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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2004
Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 478-7808
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ~
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $12,647,303 on April 30, 2004
(the last business day of the registrant's most recently completed second
quarter) based on the closing price for the common stock on the Nasdaq
Over-the-Counter Bulletin Board on said date.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 [ ]
The number of shares of the registrant's common stock outstanding on January 19,
2005, was 41,106,813 shares (excluding treasury shares).
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PART I
ITEM 1. BUSINESS
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BUSINESS OVERVIEW
We operate a group of regional networks comprised of 56 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 three 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. Twenty
three of our facilities are single-modality sites, offering either X-ray or MRI.
Consistent with our regional network strategy, we locate our single-modality
facilities near multi-modality sites to help accommodate overflow in targeted
demographic areas.
At our facilities, we provide all of the equipment as well as all
non-medical operational, management, financial and administrative services
necessary to provide diagnostic imaging services. We give our facility managers
authority to run our facilities to meet the demands of local market conditions,
while our corporate structure provides economies of scale, corporate training
programs, standardized policies and procedures and sharing of best practices
across our networks. Each of our facility managers is responsible for meeting
our standards of patient service, managing relationships with local physicians
and payors and maintaining profitability.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 30% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
Beverly Radiology Medical Group III, or 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 the professional medical services at most of our
other facilities. We obtain professional medical services from BRMG, rather than
provide such services directly or through subsidiaries, in order to comply with
California's prohibition against the corporate practice of medicine. However, as
a result of our close relationship with Dr. Berger and BRMG, we believe that we
are able to better ensure that medical service is 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.
We derive substantially all of our revenue, directly or indirectly,
from fees charged for the diagnostic imaging services performed at our
facilities. For the year ended October 31, 2004, we performed 946,928 diagnostic
imaging scans and generated net revenue from continuing operations of $137.3
million.
The following table illustrates our work performed over the five-year period
ended October 31, 2004:
YEAR ENDED OCTOBER 31,
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2000 2001 2002 2003 2004
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Total number of MRI, CT and PET systems (at end of year)* 45 52 60 63 68
Total number of scans performed* 600,667 690,484 877,574 947,032 946,928
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* Excludes discontinued operation.
INDUSTRY OVERVIEW
Diagnostic imaging involves the use of non-invasive procedures to
generate representations of internal anatomy and function that can be recorded
on film or digitized for display on a video monitor. Diagnostic imaging
procedures facilitate the early diagnosis and treatment of diseases and
disorders and may reduce unnecessary invasive procedures, often minimizing the
cost and amount of care for patients. Diagnostic imaging procedures include MRI,
CT, PET, nuclear medicine, ultrasound, mammography, X-ray and fluoroscopy.
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While general X-ray remains the most commonly performed diagnostic
imaging procedure, the fastest growing and higher margin procedures are MRI, CT
and PET. The rapid growth in PET scans is attributable to the recent
introduction of reimbursement by payors of PET procedures. The number of MRI and
CT scans continues to grow due to their wider acceptance by physicians and
payors, an increasing number of applications for their use and a general
increase in demand due to the aging population in the United States.
IMV, a provider of database and market information products and services
to the analytical, clinical diagnostic, biotechnology, life science and medical
imaging industries, estimates that over 21.9 million MRI procedures and 45.4
million CT procedures were conducted in the United States in 2002, representing
a 22% and 15% increase over the 2001 volume of MRI and CT procedures,
respectively, and that approximately 9% of those MRI procedures and 8% of those
CT procedures were performed in California. IMV indicates that the number of MRI
procedures in the United States has increased at a rate of 12% per year since
1998. This data is particularly relevant to us, given that revenue from MRI and
CT scans constituted approximately 63% of our net revenue for the year ended
October 31, 2004.
INDUSTRY TRENDS
We believe that the diagnostic imaging services industry will continue to
grow as a result of a number of factors, including the following:
ESCALATING DEMAND FOR HEALTHCARE SERVICES FROM AN AGING POPULATION
Persons over the age of 65 comprise one of the fastest growing segments
of the population in the United States. According to the United States Census
Bureau, this group is expected to increase as much as 14% from 2000 to 2010.
Because diagnostic imaging use tends to increase as a person ages, we believe
the aging population will generate more demand for diagnostic imaging
procedures.
NEW EFFECTIVE APPLICATIONS FOR DIAGNOSTIC IMAGING TECHNOLOGY
New technological developments are expected to extend the clinical uses
of diagnostic imaging technology and increase the number of scans performed.
Recent technological advancements include:
o MRI spectroscopy, which can differentiate malignant from benign
lesions;
o MRI angiography, which can produce three-dimensional images of
body parts and assess the status of blood vessels;
o Enhancements in teleradiology systems, which permit the digital
transmission of radiological images from one location to another
for interpretation by radiologists at remote locations; and
o The development of combined PET/CT scanners, which combine the
technology from PET and CT to create a powerful diagnostic imaging
system.
Additional improvements in imaging technologies, contrast agents and scan
capabilities are leading to new non-invasive methods of diagnosing blockages in
the heart's vital coronary arteries, liver metastases, pelvic diseases and
vascular abnormalities without exploratory surgery. We believe that the use of
the diagnostic capabilities of MRI and other imaging services will continue to
increase because they are cost-effective, time-efficient and non-invasive, as
compared to alternative procedures, including surgery, and that newer
technologies and future technological advancements will continue the increased
use of imaging services. In addition, we believe the growing popularity of
elective full-body scans will further increase the use of imaging services. At
the same time, we believe the industry has increasingly used upgrades to
existing equipment to expand applications, extend the useful life of existing
equipment, improve image quality, reduce image acquisition time and increase the
volume of scans that can be performed. We believe this trend toward equipment
upgrades rather than equipment replacements will continue, as we do not foresee
new imaging technologies on the horizon that will displace MRI, CT or PET as the
principal advanced diagnostic imaging modalities.
WIDER PHYSICIAN AND PAYOR ACCEPTANCE OF THE USE OF IMAGING
During the last 30 years, there has been a major effort undertaken by the
medical and scientific communities to develop higher quality, cost-effective
diagnostic imaging technologies and to minimize the risks associated with the
application of these technologies. The thrust of product development during this
period has largely been to reduce the hazards associated with conventional X-ray
and nuclear medicine techniques and to develop new, harmless imaging
technologies. As a result, the use of advanced diagnostic imaging modalities,
such as MRI, CT and PET, which provide superior image quality compared to other
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diagnostic imaging technologies, has increased rapidly in recent years. These
advanced modalities allow physicians to diagnose a wide variety of diseases and
injuries quickly and accurately without exploratory surgery or other surgical or
invasive procedures, which are usually more expensive, involve greater risk to
patients and result in longer rehabilitation time. Because advanced imaging
systems are increasingly seen as a tool for reducing long-term healthcare costs,
they are gaining wider acceptance among payors.
GREATER CONSUMER AWARENESS OF AND DEMAND FOR PREVENTIVE DIAGNOSTIC
SCREENING
Diagnostic imaging is increasingly being used as a screening tool for
preventive care such as elective full-body scans. Consumer awareness of and
demand for diagnostic imaging as a less invasive and preventive screening method
has added to the growth in diagnostic imaging procedures. We believe that
further technological advancements will create demand for diagnostic imaging
procedures as less invasive procedures for early diagnosis of diseases and
disorders.
DIAGNOSTIC IMAGING SETTINGS
Diagnostic imaging services are typically provided in one of the
following settings:
FIXED-SITE, FREESTANDING OUTPATIENT DIAGNOSTIC FACILITIES
These facilities range from single-modality to multimodality facilities
and are not generally owned by hospitals or clinics. These facilities depend
upon physician referrals for their patients and generally do not maintain
dedicated, contractual relationships with hospitals or clinics. In fact, these
facilities may compete with hospitals or clinics that have their own imaging
systems to provide services to these patients. These facilities bill third-party
payors, such as managed care organizations, insurance companies, Medicare or
Medi-Cal. All of our facilities are in this category.
HOSPITALS OR CLINICS
Many hospitals provide both inpatient and outpatient diagnostic imaging
services, typically on site. These inpatient and outpatient centers are owned
and operated by the hospital or clinic or jointly by both and are primarily used
by patients of the hospital or clinic. The hospital or clinic bills third-party
payors, such as managed care organizations, insurance companies, Medicare or
Medi-Cal.
MOBILE FACILITIES
Using specially designed trailers, imaging service providers transport
imaging equipment and provide services to hospitals and clinics on a part-time
or full-time basis, thus allowing small to mid-size hospitals and clinics that
do not have the patient demand to justify an on-site setting access to advanced
diagnostic imaging technology. Diagnostic imaging providers contract directly
with the hospital or clinic and are typically reimbursed directly by them.
DIAGNOSTIC IMAGING MODALITIES
The principal diagnostic imaging modalities we use at our facilities are:
MRI
MRI has become widely accepted as the standard diagnostic tool for a wide
and fast-growing variety of clinical applications for soft tissue anatomy, such
as those found in the brain, spinal cord and interior ligaments of body joints
such as the knee. MRI uses a strong magnetic field in conjunction with low
energy electromagnetic waves that are processed by a computer to produce
high-resolution, three-dimensional, cross-sectional images of body tissue,
including the brain, spine, abdomen, heart and extremities. A typical MRI
examination takes from 20 to 45 minutes. MRI systems can have either open or
closed designs, routinely have magnetic field strength of 0.2 Tesla to 3.0 Tesla
and are priced in the range of $0.6 million to $2.5 million.
CT
CT provides higher resolution images than conventional X-rays, but
generally not as well-defined as those produced by MRI. CT uses a computer to
direct the movement of an X-ray tube to produce multiple cross-sectional images
of a particular organ or area of the body. CT is used to detect tumors and other
conditions affecting bones and internal organs. It is also used to detect the
occurrence of strokes, hemorrhages and infections. A typical CT examination
takes from 15 to 45 minutes. CT systems are priced in the range of $0.3 million
to $1.2 million.
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PET
PET scanning involves the administration of a radiopharmaceutical agent
with a positron-emitting isotope and the measurement of the distribution of that
isotope to create images for diagnostic purposes. PET scans provide the
capability to determine how metabolic activity impacts other aspects of
physiology in the disease process by correlating the reading for the PET with
other tools such as CT or MRI. PET technology has been found highly effective
and appropriate in certain clinical circumstances for the detection and
assessment of tumors throughout the body, the evaluation of some cardiac
conditions and the assessment of epilepsy seizure sites. The information
provided by PET technology often obviates the need to perform further highly
invasive or diagnostic surgical procedures. PET systems are priced in the range
of $0.8 million to $2.5 million. We provide PET-only services through the rental
of mobile equipment at a few of our sites. Combined PET/CT systems, which we
offer, blend the PET and CT imaging modalities into one scanner. These combined
systems are priced in the range of $1.8 million to $2.2 million.
NUCLEAR MEDICINE
Nuclear medicine uses short-lived radioactive isotopes that release small
amounts of radiation that can be recorded by a gamma camera and processed by a
computer to produce an image of various anatomical structures or to assess the
function of various organs such as the heart, kidneys, thyroid and bones.
Nuclear medicine is used primarily to study anatomic and metabolic functions.
Nuclear medicine systems are priced in the range of $300,000 to $400,000.
X-RAY
X-rays use roentgen rays to penetrate the body and record images of
organs and structures on film. Digital X-ray systems add computer image
processing capability to traditional X-ray images, which provides faster
transmission of images with a higher resolution and the capability to store
images more cost-effectively. X-ray systems are priced in the range of $50,000
to $250,000.
ULTRASOUND
Ultrasound imaging uses sound waves and their echoes to visualize and
locate internal organs. It is particularly useful in viewing soft tissues that
do not X-ray well. Ultrasound is used in pregnancy to avoid X-ray exposure as
well as in gynecological, urologic, vascular, cardiac and breast applications.
Ultrasound systems are priced in the range of $90,000 to $250,000.
MAMMOGRAPHY
Mammography is a specialized form of radiology using low dosage X-rays to
visualize breast tissue and is the primary screening tool for breast cancer.
Mammography procedures and related services assist in the diagnosis of and
treatment planning for breast cancer. Mammography systems are priced in the
range of $70,000 to $100,000.
FLUOROSCOPY
Fluoroscopy uses ionizing radiation combined with a video viewing system
for real time monitoring of organs. Fluoroscopy systems are priced in the range
of $100,000 to $300,000.
COMPETITIVE STRENGTHS
SIGNIFICANT AND KNOWLEDGEABLE PARTICIPANT IN THE NATION'S LARGEST ECONOMY
We believe our group of regional networks of fixed-site, freestanding
outpatient diagnostic imaging facilities is the largest of its kind in
California, the nation's largest economy and most populous state. Our two
decades of experience in operating diagnostic imaging facilities in almost every
major population center in California gives us intimate, first-hand knowledge of
these geographic markets, as well as close, long-term relationships with key
payors, radiology groups and referring physicians within these markets.
ADVANTAGES OF REGIONAL NETWORKS WITH BROAD GEOGRAPHIC COVERAGE
The organization of our diagnostic imaging facilities into regional
networks around major population centers offers unique benefits to our patients,
our referring physicians, our payors and us.
o We are able to increase the convenience of our services to
patients by implementing scheduling systems within geographic
regions, where practical. For example, many of our diagnostic
imaging facilities within a particular region can access the
patient appointment calendars of other facilities within the same
regional network to efficiently allocate time available and to
meet a patient's appointment, date, time or location preferences.
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o We have found that many third-party payors representing large
groups of patients often prefer to enter into managed care
contracts with providers that offer a broad array of diagnostic
imaging services at convenient locations throughout a geographic
area. We believe that our regional network approach and our
utilization management system make us an attractive candidate for
selection as a preferred provider for these third-party payors.
o Through our advanced information technology systems, we can
electronically exchange information between radiologists in real
time, enabling us to cover larger geographic markets by using the
specialized training of other practitioners in our networks. In
addition, many of our facilities digitally transmit to our
headquarters, on a daily basis, comprehensive data concerning the
diagnostic imaging services performed, which our corporate
management closely monitors to evaluate each facility's
efficiency. Similarly, BRMG uses our advanced information
technology system to closely monitor radiologists to ensure that
they consistently perform at expected levels.
o The grouping of our facilities within regional networks enables us
to easily move technologists and other personnel, as well as
equipment, from under-utilized to over-utilized facilities on an
as-needed basis. This results in operating efficiencies and better
equipment utilization rates and improved response time for our
patients.
COMPREHENSIVE DIAGNOSTIC IMAGING SERVICES
At each of our multi-modality facilities, we offer patients and referring
physicians one location to serve their needs for multiple procedures.
Furthermore, we have complemented many of our multi-modality sites with
single-modality sites to accommodate overflow and to provide a full range of
services within a local area consistent with demand. This can help patients
avoid multiple visits or lengthy journeys between facilities, thereby decreasing
costs and time delays.
STRONG RELATIONSHIPS WITH EXPERIENCED AND HIGHLY REGARDED RADIOLOGISTS
Our contracted radiologists generally have outstanding credentials and
reputations, strong relationships with referring physicians, a broad mix of
sub-specialties and a willingness to embrace our approach for the delivery of
diagnostic imaging services. The collective experience and expertise of these
radiologists translates into more accurate and efficient service to patients.
Moreover, as a result of our close relationship with Dr. Berger and BRMG, we
believe that we are able to better ensure that medical service is 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 practice groups. We believe that physicians are drawn
to BRMG and the other radiologist groups with whom we contract by the
opportunity to work with the state-of-the-art equipment we make available to
them, as well as the opportunity to receive specialized training through our
fellowship programs, and engage in clinical research programs, which generally
are available only in university settings and major hospitals. Also, through the
use of options and warrants, we have made available to many of BRMG's key
physicians the opportunity to own an equity stake in our company, which we
believe further strengthens the commonality of their interests with ours.
DIVERSIFIED PAYOR MIX
Our revenue is derived from a diverse mix of payors, including private
payors, managed care capitated payors and government payors. We believe our
payor diversity mitigates our exposure to possible unfavorable reimbursement
trends within any one payor class. In addition, our experience with capitation
arrangements over the last several years has provided us with the expertise to
manage utilization and pricing effectively, resulting in a predictable stream of
profitable revenue. 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
year ended October 31, 2004.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM
Dr. Howard Berger, Norman Hames, our Chief Operating Officer, and Dr.
John Crues III, a Vice President of our company, together have close to 75 years
of healthcare management experience. Our executive management team has created
our differentiated approach based on their comprehensive understanding of the
diagnostic imaging industry and the dynamics of our regional markets. Our
management beneficially owns approximately 32% of our common stock.
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BUSINESS STRATEGY
MAXIMIZING PERFORMANCE AT OUR EXISTING FACILITIES
We intend to enhance our operations and increase scan volume and revenue
at our existing facilities by:
o Establishing new referring physician and payor relationships;
o Increasing patient referrals through targeted marketing efforts to
referring physicians;
o Adding modalities and increasing imaging capacity through
equipment upgrades to existing machinery, additional machinery and
relocating machinery to meet the needs of our regional markets;
o Leveraging our multi-modality offerings to increase the number of
high-end procedures performed; and
o Building upon our capitation arrangements to obtain
fee-for-service business.
FOCUSING ON PROFITABLE CONTRACTING
We regularly evaluate our contracts with third-party payors and radiology
groups, as well as our equipment and real property leases, to determine how we
may improve the terms to increase our revenues and reduce our expenses. Because
many of our contracts have one-year terms, we can regularly renegotiate these
contracts, if necessary. We believe our position as a leading provider of
diagnostic imaging services in California, our experience and knowledge of the
various geographic markets in California, and the benefits offered by our
regional networks enable us to obtain more favorable contract terms than would
be available to smaller or less experienced organizations.
EXPANDING MRI AND CT APPLICATIONS
We intend to continue to use expanding MRI and CT applications as they
become commercially available. Most of these applications can be performed by
existing MRI and CT systems with upgraded software and hardware enhancements. By
way of example, in January 2005, we placed into service a new piece of equipment
which functions in conjunction with the MRI and utilizes focused ultrasound as a
completely non-invasive procedure to treat symptomatic uterine fibroids. The
equipment costing $750,000 received FDA approval in late October 2004 and we are
the first organization in the Western United States to acquire the equipment. We
also intend to introduce applications that will decrease scan and image-reading
time to increase our productivity.
OPTIMIZING OPERATING EFFICIENCIES
We intend to maximize our equipment utilization by adding, upgrading and
re-deploying equipment where we experience excess demand. We will continue to
trim excess operating and general and administrative costs where it is feasible
to do so, including consolidating, divesting or closing underperforming
facilities to reduce operating costs and improve operating income. We also may
continue to use, where appropriate, highly-trained radiology physician
assistants to perform, under appropriate supervision of radiologists, basic
services traditionally performed by radiologists. We will continue to upgrade
our advanced information technology system to create cost reductions for our
facilities in areas such as image storage, support personnel and financial
management.
EXPANDING OUR NETWORKS
We intend to expand our networks of facilities through new developments
and acquisitions, using a disciplined approach for evaluating and entering new
areas, including consideration of whether we have adequate financial resources
to expand. We perform extensive due diligence before developing a new facility
or acquiring an existing facility, including surveying local referral sources
and radiologists, as well as examining the demographics, reimbursement
environment, competitive landscape and intrinsic demand of the geographic
market. We generally will only enter new markets where:
o There is sufficient patient demand for outpatient diagnostic
imaging services;
o We believe we can gain significant market share;
o We can build key referral relationships or we have already
established such relationships; and
o Payors are receptive to our entry into the market.
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OUR SERVICES
We offer the following services: MRI, CT, PET, nuclear medicine, X-ray,
ultrasound, mammography and fluoroscopy. Our facilities provide standardized
services, regardless of location, to ensure patients, physicians and payors
consistency in service and quality. We monitor our level of service, including
patient satisfaction, timeliness of services to patients and reports to
physicians.
The key features of our services include:
o Patient-friendly, non-clinical environments;
o A 24-hour turnaround on routine examinations;
o Interpretations within one to two hours, if needed;
o Flexible patient scheduling, including same-day appointments;
o Extended operating hours, including weekends;
o Reports delivered via courier, fax or email;
o Availability of second opinions and consultations;
o Availability of sub-specialty interpretations at no additional
charge;
o Standardized fee schedules by region; and
o Fees that are more competitive than hospital fees.
RADIOLOGY PROFESSIONALS
In California, a lay person or any entity other than a professional
corporation is not allowed to practice medicine, including by employing
professional persons or by having any ownership interest or profit participation
in or control over any medical professional practice. This doctrine is commonly
referred to as the prohibition on the "corporate practice" of medicine. In order
to comply with this prohibition, we contract, directly or through BRMG, with
radiologists to provide professional medical services in our facilities,
including the supervision and interpretation of diagnostic imaging procedures.
The radiology practice maintains full control over the physicians it employs.
Pursuant to each management contract, we make available the imaging facility and
all of the furniture and medical equipment at the facility for use by the
radiology practice, and the practice is responsible for staffing the facility
with qualified professional medical personnel. In addition, we provide
management services and administration of the non-medical functions relating to
the professional medical practice at the facility, including among other
functions, provision of clerical and administrative personnel, bookkeeping and
accounting services, billing and collection, provision of medical and office
supplies, secretarial, reception and transcription services, maintenance of
medical records, and advertising, marketing and promotional activities. As
compensation for the services furnished under contracts with radiologists, we
generally receive an agreed percentage of the medical practice billings for, or
collections from, services provided at the facility, typically varying between
74% to 84% of net revenue or collections.
At 42 of our facilities, BRMG is our contracted radiology group. At
October 31, 2004, BRMG employed approximately 53 fulltime and 8 part-time
radiologists. At the balance of our facilities we contract, directly or through
BRMG, with other radiology groups to provide the professional medical services.
Two imaging facilities previously owned by Burbank Advanced Imaging Center LLC
and Rancho Bernardo Advanced Imaging Center LLC were charged a fee, for our
services as manager of the limited liability companies, of 10% of the collected
revenue of each company after deduction of the professional fees. In addition,
as a member owning 75% of the equity interests of those limited liability
companies, we were entitled to 75% of income after a deduction of all expenses,
including amounts paid for medical services and medical supervision. In the
fourth quarter of fiscal 2004, we purchased the interest we did not own in both
centers.
Under our management agreement with BRMG, 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 is adjusted annually to ensure that the parties receive the fair
value for the services they render.
The following are the other principal terms of our management agreement with
BRMG:
o The agreement expires on January 1, 2014. However, the agreement
automatically renews for consecutive 10-year periods, unless
either party delivers a notice of non-renewal to the other party
no later than six months prior to the scheduled expiration date.
In addition, either party may terminate the agreement if the other
party defaults under its obligations, after notice and an
opportunity to cure, and we may terminate the agreement if Dr.
