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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
NEW YORK 13-3326724
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1510 COTNER AVENUE
LOS ANGELES, CALIFORNIA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 478-7808
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's common stock as of
May 26, 2004 was 41,106,813 (excluding treasury shares).
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
APRIL 30, OCTOBER 31,
2004 2003
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,000 $ 30,000
Accounts receivable, net 23,481,000 25,472,000
Unbilled receivables and other receivables 2,015,000 180,000
Other 1,515,000 2,092,000
-------------- --------------
Total current assets 27,013,000 27,774,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 80,876,000 81,886,000
-------------- --------------
OTHER ASSETS
Accounts receivable, net 1,906,000 2,033,000
Goodwill 23,099,000 23,064,000
Deferred income taxes 5,235,000 5,235,000
Trade name and other 2,077,000 2,043,000
-------------- --------------
Total other assets 32,317,000 32,375,000
-------------- --------------
Total assets $ 140,206,000 $ 142,035,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursements in transit $ 2,817,000 $ 2,853,000
Accounts payable and accrued expenses 22,193,000 24,462,000
Notes payable to related party 2,062,000 2,069,000
Current portion of notes and leases payable 55,308,000 43,005,000
-------------- --------------
Total current liabilities 82,380,000 72,389,000
-------------- --------------
LONG-TERM LIABILITIES
Subordinated debentures payable 16,215,000 16,215,000
Notes payable to related party 100,000 100,000
Notes and leases payable, net of current portion 96,219,000 104,360,000
Accrued expenses 824,000 1,421,000
-------------- --------------
Total long-term liabilities 113,358,000 122,096,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 649,000 637,000
-------------- --------------
STOCKHOLDERS' DEFICIT (56,181,000) (53,087,000)
-------------- --------------
Total liabilities and stockholders' deficit $ 140,206,000 $ 142,035,000
============== ==============
The accompanying notes are an integral part of these financial statements
1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, 2004 2003 2004 2003
- --------- ------------- ------------- ------------- -------------
NET REVENUE $ 35,853,000 $ 34,966,000 $ 69,900,000 $ 69,347,000
OPERATING EXPENSES
Operating expenses 27,680,000 26,396,000 53,143,000 52,308,000
Depreciation and amortization 4,477,000 4,273,000 8,842,000 8,488,000
Provision for bad debts 1,398,000 1,988,000 2,656,000 3,860,000
------------- ------------- ------------- -------------
Total operating expenses 33,555,000 32,657,000 64,641,000 64,656,000
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 2,298,000 2,309,000 5,259,000 4,691,000
OTHER EXPENSE (INCOME)
Interest expense 4,218,000 4,552,000 8,455,000 9,161,000
Other income (34,000) (137,000) (71,000) (231,000)
Other expense -- 229,000 65,000 229,000
------------- ------------- ------------- -------------
Total other expense 4,184,000 4,644,000 8,449,000 9,159,000
------------- ------------- ------------- -------------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION (1,886,000) (2,335,000) (3,190,000) (4,468,000)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (11,000) (19,000) (12,000) (24,000)
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (1,897,000) (2,354,000) (3,202,000) (4,492,000)
DISCONTINUED OPERATION
Income from operation of Westchester Imaging Group -- 113,000 -- 255,000
Gain on sale of discontinued operation -- 2,942,000 -- 2,942,000
------------- ------------- ------------- -------------
INCOME FROM DISCONTINUED OPERATION -- 3,055,000 -- 3,197,000
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (1,897,000) $ 701,000 $ (3,202,000) $ (1,295,000)
============= ============= ============= =============
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Loss from continuing operations $ (.05) $ (.06) $ (.08) $ (.11)
Income from discontinued operation -- .08 -- .08
------------- ------------- ------------- -------------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (.05) $ .02 $ (.08) $ (.03)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basis and diluted 41,106,813 41,100,734 41,106,813 41,076,590
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED APRIL 30, 2004
COMMON STOCK $.01 PAR VALUE,
100,000,000 SHARES AUTHORIZED TREASURY STOCK, AT COST
------------------------------ PAID-IN ------------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT DEFICIT
-------------- -------------- -------------- -------------- -------------- -------------- --------------
BALANCE--
OCTOBER 31, 2003 42,931,813 $ 430,000 $ 100,428,000 (1,825,000) $ 695,000 $(153,250,000) $ (53,087,000)
Issuance of warrant -- -- 108,000 -- -- -- 108,000
Net Loss -- -- -- -- -- (3,202,000) (3,202,000)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
BALANCE--APRIL 30,
2004 (UNAUDITED) 42,931,813 $ 430,000 $ 100,536,000 (1,825,000) $ 695,000 $(156,452,000) $ (56,181,000)
============== ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements
3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED APRIL 30, 2004 2003
- -------------------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,322,000 $ 7,385,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,183,000) (2,116,000)
Purchase of subsidiary common stock (35,000) --
Proceeds from sale of imaging center -- 1,367,000
------------- -------------
Net cash used by investing activities (1,218,000) (749,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes and leases payable (6,049,000) (13,210,000)
Payments on lines of credit (1,083,000) --
Proceeds from issuance of convertible subordinated notes payable 1,000,000 --
Borrowings on lines of credit and notes payable -- 6,864,000
Proceeds from issuance of common stock -- 28,000
Joint venture distributions -- (300,000)
------------- -------------
Net cash used by financing activities (6,132,000) (6,618,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH (28,000) 18,000
CASH, beginning of period 30,000 36,000
------------- -------------
CASH, end of period $ 2,000 $ 54,000
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,598,000 $ 8,453,000
------------- -------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
During the six months ended April 30, 2004, we converted equipment operating leases into capital
leases and capitalized equipment of $5,971,000. During the six months ended April 30, 2004 and 2003, we
entered into additional capital leases or financed equipment through notes payable for $549,000 and
$7,092,000, respectively.
The accompanying notes are an integral part of these financial statements
4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements of Primedex include the accounts of
Primedex, its wholly owned direct subsidiary, Radnet Management, Inc., or
Radnet, and Beverly Radiology Medical Group III, or BRMG, which is a partnership
of professional corporations, all collectively referred to as the Company, or
we. The consolidated financial statements also include Radnet Sub, Inc., Radnet
Management I, Inc., Radnet Management II, Inc., SoCal MR Site Management, Inc.,
and Diagnostic Imaging Services, Inc., or DIS, all wholly owned subsidiaries of
Radnet; Burbank Advanced LLC and Rancho Bernardo Advanced LLC, which are
majority controlled subsidiaries of Radnet. Interests of minority shareholders
are separately disclosed in the consolidated balance sheets and consolidated
statements of operations of the Company.
The operations of BRMG are consolidated with those of the Company as a result of
the contractual and operational relationship among BRMG, the Company and Howard
G. Berger, M.D. The Company is considered to have a controlling financial
interest in BRMG pursuant to the guidance in Emerging Issues Task Force, or
EITF, 97-2. Medical services and supervision at most of the Company's imaging
centers are provided through BRMG and through other independent physicians and
physician groups. BRMG is a partnership of and consolidated with Pronet Imaging
Medical Group, Inc. and Beverly Radiology Medical Group, Inc., both of which are
99%-owned by Dr. Berger. Radnet and DIS provide non-medical, or technical, and
administrative services to BRMG for which they receive a management fee.
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.
Westchester Imaging Group, formerly a 50% owned entity, was consolidated with
the Company based upon the criteria in EITF 97-2. Westchester Imaging Group,
which was sold in March 2003, is reflected as a discontinued operation in the
Company's consolidated statements of operations.
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 accounting principles generally accepted in the United States
for complete financial statements; however, in the opinion of our management,
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, 2004 and 2003 have been made. The results of
operations for any interim period are not necessarily indicative of the results
for a full year. These interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes
thereto contained in our Annual Report on Form 10-K for the year ended October
31, 2003.
