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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 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
August 30, 2004 was 41,106,813 (excluding treasury shares).
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
JULY 31, OCTOBER 31,
2004 2003
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 272,000 $ 30,000
Accounts receivable, net 21,528,000 25,472,000
Unbilled receivables and other receivables 1,043,000 180,000
Other 2,969,000 2,092,000
-------------- --------------
Total current assets 25,812,000 27,774,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 77,333,000 81,886,000
-------------- --------------
OTHER ASSETS
Accounts receivable, net 1,713,000 2,033,000
Goodwill 23,099,000 23,064,000
Deferred income taxes 5,235,000 5,235,000
Trade name and other 2,615,000 2,043,000
-------------- --------------
Total other assets 32,662,000 32,375,000
-------------- --------------
Total assets $ 135,807,000 $ 142,035,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursements in transit $ 2,034,000 $ 2,853,000
Accounts payable and accrued expenses 24,472,000 24,462,000
Notes payable to related party 39,000 2,069,000
Current portion of notes and leases payable 26,089,000 43,005,000
-------------- --------------
Total current liabilities 52,634,000 72,389,000
-------------- --------------
LONG-TERM LIABILITIES
Subordinated debentures payable 16,162,000 16,215,000
Notes payable to related party 2,097,000 100,000
Notes and leases payable, net of current portion 124,223,000 104,360,000
Accrued expenses 506,000 1,421,000
-------------- --------------
Total long-term liabilities 142,988,000 122,096,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 883,000 637,000
-------------- --------------
STOCKHOLDERS' DEFICIT (60,698,000) (53,087,000)
-------------- --------------
Total liabilities and stockholders' deficit $ 135,807,000 $ 142,035,000
============== ==============
The accompanying notes are an integral part of these financial statements
2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, 2004 2003 2004 2003
- -------- ------------------------------- -------------------------------
NET REVENUE $ 33,900,000 $ 36,340,000 $ 103,800,000 $ 105,687,000
OPERATING EXPENSES
Operating expenses 27,039,000 26,412,000 79,401,000 78,720,000
Depreciation and amortization 4,453,000 4,213,000 13,295,000 12,701,000
Provision for bad debts 1,328,000 2,162,000 3,984,000 6,022,000
-------------- -------------- -------------- --------------
Total operating expenses 32,820,000 32,787,000 96,680,000 97,443,000
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 1,080,000 3,553,000 7,120,000 8,244,000
OTHER EXPENSE (INCOME)
Interest expense 4,692,000 4,466,000 13,147,000 13,626,000
Other income (70,000) (116,000) (141,000) (347,000)
Other expense 741,000 3,000 1,587,000 233,000
-------------- -------------- -------------- --------------
Total other expense 5,363,000 4,353,000 14,593,000 13,512,000
-------------- -------------- -------------- --------------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION (4,283,000) (800,000) (7,473,000) (5,268,000)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (234,000) (9,000) (246,000) (33,000)
-------------- -------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (4,517,000) (809,000) (7,719,000) (5,301,000)
DISCONTINUED OPERATION
Income from operation of Westchester Imaging Group -- -- -- 255,000
Gain on sale of discontinued operation -- -- -- 2,942,000
-------------- -------------- -------------- --------------
INCOME FROM DISCONTINUED OPERATION -- -- -- 3,197,000
-------------- -------------- -------------- --------------
NET LOSS $ (4,517,000) $ (809,000) $ (7,719,000) $ (2,104,000)
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER SHARE
Loss from continuing operations $ (.11) $ (.02) $ (.19) $ (.13)
Income from discontinued operation -- -- -- .08
-------------- -------------- -------------- --------------
BASIC AND DILUTED NET LOSS PER SHARE $ (.11) $ (.02) $ (.19) $ (.05)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basis and diluted 41,106,813 41,102,615 41,106,813 41,085,361
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements
3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JULY 31, 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 -- -- -- -- -- (7,719,000) (7,719,000)
----------- -------------- -------------- -------------- -------------- -------------- --------------
BALANCE--JULY 31,
2004 (UNAUDITED) 42,931,813 $ 430,000 $ 100,536,000 (1,825,000) $ (695,000) $(160,969,000) $ (60,698,000)
The accompanying notes are an integral part of these financial statements
4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2004 2003
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 12,530,000 $ 15,385,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,105,000) (2,493,000)
Purchase of subsidiary common stock (35,000) --
Proceeds from sale of imaging center -- 1,367,000
------------- -------------
Net cash used by investing activities (2,140,000) (1,126,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes and leases payable (11,974,000) (19,389,000)
Proceeds from issuance of convertible subordinated notes payable 1,000,000 --
Borrowings on lines of credit and notes payable 874,000 5,427,000
Proceeds from issuance of common stock -- 28,000
Purchase of subordinated debentures (48,000) (3,000)
Joint venture distributions -- (300,000)
------------- -------------
Net cash used by financing activities (10,148,000) (14,237,000)
------------- -------------
NET INCREASE IN CASH 242,000 22,000
CASH, beginning of period 30,000 36,000
------------- -------------
CASH, end of period $ 272,000 $ 58,000
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 7,727,000 $ 12,437,000
------------- -------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended July 31, 2004, we converted equipment operating leases into capital
leases and capitalized equipment of $5,971,000. During the nine months ended July 31, 2004 and 2003, we
entered into additional capital leases or financed equipment through notes or other payables for $549,000
and $7,628,000, respectively.
