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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 2003 Commission File Number 0-19019
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PRIMEDEX HEALTH SYSTEMS, INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
New York 13-3326724
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1510 Cotner Avenue
Los Angeles, California 90025
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (310) 478-7808
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
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Number of shares outstanding of the issuer's common stock as of June 10, 2003
was 41,100,734 [excluding treasury shares].
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEETS
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APRIL 30, OCTOBER 31,
--------- -----------
2003 2002
---- ----
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 54,000 $ 36,000
Accounts receivable, net 29,441,000 29,453,000
Unbilled receivables and other receivables 137,000 1,451,000
Deferred income taxes 1,101,000 2,100,000
Other 1,305,000 1,518,000
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Total current assets 32,038,000 34,558,000
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PROPERTY AND EQUIPMENT, NET 88,407,000 87,875,000
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OTHER ASSETS:
Accounts receivable, net 2,474,000 2,366,000
Goodwill, net 23,064,000 23,064,000
Deferred income taxes 4,135,000 3,135,000
Other 544,000 641,000
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Total other assets 30,217,000 29,206,000
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$ 150,662,000 $ 151,639,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash disbursements in transit $ 5,475,000 $ 4,613,000
Accounts payable and accrued expenses 20,187,000 20,871,000
Subordinated debentures payable 7,143,000 16,291,000
Notes payable to related party 1,142,000 1,173,000
Current portion of notes and leases payable 44,083,000 36,278,000
-------------- --------------
Total current liabilities 78,030,000 79,226,000
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LONG-TERM LIABILITIES:
Subordinated debentures payable 9,148,000 --
Notes payable to related party 105,000 105,000
Notes and leases payable, net of current portion 114,409,000 121,031,000
Accrued expenses 597,000 694,000
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Total long-term liabilities 124,259,000 121,830,000
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 560,000 1,504,000
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STOCKHOLDERS' DEFICIT (52,187,000) (50,921,000)
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$ 150,662,000 $ 151,639,000
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
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APRIL 30, APRIL 30,
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2003 2002 2003 2002
---- ---- ---- ----
REVENUE
Revenue $ 103,968,000 $ 91,717,000 $ 204,737,000 $ 175,837,000
Less: Allowances 68,084,000 57,995,000 133,107,000 109,674,000
-------------- -------------- -------------- --------------
Net revenue 35,884,000 33,722,000 71,630,000 66,163,000
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Operating expenses 26,222,000 23,850,000 53,089,000 47,421,000
Depreciation and amortization 4,298,000 3,792,000 8,551,000 7,125,000
Provision for bad debts 2,040,000 1,347,000 3,989,000 2,547,000
(Gain) loss on sale of interest
in center or equipment (2,953,000) 92,000 (2,953,000) 82,000
-------------- -------------- -------------- --------------
Total operating expenses 29,607,000 29,081,000 62,676,000 57,175,000
-------------- -------------- -------------- --------------
Income from operations 6,277,000 4,641,000 8,954,000 8,988,000
-------------- -------------- -------------- --------------
OTHER EXPENSE
Interest expense, net (4,558,000) (3,987,000) (9,178,000) (7,785,000)
Other (expense) income, net (886,000) 307,000 (792,000) 626,000
-------------- -------------- -------------- --------------
Total other expense (5,444,000) (3,680,000) (9,970,000) (7,159,000)
-------------- -------------- -------------- --------------
INCOME BEFORE MINORITY
INTEREST 833,000 961,000 (1,016,000) 1,829,000
-------------- -------------- -------------- --------------
MINORITY INTEREST IN
EARNINGS OF SUBSIDIARY (132,000) (125,000) (279,000) (76,000)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 701,000 $ 836,000 $ (1,295,000) $ 1,753,000
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
APRIL 30, APRIL 30,
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2003 2002 2003 2002
---- ---- ---- ----
BASIC NET INCOME
PER SHARE: $ .02 $ .02 $ (.03) $ .04
================== ================= ================= =================
DILUTED NET INCOME
PER SHARE: $ .02 $ .02 $ (.03) $ .04
================== ================= ================= =================
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 41,100,734 40,759,664 41,076,590 40,745,928
================== ================= ================= =================
DILUTED 41,100,734 45,664,135 41,076,590 43,198,164
================== ================= ================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
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Common Stock
$.01 par value
-----------------------
100,000,000 shares
authorized Treasury Stock, at cost Stock
----------------------- Paid-in ------------------------- Accumulated Stockholders'
Shares Amount Capital Shares Amount Deficit Deficit
----------- --------- ------------- ----------- ---------- -------------- -------------
BALANCE - OCTOBER 31, 2002 42,830,734 $429,000 $100,328,000 (1,825,000) $(695,000) $(150,983,000) $(50,921,000)
Issuance of common stock 95,000 1,000 28,000 -- -- -- 29,000
Net loss -- -- -- -- -- (1,295,000) (1,295,000)
----------- --------- ------------- ----------- ---------- -------------- -------------
BALANCE - APRIL 30, 2003
(UNAUDITED) 42,925,734 $430,000 $100,356,000 (1,825,000) $(695,000) $(152,278,000) $(52,187,000)
=========== ========= ============= =========== ========== ============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED
----------------
APRIL 30,
---------
2003 2002
---- ----
NET CASH FROM OPERATING ACTIVITIES $ 6,498,000 $ 7,071,000
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,116,000) (3,953,000)
Proceeds from sale of imaging centers, property and equipment 1,367,000 1,700,000
Payments from related parties -- 77,000
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Net cash used by investing activities (749,000) (2,176,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit 901,000 531,000
Principal payments on notes and leases payable (13,179,000) (10,542,000)
Proceeds from short-term and long-term borrowings 6,864,000 5,360,000
Proceeds from issuance of common stock 28,000 2,000
Loan fees (14,000) (10,000)
Payments to related parties (31,000) (119,000)
Joint venture proceeds -- 125,000
Joint venture distribution (300,000) (275,000)
------------- -------------
Net cash used by financing activities (5,731,000) (4,928,000)
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NET INCREASE (DECREASE) IN CASH 18,000 (33,000)
CASH, beginning of period 36,000 40,000
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CASH, end of period $ 54,000 $ 7,000
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,453,000 $ 7,145,000
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Income taxes $ -- $ 156,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SIX MONTHS ENDED APRIL 30, 2003 AND 2002
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SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The
Company entered into capital leases or financed equipment through notes payable
for approximately $7,092,000 and $21,505,000 for the six months ended April 30,
2003 and 2002, respectively.
During the six months ended April 30, 2003 and 2002, the Company recorded
imputed interest expense related to notes payable and capital lease deferred
payments and restructuring charges of approximately $716,000 and $636,000,
respectively.
Effective March 31, 2003, the Company sold its 50% share in Westchester
Imaging Group and recognized a gain on the sale of approximately $2,952,000. As
part of the sale, the Company wrote-off approximately $239,000 in net property
and equipment, $52,000 in other assets, $341,000 in notes and capital leases,
$923,000 in minority interest and $612,000 in accounts payable and accrued
expenses.
In April 2003, the Company wrote-off approximately $218,000 in other
current assets relating to its Tower Heartcheck operation.
In April 2002, an officer of the Company exercised his option to purchase
300,000 shares of common stock at $.15 per share. As part of the transaction,
the officer gave the Company 30,201 shares of its common stock previously held
by the officer worth $45,000 ($1.49 per share public closing price on the
transaction date). In addition, the officer gave the Company an additional
13,424 shares of common stock previously held by the officer worth $20,000 in
payment of his note payable with accumulated interest (classified as Stock
Subscription Receivable on the Company's financial statements). By combining the
transaction, the Company issued a net 256,375 shares of common stock to the
officer for his option exercise.