Berger no longer owns at least 60% of the equity of BRMG.
o At its expense, BRMG employs or contracts with an adequate number
of physicians necessary to provide all professional medical
services at all of our facilities.
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o At our expense, we provide all furniture, furnishings and medical
equipment located at the facilities and we manage and administer
all non-medical functions at, and provide all nurses and other
non-physician personnel required for the operation of, the
facilities.
o If BRMG wants to open a new facility, we have the right of first
refusal to provide the space and services for the facility under
the same terms and conditions set forth in the management
agreement.
o If we want to open a new facility, BRMG must use its best efforts
to provide medical personnel under the same terms and conditions
set forth in the management agreement. If BRMG cannot provide such
personnel, we have the right to contract with other physicians to
provide services at the facility.
o BRMG must maintain medical malpractice insurance for each of its
physicians with coverage limits not less than $1 million per
incident and $3 million in the aggregate per year. BRMG also has
agreed to indemnify us for any losses we suffer that arise out of
the acts or omissions of BRMG and its employees, contractors and
agents.
PAYORS
We derive substantially all of our revenue, directly or indirectly, from
fees charged for the diagnostic imaging services performed at our facilities.
These fees are paid by a diverse mix of payors, as illustrated for the year
ended October 31, 2004 by the following table:
PERCENTAGE OF
PAYOR TYPE NET REVENUE
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Insurance(1) 40%
Managed Care Capitated Payors 25%
Medicare/Medi-Cal 16%
Other(2) 14%
Workers Compensation/Personal Injury 5%
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(1) Includes Blue Cross/Blue Shield, which represented 13% of our net revenue
for the year ended October 31, 2004.
(2) Includes co-payments, direct patient payments and payments through
contracts with physician groups and other non-insurance company payors.
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 year ended
October 31, 2004.
We have described below the types of reimbursement arrangements we have,
directly or indirectly, including through BRMG, with third-party payors.
INSURANCE
Generally, insurance companies reimburse us, directly or indirectly,
including through BRMG, on the basis of agreed upon rates. These rates are on
average approximately the same as the rates set forth in the Medicare Fee
Schedule for the particular service. The patients are generally not responsible
for any amount above the insurance allowable amount.
MANAGED CARE CAPITATION AGREEMENTS
Under these agreements, which are generally between BRMG and the payor,
typically an independent physicians group or other medical group, the payor pays
a pre-determined amount per-member per-month in exchange for BRMG providing all
necessary covered services to the managed care members included in the
agreement. These contracts pass much of the financial risk of providing
outpatient diagnostic imaging services, including the risk of over-use, from the
payor to BRMG and, as a result of our management agreement with BRMG, to us.
We believe that through our comprehensive utilization management, or UM,
program we have become highly skilled at assessing and moderating the risks
associated with the capitation agreements, so that these agreements are
profitable for us. Our UM program is managed by our UM department, which
consists of administrative and nursing staff as well as BRMG medical staff who
are actively involved with the referring physicians and payor management in both
prospective and retrospective review programs. Our UM program includes the
following features, all of which are designed to manage our costs while ensuring
that patients receive appropriate care:
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o PHYSICIAN EDUCATION
At the inception of a new capitation agreement, we provide the new
referring physicians with binders of educational material comprised of
proprietary information that we have prepared and third-party information
we have compiled, which are designed to address diagnostic strategies for
common diseases. We distribute additional material according to the
referral practices of the group as determined in the retrospective
analysis described below.
o PROSPECTIVE REVIEW
Referring physicians are required to submit authorization requests
for non-emergency high-intensity services: MRI, CT, special procedures
and nuclear medicine studies. The UM medical staff, according to accepted
practice guidelines, considers the necessity and appropriateness of each
request. Notification is then sent to the imaging facility, referring
physician and medical group. Appeals for cases not approved are directed
to us. The capitated payor has the final authority to uphold or deny our
recommendation.
o RETROSPECTIVE REVIEW
We collect and sort encounter activity by payor, place of service,
referring physician, exam type and date of service. The data is then
presented in quantitative and analytical form to facilitate understanding
of utilization activity and to provide a comparison between
fee-for-service and Medicare equivalents. Our Medical Director prepares a
quarterly report for each payor and referring physician, which we send to
them. When we find that a referring physician is overutilizing services,
we work with the physician to modify referral patterns.
MEDICARE/MEDI-CAL
Medicare is the national health insurance program for people age 65 or
older and people under age 65 with certain disabilities. Medi-Cal is the
California health insurance program for qualifying low income persons. Medicare
and Medi-Cal reimburse us, directly or indirectly, including through BRMG, in
accordance with the Medicare Fee Schedule, which is a schedule of rates
applicable to particular services and annually adjusted upwards or downwards,
typically, within a 4-8% range. Medicare patients are not responsible for any
amount above the Medicare allowable amount. Medi-Cal patients are not
responsible for any unreimbursed portion.
CONTRACTS WITH PHYSICIAN GROUPS AND OTHER NON-INSURANCE COMPANY PAYORS
These payors reimburse us, directly or indirectly, on the basis of agreed
upon rates. These rates are typically set at 70-80% of the rates set forth in
the Medicare Fee Schedule for the particular service. However, we often agree to
a specified rate for MRI and CT procedures which is not tied to the Medicare Fee
Schedule. The patients are generally not responsible for the unreimbursed
portion.
FACILITIES
Through our wholly owned subsidiaries, we operate 56 fixed-site,
freestanding outpatient diagnostic imaging facilities in California. We lease
the premises at which these facilities are located, with the exception of two
facilities located in buildings we own. We lease the land on which both of those
buildings are located.
Our facilities are located in regional networks that we refer to as
regions. Thirty three of our facilities are multi-modality sites, offering
various combinations of MRI, CT, PET, nuclear medicine, ultrasound, 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.
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The following table sets forth the number of our facilities for each year during
the five-year period ended October 31, 2004:
YEAR ENDED OCTOBER 31,
-------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Total facilities owned or managed (at beginning of year) 37 42 46 58 55
Facilities added by:
Acquisition 5 3 1 -- --
Internal development 1 4 11 3 4
Facilities closed or sold (1) (3) -- (6) (3)
Total facilities owned (at end of year) 42 46 58 55 56
DIAGNOSTIC IMAGING EQUIPMENT
The following table indicates as of December 31, 2004, the quantity of
principal diagnostic equipment available at our facilities, by region:
MRI OPEN CT PET/CT MAMMO- ULTRA- X-RAY NUCLEAR TOTAL
MRI GRAPHY SOUND MEDICINE
--- ---- ---- ------ ------ ------ ----- -------- -----
Tower 3 1 2 1 3 6 5 2 23
Ventura 2 1 2 1 5 8 14 2 35
San Fernando Valley 4 3 3 1 2 6 7 1 27
Antelope Valley 1 1 1 -- 1 1 2 1 8
Central California 3 3 5 -- 5 11 12 2 41
Northern California 1 2 2 -- -- -- 1 -- 6
Orange 2 1 1 1 3 6 4 1 19
Long Beach 1 -- 1 -- 3 4 7 1 17
Northern San Diego -- 1 1 -- -- -- 1 -- 3
Palm Springs 1 1 2 -- 2 4 7 1 18
Inland Empire 6 1 4 1 7 8 13 2 42
Total 24 15 24 5 31 54 73 13 239
The average age of our MRI and CT units is less than five years, and the
average age of our PET units is less than two years. The useful life of our MRI,
CT and PET units is typically ten years.
INFORMATION TECHNOLOGY
Our corporate headquarters and substantially all of our 56 facilities are
interconnected through a state-of-the-art information technology system. This
system, which is compliant with the Health Insurance Portability and
Accountability Act of 1996, is comprised of a number of integrated applications,
provides a single operating platform for billing and collections, electronic
medical records, practice management and image management.
This technology has created cost reductions for our facilities in areas
such as image storage, support personnel and financial management and has
further allowed us to optimize the productivity of all aspects of our business
by enabling us to:
o Capture all necessary patient demographic, history and billing
information at point-of-service;
o Automatically generate bills and electronically file claims with
third-party payors;
o Record and store diagnostic report images in digital format;
o Digitally transmit on a real time basis diagnostic images from one
location to another, thus enabling networked radiologists to cover
larger geographic markets by using the specialized training of
other networked radiologists;
o Perform claims, rejection and collection analysis; and
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o Perform sophisticated financial analysis, such as analyzing cost
and profitability, volume, charges, current activity and patient
case mix with respect to each of our managed care contracts.
Currently diagnostic reports and images are accessible via the Internet
to our referring providers. We have worked with some of the larger medical
groups with whom we have contracts to provide access to this content via their
web portals.
PERSONNEL
At October 31, 2004, we had a total of 610 full-time, 54 part-time and
118 per-diem employees. These numbers do not include the 53 full-time and 6
part-time radiologists or the 248 full-time and 53 part-time technologists and
191 per-diem technologists.
We employ a site manager who is responsible for overseeing day-to-day and
routine operations at each of our facilities, including staffing, modality and
schedule coordination, referring physician and patient relations and purchasing
of materials. In turn, our 8 regional managers and directors are responsible for
oversight of the operations of all facilities within their region, including
sales, marketing and contracting. The regional managers and directors, along
with our directors of contracting, marketing, facilities, management/purchasing
and human resources report to our chief operating officer. Our chief financial
officer, director of information services and our medical director report to our
chief executive officer.
None of our employees is subject to a collective bargaining agreement nor
have we experienced any work stoppages. We believe our relationship with our
employees is good.
MARKETING
Our marketing team, which consists of one director of marketing, five
territory sales managers and eighteen customer service representatives, three of
whom are part-time, employs a multi-pronged approach to marketing:
PHYSICIAN MARKETING
Each customer service representative is responsible for marketing
activity on behalf of one or more facilities. The representatives act as a
liaison between the facility and referring physicians, holding meetings
periodically and on an as-needed basis with them and their staff to present
educational programs on new applications and uses of our systems and to address
particular patient service issues that have arisen. In our experience,
consistent hands-on contact with a referring physician and his or her staff
generates goodwill and increases referrals. The representatives also continually
seek to establish referral relationships with new physicians and physician
groups. In addition to a base salary and a car allowance, each representative
receives a quarterly bonus if the facility or facilities on behalf of which he
or she markets meets specified net revenue goals for the quarter.
PAYOR MARKETING
Our marketing team regularly meets with managed care organizations and
insurance companies to solicit contracts and meet with existing contracting
payors to solidify those relationships. The comprehensiveness of our services,
the geographic location of our facilities and the reputation of the physicians
with whom we contract all serve as tools for obtaining new or repeat business
from payors.
SPORTS MARKETING PROGRAM
We employ a sports marketing program designed to increase our public
profile. We provide X-ray equipment and a technician for all of the games of the
Lakers, Clippers, Kings, Avengers and Sparks held at the Staples Center in Los
Angeles, Mighty Ducks games held at the Arrowhead Pond in Anaheim, and
University of Southern California football games held in Los Angeles. In
exchange for this service, we receive an advertisement in each team program
throughout the season. In addition, we have a close relationship with the
physicians for some of these teams.
SUPPLIERS
Historically, we have acquired almost all of our diagnostic imaging
equipment from GE Medical Systems, Inc., and we purchase medical supplies from
various national vendors. We believe that we have excellent working
relationships with all of our major vendors. However, there are several
comparable vendors for our supplies that would be available to us if one of our
current vendors becomes unavailable.
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We acquire our equipment primarily through various financing arrangements
directly with an affiliate of General Electric Corporation, or GE, involving the
use of capital leases with purchase options at minimal prices at the end of the
lease term. At October 31, 2004, capital lease obligations totaled approximately
$67.4 million through 2009, including current installments totaling
approximately $8.8 million. During fiscal 2004, we converted some of our
operating leases into capital leases of approximately $6.2 million. If we open
or acquire additional imaging facilities, we may have to incur material capital
lease obligations.
Timely, effective maintenance is essential for achieving high utilization
rates of our imaging equipment. We maintain an agreement with GE Medical Systems
under which it has agreed to be responsible for the maintenance and repair of a
majority of our equipment for a fee that is based upon a percentage of our
revenue, subject to a minimum payment. The fiscal 2004 and 2005 annual service
fee is currently the higher of 3.74% of our net revenue (less provisions for bad
debt) or approximately $4.7 million. This agreement terminates on October 31,
2005 and may be terminated earlier under specified circumstances. 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.
COMPETITION
The market for diagnostic imaging services in California is highly
competitive. We compete principally on the basis of our reputation, our ability
to provide multiple modalities at many of our facilities, the location of our
facilities and the quality of our diagnostic imaging services. We compete
locally with groups of radiologists, established hospitals, clinics and other
independent organizations that own and operate imaging equipment. Our major
national competitors include Radiologix, Inc., Alliance Imaging, Inc.,
Healthsouth Corporation and Insight Health Services. Some of our competitors may
now or in the future have access to greater financial resources than we do and
may have access to newer, more advanced equipment.
In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging facilities because of
the federal physician self-referral legislation. Final regulations issued in
January 2001 clarify exceptions to the physician self-referral legislation,
which created opportunities for some physician practices to establish their own
diagnostic imaging facilities within their group practices and to compete with
us. In the future, we could experience significant competition as a result of
those final regulations.
INSURANCE
We maintain insurance policies with coverage that we believe are
appropriate in light of the risks attendant to our business and consistent with
industry practice. However, adequate liability insurance may not be available to
us in the future at acceptable costs or at all. We maintain general liability
insurance and professional liability insurance in commercially reasonable
amounts. Additionally, we maintain workers' compensation insurance on all of our
employees. Coverage is placed on a statutory basis and responds to California's
requirements.
Pursuant to our agreements with physician groups with whom we contract,
including BRMG, each group must maintain medical malpractice insurance for the
group, having coverage limits of not less than $1.0 million per incident and
$3.0 million in the aggregate per year.
California's medical malpractice cap further reduces our exposure.
California places a $250,000 limit on non-economic damages for medical
malpractice cases. Non-economic damages are defined as compensation for pain,
suffering, inconvenience, physical impairment, disfigurement and other
non-pecuniary injury. The cap applies whether the case is for injury or death,
and it allows only one $250,000 recovery in a wrongful death case. No cap
applies to economic damages.
We maintain a $5.0 million key-man life insurance policy on the life of
Dr. Berger. We are the beneficiary under the policy.
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REGULATION
GENERAL
The healthcare industry is highly regulated, and we can give no assurance
that the regulatory environment in which we operate will not change
significantly in the future. Our ability to operate profitably will depend in
part upon us, and the contracted radiology practices and their affiliated
physicians obtaining and maintaining all necessary licenses and other approvals,
and operating in compliance with applicable healthcare regulations. We believe
that healthcare regulations will continue to change. Therefore, we monitor
developments in healthcare law and modify our operations from time to time as
the business and regulatory environment changes. Although we intend to continue
to operate in compliance, we cannot ensure that we will be able to adequately
modify our operations so as to address changes in the regulatory environment.
LICENSING AND CERTIFICATION LAWS
Ownership, construction, operation, expansion and acquisition of
diagnostic imaging facilities are subject to various federal and state laws,
regulations and approvals concerning licensing of facilities and personnel. In
addition, free-standing diagnostic imaging facilities that provide services not
performed as part of a physician office must meet Medicare requirements to be
certified as an independent diagnostic testing facility to bill the Medicare
program. We may not be able to receive the required regulatory approvals for any
future acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services.
CORPORATE PRACTICE OF MEDICINE
In California, a lay person or any entity other than a professional
corporation is not allowed to practice medicine, including by employing
professional persons or by having any ownership interest or profit participation
in or control over any medical professional practice. The laws of the State of
California also prohibit a lay person or a non-professional entity from
exercising control over the medical judgments or decisions of physicians and
from engaging in certain financial arrangements, such as splitting professional
fees with physicians. We structure our relationships with the radiology
practices, including the purchase of diagnostic imaging facilities, in a manner
that we believe keeps us from engaging in the practice of medicine or exercising
control over the medical judgments or decisions of the radiology practices or
their physicians or violating the prohibitions against fee-splitting. However,
because challenges to these types of arrangements are not required to be
reported, we cannot substantiate our belief. There can be no assurance that our
present arrangements with BRMG or the physicians providing medical services and
medical supervision at our imaging facilities will not be challenged, and, if
challenged, that they will not be found to violate the corporate practice
prohibition, thus subjecting us to a potential combination of damages,
injunction and civil and criminal penalties or require us to restructure our
arrangements in a way that would affect the control or quality of our services
or change the amounts we receive under our management agreements, or both.
MEDICARE AND MEDICAID FRAUD AND ABUSE
Our revenue is derived through our ownership, operation and management of
diagnostic imaging centers and from service fees paid to us by contracted
radiology practices. During the year ended October 31, 2004, approximately 16%
of our revenue generated at our diagnostic imaging centers was derived from
government sponsored healthcare programs (principally Medicare and Medicaid).
Federal law prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or to induce, (i) the
referral of a person, (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under the Medicare, Medicaid or other
governmental programs or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service reimbursable
under the Medicare, Medicaid or other governmental programs. Enforcement of this
anti-kickback law is a high priority for the federal government, which has
substantially increased enforcement resources and is scheduled to continue
increasing such resources. The applicability of the anti-kickback law to many
business transactions in the healthcare industry has not yet been subject to
judicial or regulatory interpretation. Noncompliance with the federal
anti-kickback legislation can result in exclusion from the Medicare, Medicaid or
other governmental programs and civil and criminal penalties.
We receive fees under our service agreements for management and
administrative services, which include contract negotiation and marketing
services. We do not believe we are in a position to make or influence referrals
of patients or services reimbursed under Medicare or other governmental programs
to radiology practices or their affiliated physicians or to receive referrals.
However, we may be considered to be in a position to arrange for items or
services reimbursable under a federal healthcare program. Because the provisions
of the federal anti-kickback statute are broadly worded and have been broadly
interpreted by federal courts, it is possible that the government could take the
position that our arrangements with the contracted radiology practices implicate
the federal anti-kickback statute. Violation of the law can result in monetary
fines, civil and criminal penalties, and exclusion from participation in federal
or state healthcare programs, any of which could have an adverse effect on our
business
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and results of operations. While our service agreements with the contracted
radiology practices will not meet a safe harbor to the federal anti-kickback
statute, failure to meet a safe harbor does not mean that agreements violate the
anti-kickback statute. We have sought to structure our agreements to be
consistent with fair market value in arms' length transactions for the nature
and amount of management and administrative services rendered. For these
reasons, we do not believe that service fees payable to us should be viewed as
remuneration for referring or influencing referrals of patients or services
covered by such programs as prohibited by statute.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions are commonly known as the Stark Law. The Stark Law
prohibits a physician from referring Medicare patients to an entity providing
designated health services, as defined under the Stark Law, including, without
limitation, radiology services, in which the physician has an ownership or
investment interest or with which the physician has entered into a compensation
arrangement. The penalties for violating the Stark Law include a prohibition on
payment by these governmental programs and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a circumvention
scheme. We believe that, although we receive fees under our service agreements
for management and administrative services, we are not in a position to make or
influence referrals of patients.
On January 4, 2001, the Centers for Medicare and Medicaid Services
published final regulations to implement the Stark Law. Under the final
regulations, radiology and certain other imaging services and radiation therapy
services and supplies are services included in the designated health services
subject to the self-referral prohibition. Under the final regulations, such
services include the professional and technical components of any diagnostic
test or procedure using X-rays, ultrasound or other imaging services, CT, MRI,
radiation therapy and diagnostic mammography services (but not screening
mammography services). The final regulations, however, exclude from designated
health services: (i) X-ray, fluoroscopy or ultrasound procedures that require
the insertion of a needle, catheter, tube or probe through the skin or into a
body orifice; (ii) radiology procedures that are integral to the performance of,
and performed during, nonradiological medical procedures; (iii) nuclear medicine
procedures; and (iv) invasive or interventional radiology, because the radiology
services in these procedures are merely incidental or secondary to another
procedure that the physician has ordered.
The Stark Law provides that a request by a radiologist for diagnostic
radiology services or a request by a radiation oncologist for radiation therapy,
if such services are furnished by or under the supervision of such radiologist
or radiation oncologist pursuant to a consultation requested by another
physician, does not constitute a referral by a referring physician. If such
requirements are met, the Stark Law self-referral prohibition would not apply to
such services. The effect of the Stark Law on the radiology practices,
therefore, will depend on the precise scope of services furnished by each such
practice's radiologists and whether such services derive from consultations or
are self-generated. We believe that, other than self-referred patients, all of
the services covered by the Stark Law provided by the contracted radiology
practices derive from requests for consultation by non-affiliated physicians.
Therefore, we believe that the Stark Law is not implicated by the financial
relationships between us and the contracted radiology practices.
In addition, we believe that we have structured our acquisitions of the
assets of existing practices, and we intend to structure any future
acquisitions, so as not to violate the anti-kickback and Stark Law and
regulations. Specifically, we believe the consideration paid by us to physicians
to acquire the tangible and intangible assets associated with their practices is
consistent with fair market value in arms' length transactions and is not
intended to induce the referral of patients. Should any such practice be deemed
to constitute an arrangement designed to induce the referral of Medicare or
Medicaid patients, then our acquisitions could be viewed as possibly violating
anti-kickback and anti-referral laws and regulations. A determination of
liability under any such laws could have an adverse effect on our business,
financial condition and results of operations.
The federal government embarked on an initiative to audit all Medicare
carriers, which are the companies that adjudicate and pay Medicare claims. These
audits are expected to intensify governmental scrutiny of individual providers.
An unsatisfactory audit of any of our diagnostic imaging facilities or
contracted radiology practices could result in any or all of the following:
significant repayment obligations, exclusion from the Medicare, Medicaid or
other governmental programs, and civil and criminal penalties.
Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare, Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern our activities and the activities of the radiology
practices. Our or the radiology practices' activities may be investigated,
claims may be made against us or the radiology practices and these increased
enforcement activities may directly or indirectly have an adverse effect on our
business, financial condition and results of operations.
CALIFORNIA ANTI-KICKBACK AND PHYSICIAN SELF-REFERRAL LAWS
California has adopted a form of anti-kickback law and a form of Stark Law.
The scope of these laws and the interpretations of them are enforced by
California courts and by regulatory authorities with broad discretion.
Generally, California law covers all referrals by all healthcare providers for
all healthcare services. A determination of liability under such laws could
result in fines and penalties and restrictions on our ability to operate.