During the nine months ended July 31, 2004 and 2003, we accrued interest on notes payable and
capital lease obligations of approximately $6,315,000 and $1,173,000, respectively, during the debt
restructuring finalized in July 2004.
The accompanying notes are an integral part of these financial statements
5
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. On August 26, 2004, we finalized the
purchase of the minority interests of Rancho Bernardo Advanced LLC for $200,000
with an initial payment of $80,000 and twelve monthly installments of $10,000
each beginning on September 30, 2004. 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 provides non-medical, or technical, and
administrative services to BRMG for which it receives 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 July 31, 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 $26.8 million at July 31, 2004 compared to a
$44.6 million deficit at October 31, 2003, and had losses from continuing
operations of $4.5 million and $0.8 million during the three months ended July
31, 2004 and 2003, respectively, and had losses from continuing operations of
$7.7 million and $5.3 million during the nine months ended July 31, 2004 and
2003, respectively. We also had a stockholders' deficit of $60.7 million at July
31, 2004 compared to a $53.1 million deficit at October 31, 2003.
6
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. As of July 31, 2004 and
October 31, 2003, our line of credit liabilities were $15.8 million and $14.9
million, respectively. In addition, we finance the acquisition of equipment
through capital and operating leases.
As of July 31, 2004, we successfully completed our restructuring of our
outstanding notes payable and capital lease obligations as evidenced by the
improvement in working capital from a deficit of $44.6 million at October 31,
2003 to a deficit of $26.8 million at July 31, 2004, a $17.8 million
improvement. As part of the restructuring, we entered into a new credit facility
with Wells Fargo Foothill, Inc., superceding our prior arrangement with GE,
providing up to $23 million of potential borrowing capacity.
Under the new Wells Fargo Foothill arrangement, due January 31, 2008, we may
borrow the lesser of 85% of the net collectible value of eligible accounts
receivable plus one month of average capitation receipts for the prior six
months, two times the trailing month cash collections, or $20,000,000. Eligible
accounts receivable shall exclude those accounts older than 150 days from
invoice date and will be net of customary reserves. In addition, Wells Fargo
Foothill set up a term loan where they can advance up to the lesser of
$3,000,000, or 80% of the liquidation value of the equipment securing the term
loan. The five-year term loan must be drawn prior to December 31, 2004 with
interest only payments through February 28, 2005 with the first quarterly
principal payment due on March 1, 2005. As of July 31, 2004, we had not borrowed
under the term loan.
Under the $20,000,000 revolver, an overadvance subline will be available not to
exceed $2,000,000, or one month of the average capitation receipts for the prior
six months, until September 30, 2005. Beginning the earlier of October 1, 2005
or when the term loan funds, the maximum overadvance cannot exceed the lesser of
$1,000,000 or one month of the average capitation receipts for the prior six
months. Also under the revolver, we would be entitled to request that Wells
Fargo Foothill issue guarantees of payment with respect to letters of credit
issued by an issuing bank in an aggregate amount not to exceed $5,000,000 at any
one time outstanding. At July 31, 2004, we had $11.9 million of borrowings
outstanding under the Wells Fargo Foothill line.
Advances outstanding under the revolver bear interest at the base rate plus
1.5%, or the LIBOR rate plus 3.0%. Advances under the overadvance subline and
term loan bear interest at the base rate plus 4.75%. Letter of credit fees bear
interest of 3.0% per annum times the undrawn amount of all outstanding lines of
credit. The base rate refers to the rate of interest announced within Wells
Fargo Bank at its principal office in San Francisco as its prime rate. The line
is collateralized by substantially all of our assets and requires that we meet
certain financial covenants including minimum levels of EBITDA, net worth, fixed
charge coverage ratios and maximum senior debt/EBITDA as well as limitations on
annual capital expenditures.
We also have a line of credit with an affiliate of DVI. At July 31, 2004, we had
$3.9 million outstanding under this line. Interest on the outstanding balance is
payable monthly at our lender's prime rate plus 1.0%. Future borrowings under
this line of credit are no longer available and the balance is being paid down
by collections on historical accounts receivable and variable monthly
installment payments in the future including $200,000 paid on September 2, 2004.
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, 2005
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.
7
In July 2004, we renegotiated our existing notes and capital lease obligations
with our three primary lenders, General Electric ("GE"), DVI Financial Services
and U.S. Bank extending terms and reducing monthly payments on approximately
$135 million of combined outstanding debt. Unfortunately, we were not able to
secure a discount on the outstanding DVI and U.S. Bank obligations and did not
obtain a gain on settlement as originally anticipated.
During the nine months ended July 31, 2004, interest and principal payments were
made on existing DVI and GE debt through July 31, 2004 reducing the outstanding
principal balance to $15.2 million and $54.3 million, respectively, as of July
31, 2004.
DVI's restructured note payable is five payments of interest only from July to
September 2004 and November to December 2004 at 9%, 43 payments of principal and
interest of $273,988, and a final balloon payment of $7.4 million on June 30,
2008 if and only if our subordinated bond debentures, then due, are not extended
and paid in full. If the bond debenture payments are deferred, we would continue
to make monthly payments of $273,988 to DVI for the next 29 months.