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENATATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles for
complete financial statements; however, in the opinion of the management of the
Company, all adjustments consisting of normal recurring adjustments necessary
for a fair presentation of financial position, results of operations and cash
flows for the interim periods ended April 30, 2003 and 2002 have been made. The
results of operations for any interim period are not necessarily indicative of
the results for the full year. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto contained in the Company's Annual Report on Form 10-K for
the year ended October 31, 2002.
The consolidated financial statements include the accounts of Primedex
Health Systems, Inc., and its subsidiaries outlined as follows:
o Radnet Management, Inc. ["Radnet"]
Subsidiaries
o Radnet Sub, Inc. ["Tower"],
o Radnet Heartcheck Management, Inc.,
o Radnet Managed Imaging Services, Inc. ["RMIS"],
o SoCal MR Site Management, Inc.,
o Radnet Management I, Inc.,
o Radnet Management II, Inc. ["Modesto"],
o Westchester Imaging Group (a 50% joint venture),
o Burbank Advanced Imaging Center, LLC (75%),
o Rancho Bernardo Advanced Imaging Center, LLC (75%)
o Diagnostic Imaging Services, Inc. ["DIS"]
Both Radnet and DIS are combined with Beverly Radiology Medical
Group III ["BRMG"]
Operating activities of subsidiary entities are included in the
accompanying financial statements from the date of acquisition. All intercompany
transactions and balances have been eliminated in consolidation and
combinations. Westchester Imaging Group ("WIG") was consolidated with the
Company based upon the criteria of EITF 97-2 insofar as the Company had a
controlling financial interest in WIG through a contractual management
arrangement. The Company's share of Westchester Imaging Group was sold on March
31, 2003.
Medical services and supervision at most of the Company's imaging centers
are provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
NOTE 2 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services through its 55 facilities. The Company arranges for
the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound,
mammography, nuclear medicine and general diagnostic radiology to the public.
7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147 ("Acquisitions of
Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9"), No. 146 ("Accounting for Costs Associated with
Exit or Disposal Activities") and No. 145, ("Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002"). SFAS No.
147 is effective for acquisitions after October 1, 2002. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002.
SFAS No. 145 is effective for financial statements issued after May 15, 2002.
The adoption of SFAS 145, SFAS 146, and SFAS 147 did not have a material impact
on the financial statements.
In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123"), which amends SFAS No. 123. SFAS No. 148, for which certain provisions are
effective for fiscal years ending after December 15, 2002, provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock based employee compensation and amends certain disclosure
provisions of SFAS No. 123. The adoption of SFAS No. 148 did not have a material
effect on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149 ("Amendment of Statement 133 on
Derivative Instruments and Hedging Activities"). This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified after June
30, 2003. The Company does not believe SFAS No. 149 will have a material impact
on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150 ("Accounting for certain
financial instruments with characteristics of both liabilities and equity").
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. The Company
believes the adoption of SFAS No. 150 will not have a material impact on the
Company's financial statements.
NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES
Center openings:
Effective December 1, 2002, the Company opened Rancho Bernardo Advanced
Imaging Center, LLC, near San Diego, which provides MRI, CT, ultrasound and
x-ray services. Prior to the opening, the Company invested approximately
$1,050,000 primarily for leasehold improvements and the LLC partners invested
$250,000 cash. The Company used its existing lines of credit for the payment of
leasehold improvements. The equipment was financed by General Electric.
8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES - CONTINUED
Center sales:
Effective March 31, 2003, the Company sold its 50% share of Westchester
Imaging Group for $2,500,000. As part of the transaction, the Company purchased
100% of the accounts receivable generated through March 31, 2003 for $850,000
and reimbursed the joint venture for $283,000, which represented 50% of the
remaining liabilities, resulting in net proceeds of approximately $1,367,000.
The Company recognized a gain on the transaction of approximately $2,952,000.
Net revenue and net income of Westchester for the six months ended April 30,
2003 was $2,283,000 and $255,000, respectively. Net revenue and net income of
Westchester for the six months ended April 30, 2002 was $2,415,000 and $161,000,
respectively.
During the second quarter of fiscal 2003, the Company closed two of its
satellite x-ray facilities servicing its Riverside and Long Beach (Los Coyotes)
locations, respectively. The closures were cost reduction measures where volume
at these locations could be directed to other nearby facilities with existing
equipment operating below capacity.
NOTE 5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill is recorded at cost of $29,330,000, less accumulated amortization
of $6,266,000 as of April 30, 2003 and October 31, 2002. Other intangible assets
consist of offering costs and loan fees which are expected to be fully amortized
by June 2003 and December 2003, respectively.
The Company implemented Statement of Financial Accounting Standards No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective November 1, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) are no longer amortized but are subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Application of the
nonamortization provisions of the Statement resulted in an increase in income of
approximately $730,000 ($0.02 per share) for each of the quarters ended April
30, 2003 and 2002.
NOTE 6 - CAPITAL TRANSACTIONS
In November 2001, the Company issued 132,850 shares of common stock as a
bonus to 274 employees under the long-term incentive stock option plan ($.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses.
Effective December 16, 2002, an officer of the Company exercised his
options to purchase 95,000 shares of common stock at $.30 per share. The officer
paid the Company $28,500 cash.
During the six months ended April 30, 2003, the Company retired 17,500
options to purchase common stock at a weighted average price of approximately
$.60 per share due to the termination of employees. In addition, the Company
issued five-year warrants to two physicians for a combined 150,000 shares of
common stock at a weighted average price of approximately $.64 per share upon
entering employment agreements with the Company.
9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 7 - RELATED PARTY TRANSACTIONS
The amount due to related parties at October 31, 2002 consisted of
$1,173,000 of short-term notes payable due to an officer of the Company, and
$105,000 of long-term notes payable due to an employee of the Company. Both
notes payable were for the purchase of DIS common stock in 1996. The notes bear
interest at 6.58%. The short-term notes payable interest is paid monthly, and
the long-term note payable interest is paid annually. During the six months
ended April 30, 2003, the Company repaid principal of $31,000 for the short-term
note payable.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to the quarter's end, the Company retired 130,000 warrants to
purchase common stock at a weighted average price of $.76 per share due to
termination of two physicians, and issued 100,000 five-year warrants to purchase
common stock at a weighted average price of $.36 per share to one physician upon
entering an employment agreement with the Company. In addition, the Company
retired an additional 8,500 stock options at a weighted average price of $.75
per share upon the termination of employees.
In May 2003, the Company restructured sixteen of its existing notes payable
with DVI Financial Services, Inc. reducing its monthly payments by approximately
$210,000 per month for the next nine months. In the tenth month, the monthly
payments increase to approximately $350,000 per month, an increase of $16,000
per month over historical payment levels. The short-term cash flow savings are
approximately $1,845,000. The revised notes bear interest at approximately 8.5%
to 10.5% and have terms from 45 to 71 months with six notes payable having
balloon payments.
Beginning in April 2003, the Company began receiving short-term working
capital loans from GE Healthcare Financial Services for $200,000 per month for
nine months, or $1,800,000. Subsequent to the quarter's end, the Company will
still receive eight installments totaling $1,600,000. The notes will accrue
interest only until the final installment with the first payment for all nine
notes to be made in January 2004. The five-year notes payable bear interest at
9.00%.
In May 2003, the Company sent out a solicitation requesting current
subordinated debenture holders to extend its term from June 2003 to June 2008.
In consideration for the deferral, the Company will increase the interest from
10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003
payment. In addition, the Company will reduce the conversion rate from $12.00 to
$2.50 per share for those consenting bondholders. The Company also agreed not to
redeem the bonds prior to June 2005. As of June 10, 2003, the Company had
received consents to extend for $9,148,000 of the bondholders. It is anticipated
more consents will be received in the upcoming weeks. On July 1, 2003, the
Company will pay the final interest payment at 10% (per annum) and intends to
provide a mechanism for those bondholders who choose not to extend the term of
the bonds to contact the Company for payment. As of October 1, 2003, the
bondholders will be paid interest on their principal at 11.5% (per annum).