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FEDERAL FALSE CLAIMS ACT
The Federal False Claims Act provides, in part, that the federal government
may bring a lawsuit against any person who it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the
federal government, or who has made a false statement or used a false record to
get a claim approved. The Federal False Claims Act further provides that a
lawsuit thereunder may be initiated in the name of the United States by an
individual who is an original source of the allegations. The government has
taken the position that claims presented in violation of the federal
anti-kickback law or Stark Law may be considered a violation of the Federal
False Claims Act. Penalties include civil penalties of not less than $5,500 and
not more than $11,000 for each false claim, plus three times the amount of
damages that the federal government sustained because of the act of that person.
We believe that we are in compliance with the rules and regulations that apply
to the Federal False Claims Act. However, we could be found to have violated
certain rules and regulations resulting in sanctions under the Federal False
Claims Act, and if we are so found in violation, any sanctions imposed could
result in fines and penalties and restrictions on and exclusion from
participation in federal and California healthcare programs that are integral to
our business.
HEALTHCARE REFORM INITIATIVES
Healthcare laws and regulations may change significantly in the future. We
continuously monitor these developments and modify our operations from time to
time as the regulatory environment changes. We cannot assure you, however, that
we will be able to adapt our operations to address new regulations or that new
regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and state
laws, neither our current or anticipated business operations nor the operations
of the contracted radiology practices has been the subject of judicial or
regulatory interpretation. We cannot assure you that a review of our business by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change in a way that restricts our operations.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
In an effort to combat healthcare fraud, Congress enacted the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA, among
other things, amends existing crimes and criminal penalties for Medicare fraud
and enacts new federal healthcare fraud crimes, including actions affecting
non-government payors. Under HIPAA, a healthcare benefit program includes any
private plan or contract affecting interstate commerce under which any medical
benefit, item or service is provided. A person or entity that knowingly and
willfully obtains the money or property of any healthcare benefit program by
means of false or fraudulent representations in connection with the delivery of
healthcare services is subject to a fine or imprisonment, or potentially both.
In addition, HIPAA authorizes the imposition of civil money penalties against
entities that employ or enter into contracts with excluded Medicare or Medicaid
program participants if such entities provide services to federal health program
beneficiaries. A finding of liability under HIPAA could have a material adverse
effect on our business, financial condition and results of operations.
Further, HIPAA requires healthcare providers and their business associates
to maintain the privacy and security of individually identifiable health
information. HIPAA imposes federal standards for electronic transactions with
health plans, the security of electronic health information and for protecting
the privacy of individually identifiable health information. Organizations such
as ours were obligated to be compliant with the initial HIPAA regulations by
April 14, 2003, and with the electronic data interchange mandates by October 16,
2003. The final security regulations were issued in February 2003 with a
compliance date of April 2005. We believe that we are in compliance with the
current requirements, but we anticipate that we may encounter certain costs
associated with future compliance. A finding of liability under HIPAA's privacy
or security provisions may also result in criminal and civil penalties, and
could have a material adverse effect on our business, financial condition, and
results of operations.
Although our electronic systems are HIPAA compatible, consistent with the
HIPAA regulations, we cannot guarantee the enforcement agencies or courts will
not make interpretations of the HIPAA standards that are inconsistent with ours,
or the interpretations of the contracted radiology practices or their affiliated
physicians. A finding of liability under the HIPAA standards may result in
criminal and civil penalties. Noncompliance also may result in exclusion from
participation in government programs, including Medicare and Medicaid. These
actions could have a material adverse effect on our business, financial
condition, and results of operations.
COMPLIANCE PROGRAM
We implemented a program to monitor compliance with federal and state laws
and regulations applicable to healthcare entities. We have appointed a
compliance officer who is charged with implementing and supervising our
compliance program, which includes the adoption of (i) Standards of Conduct for
our employees and affiliates and (ii) a process that specifies how employees,
affiliates and others may report regulatory or ethical concerns to our
compliance officer. We believe that our compliance program meets the relevant
standards provided by the Office of Inspector General of the Department of
Health and Human Services.
15
An important part of our compliance program consists of conducting periodic
audits of various aspects of our operations and that of the contracted radiology
practices. We also conduct mandatory educational programs designed to
familiarize our employees with the regulatory requirements and specific elements
of our compliance program.
U.S. FOOD AND DRUG ADMINISTRATION OR FDA
The FDA has issued the requisite premarket approval for all of the MRI and
CT systems we use. We do not believe that any further FDA approval is required
in connection with the majority of equipment currently in operation or proposed
to be operated. Except under regulations issued by the FDA pursuant to the
Mammography Quality Standards Act of 1992, where all mammography facilities are
required to be accredited by an approved non-profit organization or state
agency. Pursuant to the accreditation process, each facility providing
mammography services must comply with certain standards including annual
inspection.
Compliance with theses standards is required to obtain payment for
Medicare services and to avoid various sanctions, including monetary penalties,
or suspension of certification. Although the Mammography Accreditation Program
of the American College of Radiology currently accredits all of our facilities,
which provide mammography services, and we anticipate continuing to meet the
requirements for accreditation, the withdrawal of such accreditation could
result in the revocation of certification. Congress has extended Medicare
benefits to include coverage of screening mammography subject to the prescribed
quality standards described above. The regulations apply to diagnostic
mammography and image quality examination as well as screening mammography.
RADIOLOGIST LICENSING
The radiologists providing professional medical services at our facilities
are subject to licensing and related regulations by the State of California. As
a result, we require BRMG and the other radiology groups with which we contract
to require those radiologists to have and maintain appropriate licensure. We do
not believe that such laws and regulations will either prohibit or require
licensure approval of our business operations, although no assurances can be
made that such laws and regulations will not be interpreted to extend such
prohibitions or requirements to our operations.
INSURANCE LAWS AND REGULATION
California has adopted certain laws and regulations affecting risk
assumption in the healthcare industry, including those that subject any
physician or physician network engaged in risk-based managed care to applicable
insurance laws and regulations. These laws and regulations may require
physicians and physician networks to meet minimum capital requirements and other
safety and soundness requirements. Implementing additional regulations or
compliance requirements could result in substantial costs to the contracted
radiology practices, limiting their ability to enter into capitated or other
risk-sharing managed care arrangements and indirectly affecting our revenue from
the contracted practices.
ENVIRONMENTAL MATTERS
The facilities we operate or manage generate hazardous and medical waste
subject to federal and state requirements regarding handling and disposal. We
believe that the facilities that we operate and manage are currently in
compliance in all material respects with applicable federal, state and local
statutes and ordinances regulating the handling and disposal of such materials.
We do not believe that we will be required to expend any material additional
amounts in order to remain in compliance with these laws and regulations or that
compliance will materially affect our capital expenditures, earnings or
competitive position.
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ITEM 2. PROPERTIES
- ------- ----------
Information with respect to our facilities within our regional networks is as
follows:
NUMBER OF APPROXIMATE
REGIONAL NETWORKS FACILITIES(1) SQUARE FOOTAGE LEASE EXPIRATION
- ----------------- ------------- -------------- ----------------
TOWER (3):
Roxsan 1 8,031 Various through 2012
Wilshire 1 13,778 September 2018
Women's 1 3,830 February 2014
VENTURA (9):
Camarillo 2 2,035 Various Month-to-month
Oxnard 2 5,622 Various Month-to-month
Thousand Oaks 2 12,914 Various through November 2007
Ventura 3 12,959 Various through July 2007
SAN FERNANDO VALLEY (8):
Burbank 2 6,500 Various through August 2008
Northridge 2 9,050 Various through February 2015
Santa Clarita 2 7,293 One through June 2009; other Month-to-month
Tarzana 2 6,320 Various through February2009
ANTELOPE VALLEY (3):
Antelope Valley 1 2,890 Month-to-month
Lancaster 2 6,827 Various through August 2005
CENTRAL CALIFORNIA (5):
Fresno 1 7,231 June 2008
Modesto 1 17,852 December 2014
Sacramento 1 8,083 June 2013
Stockton 1 4,808 December 2006
Vacaville 1 5,927 March 2007
NORTHERN CALIFORNIA (3):
Emeryville 1 2,086 June 2008
San Francisco 1 1,240 Month-to-month
Santa Rosa 1 4,235 July 2011
ORANGE (5):
Orange 4 15,955 Various through August 2012
Tustin 1 2,139 January 2007
LONG BEACH (4):
Long Beach 4 16,338 Various through December 2006
NORTHERN SAN DIEGO (1):
Rancho Bernardo 1 9,557 May 2012
PALM SPRINGS (5):
Palm Desert 3 9,024 Various through May 2006
Palm Springs 2 9,042 June 2008
INLAND EMPIRE (10):
Chino 1 2,700 June 2007
Rancho Cucamonga 3 11,128 Various through May 2009
Riverside 1 12,534 Various through January 2008
San Gabriel Valley 1 2,871 December 2004
Temecula 4 14,496 Various through February 2011
--------
TOTAL 56
========
- ----------
(1) Includes leased facilities and three facilities operated pursuant
to managed care capitation agreements.
Our corporate headquarters are located in adjoining premises at 1510 and
1516 Cotner Avenue, Los Angeles, California 90025, in approximately 16,500
square feet occupied under leases, which expire on June 30, 2007. In addition,
we lease 33,987 square feet of warehouse and other space under leases, which
expire at various dates between May 2005 and February 2011.
17
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
We are involved in the following litigation:
(a) In Re DVI, Inc. Securities Litigation
United States District Court, Eastern District of PA, Docket No.
----------------------------------------------------------------
2:03-CV-05336-LDD
-----------------
This is a class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by shareholders of DVI,
Inc. ("DVI"), one of our former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.
The putative plaintiff class consists of those persons who purchased or
otherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the fact that existing
DVI loans on the centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.
This matter is in the initial pleading stages. We intend to vigorously
contest the allegations and have filed a motion to dismiss the Third Amended
Complaint for failure to state a claim. No hearing date has been set, but an
initial ruling on our motion to dismiss is expected in early 2005.
(b) Fleet Nat'l Bank v. Boyle et. al., U.S. District Court for the Eastern
----------------------------------------------------------------------
District of Pennsylvania, Docket No. 04-CV-1277
-----------------------------------------------
This case is related to In re DVI Securities Litigation, but was filed
by several of DVI's lenders. It, too, arises from the DVI bankruptcy (referenced
in the matter above) and was brought against DVI officers and directors and a
number of third party defendants, including us. We were named in the First
Amended Complaint filed in this action in September 2004.
The plaintiff alleges violations of the Racketeering Influenced and
Corrupt Organizations Act, 18 U.S.C. 1961 et seq., ("RICO"), and common-law
claims, including conspiracy to commit fraud, tortious interference with a
contract, conspiracy to commit tortious interference with a contract, conspiracy
to commit conversion and aiding and abetting fraud. Plaintiffs allege that in
2000, we acquired from a third party one or more unprofitable imaging centers in
order to help DVI conceal the fact that existing DVI loans on the centers were
delinquent.
GENERAL
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth fiscal quarter of fiscal 2004.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
AND ISSUER OF PURCHASES OF EQUITY SECURITIES
---------------------------------------------
Our common stock is quoted on the Nasdaq Over-the-Counter, or OTC,
Bulletin Board under the symbol "PMDX.OB". The following table indicates the
high and low prices for our common stock for the periods indicated based upon
information supplied by the National Quotation Bureau, Inc. Such quotations
reflect interdealer prices without adjustment for retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.
QUARTER ENDED LOW HIGH
------------- --- ----
January 31, 2004 $0.40 $0.71
April 30, 2004 0.41 0.70
July 31, 2004 0.27 0.45
October 31, 2004 0.30 0.67
January 31, 2003 0.36 0.76
April 30, 2003 0.19 0.45
July 31, 2003 0.19 0.38
October 31, 2003 0.15 0.50
The last reported closing high and low prices for our common stock on the
OTC Bulletin Board on January 19, 2005 were $0.58 and $0.56, respectively. As of
January 10, 2005, the number of holders of record of our common stock was 3,986.
However, Cede & Co., the nominee for The Depository Trust Company, the clearing
agency for most broker-dealers, owned a substantial number of our outstanding
shares of common stock of record on that date. Our management believes that
customers of these broker-dealers beneficially own these shares and that the
number of beneficial owners of our common stock is substantially greater than
3,986.
We did not pay dividends in fiscal 2003 or 2004 and we do not expect to
pay any dividends in the foreseeable future.
CONVERTIBLE SUBORDINATED DEBENTURES
At October 31, 2004, we had $16.2 million convertible subordinated
debentures outstanding which mature June 30, 2008 and bear interest, payable
quarterly, at an annual rate of 11.5%. The debentures are convertible into our
common stock at a price of $2.50 per share.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended October 31, 2004, we sold the following
securities pursuant to an exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended:
o In December 2003, we issued to one of BRMG's radiologists a five-year
warrant exercisable at a price of $0.41 per share, which was the public
market closing price for our common stock on the transaction date, to
purchase 100,000 shares of our common stock.
o In December 2003, we issued to two of BRMG's radiologists/directors
five-year warrants exercisable at a price of $0.46 per share, which was
the public market closing price for our common stock on the transaction
date, to purchase a combined 2,000,000 shares of our common stock.
o In December 2003, we issued to one of our external lenders a five-year
warrant exercisable at a price of $0.50 per share, which was the public
market closing price for our common stock on the transaction date, to
purchase 500,000 shares of our common stock.
o In January 2004, we issued to one of BRMG's radiologists a five-year
warrant exercisable at a price of $0.55 per share, which was the public
market price closing price for our common stock on the transaction date,
to purchase 100,000 shares of our common stock.
19
o In January 2004, we issued to two of BRMG's radiologists five-year
warrants exercisable at a price of $0.65 per share, which was the public
market closing price for our common stock on the transaction date, to
purchase a combined 200,00 shares of our common stock.
o In January 2004, we issued to one of BRMG's radiologists a five-year
warrant exercisable at a price of $0.70 per share, which was the public
market closing price for our common stock on the transaction date, to
purchase 200,000 shares of our common stock.
o In March 2004, we issued to two of our independent directors five-year
warrants exercisable at $0.60 per share, which was the public market
price for our common stock on the transaction date, to purchase a
combined 100,000 shares of our common stock.
o In July 2004, we issued to two of our officers five-year warrants
exercisable at $0.30 per share, which was the public market price for our
common stock on the transaction date, to purchase a combined 850,000
shares of our common stock.
o In August 2004, we issued to one of BRMG's radiologists a five-year
warrant exercisable at a price of $0.35 per share, which was the public
market price for our common stock on the transaction date, to purchase
100,000 shares of our common stock.
o In September 2004, we issued to one of our independent directors a
five-year warrant exercisable at a price of $0.49 per share, which was
the public market closing price for our common stock on the transaction
date, to purchase 50,000 shares of our common stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information with respect to options,
warrants and other rights under our equity compensation plans at October 31,
2004:
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS OUTSTANDING OPTIONS UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
------------- ------------------- ------------------- ------------------
Equity compensation plans approved by security
holders(1) 1,201,417 $ 0.47 1,289,084
Equity compensation plans not approved by security
holders 12,004,770 $ 0.61 N/A
------------- --------- ------------
Total 13,206,187 $ 0.59 1,289,084
============= ========= ============
- ----------
(1) 500,000 options at $0.40 per share to one employee expiring in March 2005
remain outstanding under the Incentive Plan, as defined in "Executive
Compensation - Stock Incentive Plans." We no longer issue any options
under our Incentive Plan.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ------- ------------------------------------
The following table sets forth our selected historical consolidated
financial data. The selected consolidated statements of operations data set
forth below for each of the years in the three year period ended October 31,
2004 and the consolidated balance sheet data set forth below as of October 31,
2003 and 2004 are derived from our audited consolidated financial statements and
notes thereto included elsewhere herein. The selected historical consolidated
statements of operations data set forth below for the years ended October 31,
2000 and 2001, and the consolidated balance sheet data set forth below as of
October 31, 2000, 2001 and 2002 are derived from our audited consolidated
financial statements not included herein. The selected historical consolidated
financial data set forth below should be read in conjunction with and is
qualified in its entirety by reference to the audited consolidated financial
statements and the related notes included elsewhere in this Form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The financial data set forth below and discussed in this Annual Report
are derived from the consolidated financial statements of Primedex, its
subsidiaries and certain affiliates. As a result of the contractual and
operational relationship among BRMG, Dr. Berger and us, we are considered to
have a controlling financial interest in BRMG pursuant to guidance issued by the
Emerging Issues Task Force, or EITF, of the Financial Accounting Standards
Board, or FASB, in EITF's release 97-2. Due to the deemed controlling financial
interest, we are required to include BRMG as a consolidated entity in our
consolidated financial statements. This means, for example, that revenue
generated by BRMG from the provision of professional medical services to our
patients, as well as BRMG's costs of providing those services, are included as
net revenue in our consolidated statement of operations, whereas the management
fee that BRMG pays to us under our management agreement with BRMG is eliminated
as a result of the consolidation of our results with those of BRMG. Also,
because BRMG is a consolidated entity in our financial statements, any
borrowings or advances we have received from or made to BRMG are not reflected
in our consolidated balance sheet. If BRMG were not treated as a consolidated
entity in our consolidated financial statements, the presentation of certain
items in our income statement, such as net revenue and costs and expenses, would
change but our net income would not, because 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.
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS)
Net revenue $ 84,483 $ 107,567 $ 134,078 $ 140,259 $ 137,277
Operating expenses:
Operating expenses 60,121 75,457 102,286 106,078 105,828
Depreciation and amortization 8,210 10,315 15,010 16,874 17,762
Provision for bad debts 2,476 3,851 6,892 4,944 3,911
Income (loss) from continuing operations 2,090 13,813 (6,435) (5,464) (14,576)
Income from discontinued operation 524 688 884 3,197 --
Net income (loss) 2,614 14,501 (5,551) (2,267) (14,576)
BALANCE SHEET DATA:
Cash and cash equivalents $ 36 $ 40 $ 36 $ 30 $ 1
Total assets 90,625 128,429 151,639 142,035 127,451
Total long-term liabilities 82,693 110,188 121,830 122,096 139,980
Total liabilities 151,538 174,071 202,560 195,122 195,006
Working capital (deficit) (44,588) (26,987) (44,668) (44,615) (32,172)
Stockholders' equity (deficit) (60,913) (45,642) (50,921) (53,087) (67,555)
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
We operate a group of regional networks comprised of 56 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 three of our facilities are multi-modality sites,
offering various combinations of MRI, CT, PET, nuclear medicine, ultrasound,
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 sites near
multi-modality sites 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.
For the year ended October 31, 2004, we derived 63% of our net revenue from MRI
and CT scans. Over the past three fiscal years, we have increased net revenue
primarily through acquisitions, expansions of existing facilities, upgrades in
equipment and development of new facilities.
The fees charged for diagnostic imaging services performed at our
facilities are paid by a diverse mix of payors, as illustrated for the year
ended October 31, 2004 by the following table:
PERCENTAGE OF
PAYOR TYPE NET REVENUE
---------- -----------
Insurance(1) 40%
Managed Care Capitated Payors 25
Medicare/Medi-Cal 16
Other(2) 14
Workers Compensation/Personal Injury 5
- ----------
(1) Includes Blue Cross/Blue Shield, which represented 13% of our net revenue
for the year ended October 31, 2004.
(2) Includes co-payments, direct patient payments and payments through
contracts with physician groups and other non-insurance company payors.
Our eligibility to provide service in response to a referral often
depends on the existence of a contractual arrangement between the radiologists
providing the professional medical services or us 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
year ended October 31, 2004. 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 for 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 volumes can result in
significantly lower margins.
BRMG strives to maintain qualified radiologists and technologists 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.
22
For a discussion of other factors that may have an impact on our business
and our future results of operations, see "Risks Related to our Business."
OUR RELATIONSHIP WITH BRMG
Howard G. Berger, M.D. is our President and Chief Executive, a member 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
prohibition against the corporate practice of medicine. 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 practice 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 79% at October 31,
2004, 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 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 Wells Fargo Foothill 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
consolidated financial statements. See "Selected Consolidated Financial Data."
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $32.2 million at October 31, 2004 and
had losses from continuing operations of $5.5 million and $14.6 million during
fiscal 2003 and 2004, respectively. The loss in fiscal 2004 includes a $5.2
million expense resulting from the increase in the valuation allowance for
deferred income taxes. We also had a stockholders' deficit of $67.6 million at
October 31, 2004. 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 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, now with Wells Fargo Foothill.
Even though the line of credit matures in 2008, we classify the line of credit
as a current liability primarily because is is collateralized by accounts
receivable and the eligible borrowing base is classified as a current asset. We
finance the acquisition of equipment mainly through capital and operating
leases.
During fiscal 2004, we took the actions described below to continue to
fund our obligations. In addition, some of our plans to provide the necessary
working capital in the future are summarized below.
BRMG and Wells Fargo Foothill are parties to a credit facility under
which BRMG may borrow the lesser of 85% of the net collectible value 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 value servicing the
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 payments due on March 1, 2005. As of December 31, 2004, we had not
borrowed under the term loan.
23
Under the $20,000,000 revolving loan, 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 revolving loan, we are
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 October 31, 2004, we
had $7.1 million of available borrowing under the Wells Fargo Foothill revolving
loan.
Advances outstanding under the revolving loan 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 it
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 if EBITDA, net worth, fixed charge coverage ratios and maximum
senior debt/EBITDA ratios as well as limitations on annual capital expenditures.
We also had a line of credit with an affiliate of DVI. At October 31,
2004, the Company had $3.4 million outstanding under this line. Interest on the
outstanding balance was payable monthly at our lender's prime rate plus 1.0%.
Future borrowings under this line of credit were no longer available and the
balance was being paid down by collections on historical accounts receivable and
variable monthly installment payments in the future. Subsequent to year-end, we
and Post Advisory Group, LLC, a Los Angeles-based investment advisor, issued
$4.0 million in principal amount of notes to repurchase the DVI affiliate's line
of credit facility with the residual funds utilized by us as working capital.
The new note payable has monthly interest only payments at 12% per annum until
its maturity in July 2008.
On December 19, 2003, we issued a $1.0 million convertible subordinate
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 $.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.
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.
At the time of the debt restructuring, outstanding principal balances for
DVI and GE were $15.2 million and $54.3 million respectively.
DVI's restructured note payable is six payments of interest only from
July to December 2004 at 9%, 41 payments of principal and interest of $273,988,
and a final balloon payment of $7.6 million 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 payment is deferred, the Company would make monthly
payments of $290,785 to DVI for the next 29 months. Effective November 30, 2004,
Post Advisory Group, LLC, ("Post"), acquired the DVI note payable and the
indebtedness was restructured by Post and the Company. The new note payable has
monthly interest only payments at 11% per annum until its maturity in June 2008.
The assignment of the note payable to Post will not result in any actual total
dollar savings to the Company over the term of the new obligation, but it will
defer cash outlays of approximately $1.3 million per year until its maturity.