GE's restructured note payable is six payments of interest only at 9%, or
$407,210, beginning on August 1, 2004, 40 payments of principal and interest at
$1,127,067 beginning on February 1, 2005, and a final balloon payment of $21
million due on June 1, 2008 if and only if our subordinated bond debentures,
then due, are not extended and paid in full. If the bond debenture payments are
deferred, we would continue to make monthly payments of $1,127,067 to GE for the
next 20 months.
During the nine months ended July 31, 2004, interest was accrued on the
outstanding obligations due U.S. Bank through July 31, 2004. U.S. Bank's
restructured note payable is six payments of interest only at 9%, or $491,933,
beginning on August 1, 2004, 40 payments of principal and interest of $1,055,301
beginning on February 1, 2005, and a final balloon payment of $39.7 million due
on June 1, 2008 if and only if our subordinated bond debentures, then due, are
not extended and paid in full. If the bond debenture payments are deferred, we
would continue to make monthly payments of $1,055,301 to U.S. Bank for the next
44 months.
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.
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. 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 and
2005.
8
NOTE 3--ACCOUNTING POLICIES
NET REVENUE
The following table summarizes net revenue for the nine months ended
July 31, 2004 and 2003:
2004 2003
------------- -------------
Net patient service $ 78,457,000 $ 83,262,000
Capitation 25,343,000 22,425,000
------------- -------------
Net revenue $103,800,000 $105,687,000
------------- -------------
In addition, net revenue, less provision for bad debt, for the nine months ended July
31, 2004 and 2003 was:
2004 2003
------------- -------------
Net patient service, less provision for bad debt $ 74,473,000 $ 77,240,000
Capitation 25,343,000 22,425,000
------------- -------------
Net revenue, less provision for bad debt $ 99,816,000 $ 99,665,000
------------- -------------
Accounts receivable as of July 31, 2004 are presented net of allowances
of approximately $55.0 million, of which $50.9 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.
NINE MONTHS ENDED JULY 31, 2004 2003
Net loss as reported $(7,719,000) $(2,104,000)
Deduct: Total stock-based employee compensation
expense determined under fair value-based method (272,000) (53,000)
Pro forma net loss $(7,991,000) $(2,157,000)
Loss per share:
Basic and diluted loss per share--as reported $ (.19) $ (.05)
Basic and diluted loss per share--pro forma $ (.19) $ (.05)
9
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
JULY 31, INTEREST RATE EXPECTED LIFE EXPECTED VOLATILITY EXPECTED DIVIDENDS
- -------- ------------- ------------- ------------------- ------------------
2004 3.00% 5 years 31% - 77% --
2003 3.00% 5 years 108% --
RECLASSIFICATIONS
Certain amounts in the 2003 and 2004 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
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 July 31, 2003 was
$-0-. Net revenue and net income for Westchester for the nine months ended July
31, 2003 was $2.3 million and $0.3 million, respectively.
In July 2003, we closed our La Habra facility. Net revenue and net loss
for La Habra for the three months ended July 31, 2003 was $82,000 and $46,000,
respectively. Net revenue and net loss for La Habra for the nine months ended
July 31, 2003 was $380,000 and $125,000, respectively.
In May 2004, we closed our North County facility and transferred the
remaining CT to Palm Desert (Indio). We recognized a loss of $79,000 for the net
book value of leasehold improvements at the facility. Net revenue and net income
for the three months ended July 31, 2003 was $307,000 and $27,000, respectively.
There was no net revenue or net income for the three months ended July 31, 2004.
Net revenue and net income for the nine months ended July 31, 2003 was $937,000
and $84,000, respectively. Net revenue and net loss for the nine months ended
July 31, 2004 was $49,000 and $122,000, respectively.
At various times, we 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 we 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 nine months ended July 31, 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 nine months ended July 31, 2004, we granted 2,700,000
warrants to eight physicians of BRMG, with the individual grants ranging from
50,000 to 1,500,000. The warrants have exercise prices ranging from $0.35 to
$0.70 per share.
During the nine months ended July 31, 2004, we granted 1,075,000
warrants to two officers, one employee and one director with the individual
grants ranging from 50,000 to 450,000 and have exercise prices ranging from
$0.30 to $0.60 per share. During the same period, we retired warrants to
purchase 323,000 shares at $0.60 per share upon one officer's termination and
another employee's warrant's expiration date.
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,
2005 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.
10
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
or approximately $60,000 in the aggregate. 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. During the nine months ended July 31, 2004, we paid $35,000 to acquire
648,366 shares of DIS common stock to those shareholders responding 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 54 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. Thirty-one 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. Twenty-three 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
NINE MONTHS ENDED
PAYOR TYPE JULY 31, JULY 31,
2004 2003
Insurance (1) 39% 41%
Managed Care Capitated Payors 24 21
- ----------------- -------- --------
Medicare/Medi-Cal 16 15
Other (2) 15 16
Worker's Compensation/Personal Injury 6 7
(1) Includes Blue Cross/Blue Shield, which represented approximately 13% of
our net revenue for the nine months ended July 31, 2004 and 2003.
(2) Includes co-payments, direct patient payments through contracts with
physician groups and other non-insurance company payors.
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 nine months ended July 31, 2004 or 2003. Under our
capitation agreements, we receive from the payor a predetermined 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.