Effective May 1, 2003, the Company received an increase in its capitation
reimbursement from Oasis Medical Group averaging approximately $45,000 per month
which will benefit the Company's Desert Advanced facilities (Palm Springs and
Palm Desert). Effective July 1, 2003, the Company entered into a new capitation
arrangement with Lakeside Medical Group for approximately 50,000 lives primarily
benefiting the Company's Northridge, Burbank and Tower facilities.
10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 8 - SUBSEQUENT EVENTS - continued
Effective August 1, 2003, the Company will form a new LLC with CTI Molecular
Imaging which will provide PET services at its Tower Roxsan facility. CTI will
provide the equipment and the Company will provide the facility, physician,
employees and supplies necessary to provide the services. Roxsan currently has
sufficient space to house the PET so the Company will only need to provide the
variable expenditures necessary.
NOTE 9 - LIQUIDITY
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. At April 30, 2003,
the Company has a deficiency in equity of $52,187,000 compared to $50,921,000 as
of October 31, 2002, and a working capital deficiency of $45,992,000 as of April
30, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. 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 in two of the last three years. However, the results of the last
twelve months show that continued effort is necessary in the future to allow the
Company to operate profitably. Such actions and plans include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In December 2002, the Company
opened a new center in Rancho Bernardo. The Company has no current plans
to open any new facilities in the near future.
o Increase revenue by expanding existing facilities or opening new
locations close to existing sites. In order to obtain certain new large
contracts, the Company has opened nearby x-ray or satellite offices to
meet the increase in patient volume for a certain region. In January
2002, the Company opened two x-ray offices near its Temecula facility
which allowed the Company to obtain a new capitation contract for
approximately 62,000 lives. In addition, to meet demand and generate
economies of scale, the Company has consolidated its mammography and
ultrasound services at a few of its largest facilities into separate
womens' centers. In September 2002, the Company opened a women's center
adjacent to its Orange Imaging facility.
o Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursements
fall short of the Company's costs. The Company will renegotiate several
of its existing capitation contracts with the goal of increasing net
reimbursement for the current fiscal year. Effective May 1, 2003, the
Company received an increase in its capitation reimbursement from Oasis
Medical Group averaging approximately $45,000 per month which will
benefit the Company's Desert Advanced facilities (Palm Springs and Palm
Desert).
o Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is feasible to
do so including consolidating underperforming facilities to reduce
operating cost duplication and improve operating income. During the
second quarter of fiscal 2003, the Company closed two of its satellite
x-ray facilities servicing its Riverside and Long Beach (Los Coyotes)
locations, respectively. The closures were cost reduction measures where
volume at these locations could be directed to other nearby facilities
with existing equipment operating below capacity.
11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY - CONTINUED
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. Upgrades and new equipment would be
acquired only when anticipated increases in patient volume support the
increased debt service.
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. In May 2003, the Company
restructured sixteen of its existing notes payable with DVI Financial
Services, Inc. reducing its monthly payments by approximately $210,000
per month for the next nine months. In the tenth month, the month
payments increase to approximately $350,000 per month, an increase of
$16,000 per month over historical payment levels. The short-term cash
flow savings are approximately $1,845,000. The revised notes bear
interest at approximately 8.5% to 10.5% and have terms from 45 to 71
months with six notes payable having balloon payments.
Beginning in April 2003, the Company began receiving short-term working
capital loans from GE Healthcare Financial Services for $200,000 per
month for nine months, or $1,800,000. Subsequent to the quarter's end,
the Company will still receive eight installments totaling $1,600,000.
The notes will accrue interest only until the final installment with the
first payment for all nine notes to be made in January 2004. The
five-year notes payable bear interest at 9.00%.
On February 10, 2003, the Company was advised that the Federal Deposit
Insurance Corporation ("FDIC") had elected to close Coast Business
Credit ("Coast") and liquidate its accounts. As part of that process,
the FDIC advised the Company that until its account was sold its credit
line would be reduced to $15.5 million. During the second quarter of
fiscal 2003, the FDIC sold the accounts receivable portfolio to GF Asset
Management, Inc., a division of GE. As a result of the Company's
relationship with GE, both companies are working on an arrangement to
continue to provide a revolving line of credit with the Company past the
December 31, 2003 termination possibly consolidating all of the
Company's receivables into one line of credit.
In May 2003, the Company sent out a solicitation requesting current
subordinated debenture holders to extend its term from June 2003 to June
2008. In consideration for the deferral, the Company will increase the
interest from 10% to 11.5% (per annum) paid quarterly beginning with the
October 1, 2003 payment. In addition, the Company will reduce the
conversion rate from $12.00 to $2.50 per share for those consenting
bondholders. The Company also agreed not to redeem the bonds prior to
June 2005. As of June 10, 2003, the Company had received consents to
extend for $9,148,000 of the bondholders. It is anticipated more
consents will be received in the upcoming weeks. On July 1, 2003, the
Company will pay the final interest payment at 10% (per annum) and
intends to provide a mechanism for those bondholders who choose not to
extend the term of the bonds to contact the Company for payment. As of
October 1, 2003, the bondholders will be paid interest on their
principal at 11.5% (per annum). The Company believes it will have
sufficient funds under its available financing resources to purchase the
remaining debentures, if necessary, but such action will severely affect
the Company's liquidity.
12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - LIQUIDITY - CONTINUED
o Continue its attempt to settle historical notes payable, subordinated
bond debentures and other debt at a discount.
o Depending on price, market circumstances and strategic buyers, the
Company may look to sell non core assets. Effective March 31, 2003, the
Company sold its 50% share of Westchester Imaging Group for $2,500,000.
As part of the transaction, the Company purchased 100% of the accounts
receivable generated through March 31, 2003 for $850,000 and reimbursed
the joint venture for $283,000, which represented 50% of the remaining
liabilities, resulting in net proceeds of approximately $1,367,000. The
Company recognized a gain on the transaction of approximately
$2,952,000.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
13
ITEM 2:
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services through its 55 facilities. The Company arranges for
the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound,
mammography, nuclear medicine and general diagnostic radiology to the public.
The consolidated financial statements include the accounts of Primedex
Health Systems, Inc., and its subsidiaries outlined as follows:
o Radnet Management, Inc. ["Radnet"]
Subsidiaries
o Radnet Sub, Inc. ["Tower"],
o Radnet Heartcheck Management, Inc.,
o Radnet Managed Imaging Services, Inc. ["RMIS"],
o SoCal MR Site Management, Inc.,
o Radnet Management I, Inc.,
o Radnet Management II, Inc. ["Modesto"],
o Westchester Imaging Group (a 50% joint venture),
o Burbank Advanced Imaging Center, LLC (75%),
o Rancho Bernardo Advanced Imaging Center, LLC (75%)
o Diagnostic Imaging Services, Inc. ["DIS"]
Both Radnet and DIS are combined with Beverly Radiology Medical
Group III ["BRMG"]
Operating activities of subsidiary entities are included in the
accompanying financial statements from the date of acquisition. All intercompany
transactions and balances have been eliminated in consolidation and
combinations. Westchester Imaging Group ("WIG") was consolidated with the
Company based upon the criteria of EITF 97-2 insofar as the Company had a
controlling financial interest in WIG through a contractual management
arrangement. The Company's share of Westchester Imaging Group was sold on March
31, 2003.