NOTE 2--FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $55.4 million at April 30, 2004 compared to
a $44.6 million deficit at October 31, 2003, and had losses from continuing
operations of $1.9 million and $2.4 million during the three months ended April
30, 2004 and 2003, respectively, and had losses from continuing operations of
$3.2 million and $4.5 million during the six months ended April 30, 2004 and
2003, respectively. We also had a stockholders' deficit of $56.2 million at
April 30, 2004 compared to a $53.1 million deficit at October 31, 2003.
5
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations. In addition to operations, we
require significant amounts of capital for the initial start-up and development
expense of new diagnostic imaging facilities, the acquisition of additional
facilities and new diagnostic imaging equipment, and to service our existing
debt and other contractual obligations. Because our cash flows from operations
are insufficient to fund all of these capital requirements, we depend on the
availability of financing under credit arrangements with third parties.
Historically, our principal sources of liquidity have been funds available for
borrowing under our existing lines of credit with an affiliate of General
Electric Corporation, or GE, and an affiliate of DVI Financial Services, Inc.,
or DVI. We classify these lines of credit as current liabilities primarily
because they are collateralized by accounts receivable and the eligible
borrowing bases are classified as current assets. We finance the acquisition of
equipment through capital and operating leases.
During the first six months of fiscal 2004, we took actions to continue to fund
our obligations. Some of our plans to provide the necessary working capital in
the future are summarized below:
BRMG and our GE affiliate lender are parties to a credit facility under which
BRMG may borrow the lesser of 75% to 80% of eligible accounts receivable, the
prior four months' cash collections, or $14.5 million. At any time, BRMG 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. Under our management agreement with BRMG, BRMG regularly
advances to us draws that it makes under the line. In February 2004, the
maturity date of the facility was extended from February 29, 2004 to March 31,
2004. Currently we are on a month-to-month basis. We and BRMG are currently
negotiating a new credit facility which, if successfully completed, will
consolidate all of our and BRMG's lines of credit into one facility. Interest on
outstanding borrowings is payable monthly at the greater of 8.0% or the lender's
prime rate plus 2.5%, with a minimum interest paid each month of $30,000. At
April 30, 2004, BRMG had approximately $9.7 million outstanding under this line.
The GE affiliate lender holds a first lien on substantially all of BRMG's
assets. Dr. Berger, our CEO, President and a major shareholder, has personally
guaranteed $10.0 million of the line, and we have guaranteed the full amount of
BRMG's obligations under the line.
Beginning in April 2003, an affiliate of GE began making short-term working
capital loans to us in the amount of $0.2 million per month for nine months.
These loans have now been fully funded by our lender. The loans are represented
by five-year notes that accrue interest at 9.0% per annum, with the first
interest payment for all nine notes paid in January 2004.
We also have a line of credit with an affiliate of DVI, under which we may
borrow the lesser of 110% of eligible accounts receivable or $5.0 million.
Interest on the outstanding balance is payable monthly at our lender's prime
rate plus 1.0%. At April 30, 2004, we had approximately $4.1 million outstanding
under this line. This line of credit is available to us on a month-to-month
basis and is collateralized by approximately 80% of the eligible accounts
receivable from our Beverly Hills facilities, or the Tower facilities. On August
25, 2003, DVI commenced a Chapter 11 proceeding in the United States Bankruptcy
Court, District of Delaware.
Both of our working capital lenders' prime rates at April 30, 2004 were 4.0%. As
of April 30, 2004, the total funds available for borrowing under the two lines
in accordance with the borrowing base formulas was approximately $4.8 million.
On December 19, 2003, we issued a $1.0 million convertible subordinated note
payable at a stated rate of 11% per annum with interest payable quarterly. The
note payable is convertible at the holder's option anytime after June 19, 2004
at $0.50 per share. As additional consideration for the financing we issued a
6
warrant for the purchase of 500,000 shares at an exercise price of $0.50 per
share. We have allocated $0.1 million to the value of the warrants and believe
the value of the conversion feature is nominal.
At April 30, 2004, we had an aggregate of $63.6 million in outstanding capital
lease obligations which included the conversion of $6.0 million of operating
leases into capital leases in November 2003.
DVI CREDIT RESTRUCTURING. At April 30, 2004, we had approximately $81.6 million
of debt outstanding under various contracts and financing arrangements comprised
of equipment notes and capital leases with DVI and some of its affiliates.
During fiscal 2003, we restructured some of these credit arrangements. In May
2003, we restructured 16 of our notes payable to DVI to reduce our monthly
payments by approximately $210,000 per month through January 2004. Beginning
February 2004, the monthly payments increased to approximately $350,000 per
month, an increase of $16,000 per month over historical payment levels. The
resulting cash flow deferrals between May 2003 and April 2004 total
approximately $1.1 million. The restructured notes bear interest at rates
ranging from 8.5% to 10.5% and have terms ranging from 45 to 71 months, with six
notes payable having balloon payments ranging from $20,000 to $160,000 due in
January 2009.
On August 25, 2003, DVI commenced a Chapter 11 proceeding in the United States
Bankruptcy Court, District of Delaware. We have an agreement to repay our debt
outstanding under equipment notes and capital leases to DVI, which was
approximately $81.6 million at April 30, 2004, for approximately $68.3 million.
This agreement is conditioned upon the receipt of waivers from two vendors who
have made claims on account of DVI's failure to fund equipment purchases (which
waivers have been obtained and are conditioned upon full payment) and completion
on or before June 30, 2004. Successful completion of the transaction is
dependent upon obtaining additional financing, negotiations for which are
currently in process, the success of which cannot presently be determined.
During the first six months of fiscal 2004, we began negotiations with DVI
concerning the restructuring of our outstanding notes payable and capital leases
with DVI. During this period, both parties agreed that monthly scheduled
principal payments would cease. Interest continues to accrue on outstanding
principal balances due pending completion of the settlement. During the six
months ended April 30, 2004, accrued interest on notes payable and capital
leases with DVI was $3.1 million.
In addition to these measures, we continue to work with our existing lenders to
negotiate more favorable terms and pursue other sources of long-term financing
to improve our liquidity and increase cash flows. These sources may include,
among others, public or private offerings of debt or equity securities. However,
it is impossible to predict with certainty whether we will be able to complete
any such transactions, or if so, what the terms of any such transactions would
be.
Our business strategy with regard to operations will focus on the following:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI and CT applications;
o Optimizing operating efficiencies; and
o Expanding our networks.
Our ability to generate sufficient cash flow from operations to make payments on
our debt and other contractual obligations will depend on our future financial
performance. A range of economic, competitive, regulatory, legislative and
business factors, many of which are outside of our control, will affect our
financial performance. If we do not refinance or further restructure our debt,
sell assets, reduce or delay capital investments or seek to raise additional
7
capital, we will not have sufficient cash flow from operations to satisfy our
existing debt and other contractual obligations. Although we have historically
been successful in refinancing and restructuring the terms of our debt with our
principal lenders, we cannot predict whether any such refinancing or
restructuring will be possible or that we will be able to sell any assets on
acceptable terms or otherwise. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in fiscal 2004
NOTE 3--ACCOUNTING POLICIES
NET REVENUE
The following table summarizes net revenue for the six months ended
April 30, 2004 and 2003:
2004 2003
------------ ------------
Net patient service $52,936,000 $54,671,000
Capitation 16,964,000 14,676,000
------------ ------------
Net revenue $69,900,000 $69,347,000
============ ============
Accounts receivable as of April 30, 2004 are presented net of
allowances of approximately $54.1 million, of which $50.0 million is included in
current and $4.1 million is included in noncurrent. Accounts receivable as of
October 31, 2003 are presented net of allowances of approximately $60.0 million,
of which $55.6 million is included in current and $4.4 million is included in
noncurrent.
STOCK OPTIONS
We account for our stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based employee
compensation cost for the issuance of stock options is reflected in net income,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition principles of SFAS No.