11
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, 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 the first nine months of fiscal 2003, is adjusted
annually, if necessary, to ensure that the parties receive fair value for the
services they render. In May 2004, this percentage was adjusted to 79%. In
operation and historically, the annual revenue of BRMG from all sources closely
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.
As of July 31, 2004, BRMG finances these receivables under a working capital
facility with Wells Fargo Foothill, Inc., 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 $26.8 million at July 31, 2004
compared to a $44.6 million deficit at October 31, 2003, and had losses from
continuing operations of $4.5 million and $0.8 million during the three months
ended July 31, 2004 and 2003, respectively, and had losses from continuing
operations of $7.7 million and $5.3 million during the nine months ended July
31, 2004 and 2003, respectively. We also had a stockholders' deficit of $60.7
million at July 31, 2004 compared to a $53.1 million deficit at October 31,
2003.
12
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. As of July 31, 2004 and
October 31, 2003, the Company's line of credit liabilities were $15.8 million
and $14.9 million, respectively. In addition, we finance the acquisition of
equipment through capital and operating leases.
As of July 31, 2004, we successfully completed our restructuring of our
outstanding notes payable and capital lease obligations as evidenced by the
improvement in working capital from a deficit of $44.6 million at October 31,
2003 to a deficit of $26.8 million at July 31, 2004, a $17.8 million
improvement. As part of the restructuring, we entered into a new credit facility
with Wells Fargo Foothill, Inc., superceding our prior arrangement with GE,
providing up to $23 million of potential borrowing capacity.
Under the new Wells Fargo Foothill arrangement, due January 31, 2008,
we may borrow the lesser of 85% of the net collectible value of eligible
accounts receivable plus one month of average capitation receipts for the prior
six months, two times the trailing month cash collections, or $20,000,000.
Eligible accounts receivable shall exclude those accounts older than 150 days
from invoice date and will be net of customary reserves. In addition, Wells
Fargo Foothill set up a term loan where they can advance up to the lesser of
$3,000,000, or 80% of the liquidation value of the equipment securing the term
loan. The five-year term loan must be drawn prior to December 31, 2004 with
interest only payments through February 28, 2005 with the first quarterly
principal payment due on March 1, 2005. As of July 31, 2004, we had not borrowed
under the term loan.
Under the $20,000,000 revolver, an overadvance subline will be
available not to exceed $2,000,000, or one month of the average capitation
receipts for the prior six months, until September 30, 2005. Beginning the
earlier of October 1, 2005 or when the term loan funds, the maximum overadvance
cannot exceed the lesser of $1,000,000 or one month of the average capitation
receipts for the prior six months. Also under the revolver, we would be entitled
to request that Wells Fargo Foothill issue guarantees of payment with respect to
letters of credit issued by an issuing bank in an aggregate amount not to exceed
$5,000,000 at any one time outstanding. At July 31, 2004, we had $11.9 million
of borrowings outstanding under the Wells Fargo Foothill line.
Advances outstanding under the revolver bear interest at the base rate
plus 1.5%, or the LIBOR rate plus 3.0%. Advances under the overadvance subline
and term loan bear interest at the base rate plus 4.75%. Letter of credit fees
bear interest of 3.0% per annum times the undrawn amount of all outstanding
lines of credit. The base rate refers to the rate of interest announced within
Wells Fargo Bank at its principal office in San Francisco as its prime rate. The
line is collateralized by substantially all of the Company's assets and requires
the Company to meet certain financial covenants including minimum levels of
EBITDA, net worth, fixed charge coverage ratios and maximum senior debt/EBITDA
as well as limitations on annual capital expenditures.
We also have a line of credit with an affiliate of DVI. At July 31,
2004, the Company had $3.9 million outstanding under this line. Interest on the
outstanding balance is payable monthly at our lender's prime rate plus 1.0%.
Future borrowings under this line of credit are no longer available and the
balance is being paid down by collections on historical accounts receivable and
variable monthly installment payments in the future including $200,000 paid on
September 2, 2004.
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,
2005 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.
13
In July 2004, we renegotiated our existing notes and capital lease
obligations with our three primary lenders, General Electric ("GE"), DVI
Financial Services and U.S. Bank extending terms and reducing monthly payments
on approximately $135 million of combined outstanding debt. Unfortunately, we
were not able to secure a discount on the outstanding DVI and U.S. Bank
obligations and did not obtain a gain on settlement as originally anticipated.
During the nine months ended July 31, 2004, interest and principal
payments were made on existing DVI and GE debt through July 31, 2004 reducing
the outstanding principal balance to $15.2 million and $54.3 million,
respectively, as of July 31, 2004.
DVI's restructured note payable is five payments of interest only from
July to September 2004 and November to December 2004 at 9%, 43 payments of
principal and interest of $273,988, and a final balloon payment of $7.4 million
on June 30, 2008 if and only if the Company's subordinated bond debentures, then
due, are not extended and paid in full. If the bond debenture payments are
deferred, the Company would continue to make monthly payments of $273,988 to DVI
for the next 29 months.
GE's restructured note payable is six payments of interest only at 9%,
or $407,210, beginning on August 1, 2004, 40 payments of principal and interest
at $1,127,067 beginning on February 1, 2005, and a final balloon payment of $21
million due on June 1, 2008 if and only if the Company's subordinated bond
debentures, then due, are not extended and paid in full. If the bond debenture
payments are deferred, the Company would continue to make monthly payments of
$1,127,067 to GE for the next 20 months.