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 payment is
deferred, we will continue to make monthly payments of $1,127,067 to GE for the
next 20 months.
At the time of the debt restructuring, the outstanding principal balance,
including accrued interest, due U.S. Bank was $65.6 million. 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 payment is deferred, we
will continue to make monthly payments of $1,055,301 to U.S. Bank for the next
44 months.
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 forgone a portion of their salary, an affiliate of GE began making
short-term working capital loans in the amount of $0.2 million per month for
nine months, and we sold Westchester Imaging Group for net cash proceeds of
approximately $1.4 million. See "Significant Events - Sale of Joint Venture
Interest - Discontinued Operation".
24
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 2005.
SOURCES AND USES OF CASH
Cash decreased for fiscal 2004 and 2003 by $29,000 and $6,000,
respectively.
Cash provided by operating activities for the year ended October 31, 2004
was $17.1 million compared to $22.0 million for the same period in 2003. The
primary reason for the decrease in cash was due to reductions in accounts
payable and accrued expenses in fiscal 2004 of $2.8 million compared to an
increase in these same liabilities in fiscal 2003 of $3.2 million. Fiscal 2003
results include cash used by the discontinued operation of $0.8 million. In
addition, imputed interest expense increased approximately $5.1 million for the
year ended October 31, 2004 compared to the same period in 2003. Imputed
interest is interest accrued and unpaid on outstanding notes and capital lease
obligations, as well as interest on capitalized debt restructuring charges which
are amortized over the term of the new note payable or capital lease obligation.
During the first three quarters of fiscal 2004, we deferred payments on the
majority of our notes payable with DVI while negotiating with external third
parties and the existing lender.
Cash used by investing activities for fiscal 2004 was $3.8 million
compared to $1.7 million for the same period in 2003. For fiscal 2004 and 2003,
we purchased property and equipment for approximately $3.8 million and $3.1
million, respectively, and received proceeds from the sale of facilities of $1.4
million in fiscal 2003 and purchased additional DIS common stock for $35,000 in
fiscal 2004. The cash received from the sale of facilities in fiscal 2003 was
for the discontinued operation.
Cash used for financing activities for fiscal 2004 was $13.3 million
compared to $20.3 million for the same period in 2003. For fiscal 2004 and 2003,
we made principal payments on capital leases, notes payable and lines of credit
of approximately $13.2 million and $25.7 million, respectively, reduced cash
disbursements in transit by $0.3 million and $1.7 million, respectively,
received proceeds from borrowings under existing lines of credit and refinancing
arrangements of approximately $1.0 million and $7.4 million, respectively,
purchased subordinated debentures for approximately $60,000 and $3,000,
respectively, made payments to limited partners of $650,000 and $300,000
respectively, and received proceeds from the issuance of common stock of
approximately $0 and $28,000, respectively.
Cash used for financing the discontinued operation, included above, for
fiscal 2003 was $0.6 million. The payments were for principal payments on
capital leases and joint venture distributions.
25
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-
2005 2006 2007 2008 2009 AFTER TOTAL
--------- --------- --------- --------- --------- --------- ---------
Notes payable* $ 13,975 $ 13,999 $ 13,999 $ 49,317 -- -- $ 91,290
Capital leases* 14,635 16,147 15,987 36,553 319 -- 83,641
Lines of credit 14,011 -- -- -- -- -- 14,011
Subordinated debentures -- -- -- 16,147 -- -- 16,147
Operating leases 6,922 6,025 4,980 3,873 3,254 12,822 37,876
Purchase obligations(1) 2,500 2,500 -- -- -- -- 5,000
Tower settlement 600 174 -- -- -- -- 774
Other obligations(2) 1,251 -- -- -- -- -- 1,251
- ------ --------- --------- --------- --------- --------- --------- ---------
TOTAL(3) $ 53,894 $ 38,845 $ 34,966 $105,890 $ 3,573 $ 12,822 $249,990
- ----------
* Includes interest.
(1) Includes a three-year obligation to purchase imaging film from Fuji. We
must purchase an aggregate of $7.5 million of film at a rate of
approximately $2.5 million per year over the term of the agreement in
which one year has already been completed.
(2) Other short-term obligations related to buyouts of the limited liability
Company minority interests in Rancho Bernardo and Burbank and other
assets.
(3) Does not include our obligation under our maintenance agreement with GE
Medical Systems described below.
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
debt) 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
fiscal 2004 and 2005 the monthly service fees were 3.74% of net revenue with a
minimum net revenue of $125.0 million. 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.
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. In Note 2 to our consolidated financial
statements, we discuss our significant accounting policies, including those that
do not require management to make difficult, subjective or complex judgments or
estimates. The most significant areas involving management's judgments and
estimates are described below.
26
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 than established patient 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 56 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 experience. For
fiscal 2002, 2003 and 2004 our provision for bad debts as a percentage of net
revenue was 5.1%, 3.6% and 2.8% respectively.
DEFERRED TAX ASSETS
We evaluate the realizability of the net deferred tax assets and assess
the valuation allowance periodically. If future taxable income or other factors
are not consistent with our expectations, an adjustment to our allowance for net
deferred tax assets may be required. Even though we expect to utilize our net
operating loss carry forwards in the future, the last three fiscal year losses
and available evidence cause the valuation of our net deferred tax assets to be
uncertain in the near term. As of October 31, 2004, we have fully allowed for
our net deferred tax assets.
VALUATION OF GOODWILL AND LONG-LIVED ASSETS
Our net goodwill at October 31, 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 October 31, 2004 consist of net property and
equipment of $77.3 million and other net intangible assets of $1.7 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 the 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 three years in the period ended October 31, 2004, 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
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. As part of
the transaction, we acquired 100% of the accounts receivable generated through
March 31, 2003 for $1.3 million and reimbursed Westchester $0.3 million, which
represented 50% of the remaining liabilities, resulting in net cash proceeds of
approximately $1.4 million. We have an option, which is exercisable on or before
March 31, 2005, to repurchase our financial interest in Westchester at fair
market value, as determined in accordance with the sale agreement. We recognized
a gain on the transaction of approximately $2.9 million in fiscal 2003.
27
Westchester's results from fiscal 2000 to fiscal 2003 were as follows:
2000 2001 2002 2003(1)
---------- ---------- ---------- ----------
Net revenue $3,482,000 $4,270,000 $5,203,000 $2,230,000
Operating expenses 2,561,000 3,112,000 3,777,000 1,703,000
Net income 524,000 688,000 884,000 255,000
- ----------
(1) Represents operations through March 31, 2003
FACILITY OPENINGS
In January 2004, we entered into a new building lease for approximately
3,963 square feet of space in Murrietta, California, near Temecula. The center
opened in December 2004 and offers MRI, CT, PET and x-ray services. The
equipment was financed by GE. At October 31, 2004, we had used existing lines of
credit for the payment of approximately $840,000 in leasehold improvements for
Murietta.
In December 2002, we opened an imaging center in Rancho Bernardo,
California. Prior to its opening, in late November 2001, we entered into a new
building lease arrangement for 9,557 square feet in Rancho Bernardo in
anticipation of opening the new multi-modality imaging center. The center was
75%-owned by us and 25%-owned by two physicians who invested $250,000. Effective
July 31, 2004, we purchased the 25% minority interest from the two physicians
for $200,000 which consisted of an $80,000 down payment and monthly payments of
$10,000 due from September 2004 to August 2005. There was no goodwill recorded
in the transaction.
In the second quarter of fiscal 2002, we entered into two new building
leases for approximately 10,000 square feet of space in the building across the
street from its Orange Imaging Center to open Orange Advanced Imaging Center and
Orange Women's Center. The centers opened in late September 2002. Orange
Advanced provides MRI, PET, nuclear medicine and X-ray services, and Orange
Women's provides ultrasound and mammography services.
Effective May 1, 2002, we acquired certain assets and liabilities of Grove
in Rancho Cucamonga, California for the assumption of approximately $1,454,000
of outstanding obligations to DVI. The center provides MRI, CT, ultrasound,
mammography and X-ray services.
Effective January 1, 2002, we entered into a new capitation arrangement
with Primecare Medical Group for approximately 62,000 covered lives, primarily
benefiting the Company's Temecula facility. We entered into two new building
leases in Sun City and Lake Elsinore, California, which provide X-ray services
to support the new contract. In January 2003, we closed the Lake Elsinore
facility and moved the location to nearby Wildomar, California.
In January 2002, we opened Tarzana Advanced Imaging Center, which provides
MRI, CT and PET services.
In late November 2001, we opened Burbank, which provides MRI, CT,
ultrasound and X-ray services. Burbank was 75%-owned by us and 25%-owned by two
physicians. Effective September 30, 2004, we purchased the 25% minority interest
from the two physicians for $1,090,000 which consisted of a $500,000 down
payment and monthly payments of $60,000 due from October 2004 to May 2005, and
monthly payments of $55,000 due from June to July 2005. There was no goodwill
recorded in the transaction.
In addition, during fiscal 2003, upon entering into new capitation
arrangements, we opened two facilities adjacent to our Burbank and Santa Clarita
facilities to provide X-ray services. In fiscal 2004, we opened an additional
three satellite facilities servicing our Northridge, Rancho Cucamonga and
Thousand Oaks centers.
FACILITY CLOSURES
In early fiscal 2004, we first downsized and later closed our North County
facility. The center's location was no longer productive and business could be
sent to our facility in Rancho Bernardo. The equipment was moved to other
locations and our leasehold improvements were written off. During the years
ended October 31, 2002, 2003 and 2004, the center generated net revenue of
$1,527,000, $1,067,000 and $49,000, respectively. During the year ended October
31, 2004, the center incurred a net loss of $122,000, and during the years ended
October 31, 2002 and 2003, the center generated net income of $151,000 and
$33,000, respectively.
28
In addition, during fiscal 2004, we closed two satellite facilities
servicing our Antelope Valley and Lancaster regions.
In July 2003, we closed our La Habra facility. The center's location was no
longer a productive asset in our network and business could be sent to our
facilities in Orange County. The equipment was moved to other locations or
returned to the vendor and its leasehold improvements were written off. During
the years ended October 31, 2002 and 2003, the center generated net revenue of
$1,542,000 and $368,000, respectively, and generated net income of $281,000 for
the year ended October 31, 2002, and incurred a net loss of $155,000 for the
year ended October 31, 2003.
Due to low volume, RadNet Heartcheck Management, Inc., one of our
subsidiaries, ceased doing business in early fiscal 2003. We wrote-off a
receivable related to Heartcheck of approximately $0.2 million during fiscal
2003.
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" name for our Beverly Hills
facilities. We capitalized the $1.5 million payment as an intangible asset for
the "Tower" name, which was offset by a related $1.5 million of accrued expense.
At October 31, 2004, we still owed approximately $775,000 to Tower. Dr. Berger
has personally guaranteed our obligation to make this 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. 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 at historical net revenue levels. Since
January 2004, BRMG rehired 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.
DEBT RESTRUCTURING
During fiscal 2004, we continued our focused efforts to improve our
financial position and liquidity by restructuring and reducing our indebtedness
on favorable terms. For a discussion of these efforts, see "Financial Condition
- - Liquidity and Capital Resources."
29
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
that certain items in the statement of operations bears to net revenue.
YEAR ENDED OCTOBER 31,
---------------------------------
2002 2003 2004
------- ------- -------
Net revenue 100.0% 100.0% 100.0%
Operating expenses:
Operating expenses 76.3 75.6 77.1
Depreciation and amortization 11.2 12.0 12.9
Provision for bad debts 5.1 3.6 2.8
------- ------- -------
Total operating expense 92.6 91.2 92.8
Income from operations 7.4 8.8 7.2
Other expense (income):
Interest expense 12.4 12.8 12.6
Other income (0.6) (0.4) (0.1)
Other expense 0.4 0.2 1.2
------- ------- -------
Total other expense 12.2 12.6 13.7
Loss before provision for income taxes, minority interest
and discontinued operation (4.8) (3.8) (6.5)
Income tax expense -- -- (3.8)
------- ------- -------
Loss before minority interest and discontinued operation (4.8) (3.8) (10.3)
Minority interest in earnings of subsidiaries (0.1) 0.1 0.3
------- ------- -------
Loss from continuing operations (4.7) (3.9) (10.6)
Discontinued operation:
Income from operations of Westchester Imaging Group 0.6 0.2 --
Gain on sale of discontinued operation -- 2.1 --
------- ------- -------
Income from discontinued operation 0.6 2.3 --
Net loss (4.1) (1.6) (10.6)
======= ======= =======
30
YEAR ENDED OCTOBER 31, 2004 COMPARED TO THE YEAR ENDED OCTOBER 31, 2003
During fiscal 2004, we continued our efforts to enhance our operations
and expand our network, while improving our financial position and cash flows.
Our results for fiscal 2004 were affected by the opening and integration of new
facilities and the closure of underperforming operations, the increase in the
valuation allowance for net deferred tax assets of $5.2 million, the expenses
involved with a bond offering which did not materialize, the slower than
expected improvements in net revenue at Beverly Tower, and our continuing focus
on controlling operating expenses. As a result of these factors and the other
matters discussed below, we experienced a decrease in income from operations of
$2.6 million and an increase in net loss from continuing operations of $9.1
million.
Also during fiscal 2004, we made significant progress in solidifying our
financial condition. We restructured the majority of our existing notes and
capital lease obligations consolidating balances, extending terms and improving
future net cash flows for debt service, and we restructured our working capital
line with a new lender, Wells Fargo Foothill. Net cash used by financing
activities changed from $20.3 million in fiscal 2003 to $13.3 million in fiscal
2004, and our working capital deficit improved from $44.6 million in fiscal 2003
to $32.2 million in fiscal 2004. At the same time, however, net cash provided by
operating activities decreased in fiscal 2004. Subsequent to year-end, effective
November 30, 2004, we and Post Advisory Group, LLC, ("Post"), a Los
Angeles-based investment advisor, issued $4.0 million in principal amount of
notes to repurchase the DVI affiliate's line of credit facility with the
residual funds utilized as working capital. The new note payable has monthly
interest only payments at 12% per annum until its maturity in July 2008. In
addition, Post acquired $15.2 million of our notes payable from an affiliate of
DVI and the indebtedness was restructured by Post and us. The new note payable
has monthly interest only payments at 11% per annum until its maturity in June
2008. The assignment of the note payable to Post will not result in any actual
total dollar savings to us over the term of the new obligation, but it will
defer cash flow outlays of approximately $1.3 million per year until maturity.
See "Financial Condition - Liquidity and Capital Resources."
NET REVENUE
Net revenue from continuing operations for fiscal 2004 was $137.3 million
compared to $140.3 million for fiscal 2003, a decrease of approximately $3.0
million, or 2.1%. Of the net revenue decrease, $1.4 million is attributable to
two facilities, La Habra and North County, which were closed in fiscal 2003 and
2004, respectively. The decrease was offset by $0.4 million in net revenue from
one facility, Rancho Bernardo, which opened in December 2002. Our same store
facilities', which we define as facilities open two years or more, net revenue
in 2003 and 2004 was $137.7 million and $135.8 million, respectively. The same
store facilities' net revenue was affected by a $3.4 million decrease in net
revenue at our Beverly Tower facilities over the same period. The decreases in
net revenue at our Beverly Tower facilities were attributable to disruptions
arising from the dispute described under "Significant Events - Termination of
Contract with Tower Imaging Medical Group, Inc." Exclusive of Beverly Tower, our
same store facilities had an increase in net revenue of approximately $1.4
million from fiscal 2003 to fiscal 2004. We present same store facilities as
those open two years or more because we believe that this presentation
eliminates the effect of facilities opened only a partial year.
Managed care capitated payor revenue increased from 22% of net revenue,
or approximately $31 million, to 25% of net revenue, or approximately $34
million, for the years ended October 31, 2003 and 2004, respectively. We have
been successful in retaining existing contracts while obtaining increases in
reimbursement from the payors coupled with receiving increases in co-payments
from the individual patients upon service. We anticipate maintaining a similar
mix of managed care capitated payor business in fiscal 2005 due to increases in
reimbursement from existing payors, offset by expected decreases in contracts
that will not be renewed.
OPERATING EXPENSES
Operating expenses from continuing operations for fiscal 2004 decreased
approximately $0.4 million, or 0.3%, from $127.9 million in fiscal 2003 to
$127.5 million in fiscal 2004. The decrease includes $1.4 million of net
operating expenses related to two facilities, La Habra and North County, which
were closed during the last two fiscal years. This was offset by $0.1 million
for Rancho Bernardo which opened in December 2002.
31
The following table sets forth our operating expenses for fiscal 2003 and
2004 (dollars in thousands):
Year Ended October 31,
-------------------------
2003 2004
--------- ---------
Salaries and professional reading fees $ 62,454 $ 64,932
Building and equipment rental 9,375 7,804
General administrative expenses 34,249 33,092
--------- ---------
Total operating expenses 106,078 105,828
Depreciation and amortization 16,874 17,762
Provision for bad debt 4,944 3,911
o SALARIES AND PROFESSIONAL READING FEES
Salaries and professional reading fees increased $2.5 million from
fiscal 2003 to 2004. The amount is net of $0.4 million relating to two
closed facilities, La Habra and North County, and one new facility,
Rancho Bernardo, which opened in December 2002. For our same store
facilities, salaries increased $2.2 million and professional reading
fees decreased $0.7 million from fiscal 2003 to fiscal 2004. The $0.7
million improvement in same store professional reading fees was due to
changes in the fee arrangement at our Beverly Tower facilities. In
October 2003, the radiologists, who had previously been compensated
based on a percentage of net revenue, were eliminated and those
physicians rehired by BRMG are now paid a fixed salary. See
"Significant Events - Termination of Contract with Tower Imaging
Medical Group, Inc." For fiscal 2003 and 2004, professional reading
fees at Beverly Tower were $3.9 million and $2.9 million, respectively.
The $2.2 million increase in salaries is due to the higher costs
associated with recruiting and retaining key personnel, the hiring of a
chief financial officer, the solidifying of Beverly Tower's non
physician staff due to the disruption in October 2003, the hiring of
physician assistants, and the costs of additional personnel necessary
to open additional satellite locations and the build-out of a new
center in Murietta.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses decreased $1.6 million in fiscal
year 2004 when compared to the same period last year. The decrease is
primarily due to the elimination of equipment operating leases
including GE operating leases which were converted into $6.0 million in
capital leases in November 2003, and $250,000 for Toshiba MR equipment
which was converted into a capital lease in April 2004. During fiscal
2003 and 2004, we had equipment rental expenses of $2.2 million and
$0.3 million, respectively.
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 $1.2 million, or 3.4%, in fiscal 2004 compared to
the previous period primarily due to the decrease in net revenue. In
addition, general and administrative expenses decreased $0.4 million
for two facilities which were closed during the last two fiscal
periods, offset by one center which was opened in December 2002.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.9 million in fiscal year
2004 when compared to the same period last year. The increase was
primarily due to the conversion of $6.2 million in equipment operating
leases into capital leases during fiscal 2004 coupled with a
full-year's amortization of the Tower tradename purchased in October
2003 for $1.5 million and amortized over 10 years.
o PROVISION FOR BAD DEBT
The $1.0 million decrease in provision for bad debt was primarily a
result of decreased bad debt write-offs, the improvement in billing and
collections with the conversion to a single internal system, increased
capitation business which has no bad debt, decreased net revenue, and
no significant payor dissolutions in fiscal 2004.
32
INTEREST EXPENSE
Interest expense for fiscal 2004 decreased approximately $0.7 million, or
3.7%, from the same period in fiscal 2003. The decrease was primarily due to the
consolidation and restructuring of notes payable and capital lease obligations
with new terms and interest rates.
OTHER INCOME
In fiscal 2003 and 2004, we earned other income of $0.6 million and $0.2
million, respectively, principally comprised of sublease income, record copy
income, deferred rent income, other income related to certain write-offs of
liabilities and business interruption and insurance refunds. During fiscal 2004,
we had no write-offs of liabilities nor business interruption or insurance
refunds.
OTHER EXPENSE
In fiscal 2003 and 2004, we incurred other expense of $0.3 million and $1.7
million, respectively, principally comprised of write-offs of miscellaneous
receivables and other assets, losses on disposal of equipment, forgiveness of
notes, losses on the sale or disposal of assets, and costs related to bond
offerings and debt restructures. During fiscal 2004, we incurred approximately
$1.6 million of legal and professional service costs related to our earlier
attempts to solidify financing and the related bond offering that was not
completed.
INCOME TAX EXPENSE
In fiscal 2004, we increased the valuation allowance for the net deferred
tax asset by $5.2 million due to our recurring losses from continuing operations
over the last three fiscal years.
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 Rancho Bernardo Advanced LLC for the period. The residual
interests of both centers were purchased by us in September and July 2004,
respectively. We now own 100% of all our locations and our minority interest
liabilities have been eliminated. Minority interest in earnings of subsidiaries
increased $250,000 in fiscal 2004 compared to the same period in the prior
period primarily due to the earnings incurred by Rancho Bernardo.
DISCONTINUED OPERATION
The income from operations of Westchester was $0.3 million for fiscal 2003.
Net revenue was $2.2 million for fiscal 2003. Effective March 31, 2003, we sold
our 50% share of Westchester to our joint venture partner for $3.0 million. As
part of the transaction, we acquired 100% of the accounts receivable generated
through March 31, 2003 for $1.3 million and reimbursed Westchester $0.3 million,
which represented 50% of the remaining liabilities, resulting in net cash
proceeds of approximately $1.4 million. We recognized a gain on the transaction
of approximately $2.9 million in fiscal 2003.
33
YEAR ENDED OCTOBER 31, 2003 COMPARED TO THE YEAR ENDED OCTOBER 31, 2002
During fiscal 2003, we continued our efforts to enhance our operations and
expand our network, while improving our financial position and cash flows. Our
results for fiscal 2003 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 the other
matters discussed below, we were able to achieve modest improvements in our net
revenues and narrowed our loss from continuing operations. However, we continued
to experience net losses, although this was reduced from a net loss of $5.6
million in fiscal 2002 to a net loss of $2.3 million in fiscal 2003.