Medical services and supervision at most of the Company's imaging centers
are provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
The administrative provisions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") direct the federal government to adopt
national electronic standards for automated transfer of certain health care data
between health care payors, plans and providers. HIPAA is designed to enable the
entire health care industry to communicate electronic data using a single set of
standards, thus eliminating all nonstandard formats currently in use. The
Company's contracted radiology practices and diagnostic imaging centers are
"covered entities" under HIPAA, and as such, must comply with the HIPAA
electronic data interchange mandates. The Company is required to be compliant by
October 16, 2003. The Company is in the process of determining the readiness
status of its software vendors, payors and claim clearinghouses to assess
exposure with regard to this legislation. The Company is at risk for both its
own HIPAA compliance and the compliance of those with whom it does business,
particularly third party payors. There can be no assurance that HIPAA compliance
issues will not have an adverse effect on the Company's business, results of
operations or financial condition.
14
FORWARD LOOKING STATEMENTS:
Throughout this report the Company makes "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements include words such as "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about the Company's
acquisition and development plans. The Company does not guarantee that the
transactions and events described in this report will happen as described or
that any positive trends noted in this report will continue. The forward-looking
statements contained in this report are generally located in the material set
forth under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," but may be found in other locations as
well. These forward-looking statements generally relate to Company plans,
objectives and expectations for future operations and are based upon
management's reasonable estimates of future results or trends. Although the
Company believes that its plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, the Company may not achieve such
plans or objectives. You should read this report completely and with the
understanding that actual future results may be materially different from what
the Company expects. The Company will not update forward-looking statements even
though the situation may change in the future.
Specific factors that might cause actual results to differ from the Company's
expectation include, but are not limited to:
- economic, competitive demographic, business and other conditions in
the Company's markets;
- a decline in patient referrals;
- change in the rates or methods of third-party reimbursement for
diagnostic imaging services;
- the termination of contracts with third party payers;
- the availability of additional capital to fund capital expenditure
requirements;
- burdensome lawsuits against contracted radiology practices and the
Company;
- reduced operating margins due to managed care contracts and capitated
fee arrangements;
- any failure on the Company's part to comply with state and federal
anti-kickback and anti-self-referral laws or any other applicable
healthcare regulations;
- the Company's substantial indebtedness, debt service requirements and
liquidity constraints;
- risks related to convertible subordinated debentures and healthcare
securities generally;
- unforeseen technological changes; and
- other factors discussed elsewhere in this report.
15
All future written and verbal forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR
PERCENT OF NET REVENUE INCREASE
SIX MONTHS ENDED APRIL 30, (DECREASE)
--------------------------------------- ---------------------
2003 2002 `02 TO `03
------------------- ------------------- ---------------------
Revenue 285.8% 265.8 % 16.4%
Less: Allowances (185.8) (165.8) 21.4
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 8.3
Operating expense
Operating expenses (74.1) (71.7) 12.0
Depreciation and amortization (11.9) (10.8) 20.0
Provision for bad debts (5.6) (3.8) 56.6
Gain (loss) on sale of centers
and equipment 4.1 (0.1) (3701.2)
------------------- ------------------- ---------------------
Total operating expense (87.5) (86.4) 9.6
------------------- ------------------- ---------------------
Income from operations 12.5 13.6 (0.4)
Interest expense, net (12.8) (11.8) 17.9
Other (expense) income, net (1.1) 1.0 (226.5)
------------------- ------------------- ---------------------
(Loss) Income before minority (1.4) 2.8 (155.5)
interest
Minority interest (0.4) (0.1) 267.1
------------------- ------------------- ---------------------
Net income (loss) (1.8) 2.7 (173.9)
=================== =================== =====================
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the six months ended April
30, 2003 compared to the six months ended April 30, 2002. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this quarterly report.
2003 2002
---- ----
NET REVENUE $71,630,000 $ 66,163,000
- -----------
Revenue of the contracted radiology practices and diagnostic imaging centers is
recorded when services are rendered based upon established charges and reduced
by contractual allowances. The Company utilizes historical collection experience
16
in estimating contractual allowances. The factors influencing the historical
collection experience include the contracted radiology practices' and diagnostic
imaging centers' patient or insurance mix, impact of managed care contract
pricing and contract revenue and the aging of the patient accounts receivable
balances. As these factors change, the historical collection experience is
revised accordingly in the period known. Net revenue as a percentage of gross
revenue may change from period to period for a variety of reasons including
changes in reimbursement and changes in fee schedules. As the Company
consolidates its billing into one internal system, a universal gross fee
schedule is being utilized which may differ from previous gross charge amounts
from 5% to 30%. In those cases, the individual facility's collection percentage
would decrease to accurately reflect the period's net revenue. The Company
anticipates all facilities will be converted to its internal billing and
collection system by fiscal year-end with the exception of its three Tower
locations.
Net revenue increased approximately $5,467,000, or 8.3%, for the six months
ended April 30, 2003, compared to the same period last year. Of the net revenue
increase, 40.2% was due to the addition of four new sites subsequent to November
1, 2001 (Burbank, Tarzana Advanced, Grove Diagnostic and Rancho Bernardo). The
remaining 59.8% increase was due primarily to new contracts and increases in
throughput at many sites due to the addition or upgrade of medical equipment and
expansion of existing facilities. In particular were improvements at the
Company's Orange facility where net revenue increased by approximately
$1,374,000 during the six months ended April 30, 2003 versus the same period the
prior year due to its expansion in late fiscal 2002.
OPERATING EXPENSES 2003 2002
- ------------------ ---- ----
OPERATING EXPENSES $ 53,089,000 $ 47,421,000
DEPRECIATION AND AMORTIZATION 8,551,000 7,125,000
PROVISION FOR BAD DEBTS 3,989,000 2,547,000
(GAIN) LOSS ON SALE OF INTEREST IN CENTER
OR EQUIPMENT (2,953,000) 82,000
------------- -------------
TOTAL OPERATING EXPENSES $ 62,676,000 $ 57,175,000
Operating expenses for the six months ended April 30, 2003 increased
approximately $5,668,000, or 12.0%, compared to the same period last year. The
majority of this increase was due to a 8.3% increase in net revenue and the
variable nature of many of the expense line items including, but not limited to,
medical supplies, billing fees, percentage of revenue agreements relating to
physician reading fees and the GE repair and maintenance agreement which
increased contracted fees from 3.64% to 3.74% of net revenue effective November
1, 2002. In addition, many sites expanded their operations in late fiscal 2002
including Orange Imaging Center which opened two additional facilities across
the street.
Included in operating expenses for the six months ended April 30, 2003 and 2002
is approximately $31,668,000 and $28,703,000, respectively, for salaries and
reading fees, approximately $4,758,000 and $4,184,000, respectively, for
building and equipment rentals, and approximately $16,663,000 and $14,534,000,
respectively, in general and administrative expenditures. The Company's general
and administrative expenses include billing fees, medical supplies, office
supplies, repairs and maintenance, insurance, business tax and license, outside
services, utilities and other expenses including marketing, auto expenses and
travel.
During fiscal 2002, the Company in negotiation with some of its outside
physician groups converted some of its fixed fee agreements to percent of
revenue arrangements. At these centers, including, but not limited to, DRI,
Vacaville and Santa Rosa, the physician fees now range from 15% to 18% of net
revenue as opposed to a fixed salary. During the six months ended April 30,
2003, these three sites generated increases in net revenue (less provision for
bad debt) of approximately $800,000 resulting in additional professional reading
fees of approximately $130,000 compared to last year. In addition, with the
expansion of facilities and increases in the quantity of medical equipment, the
Company was required to hire additional technologists and clinic personnel.
17
During the last quarters of fiscal 2002, the Company experienced significant
insurance rate increases upon policy renewals. From July to October 2002,
general liability rates increased 50%, workers compensation insurance rates
increased 45% and malpractice rates increased 80%. For the six months ended
April 30, 2003, the Company's costs for insurance increased 48%, or $850,000,
compared to the same period last year.