During the nine months ended July 31, 2004, interest was accrued on the
outstanding obligations due U.S. Bank through July 31, 2004. U.S. Bank's
restructured note payable is six payments of interest only at 9%, or $491,933,
beginning on August 1, 2004, 40 payments of principal and interest of $1,055,301
beginning on February 1, 2005, and a final balloon payment of $39.7 million due
on June 1, 2008 if and only if theCompany's subordinated bond debentures, then
due, are not extended and paid in full. If the bond debenture payments are
deferred, the Company would continue to make monthly payments of $1,055,301 to
U.S. Bank for the next 44 months.
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.
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. 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 and
2005.
14
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
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 based upon historical Tower net revenue amounts. 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 JOINT VENTURE INTEREST--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 July 31, 2003 was $-0-. Net revenue and
net income for Westchester for the nine months ended July 31, 2003 was $2.3
million and $0.3 million, respectively.
FACILITY CLOSURES
In July 2003, we closed our La Habra facility. Net revenue and net loss
for La Habra for the three months ended July 31, 2003 was $82,000 and $46,000,
respectively. Net revenue and net loss for La Habra for the nine months ended
July 31, 2003 was $380,000 and $125,000, respectively.
In May 2004, we closed our North County facility and transferred the
remaining CT to Palm Desert (Indio). The Company recognized a loss of $79,000
for the net book value of leasehold improvements at the facility. Net revenue
and net income for the three months ended July 31, 2003 was $307,000 and
$27,000, respectively. There was no net revenue or net income for the three
months ended July 31, 2004. Net revenue and net income for the nine months ended
July 31, 2003 was $937,000 and $84,000, respectively. Net revenue and net loss
for the nine months ended July 31, 2004 was $49,000 and $122,000, respectively.
At various times, we 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 we may
end the arrangement, resulting in the subsequent closures of these smaller
satellite facilities.
15
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.
NINE MONTHS
ENDED JULY 31,
2004 2003
------- -------
NET
REVENUE 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 76.5 74.5
Depreciation and amortization 12.8 12.0
Provision for bad debts 3.8 5.7
------- -------
Total operating expenses 93.1 92.2
------- -------
INCOME FROM OPERATIONS 6.9 7.8
OTHER EXPENSE (INCOME)
Interest expense 12.7 12.9
Other income (0.1) (0.3)
Other expense 1.5 0.2
------- -------
Total other expense 14.1 12.8
------- -------
LOSS BEFORE MINORITY INTEREST AND DISCONTINUED OPERATION (7.2) (5.0)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (0.2) (0.0)
------- -------
LOSS FROM CONTINUING OPERATIONS (7.4) (5.0)
INCOME FROM DISCONTINUED OPERATION -- 3.0
------- -------
NET LOSS (7.4)% (2.0)%
------- -------
NINE MONTHS ENDED JULY 31, 2004 COMPARED TO NINE MONTHS ENDED JULY 31,
2003
During the last fiscal year and the first nine months of fiscal 2004,
we continued our efforts to enhance our operations and expand our network. Our
results for fiscal 2003 and the first nine 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.
During the year, we undertook a variety of approaches to refinance our
existing notes payable and capital lease obligations and improve our liquidity.
We were unsuccessful in our attempt to secure financing through a bond offering
and incurred additional costs of approximately $904,000 in legal, accounting and
outside rating agency fees. In addition, in the second and third quarters of
fiscal 2004, we worked with a variety of lenders in our attempt to refinance our
existing debt and potentially settle a portion of the outstanding balance at a
discount. This was done while simultaneously working with our existing lenders
extending monthly payments during the process. In the third quarter of fiscal
2004, we were not able to secure the external financing to take advantage of the
discount. During this period, we incurred outside service costs primarily
associated with the prospective lenders' due diligence of approximately
$539,000, and incurred additional interest charges with our existing lenders
during the process of approximately $554,000. These costs increased our net loss
by approximately $2.0 million for the nine months ended July 31, 2004.
As of July 31, 2004, we successfully completed our restructuring of our
outstanding notes payable and capital lease obligations with our three existing
lenders as evidenced by the improvement in working capital from a deficit of
$44.6 million at October 31, 2003 to a deficit of $26.8 million at July 31,
2004, a $17.8 million improvement. As part of the restructuring, we entered into
a new credit facility with Wells Fargo Foothill, Inc., superceding our prior
arrangement with GE, providing up to $23 million of potential borrowing
capacity.
16
Though we have significantly improved our liquidity with the
refinancing, we continue to experience net losses. We believe with our debt
structure solidified, management can now concentrate its efforts on improving
existing operations and profitability.
NET REVENUE. Net revenue from continuing operations for the nine months
ended July 31, 2004 was $103.8 million compared to $105.7 million for the same
period in fiscal 2003, a decrease of approximately $1.9 million, or 1.8%. The
net revenue decrease included $0.4 million which was attributable to the La
Habra facility which we closed in July 2003, and $0.9 million attributable to
the North County facility which we closed in May 2004. Net revenue, less
provision for bad debt, for the nine months ended July 31, 2004 and 2003 was
$99.8 million and $99.7 million, respectively.