Also during fiscal 2003, 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. Net
cash provided by operating activities improved from $13.7 million in fiscal 2002
to $22.0 million in fiscal 2003, and we also reduced our net cash used by
investing activities during this period. At the same time, however, net cash
used in financing activities increased in fiscal 2003, and we continue to have a
working capital deficiency of $44.6 million at October 31, 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 fiscal 2003 was $140.3 million
compared to $134.1 million for fiscal 2002, an increase of approximately $6.2
million, or 4.6%. Of the net revenue increase, $6.0 million is attributable to
four new facilities which we opened or acquired during the last two fiscal
years: Burbank, which opened late November 2001, Tarzana Advanced, which opened
January 2002, Grove Diagnostic, which opened May 2002, and Rancho Bernardo
Advanced, which opened December 2002, offset by one facility, La Habra, which we
closed in July 2003. Our same store facilities, which we define as facilities
open two years or more, net revenue in 2002 and 2003 was $125.7 million and
$125.9 million, respectively. The same store facilities' net revenue was
affected by a $3.4 million decrease in net revenue at our Beverly Tower
facilities over the same period. The decreases in net revenue at our Beverly
Tower facilities were attributable to disruptions arising from the dispute
described under "Significant Events - Termination of Contract with Tower Imaging
Medical Group, Inc." Exclusive of Beverly Tower, our same store facilities had
an increase in net revenue of approximately $3.0 million from fiscal 2002 to
fiscal 2003. We present same store facilities as those open two years or more
because we believe that this presentation eliminates the effect of facilities
opened only a partial year.
Managed care capitated payor revenue increased from 20% of net revenue, or
approximately $26 million, to 22% of net revenue, or approximately $31 million,
for the years ended October 31, 2002 and 2003, respectively. We were successful
in retaining existing contracts while obtaining increases in reimbursement from
the payors coupled with receiving increases in co-payments from the individual
patients upon service
OPERATING EXPENSES
Operating expenses from continuing operations for fiscal 2003 increased
approximately $3.7 million, or 3.0%, from $124.2 million in fiscal 2002 to
$127.9 million in fiscal 2003. The $3.7 million increase includes $4.5 million
of net operating expenses related to four new facilities described above which
we opened or acquired during the last two fiscal years, offset by the closure of
our La Habra facility.
The following table sets forth our operating expenses for fiscal 2002 and
2003 (dollars in thousands):
Year Ended October 31,
-------------------------
2002 2003
--------- ---------
Salaries and professional reading fees $ 60,276 $ 62,454
Building and equipment rental 8,628 9,375
General administrative expenses 33,382 34,249
--------- ---------
Total operating expenses 102,286 106,078
Depreciation and amortization 15,010 16,874
Provision for bad debt 6,892 4,944
34
o SALARIES AND PROFESSIONAL READING FEES
Of the $2.2 million increase in salaries and professional reading fees
from fiscal 2002 to fiscal 2003, $2.4 million was due to the full
effect of the four new facilities which we opened or acquired during
the last two fiscal years, offset by one facility which we closed in
fiscal 2003. The $0.2 million improvement in same store salaries and
professional reading fees was due to the virtual elimination of the use
of locum tenens, or part-time, fill-in physicians, during fiscal 2003,
the hiring of a medical director who has recruited and solidified the
BRMG physician staff and the mix of revenue. In addition, part of the
improvement in professional reading fee expense was due to a decrease
in revenue at our Beverly Tower facilities during fiscal 2003, because
the radiologists at the Tower facilities had been compensated based on
a percentage of net revenue. Since October 2003, BRMG has staffed the
Beverly Tower facilities with radiologists with fixed salaries.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $0.7 million in fiscal
year 2003. The increase is primarily due to the expansion of
facilities, including Orange and Santa Clarita, and the impact of the
cost of living increases in our existing lease agreements at these
facilities.
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 increased $0.9 million in fiscal 2003 compared to the previous
period. However, total insurance costs increased $1.3 million in fiscal
2003. We continue to experience significant increases in insurance
costs as carriers request greater fees upon renewal. These increases in
insurance costs offset decreases in other expenses, including medical
supplies, utilities and other miscellaneous expenses. During fiscal
2003, we significantly reduced the cost of medical supplies through
increased rebates, improved inventory control, a new internal
purchasing staff, cost reductions, volume discounts and filmless
technology. Overall, medical supplies expense decreased approximately
$0.8 million during fiscal 2003 despite an increase in net revenue. In
addition, our expenditures for utilities, including telephone, computer
and circuit lines, and water and electricity, decreased $0.4 million
primarily due to a reduction in rates as compared to an increase
incurred in the summer of fiscal 2002 and the audit and elimination of
circuit lines.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $1.9 million due to the full
effect of four new facilities which we opened or acquired during the
last two fiscal years, offset by one facility which we closed in fiscal
2003.
o PROVISION FOR BAD DEBT
The $1.9 million decrease in provision for bad debt was primarily a
result of decreased bad debt write-offs and no significant payor
dissolutions, both of which had occurred in fiscal 2002.
INTEREST EXPENSE
Interest expense for fiscal 2003 increased approximately $1.3 million, or
7.8%, from $16.6 million in fiscal 2002 to $17.9 million in fiscal 2003. During
fiscal 2003, we entered into new capital lease obligations or notes payable of
approximately $8.4 million with average interest rates of 9.0%. Interest expense
increased primarily as a result of these new capital lease obligations and notes
payable, coupled with a full year's interest on over $30.8 million of capital
lease obligations entered into at various times throughout fiscal 2002.
OTHER INCOME
In fiscal 2002 and 2003, we earned other income of $0.8 million and $0.6
million, respectively, principally comprised of professional reading income,
sublease income, record copy income, deferred rent income, other income related
certain write-offs of liabilities and business interruption and insurance
refunds.
35
OTHER EXPENSE
In fiscal 2002 and 2003, we incurred other expense of $0.6 million and $0.3
million, respectively, principally comprised of write-offs of miscellaneous
receivables and other assets, losses on disposal of equipment, forgiveness of
notes, losses on the sale or disposal of assets and amortization of the
modification fee discount.
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 Rancho Bernardo Advanced LLC for the period. Minority
interest changed from earnings of $0.1 million in fiscal 2002 to a loss of $0.1
million in fiscal 2003 primarily due to the improved earnings at Burbank
Advanced Imaging Center LLC.
DISCONTINUED OPERATION
The income from operations of Westchester was $0.9 million and $0.3 million
for fiscal 2002 and 2003, respectively. Net revenue for the periods was $5.2
million and $2.2 million, respectively. Effective March 31, 2003, we sold our
50% share of Westchester to our joint venture partner for $3.0 million. As part
of the transaction, we acquired 100% of the accounts receivable generated
through March 31, 2003 for $1.3 million and reimbursed Westchester $0.3 million,
which represented 50% of the remaining liabilities, resulting in net cash
proceeds of approximately $1.4 million. We recognized a gain on the transaction
of approximately $2.9 million in fiscal 2003.
36
SUMMARY OF OPERATIONS BY QUARTER
The following table presents unaudited quarterly operating results for
each of our last eight fiscal quarters. We believe that all necessary
adjustments have been included in the amounts stated below to present fairly the
quarterly results when read in conjunction with the consolidated financial
statements. Results of operations for any particular quarter are not necessarily
indicative of results of operations for a full year or predictive of future
periods.
2003 Quarter Ended 2004 Quarter Ended
--------------------------------------------- ---------------------------------------------
Jan 31 Apr 30 Jul 31 Oct 31 Jan 31 Apr 30 Jul 31(1) Oct 31(2)
--------- --------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenue $ 34,381 $ 34,966 $ 36,340 $ 34,572 $ 34,047 $ 35,853 $ 33,900 $ 33,477
Operating expenses 31,999 32,657 32,787 30,453 31,086 32,774 32,820 30,821
Total other expense 4,515 4,644 4,354 4,213 4,265 4,965 5,363 4,173
Income tax expense -- -- -- -- -- -- -- 5,235
Loss from continuing
operations (2,138) (2,354) (809) (163) (1,305) (1,897) (4,517) (6,857)
Income from discontinued
operation 142 3,055 -- -- -- -- -- --
Net income (loss) (1,996) 701 (809) (163) (1,305) (1,897) (4,517) (6,857)
Basic earnings per share:
Loss from continuing
operations (.05) (.06) (.02) (.00) (.03) (.05) (.11) (.16)
Income from discontinued
operation .00 .08 -- -- -- -- -- --
Basic net loss per share (.05) .02 (.02) (.00) (.03) (.05) (.11) (.16)
Diluted earnings per share:
Loss from continuing
operations (.05) (.06) (.02) (.00) (.03) (.05) (.11) (.16)
Income from discontinued
operation .00 .08 -- -- -- -- -- --
Diluted net loss per share (.05) .02 (.02) (.00) (.03) (.05) (.11) (.16)
- ----------
(1) Includes costs related to some of our earlier attempts to solidify
financing and the related bond offering that was not completed including
$660,000 in professional and legal fees and $555,000 in interest expense.
(2) Includes $5.2 million of expense for the increase in the valuation
allowance for the net deferred tax asset.
RELATED PARTY TRANSACTIONS
We describe certain transactions between us and certain related parties
under "Certain Relationships and Related Transactions" below.
37
RECENT ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment". The new rule requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements based on
the fair value of the equity or liability instruments issued. The Company will
be required to apply Statement 123R as of the first interim reporting period
starting after June 15, 2005, which is the Company's fourth quarter beginning
August 1, 2005. The Company routinely uses share-based payment arrangements as
compensation for its employees. During fiscal 2002, 2003 and 2004, had this rule
been in effect, the Company would have recorded the non-cash expense of
$1,063,000, $82,000 and $379,000, respectively.
EXCHANGES OF NONMONETARY ASSETS
In December 2004, the FASB issued FASB Statement No. 153, "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29." The amendments made by
Statement 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." The provisions in
Statement 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Adoption of this standard is not expected
to have a material impact on the consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In September 2004, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 04-10, "Applying Paragraph 19 of FAS 131 in
Determining Whether to Aggregate Operating Segments That Do Not Meet the
Quantitative Thresholds." The consensus states that operating segments that do
not meet the quantitative thresholds can be aggregated only if aggregation is
consistent with the objective and basic principles of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the segments have
similar economic characteristics, and the segments share a majority of the
aggregation criteria (a)-(e) listed in paragraph 17 of SFAS 131. The consensus
was ratified by the FASB at their October 13, 2004 meeting. The effective date
of the consensus in this Issue has been postponed indefinitely at the November
17-18 EITF meeting. The Company does not anticipate a material impact on the
financial statements from the adoption of this consensus.
DETERMINING WHETHER TO REPORT DISCONTINUED OPERATIONS
In November 2004, the Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," in Determing Whether to Report Discontinued Operations. The consensus
provides guidance in determining: (a) which cash flows should be taken into
consideration when assessing whether the cash flows of the disposal component
have been or will be eliminated from the ongoing operations of the entity, (b)
the types of involvement ongoing between the disposal component and the entity
disposing of the component that constitute continuing involvement in the
operations of the disposal component, and (c) the appropriate (re)assessment
period for purposes of assessing whether the criteria in paragraph 42 have been
met. The consensus was ratified by the FASB at their November 30, 2004 meeting
and should be applied to a component of an enterprise that is either disposed of
or classified as held for sale in fiscal periods beginning after December 15,
2004. The Company does not anticipate a material impact on the financial
statements from the adoption of this consensus.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, could
cause our actual results to differ materially from those expressed in, or
implied by, the forward-looking statements.
38
Specific factors that might cause actual results to differ from our
expectations, include, but are not limited to:
o economic, competitive, demographic, business and other conditions in
our markets;
o a decline in patient referrals;
o changes in the rates or methods of third-party reimbursement for
diagnostic imaging services;
o the enforceability or termination of our contracts with radiology
practices;
o the availability of additional capital to fund capital expenditure
requirements;
o burdensome lawsuits against our contracted radiology practices and
us;
o reduced operating margins due to our managed care contracts and
capitated fee arrangements;
o any failure on our part to comply with state and federal
anti-kickback and anti-self-referral laws or any other applicable
healthcare regulations;
o our substantial indebtedness, debt service requirements and
liquidity constraints;
o the interruption of our operations in certain regions due to
earthquake or other extraordinary events;
o the recruitment and retention of technologists by us or by
radiologists of our contracted radiology groups; and
o other factors discussed in the "Risk Factors" section or elsewhere
in this report.
All future written and verbal forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this report might not occur.
RISKS RELATING TO OUR BUSINESS
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT
SERVICE OBLIGATIONS.
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. Our inability to generate sufficient cash flow to satisfy
our debt and other contractual obligations would adversely impact our business,
financial condition and results of operations.
OUR ABILITY TO GENERATE REVENUE DEPENDS IN LARGE PART ON REFERRALS FROM
PHYSICIANS.
A significant reduction in referrals would have a negative impact on our
business. We derive substantially all of our net revenue, directly or
indirectly, from fees charged for the diagnostic imaging services performed at
our facilities. We depend on referrals of patients from unaffiliated physicians
and other third parties who have no contractual obligations to refer patients to
us for a substantial portion of the services we perform. If a sufficiently large
number of these physicians and other third parties were to discontinue referring
patients to us, our scan volume could decrease, which would reduce our net
revenue and operating margins. Further, commercial third-party payors have
implemented programs that could limit the ability of physicians to refer
patients to us. For example, prepaid healthcare plans, such as health
maintenance organizations, sometimes contract directly with providers and
require their enrollees to obtain these services exclusively from those
providers. Some insurance companies and self-insured employers also limit these
services to contracted providers. These "closed panel" systems are now common in
the managed care environment, including California. Other systems create an
economic disincentive for referrals to providers outside the system's designated
panel of providers. If we are unable to compete successfully for these managed
care contracts, our results and prospects for growth could be adversely
affected.
CHANGES IN THIRD-PARTY REIMBURSEMENT RATES OR METHODS FOR DIAGNOSTIC
IMAGING SERVICES COULD RESULT IN A DECLINE IN OUR NET REVENUE AND NEGATIVELY
IMPACT OUR BUSINESS.
The fees charged for the diagnostic imaging services performed at our
facilities are paid by insurance companies, Medicare and Medi-Cal, workers
compensation, private and other payors. Any change in the rates of or conditions
for reimbursement from these sources of payment could substantially reduce the
amounts reimbursed to us or to our contracted radiology practices for services
provided, which could have an adverse effect on our net revenue. For example,
recent legislative changes in California's workers compensation rules will have
a negative impact on reimbursement rates for diagnostic imaging services,
although because we derive only a small portion of our net revenue from workers
compensation, we do not expect this particular legislation to have a significant
impact on us.
39
PRESSURE TO CONTROL HEALTHCARE COSTS COULD HAVE A NEGATIVE IMPACT ON OUR
RESULTS.
One of the principal objectives of health maintenance organizations and
preferred provider organizations is to control the cost of healthcare services.
Managed care contracting has become very competitive, and reimbursement
schedules are at or below Medicare reimbursement levels. The development and
expansion of health maintenance organizations, preferred provider organizations
and other managed care organizations within the geographic areas covered by our
network could have a negative impact on the utilization and pricing of our
services, because these organizations will exert greater control over patients'
access to diagnostic imaging services, the selections of the provider of such
services and reimbursement rates for those services.
IF BRMG OR ANY OF OUR OTHER CONTRACTED RADIOLOGY PRACTICES TERMINATE THEIR
AGREEMENTS WITH US, OUR BUSINESS COULD SUBSTANTIALLY DIMINISH.
Our relationship with BRMG is an integral part of our business. Through our
management agreement, BRMG provides all of the professional medical services at
42 of our 56 facilities, contracts with various other independent physicians and
physician groups to provide all of the professional medical services at most of
our other facilities, and must use its best efforts to provide the professional
medical services at any new facilities that we open or acquire. In addition,
BRMG's strong relationships with referring physicians are largely responsible
for the revenue generated at the facilities it services. Although our management
agreement with BRMG runs until 2014, BRMG has the right to terminate the
agreement if we default on our obligations and fail to cure the default. Also,
BRMG's ability to continue performing under the management agreement may be
curtailed or eliminated due to BRMG's financial difficulties, loss of physicians
or other circumstances. If BRMG cannot perform its obligation to us, we would
need to contract with one or more other radiology groups to provide the
professional medical services at the facilities serviced by BRMG. We may not be
able to locate radiology groups willing to provide those services on terms
acceptable to us, if at all. Even if we were able to do so, any replacement
radiology group's relationships with referring physicians may not be as
extensive as those of BRMG. In any such event, our business could be seriously
harmed. In addition, BRMG is party to substantially all of the managed care
contracts from which we derive revenue. If we were unable to readily replace
these contracts, our revenue would be negatively affected.
Except for our management agreement with BRMG, most of the agreements we or
BRMG have with contracted radiology practices typically have terms of one year,
which automatically renew unless either party delivers a non-renewal notice to
the other within a prescribed period. Most of these agreements may be terminated
by either party under some conditions, including, with respect to some of those
agreements, the right of either party to terminate the agreement without cause
upon 30 to 120 days notice. For example, in October 2003, our management
agreement with Tower Imaging Medical Group, Inc. was terminated as the result of
the settlement of litigation between Tower and us. The termination or material
modification of any of the agreements we or BRMG have with the radiologists that
provide professional medical services at our facilities could reduce our
revenue, at least in the short term.
IF OUR CONTRACTED RADIOLOGY PRACTICES, INCLUDING BRMG, LOSE A SIGNIFICANT
NUMBER OF THEIR RADIOLOGISTS, OUR FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED.
Recently, there has been a shortage of qualified radiologists in some of
the regional markets we serve. In addition, competition in recruiting
radiologists may make it difficult for our contracted radiology practices to
maintain adequate levels of radiologists. If a significant number of
radiologists terminate their relationships with our contracted radiology
practices and those radiology practices cannot recruit sufficient qualified
radiologists to fulfill their obligations under our agreements with them, our
ability to maximize the use of our diagnostic imaging facilities and our
financial results could be adversely affected. For example, in fiscal 2002, due
to a shortage of qualified radiologists in the marketplace, BRMG experienced
difficulty in hiring and retaining physicians and thus engaged independent
contractors and part-time fill-in physicians. Their cost was double the salary
of a regular BRMG full-time physician. Increased expenses to BRMG will impact
our financial results because the management fee we receive from BRMG, which is
based on a percentage of BRMG's collections, is adjusted annually to take into
account the expenses of BRMG. Neither we nor our contracted radiology practices
maintain insurance on the lives of any affiliated physicians.
WE MAY NOT BE ABLE TO SUCCESSFULLY GROW OUR BUSINESS.
As part of our business strategy, we intend to increase our presence in
California through selectively acquiring facilities, developing new facilities,
adding equipment at existing facilities, and directly or indirectly through BRMG
entering into contractual relationships with high-quality radiology practices.
However, our ability to successfully expand depends upon many factors,
including our ability to:
o Identify attractive and willing candidates for acquisitions;
o Identify locations in existing or new markets for development of
new facilities;
40
o Comply with legal requirements affecting our arrangements with
contracted radiology practices, including California prohibitions
on fee-splitting, corporate practice of medicine and
self-referrals;
o Obtain regulatory approvals where necessary and comply with
licensing and certification requirements applicable to our
diagnostic imaging facilities, the contracted radiology practices
and the physicians associated with the contracted radiology
practices;
o Recruit a sufficient number of qualified radiology technologists
and other non-medical personnel;
o Expand our infrastructure and management; and
o Our ability to expand also depends on our ability to compete for
opportunities. We may not be able to compete effectively for the
acquisition of diagnostic imaging facilities. Our competitors may
have better established operating histories and greater resources
than we do. Competition also may make any acquisitions more
expensive.
Acquisitions involve a number of special risks, including the following:
o Obtain adequate financing.
o Possible adverse effects on our operating results;
o Diversion of management's attention and resources;
o Failure to retain key personnel;
o Difficulties in integrating new operations into our existing
infrastructure; and
o Amortization or write-offs of acquired intangible assets.
WE MAY BECOME SUBJECT TO PROFESSIONAL MALPRACTICE LIABILITY.
Providing medical services subjects us to the risk of professional
malpractice and other similar claims. The physicians that our contracted
radiology practices employ are from time to time subject to malpractice claims.
We structure our relationships with the practices under our management
agreements with them in a manner that we believe does not constitute the
practice of medicine by us or subject us to professional malpractice claims for
acts or omissions of physicians employed by the contracted radiology practices.
Nevertheless, claims, suits or complaints relating to services provided by the
contracted radiology practices have been asserted against us in the past and may
be asserted against us in the future. In addition, we may be subject to
professional liability claims, including, without limitation, for improper use
or malfunction of our diagnostic imaging equipment. We may not be able to
maintain adequate liability insurance to protect us against those claims at
acceptable costs or at all.
Any claim made against us that is not fully covered by insurance could be
costly to defend, result in a substantial damage award against us and divert the
attention of our management from our operations, all of which could have an
adverse effect on our financial performance. In addition, successful claims
against us may adversely affect our business or reputation. Although California
places a $250,000 limit on non-economic damages for medical malpractice cases,
no limit applies to economic damages.
SOME OF OUR IMAGING MODALITIES USE RADIOACTIVE MATERIALS, WHICH GENERATE
REGULATED WASTE AND COULD SUBJECT US TO LIABILITIES FOR INJURIES OR VIOLATIONS
OF ENVIRONMENTAL AND HEALTH AND SAFETY LAWS.
Some of our imaging procedures use radioactive materials, which generate
medical and other regulated wastes. For example, patients are injected with a
radioactive substance before undergoing a PET scan. Storage, use and disposal of
these materials and waste products present the risk of accidental environmental
contamination and physical injury. We are subject to federal, California and
local regulations governing storage, handling and disposal of these materials.
We could incur significant costs and the diversion of our management's attention
in order to comply with current or future environmental and health and safety
laws and regulations. Also, we cannot completely eliminate the risk of
accidental contamination or injury from these hazardous materials. In the event
of an accident, we could be held liable for any resulting damages, and any
liability could exceed the limits of or fall outside the coverage of our
insurance.
41
WE EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES AND
HOSPITALS. THIS COMPETITION COULD ADVERSELY AFFECT OUR REVENUE AND BUSINESS.
The market for diagnostic imaging services in California is highly
competitive. We compete principally on the basis of our reputation, our ability
to provide multiple modalities at many of our facilities, the location of our
facilities and the quality of our diagnostic imaging services. We compete
locally with groups of radiologists, established hospitals, clinics and other
independent organizations that own and operate imaging equipment. Our major
national competitors include Radiologix, Inc., Alliance Imaging, Inc.,
Healthsouth Corporation and Insight Health Services. Some of our competitors may
now or in the future have access to greater financial resources than we do and
may have access to newer, more advanced equipment.
In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging facilities because of
the federal physician self-referral legislation. Final regulations issued in
January 2001 clarify exceptions to the physician self-referral legislation,
which created opportunities for some physician practices to establish their own
diagnostic imaging facilities within their group practices and to compete with
us. Although we currently do not, we could in the future experience significant
competition as a result of those final regulations.
TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR
SERVICES AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.