123 to stock-based employee compensation.
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income (loss) as reported $ (3,202,000) $ (1,295,000) $ (1,897,000) $ 701,000
Deduct: Total stock-based employee compensation
expense determined under fair value-based method (189,000) (7,000) (135,000) (5,000)
-------------- -------------- -------------- --------------
Pro forma net income (loss) $ (3,391,000) $ (1,302,000) $ (2,032,000) $ 696,000
============== ============== ============== ==============
Income (Loss) per share:
Basic and diluted income (loss) per share--as reported $ (.08) $ (.03) $ (.05) $ .02
Basic and diluted income (loss) per share--pro forma $ (.08) $ (.03) $ (.05) $ .02
-------------- -------------- -------------- --------------
8
The fair value of each option granted is estimated on the grant date
using the Black-Scholes option pricing model which takes into account as of the
grant date the exercise price and expected life of the option, the current price
of the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The following
is the average of the data used to calculate the fair value:
RISK-FREE EXPECTED EXPECTED
APRIL 30, INTEREST RATE EXPECTED LIFE VOLATILITY DIVIDENDS
--------- ------------- ------------- ---------- ---------
2004 3.00% 5 years 59.04% ---
2003 3.00% 5 years 83.73% ---
RECLASSIFICATIONS
Certain amounts in the 2003 interim financial statements have been
reclassified to conform to the current period presentation. These
reclassifications have no impact on the reported net loss.
NOTE 4--SALES AND CLOSURES
SALE OF IMAGING CENTER - DISCONTINUED OPERATION
In March 2003, we sold our 50% share of Westchester Imaging Group for
$3.0 million. The gain on the sale of Westchester was $2.9 million. Net revenue
and net income for Westchester for the three months ended April 30, 2003 was
$0.9 million and $0.1 million, respectively. Net revenue and net income for
Westchester for the six months ended April 30, 2003 was $2.3 million and $0.3
million, respectively.
CLOSURES OF IMAGING CENTERS
In July 2003, we closed our La Habra facility. Net revenue and net loss
for La Habra for the three months ended April 30, 2003 was $0.1 million and
$61,000, respectively. Net revenue and net loss for La Habra for the six months
ended April 30, 2003 was $0.3 million and $78,000, respectively.
At various times, the Company may open or close small x-ray facilities
acquired primarily to service larger capitation arrangements over a specific
geographic region. Over time, the patient volume from these contracts may vary,
or the Company may end the arrangement, resulting in the subsequent closures of
these smaller satellite facilities.
NOTE 5--CAPITAL TRANSACTIONS
In December 2003, we granted options to purchase 150,000 shares to two
employees at $0.46 per share. During the six months ended April 30, 2004, we
retired warrants to purchase 4,000 shares at $1.67 per share and 500 shares at
$0.46 per share upon three employee terminations.
During the six months ended April 30, 2004, we granted 2,600,000
warrants to seven physicians of BRMG, with the individual grants ranging from
50,000 to 1,500,000. The warrants have exercise prices ranging from $0.41 to
$0.70 per share.
During the six months ended April 30, 2004, we granted 225,000 warrants
to one officer and two directors with an exercise price of $0.60 per share.
On December 19, 2003, we issued a $1.0 million convertible subordinated
note payable at a stated rate of 11% per annum with interest payable quarterly.
9
The note payable is convertible at the holder's option anytime after June 19,
2004 at $0.50 per share. As additional consideration for the financing, we
issued a warrant for the purchase of 500,000 shares at an exercise price of
$0.50 per share and an expiration date of December 19, 2010. We have allocated
$0.1 million to the value of the warrants and believe the value of the
conversion feature is nominal.
On February 17, 2004, we filed a certificate of merger with the
Delaware Secretary of State to acquire the balance of our 91% owned subsidiary,
DIS, that we did not previously own. Pursuant to the terms of the merger, we are
obligated to pay each stockholder of DIS, other than Primedex, $0.05 per share.
We believe the price per share represents the value of the minority interest.
Stockholders had the right to contest the price by exercising their appraisal
rights at any time through March 15, 2004. No stockholders exercised their
appraisal rights. During the three months ended April 30, 2004, the Company paid
$35,000 to acquire the remaining shares of DIS common stock which it did not own
previously and recorded the purchases as goodwill.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We operate a group of regional networks comprised of 53 fixed-site,
freestanding outpatient diagnostic imaging facilities in California. We believe
our group of regional networks is the largest of its kind in California. We have
strategically organized our facilities into regional networks in markets which
have both high-density and expanding populations, as well as attractive payor
diversity.
All of our facilities employ state-of-the-art equipment and technology
in modern, patient-friendly settings. Many of our facilities within a particular
region are interconnected and integrated through our advanced information
technology system. Twenty-five of our facilities are multi-modality sites,
offering various combinations of magnetic resonance imaging, or MRI, computed
tomography, or CT, positron emission tomography, or PET, nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray, and fluoroscopy
services. Thirty of our facilities are single-modality sites, offering either
X-ray or MRI services. Consistent with our regional network strategy, we locate
our single-modality facilities near multi-modality facilities to help
accommodate overflow in targeted demographic areas.
We derive substantially all of our revenue, directly or indirectly,
from fees charged for the diagnostic imaging services performed at our
facilities. The fees charged for diagnostic imaging services performed at our
facilities are paid by a diverse mix of payors, as illustrated by the following
table:
PERCENTAGE OF NET REVENUE
PAYOR TYPE APRIL 30, APRIL 30,
2004 2003
Insurance(1) 40% 40%
Managed Care Capitated Payors 24 22
Medicare/Medi-Cal 15 15
Other(2) 15 15
Worker's Compensation/Personal Injury 6 8
(1) Includes Blue Cross/Blue Shield, which represented 13% of our net
revenue for the six months ended April 30, 2004 and 2003.
(2) Includes co-payments, direct patient payments through contracts with
physician groups and other non-insurance company payors.
10
Our eligibility to provide services in response to a referral often
depends on the existence of a contractual arrangement between us or the
radiologists providing the professional medical services and the referred
patient's insurance carrier or managed care organization. These contracts
typically describe the negotiated fees to be paid by each payor for the
diagnostic imaging services we provide. With the exception of Blue Cross/Blue
Shield and government payors, no single payor accounted for more than 5% of our
net revenue for the six months ended April 30, 2004 or 2003. Under our
capitation agreements, we receive from the payor a pre- determined amount per
member, per month. If we do not successfully manage the utilization of our
services under these agreements, we could incur unanticipated costs not offset
by additional revenue, which would reduce our operating margins.
The principal components of our fixed operating expenses, excluding
depreciation, include professional fees paid to radiologists, except those
radiologists who are paid based on a percentage of revenue, compensation paid to
technologists and other facility employees, and expenses related to equipment
rental and purchases, real estate leases and insurance, including errors and
omissions, malpractice, general liability, workers' compensation and employee
medical. The principal components of our variable operating expenses include
expenses related to equipment maintenance, medical supplies, marketing, business
development and corporate overhead. Because a majority of our expenses are
fixed, increased revenue as a result of higher scan volumes per system can
significantly improve our margins, while lower scan volume can result in
significantly lower margins.
Beverly Radiology Medical Group III, or BRMG, strives to maintain
qualified radiologists while minimizing turnover and salary increases and
avoiding the use of outside staffing agencies, which are considerably more
expensive and less efficient. In recent years, there has been a shortage of
qualified radiologists and technologists in some of the regional markets we
serve. As turnover occurs, competition in recruiting radiologists and
technologists may make it difficult for our contracted radiology practices to
maintain adequate levels of radiologists and technologists without the use of
outside staffing agencies. At times, this has resulted in increased costs for
us.