Depreciation and amortization for the six months ended April 30, 2003 increased
approximately $1,426,000, or 20.0%, compared to the same period last year. The
increase is due to the addition of new sites and the upgrade or addition of
equipment throughout fiscal 2002 and early fiscal 2003. As of April 30, 2003,
gross property and equipment was approximately $139 million compared to
approximately $121 million as of April 30, 2002. During the twelve-month period
from April 30, 2002 to April 30, 2003, the Company purchased or acquired
equipment under lease of approximately $23.8 million and disposed or sold
equipment of approximately $5.6 million. The increase in equipment resulted in
increased business property taxes of approximately $240,000, or 36%, for the six
months ended April 30, 2003 as compared to the same period in the prior year.
Provision for bad debt for the six months ended April 30, 2003 increased
approximately $1,442,000, or 56.6%, compared to the same period last year.
Coupled with the increase in net revenue, the Company's overall bad debt
percentage increased from approximately 1.4% of gross revenue to approximately
1.9% during fiscal 2002. The Company's historical percentage was primarily
affected by the write-off of one individual contract during fiscal 2002.
Gain on sale of centers and equipment for the six months ended April 30, 2003
increased $3,035,000, or 3701.2%, compared to the same period last year. The
increase is primarily due to the sale of the Company's interest in a center.
During the six months ended April 30, 2003, the Company sold its 50% share of
Westchester Imaging Group for $2,500,000. As part of the transaction, the
Company purchased 100% of the accounts receivable generated through March 31,
2003 for $850,000 and reimbursed the joint venture for 50% of the remaining
liabilities, approximately $283,000, resulting in net proceeds of approximately
$1,367,000. The Company recognized a gain on the transaction of approximately
$2,952,000.
2003 2002
---- ----
INTEREST EXPENSE, NET $ 9,178,000 $ 7,785,000
- ---------------------
Net interest expense for the six months ended April 30, 2003 increased
approximately $1,393,000, or 17.9%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
2003 2002
---- ----
OTHER (EXPENSE) INCOME, NET $(792,000) $ 626,000
- ---------------------------
Other income, net of other expense, for the six months ended April 30, 2003
decreased approximately $1,418,000, or 226.5%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the six
months ended April 30, 2003, the Company incurred a one-time charge for the
write-off of approximately $218,000 in other current assets relating to its
Tower Heartcheck operation and expensed approximately $780,000 for actual and
anticipated expenditures relating to pending litigation involving covenants not
to compete (see Part II). These expenses were offset by other income including
professional reading, record copy and deferred revenue. In addition to other
18
income, during the six months ended April 30, 2002, the Company received
approximately $80,000 in general insurance refund checks for losses sustained at
its Northridge and Tustin facilities, and received approximately $150,000 for an
insurance reimbursement for a business interruption loss at its Roxsan facility
when its MRI sustained water damage and was out of service for approximately six
weeks.
2003 2002
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 279,000) ($ 76,000)
- -------------------------------------------
Minority interest expense for the six months ended April 30, 2003 increased
approximately $203,000, or 267.1%, compared to the same period last year.
Minority interest is primarily comprised of 25% of the earnings of Burbank
Advanced Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of
the earnings of Westchester Imaging Group. The Company's share in Westchester
Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in
December 2002. During the six months ended April 30, 2003 and 2002, minority
interest related to Westchester was approximately ($255,000) and ($161,000),
respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2003 AND 2002
The following table sets forth, for the periods indicated, the percentage that
certain items in the statement of income bear to net revenue and the percentage
dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR
PERCENT OF NET REVENUE INCREASE
THREE MONTHS ENDED APRIL 30, (DECREASE)
--------------------------------------- ---------------------
2003 2002 `02 TO `03
------------------- ------------------- ---------------------
Revenue 289.7% 272.0 % 13.4%
Less: Allowances (189.7) (172.0) 17.4
------------------- ------------------- ---------------------
Net revenue 100.0 100.0 6.4
Operating expense
Operating expenses (73.1) (70.7) 9.9
Depreciation and amortization (11.9) (11.2) 13.3
Provision for bad debts (5.7) (4.0) 51.4
(Gain) loss on sale of interest
in center or equipment 8.2 (0.3) (3309.8)
------------------- ------------------- ---------------------
Total operating expense (82.5) (86.2) 1.8
------------------- ------------------- ---------------------
Income from operations 17.5 13.8 35.3
Interest expense, net (12.7) (11.8) 14.3
Other, net (2.5) 0.9 (388.6)
------------------- ------------------- ---------------------
Income before minority interest 2.3 2.9 (13.3)
Minority interest (0.4) (0.4) 5.6
------------------- ------------------- ---------------------
Net income 1.9 2.5 (16.1)
=================== =================== =====================
19
The following discussion explains in greater detail the consolidated operating
results and financial condition of the Company for the three months ended April
30, 2003 compared to the three months ended April 30, 2002. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this quarterly report.
2003 2002
---- ----
NET REVENUE $35,884,000 $ 33,722,000
- -----------
Net revenue increased approximately $2,162,000, or 6.4%, for the three months
ended April 30, 2003, compared to the same period last year. The majority of the
increase was due primarily to new contracts and increases in throughput at many
sites due to the addition or upgrade of medical equipment and expansion of
existing facilities. In particular were improvements at the Company's Orange
facility where net revenue increased by approximately $718,000 during the three
months ended April 30, 2003 versus the same period the prior year due to its
expansion in late fiscal 2002. In addition, the quarter showed dramatic
improvements in two of its newest centers, Burbank and Tarzana Advanced, which
opened in late November 2001 and January 2002, respectively, where net revenues
increased approximately $369,000 and $337,000, respectively, for the three
months ended April 30, 2003 versus the same period the prior year.
OPERATING EXPENSES 2003 2002
- ------------------ ---- ----
OPERATING EXPENSES $ 26,222,000 $ 23,850,000
DEPRECIATION AND AMORTIZATION 4,298,000 3,792,000
PROVISION FOR BAD DEBTS 2,040,000 1,347,000
(GAIN) LOSS ON SALE OF INTEREST IN CENTER
OR EQUIPMENT (2,953,000) 92,000
------------- -------------
TOTAL OPERATING EXPENSES $ 29,607,000 $ 29,081,000
Operating expenses for the three months ended April 30, 2003 increased
approximately $2,372,000, or 9.9%, compared to the same period last year. The
majority of this increase was due to a 6.4% increase in net revenue and the
variable nature of many of the expense line items including, but not limited to,
medical supplies, billing fees, percentage of revenue agreements relating to
physician reading fees and the GE repair and maintenance agreement which
increased contracted fees from 3.64% to 3.74% of net revenue effective November
1, 2002. In addition, many sites expanded their operations in late fiscal 2002
including Orange Imaging Center which opened two additional facilities across
the street. Coupled with the expansion of facilities and increases in the
quantity of medical equipment, the Company was required to hire additional
technologists and clinic personnel.
Included in operating expenses for the three months ended April 30, 2003 and
2002 is approximately $15,502,000 and $14,475,000, respectively, for salaries
and reading fees, approximately $2,385,000 and $2,129,000, respectively, for
building and equipment rentals, and approximately $8,335,000 and $7,246,000,
respectively, in general and administrative expenditures. The Company's general
and administrative expenses include billing fees, medical supplies, office
supplies, repairs and maintenance, insurance, business tax and license, outside
services, utilities and other expenses including marketing, auto expenses and
travel.
During the last quarters of fiscal 2002, the Company experienced significant
insurance rate increases upon policy renewals. From July to October 2002,
general liability rates increased 50%, workers compensation insurance rates
increased 45% and malpractice rates increased 80%. For the three months ended
April 30, 2003, the Company's costs for insurance increased 39%, or $370,000,
compared to the same period last year.