The most significant increases and decreases in same store net revenue
when comparing the nine months ended July 31, 2004 to the same period in fiscal
2003 were at the following facilities:
NET REVENUE
SITE INCREASE (DECREASE)
---- -------------------
Vacaville 25%
Orange Imaging 22%
Ventura Coast 16%
Northridge 16%
Long Beach 15%
Lancaster / AVMRI (14%)
Tower (17%)
Modesto (23%)
San Gabriel (48%)
The combined increase in net revenue for the five sites, or groups of
sites, listed above was $4.6 million over last year's comparable period. The
majority of these increases were due to expansion, additions of satellite x-ray
facilities or improvements in capitation reimbursement and increases in
referrals or contracts. The combined decrease for the five sites, or groups of
sites, listed above was $5.7 million over last year's comparable 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.". The decrease in net revenue at
Lancaster and AVMRI was due to the termination of a capitation contract upon
renewal due to pricing which we believed not to be adequate. The decrease in net
revenue at Modesto and San Gabriel was due to increased competition and the
related decrease in referrals.
OPERATING EXPENSES. Operating expenses from continuing operations for
the nine months ended July 31, 2004 decreased approximately $763,000 from $97.4
million for the nine months ended July 31, 2003 to $96.7 million in the same
period of fiscal 2004. The decrease was offset by $1.2 million in operating
expenses related to the La Habra and North County closed facilities.
The following table sets forth our operating expenses from continuing
operations for the nine months ended July 31, 2004 and 2003 (dollars in
thousands):
NINE MONTHS ENDED
JULY 31,
2004 2003
-------- --------
Salaries and professional reading fees $48,639 $46,298
Building and equipment rental 5,849 7,040
General administrative expenses 24,913 25,382
Total operating expenses 79,401 78,720
-------- --------
Depreciation and amortization 13,295 12,701
Provision for bad debts 3,984 6,022
17
o SALARIES AND PROFESSIONAL READING FEES. Salaries and
professional reading fees expenses increased $1.8 million and
$0.5 million, respectively, from the nine months ended July
31, 2003 compared to the same period in fiscal 2004. At our
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 expense of $0.3 million from the
nine months ended July 31, 2003 compared to the same period in
fiscal 2004. The increase in salaries was primarily due to
hiring at facilities with increased patient volume, annual
raises and cost of living adjustments, and solidifying
staffing at a number of centers by retaining key
technologists, clinic personnel and managers. Late last year,
we also began hiring radiology physician assistants ("RPA's")
to help control professional reading fee expenditures and
reduce the physician's time performing nonmedical clerical
duties. In addition, at the Tower facilities, we incurred
decreases in professional fees due to the decrease in net
revenue and the early calendar 2004 hiring of its physician
staff. On the other hand, Tower employees, technologists and
related nonmedical personnel remained on payroll the entire
period while we reorganized the practice and began to rebuild
its business after the litigation.
o BUILDING AND EQUIPMENT RENTAL. Building and equipment rental
expenses decreased $1.2 million in the nine months ended July
31, 2004 compared to the same period in the prior year. The
decrease was primarily due to the conversion of GE equipment
operating leases effective November 1, 2003 which reduced
operating rental expense by approximately $1.2 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. These expenses decreased $0.5 million
in the nine months ended July 31, 2004 compared to the same
period in the prior year. The decrease was primarily due to
the decrease in net revenue.
o DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $0.6 million during the nine months ended July
31, 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 $2.0 million decrease in
provision for bad debts from the nine months ended July 31
2003 to the same period in fiscal 2004 was primarily a result
of decreased bad debt write-offs and increases in capitation
service revenue which does not require a bad debt provision.
Net revenue, less provision for bad debt, for the nine months
ended July 31, 2004 and 2003 was $99.8 million and $99.7
million, respectively.
INTEREST EXPENSE. Interest expense for the nine months ended July 31,
2004 decreased approximately $0.5 million, or 3.5%, from $13.6 million in fiscal
2003 to $13.1 million in fiscal 2004. The decrease was primarily due to the net
principal reduction in notes and capital leases over the two periods. At July
31, 2003, we had total notes and capital leases of approximately $152.7 million,
including lines of credit liabilities. At July 31, 2004, we had approximately
$150.3 million of notes and capital leases, which includes the recent conversion
of equipment operating leases into capital leases of approximately $6.0 million.
In the third quarter of fiscal 2004, we also incurred $0.6 million of additional
interest related to the debt refinancing.
OTHER INCOME. In the nine months ended July 31, 2004 and 2003, we
earned other income of $141,000 and $347,000, respectively, principally
comprised of professional reading income, sublease income, record copy income,
deferred rent income and other miscellaneous income.