OUR RELATIONSHIP WITH BRMG
Howard G. Berger, M.D. is our President and Chief Executive Officer, is
the chairman of our Board of Directors, and owns approximately 30% of Primedex's
outstanding common stock. Dr. Berger also owns, indirectly, 99% of the equity
interests in BRMG. BRMG provides all of the professional medical services at 42
of our facilities under a management agreement with us, and contracts with
various other independent physicians and physician groups to provide all of the
professional medical services at most of our other facilities. We obtain
professional medical services from BRMG, rather than providing such services
directly or through subsidiaries, in order to comply with California's corporate
practice of medicine doctrine. However, as a result of our close relationship
with Dr. Berger and BRMG, we believe that we are able to better ensure that
professional medical services are provided at our facilities in a manner
consistent with our needs and expectations and those of our referring
physicians, patients and payors than if we obtained these services from
unaffiliated physician groups.
Under our management agreement with BRMG, which expires on January 1,
2014, BRMG pays us, as compensation for the use of our facilities and equipment
and for our services, a percentage of the gross amounts collected for the
professional services it renders. The percentage, which was 74% for the first
six months of fiscal 2004 and fiscal 2003, is adjusted annually, if necessary,
to ensure that the parties receive fair value for the services they render. In
operation and historically, the annual revenue of BRMG from all sources closely
11
approximates its expenses, including Dr. Berger's compensation, fees payable to
us and amounts payable to third parties. For administrative convenience and in
order to avoid inconveniencing and confusing our payors, a single bill is
prepared for both the professional medical services provided by the radiologists
and our non-medical, or technical, services, generating a receivable for BRMG.
BRMG finances these receivables under a working capital facility with an
affiliate of GE and regularly advances to us the funds that it draws under this
working capital facility, which we use for our own working capital purposes. We
repay or offset these advances with periodic payments from BRMG to us under the
management agreement. We guarantee BRMG's obligations under this working capital
facility.
As a result of our contractual and operational relationship with BRMG
and Dr. Berger, we are required to include BRMG as a consolidated entity in our
financial statements.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $55.4 million at April 30, 2004
compared to a $44.6 million deficit at October 31, 2003, and had losses from
continuing operations of $3.2 million and $4.5 million during the six months
ended April 30, 2004 and 2003, respectively. We also had a stockholders' deficit
of $56.2 million at April 30, 2004 compared to a $53.1 million deficit at
October 31, 2003.
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations. In addition to
operations, we require significant amounts of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and other contractual obligations. Because our cash flows from
operations are insufficient to fund all of these capital requirements, we depend
on the availability of financing under credit arrangements with third parties.
Historically, our principal sources of liquidity have been funds available for
borrowing under our existing lines of credit with an affiliate of General
Electric Corporation, or GE, and an affiliate of DVI Financial Services, Inc.,
or DVI. We classify these lines of credit as current liabilities primarily
because they are collateralized by accounts receivable and the eligible
borrowing bases are classified as current assets. We finance the acquisition of
equipment through capital and operating leases.
During fiscal 2003 and the first six months of fiscal 2004, we took
actions to continue to fund our obligations. Some of our plans to provide the
necessary working capital in the future are summarized below:
BRMG and our GE affiliate lender are parties to a credit facility under
which BRMG may borrow the lesser of 75% to 80% of eligible accounts receivable,
the prior four months' cash collections, or $14.5 million. At any time, BRMG 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. Under our management agreement with BRMG, BRMG regularly
advances to us draws that it makes under the line. In February 2004, the
maturity date of the facility was extended from February 29, 2004 to March 31,
2004. Currently, we are on a month-to-month basis. We and BRMG are currently
negotiating with General Electric Capital Corporation, or GECC, on a new credit
facility which, if successfully completed, will consolidate all of our and
BRMG's lines of credit into one facility. Interest on outstanding borrowings is
payable monthly at the greater of 8.0% or our lender's prime rate plus 2.5%,
with a minimum interest paid each month of $30,000. At April 30, 2004, BRMG had
approximately $9.7 million outstanding under this line. Our lender holds a first
lien on substantially all of BRMG's assets. Dr. Berger, our CEO and President,
has personally guaranteed $10.0 million of the line, and we have guaranteed the
full amount of BRMG's obligations under the line.
12
Beginning in April 2003, an affiliate of GE began making short-term
working capital loans to us in the amount of $0.2 million per month for nine
months. These loans have now been fully funded by our lender. The loans are
represented by five-year notes that accrue interest at 9.0% per annum, with the
first interest payment for all nine notes paid in January 2004.
We also have a line of credit with an affiliate of DVI, under which we
may borrow the lesser of 110% of eligible accounts receivable or $5.0 million.
Interest on the outstanding balance is payable monthly at our lender's prime
rate plus 1.0%. At April 30, 2004, we had approximately $4.1 million outstanding
under this line. This line of credit is available to us on a month-to-month
basis and is collateralized by approximately 80% of the eligible accounts
receivable from our Tower facilities. On August 25, 2003, DVI commenced a
Chapter 11 proceeding in the United States Bankruptcy Court, District of
Delaware.
Both of our working capital lenders' prime rates at April 30, 2004 were
4.0%. As of April 30, 2004, the total funds available for borrowing under the
two lines in accordance with the borrowing base formulas was approximately $4.8
million.
In addition, during fiscal 2003, in order to provide us additional
liquidity, Dr. Berger advanced to us $1.0 million, some of our executive
officers have foregone a portion of their salary, and we sold Westchester
Imaging Group for net cash proceeds of approximately $1.4 million.
On December 19, 2003, we issued a $1.0 million convertible subordinated
note payable at a stated rate of 11% per annum with interest payable quarterly.
The note payable is convertible at the holder's option anytime after June 19,
2004 at $0.50 per share. As additional consideration for the financing we issued
a warrant for the purchase of 500,000 shares at an exercise price of $0.50 per
share. We have allocated $0.1 million to the value of the warrants and believe
the value of the conversion feature is nominal.
At April 30, 2004, we had an aggregate of $63.6 million of outstanding
capital lease obligations which included the conversion of $6.0 million of
operating leases into capital leases in November 2003.
RESTRUCTURING OF DEBT
We continue to focus on improving our financial position and cash
flows. During fiscal 2003 and the first six months of fiscal 2004, we took the
following steps toward that goal:
DVI CREDIT ARRANGEMENTS. At April 30, 2004, we had approximately $81.6
million of debt outstanding under various contracts and financing arrangements
comprised of equipment notes and capital leases with DVI and some of its
affiliates. During fiscal 2003, we restructured some of these credit
arrangements. In May 2003, we restructured 16 of our notes payable to DVI to
reduce our monthly payments by approximately $0.2 million per month through
January 2004. Beginning February 2004, the monthly payments increased to
approximately $0.4 million per month, an increase of $16,000 per month over
historical payment levels. The resulting cash flow deferrals between May 2003
and April 2004 total approximately $1.1 million. The restructured notes bear
interest at rates ranging from 8.5% to 10.5% and have terms ranging from 45 to
71 months, with six notes payable having balloon payments ranging from $20,000
to $160,000 due in January 2009.
On August 25, 2003, DVI commenced a Chapter 11 proceeding in the United
States Bankruptcy Court, District of Delaware. We have an agreement to repay our
debt outstanding under equipment notes and capital leases to DVI, which was
approximately $81.6 million at April 30, 2004, for approximately $68.3 million.
This agreement is conditioned upon the receipt of waivers from two vendors who
have made claims on account of DVI's failure to fund equipment purchases (which
waivers have been obtained and are conditioned upon full payment) and completion
on or before June 30, 2004. Successful completion of the transaction is
13
dependent upon obtaining additional financing, negotiations for which are
currently in process, the success of which cannot presently be determined.
During the first six months of fiscal 2004, we began negotiations with
DVI concerning the restructuring of our outstanding notes payable and capital
leases with DVI. During this period, both parties agreed that monthly scheduled
principal payments would cease. Interest continues to accrue on outstanding
principal balances due pending completion of the settlement. During the six
months ended April 30, 2004, accrued interest on notes payable and capital
leases with DVI was $3.1 million.