20
Depreciation and amortization for the three months ended April 30, 2003
increased approximately $506,000, or 13.3%, compared to the same period last
year. The increase is due to the addition of new sites and the upgrade or
addition of equipment throughout fiscal 2002 and early fiscal 2003. As of April
30, 2003, gross property and equipment was approximately $139 million compared
to approximately $121 million as of April 30, 2002. During the twelve-month
period from April 30, 2002 to April 30, 2003, the Company purchased or acquired
equipment under lease of approximately $23.8 million and disposed or sold
equipment of approximately $5.6 million. The increase in equipment resulted in
increased business property taxes of approximately $112,000, or 32%, for the
three months ended April 30, 2003 as compared to the same period in the prior
year.
Provision for bad debt for the three months ended April 30, 2003 increased
approximately $693,000, or 51.4%, compared to the same period last year. Coupled
with the increase in net revenue, the Company's overall bad debt percentage
increased from approximately 1.4% of gross revenue to approximately 1.9% during
fiscal 2002. The Company's historical percentage was primarily affected by the
write-off of one individual contract during fiscal 2002.
Gain on sale of centers and equipment for the three months ended April 30, 2003
increased $3,045,000, or 3309.8%, compared to the same period last year. The
increase is primarily due to the sale of the Company's interest in a center.
During the three months ended April 30, 2003, the Company sold its 50% share of
Westchester Imaging Group for $2,500,000. As part of the transaction, the
Company purchased 100% of the accounts receivable generated through March 31,
2003 for $850,000 and reimbursed the joint venture for 50% of the remaining
liabilities, approximately $283,000, resulting in net proceeds of approximately
$1,367,000. The Company recognized a gain on the transaction of approximately
$2,952,000.
2003 2002
---- ----
INTEREST EXPENSE, NET $ 4,558,000 $ 3,987,000
- ---------------------
Net interest expense for the three months ended April 30, 2003 increased
approximately $571,000, or 14.3%, compared to the same period last year. The
increase is primarily a result of acquisitions coupled with new equipment
financing offset by decreases in line of credit interest charges with the
reductions in the prime interest rate during the respective periods.
2003 2002
---- ----
OTHER (EXPENSE) INCOME, NET $ (886,000) $ 307,000
- ---------------------------
Other income, net of other expense, for the three months ended April 30, 2003
decreased approximately $1,193,000, or 388.6%, compared to the same period last
year. Other income consists of professional reading income, record copy income,
deferred income on the sale and leaseback of the Company's Orange facility and
other miscellaneous receipts. Other expenses consist primarily of modification
fee amortization and other miscellaneous expenses or write-offs. During the
three months ended April 30, 2003, the Company incurred a one-time charge for
the write-off of approximately $218,000 in other current assets relating to its
Tower Heartcheck operation and expensed approximately $780,000 for actual and
anticipated expenditures relating to pending litigation involving covenants not
to compete (see Part II). These expenses were offset by other income including
professional reading, record copy and deferred revenue. In addition to other
income, during the three months ended April 30, 2002, the Company recognized
deferred income from the sale and leaseback of its Orange facility of $23,000
and received approximately $80,000 in general insurance refund checks for losses
sustained at its Northridge and Tustin facilities.
2003 2002
---- ----
MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 132,000) ($ 125,000)
- -------------------------------------------
21
Minority interest expense for the three months ended April 30, 2003 increased
approximately $7,000, or 5.6%, compared to the same period last year. Minority
interest is primarily comprised of 25% of the earnings of Burbank Advanced
Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of the
earnings of Westchester Imaging Group. The Company's share in Westchester
Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in
December 2002. During the three months ended April 30, 2003 and 2002, minority
interest related to Westchester was approximately ($113,000) and ($108,000),
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased for the six months ended April 30, 2003 by $18,000 and decreased
for the six months ended April 30, 2002 by $33,000.
Cash used by investing activities for the six months ended April 30, 2003 was
$749,000 compared to $2,176,000 for the six months ended April 30, 2002. For the
six months ended April 30, 2003 and 2002, the Company purchased property and
equipment for approximately $2,116,000 and $3,953,000, respectively, received
proceeds from the sale of imaging centers or property and equipment of
$1,367,000 and $1,700,000, respectively. During the six months ended April 30,
2003, the Company sold its 50% share of Westchester Imaging Group for
$2,500,000. As part of the transaction, the Company purchased 100% of the
accounts receivable generated through March 31, 2003 for $850,000 and reimbursed
the joint venture for 50% of the remaining liabilities of approximately $283,000
resulting in net proceeds of approximately $1,367,000. The Company recognized a
gain on the transaction of approximately $2,952,000. During the six months ended
April 30, 2002, the Company sold the land and building at its Northridge
facility for $1,700,000 and leased the existing facility for ten years with a
beginning base rent of $13,458 per month. The Company recognized a loss on the
sale of approximately $147,000. In addition, during the six months ended April
30, 2002, the Company received payments from related parties of $77,000.
Cash used for financing activities for the six months ended April 30, 2003 was
$5,731,000 compared to $4,928,000 for the same period in 2002. For the six
months ended April 30, 2003 and 2002, the Company made principal payments on
capital leases and notes payable of approximately $13,179,000 and $10,542,000,
respectively, increased its cash disbursements in transit by $901,000 and
$531,000, respectively, received proceeds from the sale of common stock of
$28,000 and $2,000, respectively, received proceeds from borrowing under
existing lines of credit and refinancing arrangements of approximately
$6,864,000 and $5,360,000, respectively, paid loan fees of $14,000 and $10,000,
respectively, received payments from related parties of $31,000 and $119,000,
respectively, and made joint venture distributions of $300,000 and $275,000,
respectively. In addition, during the six months ended April 30, 2002, the
Company received joint venture proceeds of $125,000 for its new center in Rancho
Bernardo.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. At April 30, 2003,
the Company has a deficiency in equity of $52,187,000 compared to $50,921,000 as
of October 31, 2002, and a working capital deficiency of $45,992,000 as of April
30, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. 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 in two of the last three years. However, the results of the last
twelve months show that continued effort is necessary in the future to allow the
Company to operate profitably. Such actions and plans include:
o Increase revenue by selectively opening imaging centers in areas
currently not served by the Company. In December 2002, the Company
opened a new center in Rancho Bernardo. The Company has no current
plans to open any new facilities in the near future.
22
o Increase revenue by expanding existing facilities or opening new
locations close to existing sites. In order to obtain certain new
large contracts, the Company has opened nearby x-ray or satellite
offices to meet the increase in patient volume for a certain region.
In January 2002, the Company opened two x-ray offices near its
Temecula facility which allowed the Company to obtain a new capitation
contract for approximately 62,000 lives. In addition, to meet demand
and generate economies of scale, the Company has consolidated its
mammography and ultrasound services at a few of its largest facilities
into separate womens' centers. In September 2002, the Company opened a
women's center adjacent to its Orange Imaging facility.
o Increase net revenue and decrease operating losses by eliminating poor
performing capitation and managed care contracts where reimbursements
fall short of the Company's costs. The Company will renegotiate
several of its existing capitation contracts with the goal of
increasing net reimbursement for the current fiscal year. Effective
May 1, 2003, the Company received an increase in its capitation
reimbursement from Oasis Medical Group averaging approximately $45,000
per month which will benefit the Company's Desert Advanced facilities
(Palm Springs and Palm Desert).
o Continue to evaluate all facilities' operations and trim excess
operating and general and administrative costs where it is feasible to
do so including consolidating underperforming facilities to reduce
operating cost duplication and improve operating income. During the
second quarter of fiscal 2003, the Company closed two of its satellite
x-ray facilities servicing its Riverside and Long Beach (Los Coyotes)
locations, respectively. The closures were cost reduction measures
where volume at these locations could be directed to other nearby
facilities with existing equipment operating below capacity.