18
OTHER EXPENSE. In the nine months ended July 31, 2004 and 2003, we
incurred other expense of $1,587,000 and $233,000, respectively. In fiscal 2004,
the increase in other expense was primarily due to approximately $0.9 million in
expenditures related to our attempt to solidify financing with a bond offering
that did not materialize, and $0.5 million in expenses related to prospective
external lenders due diligence and existing lenders' service costs during our
debt refinancing (see "Liquidity and Capital Resources"). In addition, we
expensed $64,000 of charges incurred with the conversion of operating leases
into capital leases in November 2003 and we expensed $79,000 to reserve for the
write-off of leasehold improvements at our North County facility. In fiscal
2003, the other expense was primarily due to the write-off of a receivable
related to our 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 the
nine months ended July 31, 2003. For the nine months ended July 31, 2004,
minority interest expense was $246,000. On August 26, 2004, we consummated an
agreement to pay the two radiologists at Rancho Bernardo Advanced LLC $0.2
million for their interests in the center with a down payment of $80,000 and
twelve monthly installments of $10,000 beginning on September 30, 2004. The
radiologists originally invested $250,000 in the center and Rancho Bernardo's
inception to date losses offset the investment in minority interest income
throughout the period.
DISCONTINUED OPERATION. The income from operations of Westchester was
$0.3 million for the nine months ended July 31, 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 nine months ended July 31, 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 JULY 31,
2004 2003
------- -------
NET REVENUE 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 79.8 72.7
Depreciation and amortization 13.1 11.6
Provision for bad debts 3.9 5.9
------- -------
Total operating expenses 96.8 90.2
------- -------
INCOME FROM OPERATIONS 3.2 9.8
OTHER EXPENSE (INCOME)
Interest expense 13.8 12.3
Other income (0.2) (0.3)
Other expense 2.2 0.0
------- -------
Total other expense 15.8 12.0
------- -------
LOSS BEFORE MINORITY INTEREST AND DISCONTINUED OPERATION (12.6) (2.2)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (0.7) 0.0
------- -------
LOSS FROM CONTINUING OPERATIONS (13.3) (2.2)
INCOME FROM DISCONTINUED OPERATION -- --
------- -------
NET LOSS (13.3)% (2.2)%
======= =======
19
THREE MONTHS ENDED JULY 31, 2004 COMPARED TO THREE MONTHS ENDED JULY 31, 2003
NET REVENUE. Net revenue from continuing operations for the three
months ended July 31, 2004 was $33.9 million compared to $36.3 million for the
same period in fiscal 2003, a decrease of approximately $2.4 million, or 6.7%.
The net revenue decrease included $0.1 million which was attributable to the La
Habra facility which we closed in July 2003, and $0.3 million attributable to
the North County facility which we closed in May 2004. Net revenue, less
provision for bad debt, for the three months ended July 31, 2004 and 2003 was
$32.6 million and $34.2 million, respectively.
The most significant increases and decreases in same store net revenue
when comparing the nine months ended July 31, 2004 to the same period in fiscal
2003 were at the following facilities:
NET REVENUE
SITE INCREASE (DECREASE)
---- -------------------
Orange Imaging 18%
Long Beach 15%
Vacaville 11%
Ventura Coast 10%
Tower (14%)
Modesto (30%)
Lancaster / AVMRI (52%)
San Gabriel (60%)
The combined increase in net revenue for the four sites, or groups of
sites, listed above was $1.1 million over last year's comparable period. The
majority of these increases were due to expansion, additions of satellite x-ray
facilities or improvements in capitation reimbursement and increases in
referrals or contracts. The combined decrease for the five sites, or groups of
sites, listed above was $2.6 million over last year's comparable 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.". The decrease in net revenue at
Modesto and San Gabriel was due to increased competition and the related
decrease in referrals. The decrease in net revenue at Lancaster and AVMRI was
due to the termination of a capitation contract upon renewal due to pricing
which we believed not to be adequate.
OPERATING EXPENSES. Operating expenses from continuing operations for
the three months ended July 31, 2004 increased approximately $33,000, or 0.1%,
compared to the same period in fiscal 2003. The $32.8 million in operating
expenses for the three months ended July 31, 2003 includes $0.4 million related
to the La Habra and North County closed facilities.
The following table sets forth our operating expenses from continuing
operations for the three months ended July 31, 2004 and 2003 (dollars in
thousands):
THREE MONTHS ENDED
JULY 31,
2004 2003
------- -------
Salaries and professional reading fees $16,689 $15,524
Building and equipment rental 1,923 2,353
General administrative expenses 8,427 8,535
------- -------
Total operating expenses 27,039 26,412
Depreciation and amortization 4,453 4,213
Provision for bad debts 1,328 2,162
20
o SALARIES AND PROFESSIONAL READING FEES. Salaries and
professional reading fees expenses increased $0.6 million and
$0.5 million, respectively, from the nine months ended July
31, 2003 compared to the same period in fiscal 2004. At our
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 expense of $0.1 million from the
three months ended July 31, 2003, compared to the same period
in fiscal 2004. In addition, we had our first full quarter of
Tower physicians on payroll. The increase in salaries was
primarily due to hiring at facilities with increased patient
volume, annual raises and cost of living adjustments, and
solidifying staffing at a number of centers by retaining key
technologists, clinic personnel and managers. Late last year,
we also began hiring radiology physician assistants ("RPA's")
to help control professional reading fee expenditures and
reduce the physician's time performing nonmedical clerical
duties.
o BUILDING AND EQUIPMENT RENTAL. Building and equipment rental
expenses decreased $0.4 million in the three months ended July
31, 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. These expenses decreased $0.1 million
in the three months ended July 31, 2004 compared to the same
period in the prior year. The decrease was primarily due to
the decrease in net revenue
o DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased by $0.2 million during the three months ended July
31, 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 $0.8 million decrease in
provision for bad debts from the three months ended July 31,
2003 compared to the same period in fiscal 2004 was primarily
a result of decreased bad debt write-offs and increases in
capitation service revenue which does not require a bad debt
provision. Net revenue, less provision for bad debt, for the
three months ended July 31, 2004 and 2003 was $32.6 million
and $34.2 million, respectively.