BRMG CREDIT FACILITY. On February 10, 2003, the Federal Deposit
Insurance Corporation, or FDIC, advised BRMG that the FDIC had elected to close
Coast Business Credit, or Coast, and liquidate its accounts. Coast was the
lender under BRMG's secured working capital facility, which we guaranteed.
During the second quarter of fiscal 2003, the FDIC sold the accounts receivable
portfolio to an affiliate of GE. The credit line availability was reduced from
$22.0 million to $14.5 million. In February 2004, our lender extended the
maturity date of the facility from February 29, 2004 to March 31, 2004. We are
currently on a month-to-month basis. BRMG regularly advances to us the funds it
draws under this working capital facility, which we use for our own working
capital purposes. We and BRMG are currently negotiating with GECC on a new
credit facility which, if successfully completed, will consolidate all our and
BRMG's lines of credit into one facility.
CONVERTIBLE SUBORDINATED DEBENTURES. In October 2003, we successfully
consummated a "pre-packaged" Chapter 11 plan of reorganization with the United
States Bankruptcy Court, Central District of California, in order to modify the
terms of our convertible subordinated debentures by extending the maturity to
June 30, 2008, increasing the annual interest rate from 10.0% to 11.5%, reducing
the conversion price from $12.00 to $2.50 and restricting our ability to redeem
the debentures prior to July 1, 2005. The plan of reorganization did not affect
any of our operations or obligations, other than the subordinated debentures.
In addition to these measures, we continue to work with our existing
lenders to negotiate more favorable terms and pursue other sources of long-term
financing to improve our liquidity and increase cash flows. These sources may
include, among others, public or private offerings of debt or equity securities.
However, it is impossible to predict with certainty whether we will be able to
complete any such transactions, or if so, what the terms of any such
transactions would be.
Our business strategy with regard to operations will focus on the
following:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI and CT applications;
o Optimizing operating efficiencies; and
o Expanding our networks.
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. If we do not refinance or further restructure our debt,
sell assets, reduce or delay capital investments or seek to raise additional
capital, we will not have sufficient cash flow from operations to satisfy our
existing debt and other contractual obligations. Although we have historically
been successful in refinancing and restructuring the terms of our debt with our
14
principal lenders, we cannot predict whether any such refinancing or
restructuring will be possible or that we will be able to sell any assets on
acceptable terms or otherwise. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in fiscal 2004.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based on our consolidated financial statements that were prepared
in accordance with generally accepted accounting principles, or GAAP. Management
makes estimates and assumptions when preparing financial statements. These
estimates and assumptions affect various matters, including:
o Our reported amounts of assets and liabilities in our
consolidated balance sheets at the dates of the financial
statements.
o Our disclosure of contingent assets and liabilities at the
dates of the financial statements; and
o Our reported amounts of net revenue and expenses in our
consolidated statements of operations during the reporting
periods.
These estimates involve judgments with respect to numerous factors that
are difficult to predict and are beyond management's control. As a result,
actual amounts could materially differ from these estimates.
The Securities and Exchange Commission, or SEC, defines critical
accounting estimates as those that are both most important to the portrayal of a
company's financial condition and results of operations and require management's
most difficult, subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The most significant areas involving management's
judgments and estimates are described below.
REVENUE RECOGNITION
Revenue is recognized when diagnostic imaging services are rendered.
Revenue is recorded net of contractual adjustments and other arrangements for
providing services at less that established billing rates. We estimate
contractual allowances based on the patient mix at each diagnostic imaging
facility, the impact of managed care contract pricing and historical collection
information. We operate 53 facilities, each of which has multiple managed care
contracts and a different patient mix. We review the estimated contractual
allowance rates for each diagnostic imaging facility on a monthly basis. We
adjust the contractual allowance rates as changes to the factors discussed above
become known. Depending on the changes we make in the contractual allowance
rates, net revenue may increase or decrease.
ACCOUNTS RECEIVABLE
Substantially all of our accounts receivable are due under
fee-for-service contracts from third party payors, such as insurance companies
and government-sponsored healthcare programs, or directly from patients.
Services are generally provided pursuant to one-year contracts with healthcare
providers or directly to patients. Receivables generally are collected within
industry norms for third-party payors. We continuously monitor collections from
our clients and maintain an allowance for bad debts based upon any specific
payor collection issues that we have identified and our historical collection
experience. For the three months ended April 30, 2003 and 2004, our provision
for bad debts as a percentage of net revenue was 5.7% and 3.9%, respectively.
For the six months ended April 30, 2003 and 2004, our provision for bad debts as
a percentage of net revenue was 5.6% and 3.8%, respectively.
15
DEFERRED TAX ASSETS
The carrying value of our net deferred tax assets assumes that we will
be able to generate sufficient future taxable income based on estimates and
assumptions. If future taxable income or other factors are not consistent with
our expectations, an adjustment to our net deferred tax assets may be required
in the future. Any such adjustment would be charged or credited to income in the
period such determination was made. We evaluate the realizability of the
deferred tax assets and assess the need for additional valuation allowance
periodically. As of April 30, 2004, our net deferred tax assets were $5.2
million.
VALUATION OF GOODWILL AND LONG-LIVED ASSETS
Our goodwill at April 30, 2004 was $23.1 million. Goodwill is recorded
as a result of our acquisition of operating facilities. The operating facilities
are grouped by region into reporting units. We evaluate goodwill, at a minimum,
on an annual basis and whenever events and changes in circumstances suggest that
the carrying amount may not be recoverable in accordance with Statement of
Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible
Assets." Impairment of goodwill is tested at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using a combination of the income or discounted cash flows approach
and the market approach, which uses comparable market data. If the carrying
amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment
loss, if any.
Our long-lived assets at April 30, 2004 consist of property and
equipment of $80.9 million and other intangible assets of $1.4 million. We
evaluate long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." An asset is considered impaired if its carrying
amount exceeds future net cash flow the asset is expected to generate. If such
asset is considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds its fair market
value. We assess the recoverability of our long-lived and intangible assets by
determining whether the unamortized balances can be recovered through
undiscounted future net cash flows of the related assets.
For each of the year ended October 31, 2003, we recorded no impairment
of goodwill or property and equipment. However, if our estimates or the related
assumptions change in the future, we may be required to record impairment
charges to reduce the carrying amount of these assets.
SIGNIFICANT EVENTS
TERMINATION OF CONTRACT WITH TOWER IMAGING MEDICAL GROUP, INC.
In February 2003, we commenced an action against Tower Imaging Medical
Group, Inc., or Tower, and certain of its affiliated entities alleging Tower's
breach of a covenant not to compete in our existing management agreement with
them. Tower had been providing the professional medical services at our
Wilshire, Roxsan and Women's facilities located in Beverly Hills. Effective
October 20, 2003, as part of the final settlement of the litigation, we
terminated our management agreement with Tower. We are required to pay Tower
$1.5 million, comprised of 24 monthly installments of $50,000 and a final
balloon payment, less a residual balance, in settlement of the action. As part
of the settlement, we acquired use of the "Tower Imaging" name for the Tower
facilities. We capitalized the $1.5 million payment as an intangible asset for
the Tower Imaging name, and Dr. Berger has personally guaranteed our obligation
16
to make this $1.5 million payment. The amount guaranteed declines by $40,000 per
month as we make payments under the obligation. Historically, the Tower
physicians were entitled to 17.5% of the collections of the Tower facilities.
BRMG is now providing the professional medical services at those facilities,
which we expect will result in savings of approximately $1.0 million per year in
professional reading fees. Since January 2004, BRMG has hired seven former key
Tower radiologists in the Beverly Hills area for the Tower facilities to
solidify its staffing and related referral base. We believe that with BRMG
providing the professional medical services at the Tower facilities, we should
not experience further significant physician turnover at those facilities.