The development of new technologies or refinements of existing modalities
may require us to upgrade and enhance our existing equipment before we may
otherwise intend. Many companies currently manufacture diagnostic imaging
equipment. Competition among manufacturers for a greater share of the diagnostic
imaging equipment market may result in technological advances in the speed and
imaging capacity of new equipment. This may accelerate the obsolescence of our
equipment, and we may not have the financial ability to acquire the new or
improved equipment. In that event, we may be unable to deliver our services in
the efficient and effective manner which payors, physicians and patients expect
and thus our revenue could substantially decrease.
WE HAVE EXPERIENCED OPERATING LOSSES AND WE HAVE A SUBSTANTIAL ACCUMULATED
DEFICIT. IF WE ARE UNABLE TO IMPROVE OUR FINANCIAL PERFORMANCE, WE MAY BE UNABLE
TO PAY OUR OBLIGATIONS.
We have incurred net losses of $2.3 million and $14.6 million during the
years ended October 31, 2003 and 2004, respectively, and at October 31, 2004 we
had an accumulated stockholders' deficit of $67.6 million. Also, in recent
periods, we have suffered liquidity shortfalls which have led us to, among other
things, undertake and complete a "pre-packaged" Chapter 11 plan of
reorganization and modify the terms of various of our financial obligations.
While we believe that by taking these and other actions in the future we be able
to address these issues and solidify our financial condition, we cannot give
assurances that we will be able to generate sufficient cash flow from operations
to satisfy our debt obligations.
A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS COULD ADVERSELY
AFFECT OUR BUSINESS.
We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of new diagnostic imaging facilities and the
acquisition of additional facilities and new diagnostic imaging equipment. We
incur capital expenditures to, among other things, upgrade and replace existing
equipment for existing facilities and expand within our existing markets and
enter new markets. To the extent we are unable to generate sufficient cash from
our operations, funds are not available from our lenders or we are unable to
structure or obtain financing through operating leases, long-term installment
notes or capital leases, we may be unable to meet our capital expenditure
requirements.
BECAUSE WE HAVE HIGH FIXED COSTS, LOWER SCAN VOLUMES PER SYSTEM COULD
ADVERSELY AFFECT OUR BUSINESS.
The principal components of our expenses, excluding depreciation, consist
of compensation paid to technologists, salaries, real estate lease expenses and
equipment maintenance costs. Because a majority of these expenses are fixed, a
relatively small change in our revenue could have a disproportionate effect on
our operating and financial results depending on the source of our revenue.
Thus, decreased revenue as a result of lower scan volumes per system could
result in lower margins, which would adversely affect our business.
OUR SUCCESS DEPENDS IN PART ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO
RETAIN SUFFICIENT QUALIFIED PERSONNEL. IN ADDITION, FORMER EMPLOYEES COULD USE
THE EXPERIENCE AND RELATIONSHIPS DEVELOPED WHILE EMPLOYED WITH US TO COMPETE
WITH US.
Our success depends in part on our ability to attract and retain qualified
senior and executive management, managerial and technical personnel. Competition
in recruiting these personnel may make it difficult for us to continue our
growth and success. The loss of their services or our inability in the future to
attract and retain management and other key personnel could hinder the
42
implementation of our business strategy. The loss of the services of Dr. Howard
G. Berger, our President and Chief Executive Officer, or Norman R. Hames, our
Chief Operating Officer, could have a significant negative impact on our
operations. We believe that they could not easily be replaced with executives of
equal experience and capabilities. We do not maintain key person insurance on
the life of any of our executive officers with the exception of a $5.0 million
policy on the life of Dr. Berger. Also, if we lose the services of Dr. Berger,
our relationship with BRMG could deteriorate, which would adversely affect our
business.
Unlike many other states, California does not enforce agreements which
prohibit a former employee from competing with the former employer. As a result,
any of our employees whose employment is terminated is free to compete with us,
subject to prohibitions on the use of confidential information and, depending on
the terms of the employee's employment agreement, on solicitation of existing
employees and customers. A former executive, manager or other key employee who
joins one of our competitors could use the relationships he or she established
with third party payors, radiologists or referring physicians while our employee
and the industry knowledge he or she acquired during that tenure to enhance the
new employer's ability to compete with us.
CAPITATION FEE ARRANGEMENTS COULD REDUCE OUR OPERATING MARGINS.
For fiscal 2004, we derived approximately 25% of our net revenue from
capitation arrangements, and we intend to increase the revenue we derive from
capitation arrangements in the future. Under capitation arrangements, the payor
pays a pre-determined amount per-patient per-month in exchange for us providing
all necessary covered services to the patients covered under the arrangement.
These contracts pass much of the financial risk of providing diagnostic imaging
services, including the risk of over-use, from the payor to the provider. Our
success depends in part on our ability to negotiate effectively, on behalf of
the contracted radiology practices and our diagnostic imaging facilities,
contracts with health maintenance organizations, employer groups and other
third-party payors for services to be provided on a capitated basis and to
efficiently manage the utilization of those services. If we are not successful
in managing the utilization of services under these capitation arrangements or
if patients or enrollees covered by these contracts require more frequent or
extensive care than anticipated, we would incur unanticipated costs not offset
by additional revenue, which would reduce operating margins.
WE MAY BE UNABLE TO EFFECTIVELY MAINTAIN OUR EQUIPMENT OR GENERATE REVENUE
WHEN OUR EQUIPMENT IS NOT OPERATIONAL.
Timely, effective service is essential to maintaining our reputation and
high use rates on our imaging equipment. Although we have an agreement with GE
Medical Systems pursuant to which it maintains and repairs the majority of our
imaging equipment, this agreement does not compensate us for loss of revenue
when our systems are not fully operational and our business interruption
insurance may not provide sufficient coverage for the loss of revenue. Also, GE
Medical Systems may not be able to perform repairs or supply needed parts in a
timely manner. Therefore, if we experience more equipment malfunctions than
anticipated or if we are unable to promptly obtain the service necessary to keep
our equipment functioning effectively, our ability to provide services would be
adversely affected and our revenue could decline. In addition, our agreement
with GE Medical Systems terminates on October 31, 2005. We can give no assurance
that we will be able to renegotiate a replacement agreement with GE Medical
Systems or another vendor on comparable terms, or at all, in which case, our
maintenance costs could substantially increase and our business could be
adversely affected.
DISRUPTION OR MALFUNCTION IN OUR INFORMATION SYSTEMS COULD ADVERSELY AFFECT
OUR BUSINESS.
Our information technology system is vulnerable to damage or interruption
from:
o Earthquakes, fires, floods and other natural disasters;
o Power losses, computer systems failures, internet and
telecommunications or data network failures, operator negligence,
improper operation by or supervision of employees, physical and
electronic losses of data and similar events; and
o Computer viruses, penetration by hackers seeking to disrupt
operations or misappropriate information and other breaches of
security.
We and BRMG rely on this system to perform functions critical to our and
its ability to operate, including patient scheduling, billing, collections,
image storage and image transmission. Accordingly, an extended interruption in
the system's function could significantly curtail, directly and indirectly, our
ability to conduct our business and generate revenue.
43
OUR ACTUAL FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM THE PROJECTIONS WE
FILED WITH THE BANKRUPTCY COURT.
In connection with our "pre-packaged" Chapter 11 plan of reorganization
that was confirmed by the Bankruptcy Court on October 20, 2003, we were required
to prepare projected financial information to demonstrate to the Bankruptcy
Court the feasibility of the plan of reorganization and our ability to continue
operations upon our emergence from bankruptcy. As indicated in the disclosure
statement with respect to the plan of reorganization and the exhibits thereto,
the projected financial information and various estimates of value discussed
therein should not be regarded as representations or warranties by us or any
other person as to the accuracy of that information or that those projections or
valuations will be realized. We and our advisors prepared the information in the
disclosure statement, including the projected financial information and
estimates of value. This information was not audited or reviewed by our
independent accountants. The significant assumptions used in preparation of the
information and estimates of value were included as an exhibit to the disclosure
statement.
Those projections are not included in this report and you should not rely
upon them in any way or manner. We have not updated, nor will we update, those
projections. At the time we prepared the projections, they reflected numerous
assumptions concerning our anticipated future performance with respect to
prevailing and anticipated market and economic conditions which were and remain
beyond our control and which may not materialize. Projections are inherently
subject to significant and numerous uncertainties and to a wide variety of
significant business, economic and competitive risks and the assumptions
underlying the projections may be wrong in many material respects. Our actual
results may vary significantly from those contemplated by the projections. As a
result, we caution you not to rely upon those projections.
WE ARE VULNERABLE TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our headquarters and all of our facilities are located in California, an
area prone to earthquakes and other natural disasters. An earthquake or other
natural disaster could seriously impair our operations, and our insurance may
not be sufficient to cover us for the resulting losses.
COMPLYING WITH FEDERAL AND STATE REGULATIONS IS AN EXPENSIVE AND
TIME-CONSUMING PROCESS, AND ANY FAILURE TO COMPLY COULD RESULT IN SUBSTANTIAL
PENALTIES.
We are directly or indirectly through the radiology practices with which we
contract subject to extensive regulation by both the federal government and the
State of California, including:
o The federal False Claims Act;
o The federal Medicare and Medicaid anti-kickback laws, and
California anti-kickback prohibitions;
o Federal and California billing and claims submission laws and
regulations;
o The federal Health Insurance Portability and Accountability Act
of 1996;
o The federal physician self-referral prohibition commonly known as
the Stark Law and the California equivalent of the Stark Law;
o California laws that prohibit the practice of medicine by
non-physicians and prohibit fee-splitting arrangements involving
physicians;
o Federal and California laws governing the diagnostic imaging and
therapeutic equipment we use in our business concerning patient
safety, equipment operating specifications and radiation exposure
levels; and
o California laws governing reimbursement for diagnostic services
related to services compensable under workers compensation rules.
If our operations are found to be in violation of any of the laws and
regulations to which we or the radiology practices with which we contract are
subject, we may be subject to the applicable penalty associated with the
violation, including civil and criminal penalties, damages, fines and the
curtailment of our operations. Any penalties, damages, fines or curtailment of
our operations, individually or in the aggregate, could adversely affect our
ability to operate our business and our financial results. The risks of our
being found in violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities
or the courts, and their provisions are open to a variety of interpretations.
Any action brought against us for violation of these laws or regulations, even
if we successfully defend against it, could cause us to incur significant legal
expenses and divert our management's attention from the operation of our
business. For a more detailed discussion of the various federal and California
laws and regulations to which we are subject, see "Business - Government
Regulation."
44
IF WE FAIL TO COMPLY WITH VARIOUS LICENSURE, CERTIFICATION AND
ACCREDITATION STANDARDS, WE MAY BE SUBJECT TO LOSS OF LICENSURE, CERTIFICATION
OR ACCREDITATION, WHICH WOULD ADVERSELY AFFECT OUR OPERATIONS.
Ownership, construction, operation, expansion and acquisition of our
diagnostic imaging facilities are subject to various federal and California
laws, regulations and approvals concerning licensing of personnel, other
required certificates for certain types of healthcare facilities and certain
medical equipment. In addition, freestanding diagnostic imaging facilities that
provide services independent of a physician's office must be enrolled by
Medicare as an independent diagnostic testing facility to bill the Medicare
program. Medicare carriers have discretion in applying the independent
diagnostic testing facility requirements and therefore the application of these
requirements may vary from jurisdiction to jurisdiction. We may not be able to
receive the required regulatory approvals for any future acquisitions,
expansions or replacements, and the failure to obtain these approvals could
limit the opportunity to expand our services.
Our facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensure and certification. If any facility loses its certification under
the Medicare program, then the facility will be ineligible to receive
reimbursement from the Medicare and Medi-Cal programs. For the year ended
October 31, 2004, approximately 16% of our net revenue came from the Medicare
and Medi-Cal programs. A change in the applicable certification status of one of
our facilities could adversely affect our other facilities and in turn us as a
whole.
OUR AGREEMENTS WITH THE CONTRACTED RADIOLOGY PRACTICES MUST BE STRUCTURED
TO AVOID THE CORPORATE PRACTICE OF MEDICINE AND FEE-SPLITTING.
California law prohibits us from exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting professional fees with physicians. These laws
are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into management
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee typically based on a percentage of the practice's revenue. We
structure our relationships with the radiology practices, including the purchase
of diagnostic imaging facilities, in a manner that we believe keeps us from
engaging in the practice of medicine or exercising control over the medical
judgments or decisions of the radiology practices or their physicians or
violating the prohibitions against fee-splitting. However, because challenges to
these types of arrangements are not required to be reported, we cannot
substantiate our belief. There can be no assurance that our present arrangements
with BRMG or the physicians providing medical services and medical supervision
at our imaging facilities will not be challenged, and, if challenged, that they
will not be found to violate the corporate practice prohibition, thus subjecting
us to potential damages, injunction and/or civil and criminal penalties or
require us to restructure our arrangements in a way that would affect the
control or quality of our services and/or change the amounts we receive under
our management agreements. Any of these results could jeopardize our business.
FUTURE FEDERAL LEGISLATION COULD LIMIT THE PRICES WE CAN CHARGE FOR OUR
SERVICES, WHICH WOULD REDUCE OUR REVENUE AND ADVERSELY AFFECT OUR OPERATING
RESULTS.
In addition to extensive existing government healthcare regulation, there
are numerous initiatives affecting the coverage of and payment for healthcare
services, including proposals that would significantly limit reimbursement under
the Medicare and Medi-Cal programs. Limitations on reimbursement amounts and
other cost containment pressures have in the past resulted in a decrease in the
revenue we receive for each scan we perform. It is not clear at this time what
additional proposals, if any, will be made or adopted or, if adopted, what
effect these proposals would have on our business.
THE REGULATORY FRAMEWORK IN WHICH WE OPERATE IS UNCERTAIN AND EVOLVING.
Healthcare laws and regulations may change significantly in the future. We
continuously monitor these developments and modify our operations from time to
time as the regulatory environment changes. We cannot assure you, however, that
we will be able to adapt our operations to address new regulations or that new
regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and
California laws, neither our current or anticipated business operations nor the
operations of the contracted radiology practices have been the subject of
judicial or regulatory interpretation. We cannot assure you that a review of our
business by courts or regulatory authorities will not result in a determination
that could adversely affect our operations or that the healthcare regulatory
environment will not change in a way that restricts our operations.
Certain states have enacted statutes or adopted regulations affecting risk
assumption in the healthcare industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based managed care
contracting to applicable insurance laws and regulations. These laws and
regulations, if adopted in California, may require physicians and physician
networks to meet minimum capital requirements and other safety and soundness
requirements. Implementing additional regulations or compliance requirements
could result in substantial costs to us and the contracted radiology practices
and limit our ability to enter into capitation or other risk sharing managed
care arrangements.
45
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS.
Our current substantial indebtedness and any future indebtedness we incur
could have important consequences by adversely affecting our financial
condition, which could make it more difficult for us to satisfy our obligations
to our creditors. Our substantial indebtedness could also:
o Require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, reducing the
availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;
o Increase our vulnerability to adverse general economic and
industry conditions;
o Limit our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
o Place us at a competitive disadvantage compared to our
competitors that have less debt; and
o Limit our ability to borrow additional funds on terms that are
satisfactory to us or at all.
46
ITEM 7A. 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. Our credit facility, classified as a current liability
on our financial statements, is interest expense sensitive to changes in the
general level of interest because it is based upon the current prime rate plus a
factor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------- -------------------------------------------
The Financial Statements are attached hereto and begin on page F-1.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
We have audited the accompanying consolidated balance sheets of Primedex Health
Systems, Inc. and affiliates as of October 31, 2003 and 2004 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended October 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Primedex Health Systems, Inc. and affiliates as of October 31, 2003 and 2004,
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended October 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
- -----------------------
Los Angeles, California
January 11, 2005
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2003 2004
- ----------- -------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,000 $ 1,000
Accounts receivable, net 25,472,000 20,029,000
Unbilled receivables and other receivables 180,000 966,000
Other 2,092,000 1,858,000
-------------- --------------
Total current assets 27,774,000 22,854,000
-------------- --------------
PROPERTY AND EQUIPMENT, NET 81,886,000 77,333,000
-------------- --------------
OTHER ASSETS
Accounts receivable, net 2,033,000 1,868,000
Goodwill 23,064,000 23,099,000
Deferred income taxes 5,235,000 --
Trade name and other 2,043,000 2,297,000
-------------- --------------
Total other assets 32,375,000 27,264,000
-------------- --------------
Total assets $ 142,035,000 $ 127,451,000
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursements in transit $ 2,853,000 $ 2,536,000
Accounts payable and accrued expenses 24,462,000 22,852,000
Notes payable to related party 2,069,000 --
Current portion of notes and leases payable 43,005,000 29,638,000
-------------- --------------
Total current liabilities 72,389,000 55,026,000
-------------- --------------
LONG-TERM LIABILITIES
Subordinated debentures payable 16,215,000 16,147,000
Notes payable to related party 100,000 2,119,000
Notes and leases payable, net of current portion 104,360,000 121,385,000
Accrued expenses 1,421,000 329,000
-------------- --------------
Total long-term liabilities 122,096,000 139,980,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 637,000 --
STOCKHOLDERS' DEFICIT (53,087,000) (67,555,000)
-------------- --------------
Total liabilities and stockholders' deficit $ 142,035,000 $ 127,451,000
============== ==============
F-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2002 2003 2004
-------------- -------------- --------------
NET REVENUE $ 134,078,000 $ 140,259,000 $ 137,277,000
OPERATING EXPENSES
Operating expenses 102,286,000 106,078,000 105,828,000
Depreciation and amortization 15,010,000 16,874,000 17,762,000
Provision for bad debts 6,892,000 4,944,000 3,911,000
-------------- -------------- --------------
Total operating expenses 124,188,000 127,896,000 127,501,000
-------------- -------------- --------------
INCOME FROM OPERATIONS 9,890,000 12,363,000 9,776,000
OTHER EXPENSE (INCOME)
Interest expense 16,627,000 17,948,000 17,285,000
Other income (765,000) (556,000) (176,000)
Other expense 552,000 334,000 1,657,000
-------------- -------------- --------------
Total other expense 16,414,000 17,726,000 18,766,000
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND DISCONTINUED OPERATION (6,524,000) (5,363,000) (8,990,000)
INCOME TAX EXPENSE -- -- (5,235,000)
-------------- -------------- --------------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATION (6,524,000) (5,363,000) (14,225,000)
MINORITY INTEREST IN EARNINGS (LOSS) OF SUBSIDIARIES (89,000) 101,000 351,000
-------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (6,435,000) (5,464,000) (14,576,000)
DISCONTINUED OPERATION:
Income from operation of Westchester Imaging Group 884,000 255,000 --
Gain on sale of discontinued operation -- 2,942,000 --
-------------- -------------- --------------
INCOME FROM DISCONTINUED OPERATION 884,000 3,197,000 --
NET LOSS $ (5,551,000) $ (2,267,000) $ (14,576,000)
============== ============== ==============
BASIC EARNINGS PER SHARE
Loss from continuing operations $ (0.16) $ (0.13) $ (0.35)
Income from discontinued operation 0.02 0.08 --
-------------- -------------- --------------
BASIC NET LOSS PER SHARE $ (0.14) $ (0.05) $ (0.35)
-------------- -------------- --------------
DILUTED EARNINGS PER SHARE
Loss from continuing operations $ (0.16) $ (0.13) $ (0.35)
Income from discontinued operation 0.02 0.08 --
-------------- -------------- --------------
DILUTED NET LOSS PER SHARE $ (0.14) $ (0.05) $ (0.35)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 40,875,695 41,090,768 41,106,813
============== ============== ==============
Diluted 40,875,695 41,090,768 41,106,813
============== ============== ==============
F-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 2002, 2003 AND 2004
COMMON STOCK, $.01 PAR
VALUE, 100,000,000 SHARES
AUTHORIZED TREASURY STOCK, AT COST
======================= ======================================== TOTAL
PAID-IN ACCUMULATED SUBSCRIPTION STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT RECEIVABLE DEFICIT
----------- ---------- -------------- ----------- ----------- -------------- ----------- --------------
BALANCE -
OCTOBER
31, 2001 42,432,010 425,000 100,108,000 (1,825,000) (695,000) (145,432,000) (48,000) (45,642,000)
----------- ---------- -------------- ----------- ----------- -------------- ----------- --------------
Issuance
of common
stock 398,724 4,000 60,000 -- -- -- 18,000 82,000
Payment of
subscription
receivable -- -- -- -- -- -- 30,000 30,000
Retirement of
redeemable
stock -- -- 160,000 -- -- -- -- 160,000
Net loss -- -- -- -- -- (5,551,000) -- (5,551,000)
----------- ---------- -------------- ----------- ----------- -------------- ----------- --------------
BALANCE -
OCTOBER
31, 2002 42,830,734 429,000 100,328,000 (1,825,000) (695,000) (150,983,000) -- (50,921,000)
Issuance of
common
stock 95,000 1,000 27,000 -- -- -- -- 28,000
Conversion
of bond
debentures 6,079 -- 73,000 -- -- -- -- 73,000
Net loss -- -- -- -- -- (2,267,000) -- (2,267,000)
----------- ---------- -------------- ----------- ----------- -------------- ----------- --------------
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 -- -- -- -- -- (14,576,000) -- (14,576,000)
----------- ---------- -------------- ----------- ----------- -------------- ----------- --------------
BALANCE -
OCTOBER
31, 2004 42,931,813 $ 430,000 $ 100,536,000 (1,825,000) $ (695,000) $(167,826,000) $ -- $ (67,555,000)
=========== ========== ============== =========== =========== ============== =========== ==============
F-4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002 2003 2004
- ------------------------------------ ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,551,000) $ (2,267,000) $(14,576,000)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization - continuing operations 15,010,000 16,874,000 17,762,000
Depreciation and amortization - discontinued operations 299,000 63,000 --
Provision for bad debts 6,892,000 4,944,000 3,911,000
Deferred income tax expense -- -- 5,235,000
Gain on write-downs and settlement of obligations -- (8,000) (34,000)
Loss (gain) on sale of assets and operating sites 299,000 (2,841,000) 27,000
Employee stock compensation 80,000 -- --
Imputed and accrued interest expense 1,427,000 1,497,000 6,565,000
Minority interest in earnings of continuing subsidiaries (89,000) 101,000 351,000
Minority interest in earnings of discontinued subsidiaries 476,000 255,000 --
Changes in assets and liabilities:
Accounts receivable (7,448,000) (629,000) 1,696,000
Unbilled receivables (1,318,000) 1,271,000 (786,000)
Other assets (86,000) (475,000) (286,000)
Accounts payable and accrued expenses 3,830,000 3,217,000 (2,811,000)
Income taxes payable (125,000) -- --
============= ============= =============
Net cash provided by operating activities 13,696,000 22,002,000 17,054,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of imaging centers -- -- (35,000)
Purchase of property and equipment (7,815,000) (3,069,000) (3,774,000)
Proceeds from sale of divisions, centers, and equipment 1,700,000 1,367,000 --
------------- ------------- -------------
Net cash used by investing activities (6,115,000) (1,702,000) (3,809,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit 809,000 (1,731,000) (317,000)
Principal payments on notes and leases payable (20,736,000) (25,694,000) (13,247,000)
Proceeds from short and long-term borrowings 12,295,000 7,394,000 1,000,000
Purchase of subordinated debentures (10,000) (3,000) (60,000)
Proceeds from issuance of common stock 82,000 28,000 --
Joint venture proceeds 250,000 -- --
Joint venture distributions (275,000) (300,000) (650,000)
------------- ------------- -------------
Net cash used by financing activities (7,585,000) (20,306,000) (13,274,000)
------------- ------------- -------------
NET DECREASE IN CASH (4,000) (6,000) (29,000)
CASH, beginning of year 40,000 36,000 30,000
------------- ------------- -------------
CASH, end of year $ 36,000 $ 30,000 $ 1,000
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 14,953,000 $ 16,379,000 $ 10,686,000
============= ============= =============
F-5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002, 2003 AND 2004
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In October 2003, we paid $1,500,000 to acquire exclusive rights to the
use of the "Tower" trade name from Tower Radiology Medical Group, Inc. for its
Beverly Hills facilities. The intangible asset was acquired with a note payable
and will be amortized over ten years.