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. Upgrades and new equipment would be
acquired only when anticipated increases in patient volume support the
increased debt service.
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. In May 2003,
the Company restructured sixteen of its existing notes payable with
DVI Financial Services, Inc. reducing its monthly payments by
approximately $210,000 per month for the next nine months. In the
tenth month, the month payments increase to approximately $350,000 per
month, an increase of $16,000 per month over historical payment
levels. The short-term cash flow savings are approximately $1,845,000.
The revised notes bear interest at approximately 8.5% to 10.5% and
have terms from 45 to 71 months with six notes payable having balloon
payments.
Beginning in April 2003, the Company began receiving short-term working
capital loans from GE Healthcare Financial Services for $200,000 per
month for nine months, or $1,800,000. Subsequent to the quarter's end,
the Company will still receive eight installments totaling $1,600,000.
The notes will accrue interest only until the final installment with
the first payment for all nine notes to be made in January 2004. The
five-year notes payable bear interest at 9.00%.
On February 10, 2003, the Company was advised that the Federal Deposit
Insurance Corporation ("FDIC") had elected to close Coast Business
Credit ("Coast") and liquidate its accounts. As part of that process,
the FDIC advised the Company that until its account was sold its credit
line would be reduced to $15.5 million. During the second quarter of
fiscal 2003, the FDIC sold the accounts receivable portfolio to GF
Asset Management, Inc., a division of GE. As a result of the Company's
relationship with GE, both companies are working on an arrangement to
continue to provide a revolving line of credit with the Company past
the December 31, 2003 termination possibly consolidating all of the
Company's receivables into one line of credit.
23
In May 2003, the Company sent out a solicitation requesting current
subordinated debenture holders to extend its term from June 2003 to
June 2008. In consideration for the deferral, the Company will increase
the interest from 10% to 11.5% (per annum) paid quarterly beginning
with the October 1, 2003 payment. In addition, the Company will reduce
the conversion rate from $12.00 to $2.50 per share for those consenting
bondholders. The Company also agreed not to redeem the bonds prior to
June 2005. As of June 10, 2003, the Company had received consents to
extend for $9,148,000 of the bondholders. It is anticipated more
consents will be received in the upcoming two weeks. On July 1, 2003,
the Company will pay the final interest payment at 10% (per annum) and
intends to provide a mechanism for those bondholders who choose not to
extend the term of the bonds to contact the Company for payment. As of
October 1, 2003, the bondholders will be paid interest on their
principal at 11.5% (per annum). The Company believes it will have
sufficient funds under its available financing resources to purchase
the remaining debentures, if necessary, but such action will severely
affect the Company's liquidity.
o Continue its attempt to settle historical notes payable, subordinated
bond debentures and other debt at a discount.
o Depending on price, market circumstances and strategic buyers, the
Company may look to sell non core assets. Effective March 31, 2003, the
Company sold its 50% share of Westchester Imaging Group for $2,500,000.
As part of the transaction, the Company purchased 100% of the accounts
receivable generated through March 31, 2003 for $850,000 and reimbursed
the joint venture for $283,000, which represented 50% of the remaining
liabilities, resulting in net proceeds of approximately $1,367,000. The
Company recognized a gain on the transaction of approximately
$2,952,000.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
The Company's future obligations for existing notes payable, equipment under
capital lease, lines of credit, subordinated bond debentures and equipment and
building operating leases for the next five years and thereafter are as follows
(numbers in thousands):
05/01/03 05/01/04 05/01/05 05/01/06 05/01/07
to to to to to There-
04/30/04 04/30/05 04/30/06 04/30/07 04/30/08 after Total
-------- -------- -------- -------- -------- -------- --------
Notes payable $14,834 $15,211 $23,216 $12,151 $ 8,944 $ 3,054 $77,410
Interest $ 7,695 $ 6,066 $ 4,190 $ 2,157 $ 1,065 $ 201 $21,374
-------- -------- -------- -------- -------- -------- --------
Total $22,529 $21,277 $27,406 $14,308 $10,009 $ 3,255 $98,784
Capital leases $12,663 $13,098 $13,203 $10,960 $ 8,439 $ 6,133 $64,496
Interest $ 5,639 $ 4,393 $ 3,116 $ 1,925 $ 996 $ 336 $16,405
-------- -------- -------- -------- -------- -------- --------
Total $18,302 $17,491 $16,319 $12,885 $ 9,435 $ 6,469 $80,901
======== ======== ======== ======== ======== ======== ========
Lines of credit $16,586 $ -- $ -- $ -- $ -- $ -- $16,586
======== ======== ======== ======== ======== ======== ========
Bond debentures $ 7,143 $ -- $ -- $ -- $ -- $ 9,148 $16,291
======== ======== ======== ======== ======== ======== ========
Operating Leases:
Building $ 7,088 $ 6,154 $ 5,788 $ 5,110 $ 3,951 $16,470 $44,561
Equipment $ 2,300 $ 2,010 $ 1,686 $ 908 $ 336 $ -- $ 7,240
-------- -------- -------- -------- -------- -------- --------
Total $ 9,388 $ 8,164 $ 7,474 $ 6,018 $ 4,287 $16,470 $51,801
======== ======== ======== ======== ======== ======== ========
24
The Company's line of credit with Coast Business Credit, due December 2003, is
classified as a current liability primarily because it is collateralized by
account receivable and the eligible borrowing base is also classified as a
current asset. On February 10, 2003, the Company was advised that the Federal
Deposit Insurance Corporation ("FDIC") had elected to close Coast Business
Credit ("Coast") and liquidate its accounts. As part of that process, the FDIC
advised the Company that until its account was sold its credit line would be
reduced to $15.5 million. During the second quarter of fiscal 2003, the FDIC
sold the accounts receivable portfolio to GF Asset Management, Inc., a division
of GE. As a result of the Company's relationship with GE, both Companies are
working on an arrangement to continue to provide a revolving line of credit with
the Company past the December 31, 2003 termination possibly consolidating all of
the Company's receivables into one line of credit.
Effective March 1, 2000, the Company entered into an agreement with GE Medical
Systems for the maintenance of the majority of its medical equipment for a fee
based upon a percentage of net revenues with minimum aggregate net revenue
requirements. In August 2001, the agreement was amended and expires on October
31, 2005. The service fee ranges from 2.82% to 3.74% of net revenue (less
provisions for bad debt) and the aggregate minimum net revenue ranges from
$85,000,000 to $125,000,000 during the term of the agreement. For the six months
ended April 30, 2003, the monthly service fees were 3.74% of net revenue.
On August 31, 2001, the Company entered into a sale-leaseback transaction in
which it sold its Orange Imaging facility for $2,250,000 and leased it back for
10 years. Rental commenced at $18,750 per month and increases by 3% per annum.
The Company has an option to repurchase the property at any time prior to August
31, 2006, at fair market value (but not less than $2,350,000 nor more than
$2,550,000).
On March 18, 2002, the Company entered into a sale-leaseback transaction in
which it sold its Northridge Imaging facility for $1,700,000 and leased it back
for 10 years. Rental commenced at $13,458 per month and increases to $14,167 in
2003 to $14,167 in 2004 to $14,875 in 2005 to $15,583 in 2006 and thereafter
based upon a cost of living adjustment. The Company has an option to repurchase
the property from 2004 until 2007 at an exercise price commencing at $1,775,000
and increasing by $25,000 in the next year and an additional $50,000 in the
third year.