SALE OF IMAGING CENTER--DISCONTINUED OPERATION
Effective March 31, 2003, we sold our 50% share of Westchester Imaging
Group, or Westchester, to our joint venture partner for $3.0 million. The gain
on the sale of Westchester was $2.9 million. Net revenue and net income for
Westchester for the three months ended April 30, 2003 was $0.9 million and $0.1
million, respectively. Net revenue and net income for Westchester for the six
months ended April 30, 2003 was $2.3 million and $0.3 million, respectively.
CLOSURES OF IMAGING CENTERS
In July 2003, we closed our La Habra facility. Net revenue and net loss
for La Habra for the three months ended April 30, 2003 was $0.1 million and
$61,000, respectively. Net revenue and net loss for La Habra for the six months
ended April 30, 2003 was $0.3 million and $78.000, respectively.
At various times, the Company may open or close small x-ray facilities
acquired primarily to service larger capitation arrangements over a specific
geographic region. Over time, the patient volume from these contracts may vary,
or the Company may end the arrangement, resulting in the subsequent closures of
these smaller satellite facilities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage that certain items in the statements of operations bear to net
revenue.
SIX MONTHS
ENDED
APRIL 30,
2004 2003
-------- --------
NET REVENUE 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 76.0 75.4
Depreciation and amortization 12.7 12.2
Provision for bad debts 3.8 5.6
-------- --------
Total operating expenses 92.5 93.2
-------- --------
INCOME FROM OPERATIONS 7.5 6.8
OTHER EXPENSE (INCOME)
Interest expense 12.1 13.2
Other income (0.1) (0.3)
Other expense 0.1 0.3
-------- --------
Total other expense 12.1 13.2
-------- --------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION (4.6) (6.4)
MINORITY INTEREST IN EARNINGS OF
SUBSIDIARIES 0.0 (0.1)
-------- --------
LOSS FROM CONTINUING OPERATIONS (4.6) (6.5)
INCOME FROM DISCONTINUED OPERATION -- 4.6
-------- --------
NET LOSS (4.6)% (1.9)%
======== ========
17
SIX MONTHS ENDED APRIL 30, 2004 COMPARED TO SIX MONTHS ENDED APRIL 30,
2003
During the last fiscal year and the first six months of fiscal 2004, we
continued our efforts to enhance our operations and expand our network. Our
results for fiscal 2003 and the first six months of fiscal 2004 were affected by
the opening and integration of new facilities and the closure of underperforming
operations, resolution of a contractual dispute at our Tower facilities, and our
continuing focus on controlling operating expenses. As a result of these factors
and other matters discussed below, we narrowed our loss from continuing
operations. We continue to experience net losses; however our net loss from
continuing operations was reduced from $4.5 million in the first six months of
fiscal 2003 to $3.2 million in the first six months of fiscal 2004.
Also during the last fiscal year and the first six months of fiscal
2004, we made progress in solidifying our financial condition. We overcame
issues arising from the financial difficulties of our working capital lenders
and were able to restructure our working capital line with one lender and
extended the maturity of our facility with the other lender. We also were able
to extend the terms of our subordinated debentures through the successful
completion of a "pre-packaged" Chapter 11 plan of reorganization accomplished in
2003. We continue to work with our existing lenders and to explore other
possible sources of financing to address these issues. See "--Financial
Condition--Liquidity and Capital Resources."
NET REVENUE. Net revenue from continuing operations for the six months
ended April 30, 2004 was $69.9 million compared to $69.3 million for the same
period in fiscal 2003, an increase of approximately $0.6 million, or 0.8%. The
net revenue increase was offset by $0.3 million which was attributable to the La
Habra facility, which we closed in July 2003. The most significant increases in
net revenue when comparing the six months ended April 30, 2004 to the same
period in fiscal 2003 were at the Company's Orange Imaging facilities which
increased their net revenue $1.3 million, or 24%, Northridge, which increased
its net revenue $0.5 million, or 20%, Los Coyotes, which increased its net
revenue $0.4 million, or 15%, Vacaville, which increased its net revenue $0.4
million, or 24%, and the Ventura facilities, which increased their net revenue
$0.8 million, or 19%. The increase in net revenue is primarily due to increased
capitation reimbursement at the majority of these facilities. Net revenue was
affected by a $2.3 million decrease in net revenue at our Tower facilities over
the same period. The decrease in net revenue at our Tower facilities was
attributable to disruptions arising from the dispute described under
"--Significant Events--Termination of Contract with Tower Imaging Medical Group,
Inc."
OPERATING EXPENSES. Operating expenses from continuing operations for
the six months ended April 30, 2004 decreased nominally by approximately $15,000
from $64.7 million for the six months ended April 30, 2003 to $64.6 million in
the same period of fiscal 2004. The $64.7 million in operating expenses for the
six months ended April 30, 2003 includes $0.4 million related to the La Habra
facility. Our Tower facilities had a decrease in operating expenses of $2.0
million over the same period primarily due to the decrease in net revenue.
During fiscal 2003, professional radiology reading fees for the Tower facilities
were 17.5% of net revenue and billing was outsourced to Tower's internal group.
As of October 31, 2003, we terminated our relationship with Tower, and BRMG
hired physicians with fixed salaries to provide the radiology services and the
billing is now done in-house.
The following table sets forth our operating expenses from continuing
operations for the six months ended April 30, 2004 and 2003 (dollars in
thousands):
18
SIX MONTHS
ENDED
APRIL 30,
2004 2003
-------- --------
Salaries and professional reading fees $31,950 $30,774
Building and equipment rental 3,926 4,687
General administrative expenses 17,267 16,847
-------- --------
Total operating expenses 53,143 52,308
Depreciation and amortization 8,842 8,488
Provision for bad debts 2,653 3,860
o SALARIES AND PROFESSIONAL READING FEES. Salaries and
professional reading fees expenses increased $1.2 million from
the six months ended April 30, 2003 compared to the same
period in fiscal 2004. At the Company's Burbank facility, the
professional fee arrangement increased in December 2003 from
18% of net revenue to 23% of net revenue resulting in an
increase in the expense of $0.5 million from the six months
ended April 30, 2003 to the same period in fiscal 2004. The
remaining increase is primarily due to increased revenue and
the related physician and employee hiring.
o BUILDING AND EQUIPMENT RENTAL. Building and equipment rental
expenses decreased $0.8 million in the six months ended April
30, 2004 compared to the same period in the prior year. The
decrease was due to the conversion of equipment operating
leases effective November 1, 2003 which reduced operating
rental expense by approximately $0.8 million over the same
period.
o GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance,
business tax and license, outside services, utilities,
marketing, travel and other expenses. Many of these expenses
are variable in nature. The primary reason for the increase in
general and administrative expenses was due to approximately
$0.7 million in expenditures related to the Company's proposed
bond financing which was terminated during the quarter.
o DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $0.4 million during the six months ended April
30, 2004 compared to the same quarter in the prior fiscal
period due to the conversion of approximately $6.0 million of
equipment operating leases into capital leases effective
November 1, 2003 and the amortization of the trade name
intangible asset.
o PROVISION FOR BAD DEBTS. The $1.2 million decrease in
provision for bad debts from the six months ended April 30
2003 to the same period in fiscal 2004 was primarily a result
of decreased bad debt write-offs and no significant payor
dissolutions since fiscal 2002.
INTEREST EXPENSE. Interest expense for the six months ended April 30,
2004 decreased approximately $0.7 million, or 7.7%, from $9.2 million in fiscal
2003 to $8.5 million in fiscal 2004. The decrease was primarily due to the net
principal reduction in notes and capital leases over the two periods. At April
30, 2003, we had total notes and capital leases of approximately $158.5 million,
including lines of credit liabilities. At April 30, 2004, we had approximately
$151.6 million of notes and capital leases, which includes the recent conversion
of equipment operating leases into capital leases of approximately $6.0 million.