In July 2003, $73,000 in face value of subordinated bond debentures was
converted into 6,079 shares of common stock.
Effective March 31, 2003, we sold our share of Westchester Imaging
Group and generated a gain on the sale of approximately $2,942,000. As part of
the transaction, we transferred $239,000 in net equipment, $52,000 in other
assets, $602,000 in accounts payable and accrued expenses, $341,000 in capital
lease obligations and $923,000 in minority interest obligations.
We entered into capital leases or financed equipment through notes
payable for approximately $30,846,000, $8,362,000 and $9,351,000 for the years
ended October 31, 2002, 2003 and 2004, respectively.
Effective July 2, 2002, we renegotiated twelve of its outstanding notes
payable with DVI Financial Services, Inc., or DVI, and incurred $2.8 million in
refinancing charges which will be amortized over the six-year life of the notes.
Effective May 1, 2002, we acquired the assets of Grove Diagnostic
Imaging, or Grove, in Rancho Cucamonga, California for approximately $1,454,000
in assumed liabilities. We recorded net property and equipment of approximately
$1,441,000 and other current assets of approximately $13,000 as part of the
transaction.
In April 2002, on of our officers exercised his option to purchase
300,000 shares of common stock at $0.15 per share. As part of the transaction,
the officer surrendered to us 30,201 mature shares of common stock with a fair
market value of $45,000 ($1.49 per share based on the public closing price on
the transaction date). In addition, the officer surrendered us an additional
13,424 shares of common stock with a fair market value of $20,000 in payment of
his note payable with accumulated interest (classified as Stock Subscription
Receivable on our financial statements). By combining the transaction, we issued
a net 256,375 shares of common stock to the officer for his option exercise.
F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
NATURE OF BUSINESS
Primedex Health Systems, Inc., or Primedex, incorporated on October 21,
1985, provides diagnostic imaging services in the state of California. Imaging
services include 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. Our operations comprise a
single segment for financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital deficit of $32,172,000 at October 31, 2004 and
had losses from continuing operations of $5,464,000 and $14,576,000 during the
years ended October 31, 2003 and 2004, respectively. We also had a stockholders'
deficit of $67,555,000 at October 31, 2004.
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.
Our principal source of liquidity are funds available for borrowing under our
existing line of credit, now with Wells Fargo Foothill. Even though the line of
credit matures in 2008, we classify the line of credit as a current liability
primarily because it is collateralized by accounts receivable and the eligible
borrowing base is classified as a current asset. We finance the acquisition of
equipment mainly through capital and operating leases.
During fiscal 2004, we took the actions described below to continue to
fund our obligations. In addition, some of our plans to provide the necessary
working capital in the future are summarized below:
During fiscal 2004, we successfully completed our restructuring of our
outstanding notes payable and capital lease obligations. In addition 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 excludes those accounts older than 150 days from
invoice date and are 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 March 1, 2005. As of December 31, 2004, we had not
borrowed under the term loan.
Under the $20,000,000 revolving loan, an overadvance subline is
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 revolving loan, we are
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 October 31, 2004, we
had $10.6 million of borrowings outstanding under the Wells Fargo Foothill
revolving loan.
Advances outstanding under the revolving loan 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 ratios as well as limitations on annual capital expenditures.
Both of our working capital lenders' prime rates at October 31, 2004
were 4.75%. As of October 31, 2004 the total funds available for borrowing under
the available line was approximately $7.1 million. For fiscal 2003 and 2004, the
weighted average interest rates on short-term borrowings were 7.4% and 7.1%,
respectively. Our working capital facilities are further described in Note 7.
F-7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS (CONTINUED)
We also have a line of credit with an affiliate of DVI. At October 31,
2004, we had $3.4 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 in three monthly payments of $200,000 each beginning
November 1, 2004, four monthly payments of $250,000 each beginning on February
1, 2005, six monthly payments of $300,000 each beginning June 1, 2005, and a
final payment of all principal plus interest due on December 1, 2005. Subsequent
to year-end, we and Post Advisory Group, LLC, a Los Angeles-based investment
advisor, issued $4.0 million in principal amount of notes to repurchase the DVI
affiliate's line of credit facility with the residual funds utilized by us as
working capital. The new note payable has monthly interest only payments at 12%
per annum until its maturity in July 2008.
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.
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.
DVI' s restructured note payable is six payments of interest only from
July to December 2004 at 9%, 41 payments of principal and interest of $273,988,
and a final balloon payments of $7.6 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 make monthly payments of
$290,785 to DVI for the next 29 months. Effective November 30, 2004, Post
Advisory Group, LLC, ("Post"), acquired the DVI note payable and the
indebtedness was restructured by Post and the Company. The new note payable has
monthly interest only payments at 11% per annum until its maturity in June 2008.
The assignment of the note payable to Post will not result in any actual total
dollar savings to the Company over the term of the new obligation, but it will
defer cash flow outlays of approximately $1.3 million per year until its
maturity.
GE's restructured note payable is six payments of interest only at 9%,
or $407,210, from August 2004 to January 2005, 40 payments of principal and
interest at $1,127,067 beginning on February 1, 2005, and a final balloon
payments 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 will continue to make monthly payments of $1,127,067
to GE for the next 20 months.
U.S. Bank's restructured note payable is six payments of interest only
at 9%, or $491,933, from August 2004 to January 2005, 40 payments of principal
and interest at $1,055, 301 beginning on February 1, 2005, and a final balloon
payments 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 will continue to make monthly payments of
$1,055,301 to U.S Bank for the next 44 months.
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 restructure our financial obligations, we will obtain sufficient
cash to satisfy our obligations as they become due in fiscal 2005.
F-8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - 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 professional corporation, all collectively referred to as "us"
or "we". The consolidated financial statements also include Radnet Sub, Inc.,
Radnet Management I, Inc., Radnet Management II, Inc., or Modesto, SoCal MR Site
Management, Inc., Diagnostic Imaging Services, Inc., or DIS, Burbank Advanced
LLC, or Burbank, and Rancho Bernardo Advanced LLC, or RB, all wholly owned
subsidiaries of Radnet, and Westchester Imaging Group, a 50% owned subsidiary.
Interests of minority shareholders are separately disclosed in the consolidated
balance sheets and consolidated statements of operations of the Company.
Westchester Imaging Group, which was sold in March 2003, is reflected as a
discontinued operation in our consolidated statements of operations. Effective
July 31, 2004 and September 30, 2004, we purchased the remaining 25% minority
interests in Rancho Bernardo and Burbank, respectively.
The operations of BRMG are consolidated with us as a result of the
contractual and operational relationship among BRMG, Dr. Berger and us. We are
considered to have a controlling financial interest in BRMG pursuant to the
guidance in EITF 97-2. Medical services and supervision at most of our imaging
centers are provided through BRMG and through other independent physicians and
physician groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc.
and Beverly Radiology Medical Group, both of which are 99%-owned by Dr. Berger.
Radnet provides non-medical, 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.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. These
estimates and assumptions affect various matters, including our reported amounts
of assets and liabilities in its consolidated balance sheets at the dates of the
financial statements; its disclosure of contingent assets and liabilities at the
dates of the financial statements; and its reported amounts of revenues and
expenses in its 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.
REVENUE RECOGNITION - Revenue consists of net patient fee for service
revenue and revenue from capitation arrangements, or capitation revenue.
Net patient service revenue is recognized at the time services are
provided net of contractual adjustments based on our evaluation of expected
collections resulting from their analysis of current and past due accounts, past
collection experience in relation to amounts billed and other relevant
information. Contractual adjustments result from the differences between the
rates charged for services performed and reimbursements by government-sponsored
healthcare programs and insurance companies for such services.
Capitation revenue is recognized as revenue during the period in which
we were obligated to provide services to plan enrollees under contracts with
various health plans. Under these contracts, we receive a per enrollee amount
each month covering all contracted services needed by the plan enrollees.
The following table summarizes net revenue for the years ended October
31, 2002, 2003 and 2004:
2002 2003 2004
------------- ------------- -------------
Net patient service $107,593,000 $109,444,000 $103,271,000
Capitation 26,485,000 30,815,000 34,006,000
------------- ------------- -------------
Net revenue $134,078,000 $140,259,000 $137,277,000
============= ============= =============
Accounts receivable are primarily amounts due under fee-for-service
contracts from third party payors, such as insurance companies and patients and
government-sponsored healthcare programs geographically dispersed throughout
California. Receivables from government agencies made up approximately 14.0% and
15.0% of accounts receivable at October 31, 2003 and 2004, respectively.
F-9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts receivable as of October 31, 2004 are presented net of
allowances of approximately $58,641,000, of which $53,639,000 is included in
current and $5,002,000 is included in noncurrent. Accounts receivable as of
October 31, 2003, are presented net of allowances of approximately $60,042,000,
of which $55,605,000 is included in current and $4,437,000 is included in
noncurrent.
CREDIT RISKS - Financial instruments that potentially subject us to
credit risk are primarily cash equivalents and accounts receivable. We have
placed our cash and cash equivalents with one major financial institution. At
times, the cash in the financial institution is temporarily in excess of the
amount insured by the Federal Deposit Insurance Corporation, or FDIC.
With respect to accounts receivable, we routinely assesses the
financial strength of our customers and third-party payors and, based upon
factors surrounding their credit risk, establish a provision for bad debt. Net
revenue by payor for the years ended October 31, 2002, 2003 and 2004 were: Net
Revenue
2002 2003 2004
----- ----- -----
Capitation contracts 19.8% 22.0% 24.8%
HMO/PPO/Managed care 20.5% 20.6% 21.3%
Special group contract 12.4% 13.4% 12.3%
Medicare 12.9% 12.7% 13.6%
Blue Cross/Shield/Champus 11.8% 12.0% 13.2%
Commercial insurance 10.5% 8.1% 4.9%
Workers compensation 6.2% 5.6% 3.8%
Medi-Cal 2.4% 2.3% 2.6%
Other 3.5% 3.3% 3.5%
Management believes that its accounts receivable credit risk exposure,
beyond allowances that have been provided, is limited.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, we consider all highly liquid investments purchased with a maturity of
three months or less when purchased to be cash equivalents. The carrying amount
of cash and cash equivalents approximates their fair market value.
LOAN FEES - Costs of financing are deferred and amortized on a
straight-line basis over the life of the respective loan.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost,
less accumulated depreciation and amortization and valuation impairment
allowances. Depreciation and amortization of property and equipment are provided
using the straight-line method over their estimated useful lives, which range
from 3 to 15 years. Leasehold improvements are amortized over their estimated
useful lives, which range from 3 to 20 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL - Goodwill at October 31, 2004 totaled $23,099,000. Goodwill
is recorded as a result of the acquisition of operating facilities. The
operating facilities are grouped by territory into reporting units. Management
evaluates 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. For each of the three year periods ended
October 31, 2004, we recorded no impairment loss related to goodwill. However,
if 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.
LONG-LIVED ASSETS - We evaluate our long-lived assets (property, plant
and equipment) and definite-lived intangibles for impairment whenever indicators
of impairment exist. The accounting standards require that if the sum of the
undiscounted expected future cash flows from a long-lived asset or
definite-lived intangible is less than the carrying value of that asset, an
asset impairment charge must be recognized. The amount of the impairment charge
is calculated as the excess of the asset's carrying value over its fair value,
which generally represents the discounted future cash flows from that asset or
in the case of assets we expect to sell, at fair value less costs to sell. F-10
F-10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - Income tax expense is computed using an asset and
liability method and using expected annual effective tax rates. Under this
method, deferred income tax assets and liabilities result from temporary
differences in the financial reporting bases and the income tax reporting bases
of assets and liabilities. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefit that, based on available evidence,
is not expected to be realized. When it appears more likely than not that
deferred taxes will not be realized, a valuation allowance is recorded to reduce
the deferred tax asset to its estimated realizable value. Income taxes are
further explained in Note 9.
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.
Year Ended October 31,
2002 2003 2004
------------- ------------- --------------
Net loss as reported $ (5,551,000) $ (2,267,000) $ (14,576,000)
Add: Stock-based employee compensation expense included in reported
net loss 80,000 -- --
Deduct: Total stock-based employee compensation expense determined
under fair value-based method (1,063,000) (82,000) (379,000)
------------- ------------- --------------
Pro forma net loss $ (6,534,000) $ (2,349,000) $ (14,955,000)
------------- ------------- --------------
Loss per share:
Basic - as reported $ (0.14) $ (0.05) $ (0.35)
------------- ------------- --------------
Basic - pro forma $ (0.16) $ (0.06) $ (0.36)
------------- ------------- --------------
Diluted - as reported $ (0.14) $ (0.05) $ (0.35)
------------- ------------- --------------
Diluted - pro forma $ (0.16) $ (0.06) $ (0.36)
------------- ------------- --------------
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
October 31, interest rate Expected life Expected volatility Expected dividends
2004 3.00% 5 years 99.22% ---
2003 3.00% 5 years 121.88% --
2002 3.66% 5 years 78.93% --
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. These changes have no effect on
net income.
F-11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding, net of common stock held in treasury, as follows:
Year Ended October 31,
2002 2003 2004
--------------- --------------- -------------
Net loss from continuing operations $ (6,435,000) $ (5,464,000) $(14,576,000)
Net income from discontinued operations 884,000 3,197,000 --
--------------- --------------- -------------
Net loss for earnings per share computation $ (5,551,000) $ (2,267,000) $(14,576,000)
=============== =============== =============
BASIC EARNINGS (LOSS) PER SHARE
Weighted average number of common shares
outstanding during the year 40,875,695 41,090,768 41,106,813
=============== =============== =============
Basic earnings (loss) per share:
Loss from continuing operations $ (0.16) $ (0.13) $ (0.35)
Income from discontinued operation $ 0.02 $ 0.08 $ --
=============== =============== =============
Basic loss per share $ (0.14) $ (0.05) $ (0.35)
=============== =============== =============
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average number of common shares
outstanding during the year 40,875,695 41,090,768 41,106,813
Add additional shares issuable upon exercise
of stock options and warrants -- -- --
=============== =============== =============
Weighted average number of common shares used in
calculating diluted earnings per share 40,875,695 41,090,768 41,106,813
=============== =============== =============
Diluted earnings (loss) per share:
Loss from continuing operations $ (0.16) $ (0.13) $ (0.35)
Income from discontinued operation $ 0.02 $ 0.08 $ --
=============== =============== =============
Diluted loss per share $ (0.14) $ (0.05) $ (0.35)
=============== =============== =============
For the years ended October 31, 2002, 2003 and 2004, we excluded all
options, warrants and convertible debentures in the calculation of diluted
earnings per share because their effect would be antidilutive. However, these
instruments could potentially dilute earnings per share in future years.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
"Share-Based Payment". The new rule requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements based
on the fair value of the equity or liability instruments issued. The Company
will be required to apply Statement 123R as of the first interim reporting
period starting after June 15, 2005, which is the Company's fourth quarter
beginning August 1, 2005. The Company routinely uses share-based payment
arrangements as compensation for its employees. During fiscal 2002, 2003 and
2004, had this rule been in effect, the Company would have recorded the non-cash
expense of $1,063,000, $82,000 and $379,000, respectively.
F-12
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCHANGES OF NONMONETARY ASSETS
In December 2004, the FASB issued FASB Statement No. 153, "Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29." The amendments made by
Statement 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have "commercial substance." The provisions in
Statement 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Adoption of this standard is not expected
to have a material impact on the consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In September 2004, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 04-10, "Applying Paragraph 19 of FAS 131 in
Determining Whether to Aggregate Operating Segments That Do Not Meet the
Quantitative Thresholds." The consensus states that operating segments that do
not meet the quantitative thresholds can be aggregated only if aggregation is
consistent with the objective and basic principles of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the segments have
similar economic characteristics, and the segments share a majority of the
aggregation criteria (a)-(e) listed in paragraph 17 of SFAS 131. The consensus
was ratified by the FASB at their October 13, 2004 meeting. The effective date
of the consensus in this Issue has been postponed indefinitely at the November
17-18 EITF meeting. The Company does not anticipate a material impact on the
financial statements from the adoption of this consensus.
DETERMINING WHETHER TO REPORT DISCONTINUED OPERATIONS
In November 2004, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 03-13, "Applying the Conditions in Paragraph 42 of
FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," in Determing Whether to Report Discontinued Operations. The consensus
provides guidance in determining: (a) which cash flows should be taken into
consideration when assessing whether the cash flows of the disposal component
have been or will be eliminated from the ongoing operations of the entity, (b)
the types of involvement ongoing between the disposal component and the entity
disposing of the component that constitute continuing involvement in the
operations of the disposal component, and (c) the appropriate (re)assessment
period for purposes of assessing whether the criteria in paragraph 42 have been
met. The consensus was ratified by the FASB at their November 30, 2004 meeting
and should be applied to a component of an enterprise that is either disposed of
or classified as held for sale in fiscal periods beginning after December 15,
2004. The Company does not anticipate a material impact on the financial
statements from the adoption of this consensus.
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES
SALE OF IMAGING CENTER - DISCONTINUED OPERATION
In March 2003, we sold our 50% share of Westchester Imaging Group for
$3,000,000. As part of the transaction, we repurchased 100% of the accounts
receivable with the cash proceeds. We have an option, which is exercisable on or
before March 31, 2005, to repurchase our financial interest in Westchester at
fair market value, as determined in accordance with the sale agreement. The
transaction resulted in a gain of approximately $2,942,000. For the year ended
October 31, 2002 and the five months ended March 31, 2003, the center generated
net revenue of $5,203,000 and $2,231,000, respectively. At October 31, 2002, the
assets and liabilities of Westchester Imaging Group were $1,831,000 and
$2,231,000, respectively.
F-13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES (CONTINUED)
ACQUISITIONS AND OPENINGS OF IMAGING CENTERS
In January 2004, we entered into a new building lease for approximately
3,963 square feet of space in Murrietta, California, near Temecula. The center
opened in December 2004 and offers MRI, CT, PET and x-ray services. The
equipment was financed by GE. As of October 31, 2004, we had used existing lines
of credit for the payment of approximately $840,000 in leasehold improvements
for Murietta.
In December 2002, we opened an imaging center in Rancho Bernardo,
California. Prior to its opening, in late November 2001, we entered into a new
building lease arrangement for 9,557 square feet in Rancho Bernardo in
anticipation of opening the new multi-modality imaging center. The center, RB,
was 75%-owned by us and 25%-owned by two physicians who invested $250,000.
Effective July 31, 2004, we purchased the 25% minority interest from the two
physicians for $200,000 which consisted of an $80,000 down payment and monthly
payments of $10,000 due from September 2004 to August 2005. There was no
goodwill recorded in the transaction.
In the second quarter of fiscal 2002, we entered into two new building
leases for approximately 10,000 square feet of space in the building across the
street from its Orange Imaging Center to open Orange Advanced Imaging Center and
Orange Women's Center. The centers opened in late September 2002. Orange
Advanced provides MRI, PET, nuclear medicine and X-ray services, and Orange
Women's provides ultrasound and mammography services. Effective May 1, 2002, we
acquired certain assets and liabilities of Grove in Rancho Cucamonga, California
for the assumption of approximately $1,454,000 of outstanding obligations to
DVI. The center provides MRI, CT, ultrasound, mammography and X-ray services.
Effective January 1, 2002, we entered into a new capitation arrangement
with Primecare Medical Group for approximately 62,000 covered lives, primarily
benefiting the Company's Temecula facility. We entered into two new building
leases in Sun City and Lake Elsinore, California, which provide X-ray services
to support the new contract. In January 2003, we closed the Lake Elsinore
facility and moved the location to nearby Wildomar, California.
In January 2002, we opened Tarzana Advanced Imaging Center, which
provides MRI, CT and PET services.
In late November 2001, we opened Burbank, which provides MRI, CT,
ultrasound and X-ray services. Burbank was 75%-owned by us and 25%-owned by two
physicians. Effective September 30, 2004, we purchased the 25% minority interest
from the two partners for $1,090,000 which consisted of a $500,000 down payment
and monthly payments of $60,000 due from October 2004 to May 2005, and monthly
payments of $55,000 due from June to July 2005. There was no goodwill recorded
in the transaction.
In addition, during fiscal 2003, upon entering into new capitation
arrangements, we opened two facilities adjacent to our Burbank and Santa Clarita
facilities to provide X-ray services. In fiscal 2004, we opened an additional
three satellite facilities servicing our Northridge, Rancho Cucamonga and
Thousand Oaks centers.
CLOSURE OF IMAGING CENTERS
In early fiscal 2004, we first downsized and later closed its North
County facility. The center's location was no longer productive and business
could be sent to our facility in Rancho Bernardo. The equipment was moved to
other locations and approximately $80,000 of leasehold improvements were written
off. During the years ended October 31, 2002, 2003 and 2004, the center
generated net revenue of $1,527,000, $1,067,000 and $49,000, respectively.
During the year ended October 31, 2004, the center incurred a net loss of
$122,000, and during the years ended October 31, 2002 and 2003, the center
generated net income of $151,000 and $33,000, respectively.
In addition, during fiscal 2004, we closed two satellite facilities
servicing our Antelope Valley and Lancaster regions.