The Company's working capital needs currently are provided under three lines of
credit. Under one agreement with the GF Asset Management (previously Coast
Business Credit), due December 31, 2003, the Company may borrow the lesser of
75% to 80% of eligible accounts receivable, the prior four months' cash
collections, or $22,000,000. In any scenario, the Company may borrow up to the
aggregate collection of receivables in the prior four months as long as the
collections in any one month do not decrease by more than 25% from the prior
month. 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 $30,000. At April 30, 2003 approximately $14,371,000 was outstanding under
this line. 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. The line is further secured by a $5,000,000
life insurance policy on the life of the president and C.E.O.
The second and third agreements are with DVI Business Credit. Under the first of
these arrangements, 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 April 30, 2003,
approximately $2,208,000 was outstanding on this line. This line of credit is on
a month-to-month basis. This credit line is collateralized by approximately 80%
of the Tower division's eligible accounts receivable. Under the second agreement
with DVI, the Company may borrow the lesser of 85% of eligible accounts
receivable or $5,000,000. The credit line is collateralized by six of the
Company's newest facilities [Desert Advanced, Grove, Tarzana Advanced, Rancho
Bernardo, Burbank and Modesto]. At April 30, 2003, approximately $7,000 was
outstanding on this line.
25
The Company's convertible subordinated debentures mature in June 2003. In May
2003, the Company sent out a solicitation requesting current subordinated
debenture holders to extend its term from June 2003 to June 2008. In
consideration for the deferral, the Company will increase the interest from 10%
to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment.
In addition, the Company reduced the conversion rate from $12.00 to $2.50 per
share for those consenting bondholders. As of June 10, 2003, the Company had
consents to extend for $9,148,000 of the current bondholders. It is anticipated
more consents will be received in the upcoming weeks. On July 1, 2003, the
Company will pay the final interest payment at 10% (per annum) and provide a
mechanism for those bondholders who choose not to extend to contact the Company
for payment of principal. Upon surrender of their bond certificates, the
individuals will be paid and the bonds retired with the transfer agent. As of
October 1, 2003, the remaining bondholders will be paid interest on their
principal at 11.5% (per annum). The Company believes it will have sufficient
funds under its available financing resources to purchase the remaining
debentures, if necessary, but such action will severely affect the Company's
liquidity.
The Company operates in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations, particularly the
initial start-up and development expense of new diagnostic imaging centers and
the acquisition of additional centers and new diagnostic imaging equipment. To
the extent the Company is unable to generate sufficient cash from operations, or
the Company is unable to structure or obtain operating leases, it may be unable
to meet its capital expenditure requirements. Furthermore, the Company may not
be able to raise any necessary additional funds through bank financing or the
issuance of equity or debt securities on terms acceptable to it, if at all.
26
ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company sells its services exclusively in the United States and receives
payment for its services exclusively in United States dollars. As a result, the
financial results are unlikely to be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
The majority of the Company's interest expense is not sensitive to changes in
the general level of interest in the United States because the majority of the
Company's indebtedness has interest rates which were fixed when the Company
entered into the note payable or capital lease obligation. None of the Company's
long-term liabilities have variable interest rates. Only the Company's lines of
credit, classified as current liabilities on the Company's financial statements,
is interest expense sensitive to changes in the general level of interest
because it is based upon the current prime rate plus a margin.
ITEM 4 - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer has concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.
27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
a) On or about February 12, 2003, the Company commenced an action against
Tower Radiology Medical Group ("Tower") and certain affiliated
entities with respect to Tower's breach of the existing Agreement
between them. The Company contracts with Tower to provide professional
medical services at its largest facility located in Beverly Hills,
California. In the matter which is presently pending before the
American Arbitration Association in Los Angeles, California, the
Company alleges that Tower breached certain non-competition provisions
of the Agreement existing between them by entering into agreements
with St. John's Health Center in Santa Monica, California and Mission
Community Hospital in Panorama City, California. Tower disputes the
validity of the non-competition provisions. In the event Tower is
correct in its view that the non-compete provision is invalid the
Company seeks return of approximately $9 million paid to Tower in
conjunction with obtaining the non-compete. The Company intends to
vigorously prosecute the action.
b) On or about March 11, 2003, a cross-complaint was filed by the
Company's Modesto Imaging Center landlord against the Company entitled
Radnet Management II, Inc. v. HCT Modesto LLC currently pending in the
California Superior Court of Alameda and bearing Case No. RG 03080062.
The Cross-Complaint arose out of the Company's action against the
landlord in which the Company alleged that the landlord withheld
information that the Modesto facility was subject to a putative 10
year extension, through 2014, of the expiration of an above-market
lease, knowing that the Company had been provided information on or
prior to the date the Company acquired the Modesto facility that the
lease would expire in 2004. The Company seeks damages in excess of
$1.8 million. The landlord's Cross-Complaint seeks damages alleged to
be in excess of $800,000 against the Company for interfering with its
opportunity to sell the property by denying the assumption and/or
enforceability of the putative 10 year lease extension. The Company
intends to vigorously prosecute its action and defend the
Cross-Complaint.
ITEM 2. CHANGES IN SECURITIES
There are no matters to be reported under this heading.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There are no matters to be reported under this heading.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There are no matters to be reported under this heading.
ITEM 5. OTHER INFORMATION
a) On February 10, 2003, the Company was advised that the Federal Deposit
Insurance Corporation ("FDIC") had elected to close Coast Business
Credit ("Coast") and liquidate its accounts. As part of that process,
the FDIC advised the Company that until its account was sold its
credit line would be reduced to $15.5 million. During the second
quarter of fiscal 2003, the FDIC sold the Company's accounts
receivable portfolio to GF Asset Management, Inc., a division of GE.
As a result of the Company's existing relationship with GE, both
companies are working on an arrangement to continue to provide a
revolving line of credit with the Company past the Coast December 31,
2003 termination date, possibly consolidating all of the Company's
receivables into one line of credit. The Company continues to explore
with others besides GE the possibility of assuming its credit line.
28
b) Effective March 31, 2003, the Company sold its 50% interest in its
Westchester Imaging facility to its partner for $2.5 million. The
Company also purchased 100% of the accounts receivable in existence as
of March 31, 2003 and reimbursed the partnership for 50% of its then
liabilities resulting in net proceeds to the Company of approximately
$1,367,000. The Company entered into an agreement with the purchaser
whereby it will provide certain ongoing management services to the
Westchester facility for which it will receive an amount equal to 8%
of the revenues collected at the facility. The Company was also
granted an option exercisable through March 31, 2005, whereby it could
repurchase it 50% interest in the facility for approximately $2.5
million plus or minus certain adjustments.
c) In April 2003, the Company sent out a solicitation requesting
subordinated debenture holders to extend its term fro June 2003 to
June 2008. In consideration for the deferral, the Company will
increase the interest from 10% to 11.5% (per annum) paid quarterly
beginning with the October 1, 2003 payment. In addition, the Company
will reduce the conversion rate from $12.00 to $2.50 per share for
those consenting bondholders. The Company also agreed not to redeem
the bonds prior to June 2005. As of June 10, 2003, the Company has
received consents to extend for $9,148,000 of the bondholders. It is
anticipated more consents will be received in the upcoming weeks. On
July 1, 2003, the Company will pay the final interest payment at 10%
(per annum) and intends to provide a mechanism for those bondholders
who choose not to extend the term of the bonds to contact the Company
for payment. As of October 31, 2003, bondholders will be paid interest
on their principal at 11.5% (per annum).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of Earnings Per Share
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed
29
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Primedex Health Systems, Inc.
----------------------------------------------
(Registrant)
June 10, 2003 By: Howard G. Berger, M.D.
-----------------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
30
CERTIFICATION
I, Howard G. Berger, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Primedex Health
Systems, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
31
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: June 10, 2003
/s/ Howard G. Berger, M.D.
-----------------------------------------
Howard G. Berger, M.D.
President and Principal Financial Officer
32