19
OTHER INCOME. In the six months ended April 30, 2004 and 2003, we
earned other income of $71,000 and $231,000, respectively, principally comprised
of professional reading income, sublease income, record copy income, deferred
rent income and other miscellaneous income.
OTHER EXPENSE. In the six months ended April 30, 2004 and 2003, we
incurred other expense of $65,000 and $229,000, respectively. In fiscal 2004,
the other expense was due to the write-off of charges incurred with the
conversion of operating leases into capital leases in November 2003. In fiscal
2003, the other expense was primarily due to the write-off of a receivable
related to the Company's Tower Heartcheck operation.
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES. Minority interest in
earnings of subsidiaries represents the minority investors' 25% share of the
income from the Burbank Advanced Imaging Center LLC and 25% share of the income
from the Rancho Bernardo Advanced LLC for the period, which was nominal for six
months ended April 30, 2004 and 2003.
DISCONTINUED OPERATION. The income from operations of Westchester was
$0.3 million for the six months ended April 30, 2003 and net revenue for the
period was $2.3 million. Effective March 31, 2003, we sold our 50% share of
Westchester to our joint venture partner and generated a gain on the sale of
$2.9 million which was recorded in the six months ended April 30, 2003.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage that certain items in the statements of operations bear to net
revenue.
THREE MONTHS
ENDED
APRIL 30,
2004 2003
--------- ---------
NET REVENUE 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 77.2 75.5
Depreciation and amortization 12.5 12.2
Provision for bad debts 3.9 5.7
--------- ---------
Total operating expenses 93.6 93.4
--------- ---------
INCOME FROM OPERATIONS 6.4 6.6
OTHER EXPENSE (INCOME)
Interest expense 11.8 13.0
Other income (0.1) (0.4)
Other expense -- 0.7
--------- ---------
Total other expense 11.7 13.3
--------- ---------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION (5.3) (6.7)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES 0.0 0.0
--------- ---------
LOSS FROM CONTINUING OPERATIONS (5.3) (6.7)
INCOME FROM DISCONTINUED OPERATION -- 8.7
--------- ---------
NET INCOME (LOSS) (5.3)% 2.0%
========= =========
20
THREE MONTHS ENDED APRIL 30, 2004 COMPARED TO THREE MONTHS ENDED APRIL 30,
2003
NET REVENUE. Net revenue from continuing operations for the three
months ended April 30, 2004 was $35.9 million compared to $35.0 million for the
same period in fiscal 2003, an increase of approximately $0.9 million, or 2.5%.
The net revenue increase was offset by $0.1 million which was attributable to
the La Habra facility, which we closed in July 2003. The most significant
increases in net revenue when comparing the three months ended April 30, 2004 to
the same period in fiscal 2003 were at the Company's Orange Imaging facilities
which increased their net revenue $0.6 million, or 22%, Northridge, which
increased its net revenue $0.3 million, or 24%, Vacaville, which increased its
net revenue $0.3 million, or 34%, and the Ventura facilities, which increased
their net revenue $0.3 million, or 14%. The increase in net revenue is primarily
due to increased capitation reimbursement at the majority of these facilities.
Net revenue was affected by a $0.8 million decrease in net revenue at our Tower
facilities over the same period. The decrease in net revenue at our Tower
facilities was attributable to disruptions arising from the dispute described
under "--Significant Events--Termination of Contract with Tower Imaging Medical
Group, Inc."
OPERATING EXPENSES. Operating expenses from continuing operations for
the three months ended April 30, 2004 increased approximately $0.9 million, or
2.7%, from $32.7 million in the same period of fiscal 2003 to $33.6 million in
the same period of fiscal 2004. The $32.7 million in operating expenses for the
three months ended April 30, 2003 includes $0.2 million related to the La Habra
facility. Our Tower facilities had a decrease in operating expenses of $0.8
million over the same period primarily due to the decrease in net revenue.
During fiscal 2003, professional radiology reading fees for the Tower facilities
were 17.5% of net revenue and billing was outsourced to Tower's internal group.
As of October 31, 2003, we terminated our relationship with Tower, and BRMG
hired physicians with fixed salaries to provide the radiology services and the
billing is now done in-house.
The following table sets forth our operating expenses from continuing
operations for the three months ended April 30, 2004 and 2003 (dollars in
thousands):
THREE MONTHS ENDED
APRIL 30,
2004 2003
-------- --------
Salaries and professional reading fees $16,270 $15,164
Building and equipment rental 2,005 2,357
General administrative expenses 9,405 8,875
-------- --------
Total operating expenses 27,680 26,396
Depreciation and amortization 4,477 4,273
Provision for bad debts 1,398 1,988
o SALARIES AND PROFESSIONAL READING FEES. Salaries and
professional reading fees expenses increased $1.1 million from
the three months ended April 30, 2003 to the same period in
fiscal 2004. At the Company's Burbank facility, the
professional fee arrangement increased in December 2003 from
18% of net revenue to 23% of net revenue resulting in an
increase in the expense of $0.3 million from the three months
ended April 30, 2003 to the same period in fiscal 2004. The
remaining increase is primarily due to increased revenue and
the related physician and employee hiring.
21
o BUILDING AND EQUIPMENT RENTAL. Building and equipment rental
expenses decreased $0.4 million in the three months ended
April 30, 2004 compared to the same period in the prior year.
The decrease was due to the conversion of equipment operating
leases effective November 1, 2003 which reduced operating
rental expense by approximately $0.4 million over the same
period.
o GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance,
business tax and license, outside services, utilities,
marketing, travel and other expenses. Many of these expenses
are variable in nature. The primary reason for the increase in
general and administrative expenses was due to approximately
$0.7 million in expenditures related to the Company's attempt
in solidifying financing with a bond offering that did not
materialize.
o DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $0.2 million during the three months ended April
30, 2004 compared to the same quarter in the prior fiscal
period due to the conversion of approximately $6.0 million of
equipment operating leases into capital leases effective
November 1, 2003 and the amortization of the trade name
intangible asset.
o PROVISION FOR BAD DEBTS. The $0.6 million decrease in
provision for bad debts from the three months ended April 30
2003 to the same period in fiscal 2004 was primarily a result
of decreased bad debt write-offs and no significant payor
dissolutions since fiscal 2002.
INTEREST EXPENSE. Interest expense for the three months ended April 30,
2004 decreased approximately $0.3 million, or 7.3%, from $4.5 million in fiscal
2003 to $4.2 million in fiscal 2004. The decrease was primarily due to the net
principal reduction in notes and capital leases over the two periods. At April
30, 2003, we had total notes and capital leases of approximately $158.5 million,
including lines of credit liabilities. At April 30, 2004, we had approximately
$151.6 million of notes and capital leases, which includes the recent conversion
of equipment operating leases into capital leases of approximately $6.0 million.
OTHER INCOME. In the three months ended April 30, 2004 and 2003, we
earned other income of $34,000 and $137,000, respectively, principally comprised
of professional reading income, sublease income, record copy income, deferred
rent income and other miscellaneous income.
OTHER EXPENSE. In the three months ended April 30, 2004 and 2003, we
incurred other expense of $-0- and $229,000, respectively, which was primarily
due to the write-off of a receivable related to the Company's Tower Heartcheck
operation.
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES. Minority interest in
earnings of subsidiaries represents the minority investors' 25% share of the
income from the Burbank Advanced Imaging Center LLC and 25% share of the income
from the Rancho Bernardo Advanced LLC for the period, which was nominal for
three months ended April 30, 2004 and 2003.
DISCONTINUED OPERATION. The income from operations of Westchester was
$0.1 million for the three months ended April 30, 2003 and net revenue for the
period was $0.9 million. Effective March 31, 2003, we sold our 50% share of
Westchester to our joint venture partner and generated a gain on the sale of
$2.9 million which was recorded in the three months ended April 30, 2003.
