payments. Subsequent to year-end, one of the
Company's major lenders agreed to convert $5,542,018 of the Company's
debt into a new series of non-voting convertible preferred stock
significantly improving cash flows and working capital. In addition, the
Company eliminated a second line of credit with DVI Business Credit
consolidating its balances into two existing notes increasing credit
terms and improving current liabilities and working capital. In December
2000, the Company renegotiated six of its existing capital lease and
notes payable obligations with GE eliminating or reducing monthly
payments, extending terms and improving cash flows and working capital
significantly. The Company's long-term relationships with its lenders
and their continued confidence in their extensions of credit is critical
to the Company's success.
o Continue to settle historical notes payable, subordinated bond
debentures and other debt at a discount. The Company has continued
success in settling its subordinated bond debentures at a discount and
since November 1996 has reduced its outstanding indebtedness by
$8,299,000 through payments of only $4,821,119 generating extraordinary
gains of $3,472,881 during the last five years.
- --------------------------------------------------------------------------------
F-29
INDEPENDENT AUDITORS' 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, 2000 and 1999 and for the years 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
years ended October 31, 2000 and 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.
/s/ Moss Adams LLP
Los Angeles, California
January 19, 2001
S-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Additions
Balance at -------------- Deductions Balance
Beginning of Charged from Reserve at End of
Year Against Income (a) Year
-------------- -------------- -------------- --------------
YEAR ENDED OCTOBER 31, 2000:
Accounts receivable allowances - current $ 25,304,788 $ 130,677,610 $ 126,882,887 $ 29,099,511
============== ============== ============== ==============
Accounts receivable allowances - noncurrent $ 4,794,579 $ 13,537,144 $ 15,317,249 $ 3,014,474
============== ============== ============== ==============
Goodwill amortization $ 4,009,517 $ 902,633 $ - $ 4,912,150
============== ============== ============== ==============
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 (UNAUDITED):
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 $ -
============== ============== ============== ==============
(a) Deductions include sales and divestitures
- --------------------------------------------------------------------------------
S-2