INTEREST EXPENSE. Interest expense for the three months ended July 31,
2004 increased approximately $0.2 million, or 5.1%, from $4.5 million in fiscal
2003 to $4.7 million in fiscal 2004. The increase was primarily due to $0.6
million of additional interest related to the debt refinancing offset by the net
principal reduction in notes and capital leases over the two periods.
OTHER INCOME. In the three months ended July 31, 2004 and 2003, we
earned other income of $70,000 and $116,000, 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 July 31, 2004 and 2003, we
incurred other expense of $741,000 and $3,000, respectively. The other expense
for the three months ended July 31, 2004 was primarily due to approximately $0.2
million in expenditures related to our attempt to solidify financing with a bond
offering that did not materialize, and $0.4 million in expenses related to
prospective external lenders due diligence and existing lenders' service costs
during our debt refinancing (see "Liquidity and Capital Resources"). In
addition, we reserved approximately $79,000 for the write-off of leasehold
improvements at our North County facility.
21
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 the
three months ended July 31 2003. For the three months ended July 31, 2004,
minority interest expense was $234,000. On August 26, 2004, we consummated an
agreement to pay the two radiologists at Rancho Bernardo Advanced LLC $0.2
million for their interests in the center with a down payment of $80,000 and
twelve monthly installments of $10,000 beginning on September 30, 2004. The
radiologists originally invested $250,000 in the center and Rancho Bernardo's
inception to date losses offset the investment in minority interest income
throughout the period.
SOURCES AND USES OF CASH
Cash increased for the nine months ended July 31, 2004 and 2003 by
$242,000 and $22,000, respectively.
Cash provided by operating activities for the nine months ended July
31, 2004 was $12.5 million compared to $15.4 million for the same period in
2003.
Cash used by investing activities for the nine months ended July 31,
2004 was $2.1 million compared to $1.1 million for the same period in 2003.
During the nine months ended July 31, 2004 and 2003, we purchased property and
equipment of $2.1 million and $2.5 million, respectively. During the nine months
ended July 31, 2004, we purchased additional shares of DIS common stock for
$35,000. During the nine months ended July 31, 2003, we received proceeds from
the sale of Westchester Imaging Group of $1.4 million.
Cash used for financing activities for the nine months ended July 31,
2004 was $10.1 million compared to $14.2 million for the same period in 2003.
For the nine months ended July 31, 2004 and 2003, we made principal payments on
capital leases and notes payable of approximately $12.0 million and $19.4
million, respectively, and received proceeds from borrowings under existing
lines of credit, new borrowings and refinancing arrangements of $0.9 million and
$5.4 million, respectively, and purchased subordinated bond debentures for
$48,000 and $3,000, respectively. During the nine months ended July 31, 2004, we
received proceeds from the issuance of a convertible subordinated note payable
of $1.0 million. During the nine months ended July 31, 2003, we made joint
venture distributions of $0.3 million and received proceeds from the issuance of
common stock of approximately $28,000.
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):
FOR THE TWELVE MONTHS ENDED JULY 31, There-
2005 2006 2007 2008 2009 After Total
--------- --------- --------- --------- --------- --------- ---------
Notes payable $ 12,136 $ 13,801 $ 13,797 $ 52,029 $ -- $ -- $ 91,763
Capital leases 11,280 15,970 15,680 40,662 -- -- 83,592
Lines of credit 15,791 -- -- -- -- -- 15,791
Subordinated debentures -- -- -- 16,162 -- -- 16,162
Operating leases (1) 7,301 6,412 5,551 4,203 3,365 12,093 38,925
Purchase obligations (2) 2,500 2,500 625 -- -- -- 5,625
Tower settlement 600 324 -- -- -- -- 924
--------- --------- --------- --------- --------- --------- ---------
Total (3) $ 49,608 $ 39,007 $ 35,653 $113,056 $ 3,365 $ 12,093 $252,782
(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.
22
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 greater 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 nine 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 receive
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
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.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 31.1 -- Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 -- 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
Exhibit 32.2 -- Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) On July 2, 2004, we filed on Form 8-K for an event on July 2, 2004,
disclosing under Item 9 an agreement in principle to restructure our
outstanding approximately $160 Million credit arrangements utilizing
our current lenders.
On August 3, 2004, we filed on Form 8-K for an event on August 2, 2004,
disclosing under Item 9 our entry into a restructuring arrangement for
our outstanding credit arrangements utilizing our current lenders and a
new credit facility with Wells Fargo Foothill, Inc. providing up to $23
Million of borrowing capacity.
24
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 thereto duly authorized.
PRIMEDEX HEALTH SYSTEMS, INC.
(Registrant)
September 10, 2004 By: /s/ HOWARD G. BERGER, M.D.
------------------------------------------
Howard G. Berger, M.D. Chairman, President
and Chief Executive Officer
September 10, 2004 By: /s/ MARK D. STOLPER
----------------------------------------
Mark D. Stolper, Chief Financial Officer
25