22
SOURCES AND USES OF CASH
Cash decreased for the six months ended April 30, 2004 by $28,000 and
cash increased for the six months ended April 30, 2003 by $18,000.
Cash provided by operating activities for the six months ended April
30, 2004 was $7.3 million compared to $7.4 million for the same period in 2003.
Cash used by investing activities for the six months ended April 30,
2004 was $1.2 million compared to $0.7 million for the same period in 2003.
During the six months ended April 30, 2004 and 2003, the Company purchased
property and equipment of $1.2 million and $2.1 million, respectively. During
the six months ended April 30, 2004, the Company purchased additional shares of
DIS common stock for $35,000. During the six months ended April 30, 2003, the
Company received proceeds from the sale of Westchester Imaging Group of $1.4
million.
Cash used for financing activities for the six months ended April 30,
2004 was $6.1 million compared to $6.6 million for the same period in 2003. For
the six months ended April 30, 2004 and 2003, we made principal payments on
capital leases and notes payable of approximately $6.0 million and $13.2
million, respectively. During the six months ended April 30, 2004, the Company
made payments to its existing lines of credit of $1.1 million, and received
proceeds from the issuance of a convertible subordinated note payable of $1.0
million. During the six months ended April 30, 2003, the Company received
proceeds from borrowings under existing lines of credit, new borrowings and
refinancing arrangements of approximately $6.9 million, made joint venture
distributions of $0.3 million and received proceeds from the issuance of common
stock of approximately $28,000.
During the first six months of fiscal 2004, we began negotiations with
DVI concerning the restructuring of our outstanding notes payable and capital
leases with DVI. During this period, both parties agreed that monthly scheduled
principal payments would cease. Interest continues to accrue on outstanding
principal balances pending completion of the negotiated settlement. During the
six months ended April 30, 2004, accrued interest on notes payable and capital
leases with DVI was $3.1 million.
CONTRACTUAL COMMITMENTS
Our future obligations for notes payable, equipment under capital
leases, lines of credit, subordinated debentures, equipment and building
operating leases and purchase and other contractual obligations for the next
five years and thereafter include (dollars in thousands):
THERE-
FOR THE TWELVE MONTHS ENDED APRIL 30, 2005 2006 2007 2008 2009 AFTER TOTAL
--------- --------- --------- --------- --------- --------- ---------
Notes payable $ 30,096 $ 29,006 $ 14,843 $ 10,306 $ 4,368 $ -- $ 88,619
Capital leases 22,944 18,672 14,930 11,953 6,831 1,122 76,452
Lines of credit 13,834 -- -- -- -- -- 13,834
Subordinated debentures -- -- -- 16,215 -- -- 16,215
Operating leases(1) 7,333 6,343 5,566 4,302 3,354 12,433 39,331
Purchase obligations(2) 2,500 2,500 1,250 -- -- -- 6,250
Tower settlement 600 474 -- -- -- -- 1,074
--------- --------- --------- --------- --------- --------- ---------
Total(3) $ 77,307 $ 56,995 $ 36,589 $ 42,776 $ 14,553 $ 13,555 $241,775
(1) Primarily consists of real estate leases.
(2) Includes a three-year obligation to purchase imaging film from Fujifilm
Medical Systems USA, Inc. We must purchase an aggregate of $7.5 million
of film at a rate of approximately $2.5 million of film per year over
the term of the agreement.
(3) Does not include our obligations under our maintenance agreement with
GE Medical Systems described below.
23
We are parties to an agreement with GE Medical Systems for the
maintenance and repair of the majority of our medical equipment for a fee based
upon a percentage of net revenues, subject to minimum aggregate net revenue
requirements. The agreement expires on October 31, 2005. The annual service fee
is currently the higher of 3.74% of our net revenue (less provisions for bad
debts) or approximately $4.7 million. The aggregate minimum net revenue ranges
from $85.0 million to $125.0 million during the term of the agreement. For the
first six months of fiscal 2004, the monthly service fees were 3.74% of net
revenue. We believe this framework of basing service costs on usage is an
effective and unique method for controlling our overall costs on a
facility-by-facility-basis. This amount is not included in the table above. In
addition, we also have obligations under employment agreements with our
executive officers, which are not included in the table above.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements reflect, among other things, management's
current expectations and anticipated results of operations, all of which are
subject to known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements, or industry results, to
differ materially from those expressed or implied by such forward-looking
statements. Therefore, any statements contained herein that are not statements
of historical fact may be forward looking statements and should be evaluated as
such. Without limiting the foregoing, the words, "believes, " "anticipates,"
"plans," "intends," "will," "expects," "should," and similar words and
expressions are intended to identify forward-looking statements. Except as
required under the federal securities laws or by the rules and regulations of
the SEC, we assume no obligation to update any such forward-looking information
to reflect actual results or changes in the factors affecting such
forward-looking information. The factors included in "Risks Relating to Our
Business," among others, in our Annual Report on Form 10-K for fiscal 2003 could
cause our actual results to differ materially from those expressed in, or
implied by, the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We sell our services exclusively in the United States and receives
payment for our services exclusively in United States dollars. As a result, our
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 our interest expense is not sensitive to changes in the
general level of interest in the United States because the majority of our
indebtedness has interest rates which were fixed when we entered into the note
payable or capital lease obligation. None of our long-term liabilities have
variable interest rates. Only our lines of credit, classified as current
liabilities on our financial statements, are interest expense sensitive to
changes in the general level of interest because they are based upon the current
prime rate plus a margin.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Exchange Act, our management,
including our Chief Executive Officer, conducted an evaluation as of the end of
the period covered by this Quarterly Report, of the effectiveness of our
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, our Chief Executive Officer believes that our
disclosure controls and procedures were effective as of the end of the period
covered by this Quarterly Report in making known to them material information
required to be included in this report. As required by Rule 13a-15(d), our
management, including the Chief Executive Officer, also conducted an evaluation
24
of our internal control over financial reporting to determine whether any
changes occurred during the period covered by this Quarterly Report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Based on that evaluation, there has been no
such change during the period covered by this Quarterly Report, known to the
Chief Executive Officer, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have become aware that the Company has been named as a defendant with
numerous other parties in an amended Complaint filed in the U.S. District Court
for the Eastern District of Pennsylvania entitled IN RE DVI, INC. SECURITIES
LITIGATION bearing case number 2:03-CV-005336-LDD. The legal action is styled as
a class action and alleges that the Company had a special relationship with DVI
(one of our primary lenders) and as a result accepted loans from DVI knowing it
was assisting DVI in its alleged violation of Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder and thereby the Company violated those
laws and rules as well. While the Company has not yet been served with the
Complaint, the Company believes the action is without merit and intends to
vigorously oppose the action.
We are engaged from time to time in the defense of lawsuits arising out
of the ordinary course and conduct of our business. We believe that the outcome
of our current litigation will not have a material adverse impact on our
business, financial condition and results of operations. However, we could be
subsequently named as a defendant in other lawsuits that could adversely affect
us.
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
There are no matters to be reported under this heading.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 -- DVI Agreement as amended
Exhibit 31.1 -- Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 -- Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
25
(b) On March 16, 2004 we filed a report on Form 8-K for an event on March
16, 2004 disclosing under Item 9 certain information which was provided
to potential investors in an offering pursuant to Regulation S under
the Securities Act of 1933 together with a press release issued in
connection therewith.
On April 19, 2004 we filed a report on Form 8-K for an event on April
16, 2004, disclosing a proposed credit facility intended to replace the
offering pursuant to Regulation S under the Securities Act of 1933
together with a press release issued in connection therewith.
SIGNATURES
Pursuant to the requirements 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 11, 2004 By: /s/ HOWARD G. BERGER, M.D.
------------------------------------
Howard G. Berger, M.D., Chairman,
President, Chief Executive and Chief
Financial Officer
26