In July 2003, we closed our La Habra facility. The center's location
was no longer a productive asset in our network and the business could be sent
to our facilities in Orange County. The equipment was moved to other locations
or returned to the vendor and its leasehold improvements were written off.
During the years ended October 31, 2002 and 2003, the center generated net
revenue of $1,542,000 and $368,000, respectively, and generated net income of
$281,000 for the year ended October 31, 2002, and incurred a net loss of
$155,000 for the year ended October 31, 2003.
Due to low volume, RadNet Heartcheck Management, Inc., one of our
subsidiaries, ceased doing business in early fiscal 2003. We wrote-off a
receivable related to Heartcheck of approximately $0.2 million during fiscal
2003.
F-14
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization as of
October 31, 2003 and 2004 are:
2003 2004
-------------- --------------
Buildings $ 600,000 $ 600,000
Medical equipment 21,888,000 22,069,000
Office equipment, furniture and fixtures 6,577,000 7,171,000
Leasehold improvements 24,375,000 26,243,000
Equipment under capital lease 84,437,000 93,289,000
-------------- --------------
137,877,000 149,372,000
Accumulated depreciation and amortization (55,991,000) (72,039,000)
-------------- --------------
$ 81,886,000 $ 77,333,000
============== ==============
Depreciation and amortization expense on property and equipment for the
years ended October 31, 2002, 2003 and 2004 was approximately $15,052,000,
$16,756,000 and $17,494,000, respectively. Accumulated amortization for
equipment under capital leases as of October 31, 2003 and 2004 was approximately
$31,110,000 and $41,747,000, respectively. Amortization expense for equipment
under capital leases for the years ended October 31 2002, 2003, and 2004
included above, was approximately, $8,913,000, $10,507,000, and $11,550,000,
respectively.
NOTE 5 - GOODWILL
Goodwill is recorded at cost of $29,329,000, less accumulated
amortization of $6,265,000 for the year ended October 31, 2003, and $29,144,000
less accumulated amortization of $6,045,000 for the year ended October 31, 2004.
Fully amortized goodwill at the Company's Tustin location, with both cost and
accumulated amortization of $220,000, was written off in October 2004. Upon the
adoption of SFAS No. 142, we discontinued amortization of goodwill effective
November 1, 2001. Thus, for the three years ended October 31, 2002, 2003 and
2004, no adjustment to amortization expense is necessary when comparing net
income and earnings per share.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2003 2004
------------- -------------
Accounts payable $ 11,545,000 $ 7,882,000
Accrued expenses 10,444,000 12,173,000
Accrued professional fees 1,997,000 1,045,000
Accrued loss on legal judgments 277,000 205,000
Accrued patient service payable 1,620,000 1,876,000
------------- -------------
25,883,000 23,181,000
Less long-term portion (1,421,000) (329,000)
------------- -------------
$ 24,462,000 $ 22,852,000
============= =============
Accrued professional fees consist of outside professional agreements,
which are paid out of net cash collections. The long-term portion relates to the
accounts receivable classified as long-term. Accrued patient service payable
relates to one contract which prepays us for future diagnostic exams to be
performed for which they receive a discount.
F-15
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES
Notes payable, long-term debt and capital lease obligations at October
31, 2003 and 2004 consist of the following:
2003 2004
-------------- --------------
Revolving lines of credit $ 14,916,000 $ 14,011,000
Notes payable at interest rates ranging from
6.6% to 11.5%, due through 2009,
collateralized by medical equipment 71,790,000 69,613,000
Obligations under capital leases at interest
rates ranging from 7.6% to 13.6%, due through 2009,
collateralized by medical and office equipment 60,659,000 67,399,000
-------------- --------------
147,365,000 151,023,000
Less: current portion (43,005,000) (29,638,000)
-------------- --------------
$ 104,360,000 $ 121,385,000
============== ==============
Our working capital needs currently are provided under one line of
credit with Wells Fargo Foothill. BRMG and Wells Fargo Foothill are parties to a
credit facility under which BRMG may borrow the lesser of 85% of the net
collectible value 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 value servicing the 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 payments due on March 1, 2005. As of December 31,
2004, we had not borrowed under the term loan.
Under the $20,000,000 revolving loan, 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 revolving loan, we are
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 October 31, 2004, we
had $10.6 million of borrowings outstanding under the Wells Fargo Foothill
revolving loan. The revolving loan is subject to renewal on January 31, 2008.
Advances outstanding under the revolving loan 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 it
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 if EBITDA, net worth, fixed charge coverage ratios and maximum
senior debt/EBITDA ratios as well as limitations on annual capital expenditures.
We also had a line of credit with an affiliate of DVI. At October
31,2004, we had $3.4 million outstanding under this line. Interest on the
outstanding balance was payable monthly at our lender's prime rate plus 1.0%.
Future borrowings under this line of credit were no longer available and the
balance was being paid down by collections on historical accounts receivable and
variable monthly installment payments in the future. Subsequent to year-end, we
and Post Advisory Group, LLC, a Los Angeles-based investment advisor, issued
$4.0 million in principal amount of notes to repurchase the DVI affiliate's line
of credit facility with the residual funds utilized by us as working capital.
Both of our working capital lenders' prime rates at October 31, 2004
were 4.75%. As of October 31, 2004 the total funds available for borrowing under
the available line was approximately $7.1 million. For fiscal 2003 and 2004, the
weighted average interest rates on short-term borrowings were 7.4% and 7.1%,
respectively.
F-16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED)
Annual principal maturities of notes payable, revolving lines of credit
and long-term obligations exclusive of capital leases for future years ending
October 31 are:
2005 $20,796,000
2006 7,817,000
2007 8,742,000
2008 46,269,000
Thereafter --
------------
$83,624,000
============
We lease equipment under capital lease arrangements. Future minimum
lease payments under capital leases for future years ending October 31 are:
2005 $ 14,635,000
2006 16,147,000
2007 15,987,000
2008 36,553,000
2009 319,000
Thereafter --
-------------
Total minimum payments 83,641,000
Amount representing interest (16,242,000)
-------------
Present value of net minimum lease payments 67,399,000
Current portion (8,842,000)
-------------
Long-term portion $ 58,557,000
=============
At October 31, 2004, we were in default on approximately $317,000 under
various note agreements pertaining to the acquisition of imaging centers for
non-payment of principal and interest. These notes have been classified as
current payables.
NOTE 8 - SUBORDINATED DEBENTURES
In June 1993, our registration for a total of $25,875,000 of 10% Series
A convertible subordinated debentures due June 2003 was declared effective by
the Securities and Exchange Commission. The net proceeds to us were
approximately $23,000,000. Costs of $3,000,000 associated with the original
offering were fully amortized over ten years. The debentures were convertible
into shares of common stock at any time before maturity into $1,000 principal
amounts at a conversion price of $12.00 per share after June 1999.
Amortization expense of the offering costs for the years ended October
31, 2002, 2003 and 2004 was $188,000, $110,000 and $-0-, respectively. Interest
expense for the years ended October 31, 2002, 2003 and 2004 was approximately
$1,630,000, $1,708,000 and $1,862,000, respectively. Bondholders converted
$73,000 face value of debentures into 6,079 shares of common stock in July 2003.
There were no conversions during the years ended October 31, 2002 and 2004.
During the years ended October 31, 2002, 2003 and 2004, we repurchased
debentures with face amounts of $12,000, $3,000 and $68,000, for $11,000, $3,000
and $60,000, respectively, resulting in gains on early extinguishments of
$1,000, $-0- and $8,000, respectively.
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 its 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.
F-17
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
Income taxes have been recorded under SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial and
income tax reporting purposes and operating loss carryforwards. We did not incur
any federal or state income taxes in 2002, 2003 or 2004.
Reconciliation between the effective tax rate and the statutory tax
rates for the years ended October 31, 2002, 2003 and 2004 are as follows:
2002 2003 2004
-------- -------- --------
Federal tax (34.0)% (34.0)% (34.0)%
State franchise tax, net of federal benefit (5.8) (5.8) 2.2
Change in valuation allowance 39.8 39.8 90.0
-------- -------- --------
Income tax benefit --% --% 58.2%
-------- -------- --------
At October 31, 2003 and 2004, our deferred tax assets and liabilities
were comprised of the following items:
2003 2004
------------- -------------
DEFERRED TAX ASSETS AND LIABILITIES, noncurrent
Fixed and intangible assets $ (8,362,000) $(10,435,000)
Other 966,000 632,000
Net operating loss carryforwards 51,993,000 57,259,000
------------- -------------
44,597,000 47,456,000
Valuation allowance (39,362,000) (47,456,000)
------------- -------------
$ 5,235,000 $ --
------------- -------------
As of October 31, 2004, we had federal and state net operating loss
carryforwards of approximately $160,340,000 and $45,300,000, which expire at
various intervals from the years 2005 to 2024. As of October 31, 2004,
$22,100,000 of our federal net operating loss carryforwards were subject to
limitations related to their utilization under Section 382 of the Internal
Revenue Code. The annual limitations for utilization of these net operating loss
carryforwards have not been determined. If a greater than 50% change in
ownership (as determined in accordance with Section 382 of the Internal Revenue
Code) were to occur, the net operating loss carryovers may be subject to
limitation in future years.
For the next five years, and thereafter, federal net operating loss
carryforwards expire as follows:
Total Net
Operating Loss Subject to
Year Ended Carryforward Limitation
---------- ------------- -------------
2005 $ 4,053,000 $ 4,053,000
2006 3,439,000 3,439,000
2007 1,226,000 1,226,000
2008 22,533,000 2,295,000
2009 16,421,000 2,513,000
Thereafter 112,668,000 8,574,000
------------- -------------
$160,340,000 $ 22,100,000
------------- -------------
F-18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS
PREFERRED STOCK
We have authorized the issuance of 10,000,000 shares of preferred stock
with a par value of $0.01 per share. There were no preferred shares issued or
outstanding at October 31, 2002, 2003 or 2004. Shares may be issued in one or
more series. During the year ended October 31, 2001, we issued 5,542,018
preferred shares in settlement of certain debt obligations and subsequently
retired the stock by restructuring existing notes payable and combining the
preferred stock balance due of approximately $5,542,000 plus accrued interest of
approximately $235,000. In conjunction with this refinancing, we issued
five-year warrants to purchase 1,000,000 shares of common stock at an exercise
price of $1.00 per share.
STOCK OPTION INCENTIVE PLANS
We have two long-term incentive stock option plans. The 1992 plan has
not issued options since the inception of the new 2000 plan. The 2000 plan
reserves 2,000,000 shares of common stock. Options granted under the plan are
intended to qualify as incentive stock options under existing tax regulations.
In addition, we have issued non-qualified stock options from time to time in
connection with acquisitions and for other purposes and has also issued stock
under the plan. Employee stock options generally vest over three years and
expire five to ten years from date of grant. As of October 31, 2004,
approximately 1,095,000, or 91%, of the outstanding stock options are fully
vested.
We have issued warrants under various types of arrangements to
employees, in conjunction with debt financing and in exchange for outside
services. All warrants are issued with an exercise price equal to the fair
market value of the underlying common stock on the date of issuance. Generally,
the warrants expire five years from the date of grant. The terms of vesting are
determined by the board of directors at issuance. Warrants issued to employees
typically vest over three years.
The following table summarizes the activity for each of the three years
ended October 31, 2004:
Outstanding Warrants Outstanding Options
-------------------- -------------------
Exercise
Shares Price Range Number Price Range
----------- -------------- ---------- --------------
Balance, October 31, 2001 6,677,885 $ 0.38 - 1.00 1,502,000 $ 0.15 - 0.72
Granted 1,093,250 0.60 - 1.61 29,000 1.67
Exercised -- -- (309,499) 0.15 - 0.46
Canceled or expired (309,000) 0.40 - 1.35 (39,584) 0.46 - 1.67
----------- -------------- ---------- --------------
Balance, October 31, 2002 7,462,135 $ 0.38 - 1.61 1,181,917 $ 0.46 - 1.67
Granted 750,000 0.19 - 0.41 -- --
Exercised -- -- (95,000) 0.30
Canceled or expired (130,000) 0.75 - 0.79 (28,000) 0.46 - 1.67
----------- -------------- ---------- --------------
Balance, October 31, 2003 8,082,135 $ 0.19 - 1.61 1,058,917 $ 0.46 - 1.67
Granted 4,325,000 0.30 - 0.70 150,000 0.46
Exercised -- -- -- --
Canceled or expired (402,365) 0.41 - 0.80 (7,500) 0.46 - 1.67
----------- -------------- ---------- --------------
Balance, October 31, 2004 12,004,770 $ 0.19 - 1.61 1,201,417 $ 0.46 - 1.67
=========== ============== ========== ==============
F-19
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED)
Options under the plans are issued at the fair market value of the
common stock on the date issued. The following summarizes information about
employee stock options and warrants outstanding at October 31, 2004:
Outstanding Options
-------------------------------------------------------------
Number Weighted average Weighted average
Range of exercise prices outstanding remaining contractual life exercise price
- ------------------------ ----------- -------------------------- ----------------
$ 0.40 - $ 0.75 1,182,417 3.54 years $ 0.45
$ 0.76 - $ 1.70 19,000 2.33 years $ 1.67
-----------
1,201,417 3.60 years $ 0.47
-----------
Outstanding Options
-------------------------------------------------------------
Number Weighted average Weighted average
Range of exercise prices outstanding remaining contractual life exercise price
- ------------------------ ----------- -------------------------- ----------------
$ 0.15 - $ 0.75 9,312,115 2.81 years $ 0.48
$ 0.76 - $ 1.70 2,692,655 1.81 years $ 1.06
-----------
12,004,770 2.59 years $ 0.61
-----------
CAPITAL TRANSACTIONS
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 year ended October 31, 2004, we paid $35,000 to acquire
648,366 shares of DIS common stock and recorded the purchases as goodwill.
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.
During the year ended October 31, 2003, one individual exercised his
options to purchase 95,000 shares of common stock at $0.30 per share, or
$28,500. During the year ended October 31, 2002, five individuals exercised
their options to purchase 9,499 shares of common stock at $0.46 per share, or
approximately $4,000.
In April 2002, an officer of ours exercised his option to purchase
300,000 shares of common stock at $0.15 per share. As part of the transaction,
the officer surrendered to us 30,201 mature shares of common stock with a fair
market value of $45,000 ($1.49 per share public closing price on the transaction
date). In addition, the officer surrendered to us an additional 13,424 mature
shares of common stock with a fair market value of $20,000 in payment of his
note payable with accumulated interest (classified as Stock Subscription
Receivable on our financial statements). By combining the transaction, we issued
a net 256,375 shares of common stock to the officer for his option exercise.
In November 2001, we issued 132,850 shares of common stock as a bonus
to 274 employees under the long-term incentive stock option plan ($0.60 per
share public closing price on the authorization date). As part of the
transaction, approximately $80,000 was recorded as operating expenses. In
addition, we paid $40,000 to a former officer to eliminate his options to
require us to repurchase 400,000 shares of common stock under his separation
agreement (stock put was classified as Redeemable Stock on our financial
statements). The $40,000 was charged to other expenses.
F-20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments as of October 31,
follows:
2003 2004
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Accounts receivable, current $25,472,000 $25,472,000 $20,029,000 $20,029,000
Accounts receivable, long term 2,033,000 2,033,000 1,868,000 1,868,000
Debt maturing within one year 30,040,000 30,040,000 20,796,000 20,796,000
Long-term debt 56,666,000 53,318,000 62,828,000 59,364,000
Notes payable to related parties, current 2,069,000 2,069,000 -- --
Notes payable to related parties, long-term 100,000 107,000 2,119,000 2,258,000
Subordinated debentures 16,215,000 18,403,000 16,147,000 17,983,000
In assessing the fair value of these financial instruments, we had used a
variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, cash overdraft, current accounts receivable, due to
related parties and current and short-term debt, it was assumed that the
carrying amount approximated fair value for the majority of these instruments
because of their short maturities. The fair value of the long-term amounts for
accounts receivable due from related party, notes payable to related parties and
debt is based on current rates at which the Company could borrow funds with
similar remaining maturities. The fair value of the subordinated debentures is
the estimated value of debentures available to repurchase at current market
rates over the bond term including an estimated interest payment stream.
NOTE 12 - RELATED PARTY TRANSACTIONS
The amount due to related parties at October 31, 2004 consisted of
notes payable, with interest at 6.58%, due to an officer and employee of ours
for the purchase of DIS common stock in 1996 of $940,000 and $105,000,
respectively, and a note payable of $1,074,000, with interest at 6.58%, due to
another officer of ours for loans made by him to us. During the year ended
October 31, 2004, we made principal payments of $118,000 and accrued $68,000 of
interest that was not paid.
The amount due to related parties at October 31, 2003 consisted of
notes payable, with interest at 6.58%, due to an officer and employee of ours
for the purchase of DIS common stock in 1996 of $1,058,000 and $105,000,
respectively, and a note payable of $1,005,000, with interest at 6.58%, due to
another officer of ours for loans made by him to us. During the year ended
October 31, 2003, we made principal payments of $115,000 and accrued $5,000 of
interest that was not paid. In addition, during fiscal 2003, in order to provide
us additional liquidity, the President and C.E.O. advanced to us $1.0 million
with interest at 6.58%.
During the year ended October 31, 2002, we made principal payments of
$171,000 on related party notes payable.
F-21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LEASES - We lease various operating facilities and certain medical
equipment under operating leases expiring through 2018. Certain leases contain
renewal options from two to ten years and escalation based primarily on the
consumer price index. Minimum annual payments under noncancellable operating
leases for future years ending October 31 are as follows:
Facilities Equipment Total
------------ ------------ ------------
2005 $ 6,859,000 63,000 6,922,000
2006 6,001,000 24,000 6,025,000
2007 4,975,000 5,000 4,980,000
2008 3,868,000 5,000 3,873,000
2009 3,249,000 5,000 3,254,000
Thereafter 12,822,000 -- 12,822,000
------------ ------------ ------------
$37,774,000 $ 102,000 $37,876,000
============ ============ ============
Total rent expense, including equipment rentals, for the years ended
October 31, 2002, 2003 and 2004 amounted to approximately $8,799,000, $9,446,000
and $7,804,000, respectively. Effective November 1, 2003, we converted operating
leases with an affiliate of GE into capital leases by amending the lease
agreements to include $1.00 buyouts. The total converted equipment cost and
capitalized lease obligation is $6,206,000. Included in equipment rental expense
for the years ended October 31, 2002 and 2003 was GE rental expenses of
approximately $1,830,000 and $1,765,000, respectively.
Salaries and consulting agreements - We have a variety of arrangements
for the payment of professional and employment services. The agreements provide
for the payment of professional fees to physicians under various arrangements,
including a percentage of revenue collected from 15.0% to 30.0%, fixed amounts
per periods and combinations thereof.
We also have employment agreements with officers, key employees and
through BRMG, physicians, at annual compensation rates ranging from $50,000 to
$375,000 and for periods extending up to three years through July 2007. Total
commitments under the agreements are approximately $15,040,000 for fiscal 2005.
The majority of the contracts are for one year.
PURCHASE COMMITMENT
On December 18, 2003, we entered into a three-year purchase agreement
with an imaging film provider whereby we must purchase $7,500,000 of film at a
rate of approximately $2,500,000 annually over the term of the agreement.
EQUIPMENT SERVICE CONTRACT
On March 1, 2000, we entered into an equipment maintenance service
contract through October 2005 with GE Medical Systems to provide maintenance and
repair on the majority of its medical equipment for a fee based upon a
percentage of net revenues, subject to certain minimum aggregate net revenue
requirements. The percent of revenue to be billed ranges from 2.82% to 3.74%,
and the aggregate minimum net revenue ranges from $85,000,000 to $125,000,000
during the term of the agreement. We have met or exceeded the minimum required
revenue for fiscal 2003 and 2004. As of October 31, 2004, we owe GE Medical
Systems $2,747,000 for past services under the arrangement since fiscal 2002. GE
has made arrangements for interest-free payments which will continue to reduce
this liability during fiscal 2005. The liability is classified as "Accounts
Payable and Accrued Expenses-current" on the financial statements.
LITIGATION
In the ordinary course of business from time to time we become involved
in certain legal proceedings, the majority of which are covered by insurance.
Management is not aware of any pending material legal proceedings outside of the
ordinary course of business.
F-22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EMPLOYEE BENEFIT PLAN
We adopted a profit-sharing/savings plan pursuant to Section 401(k) of
the Internal Revenue Code that covers substantially all non-professional
employees. Eligible employees may contribute on a tax-deferred basis a
percentage of compensation, up to the maximum allowable under tax law. Employee
contributions vest immediately. The plan does not require a matching
contribution by us. There was no expense for the years ended October 31, 2002,
2003 or 2004.
NOTE 15 - MALPRACTICE INSURANCE
We and our affiliated physicians are insured by Fairway Physicians
Insurance Company. Fairway provides claims-based malpractice insurance coverage
which covers only asserted malpractice claims within policy limits. Management
does not believe there are material uninsured malpractice costs at October 31,
2004.
NOTE 16 - SUBSEQUENT EVENTS
On November 30, 2004, we completed the issuance of $19.2 million in
principal amount of senior secured notes to certain investment funds managed by
Post Advisory Group, LLC, a Los Angeles-based investment advisor ("Post"). In
one of the two financings that was completed, an outstanding note with a
principal amount of $15.2 million owed by us to DVI Financial Services, Inc. was
acquired by Post for $11.0 million, and the indebtedness was then restructured
by Post and us. In the other financing that was completed, we issued $4.0
million in principal amount of notes to Post in exchange for $4.0 million, which
was used to repurchase, also at a discount, a revolving credit facility with a
face value of approximately $3.2 million owed to DVI Business Credit Receivables
III ("REC III") for a payment, including legal fees, of approximately $3.0
million, and we received approximately $987,000 in working capital loans. The
new senior secured notes were issued in two separate tranches; one has a
maturity on June 1, 2008 and the other on July 1, 2008. Neither note has
principal amortization. The repurchase of the note owed to DVI Financial
Services, Inc. will not result in any actual dollar savings to us over the term
of the obligation, but it will provide us with approximately $1.3 million of
debt service relief per year until maturity. Furthermore, the repurchase of the
REC III revolver will result in another approximately $2.5 million of debt
service relief in calendar 2005.
In December 2004, the Company opened its new facility in Murietta, near
Temecula, which will provide MRI, PET/CT and x-ray services. See Note 3
"Acquisitions, Sales and Divestitures".
In order to take advantage of recent years with very low losses and to
capitalize on a changing workers compensation market in California, effective
November 1, 2004, we transitioned our workers compensation insurance policy from
a traditional fixed rate with the State Fund to a deductible program with AIG.
In addition, effective November 1, 2004, we started our participation in a
partially self-funded employee medical insurance program through Great West
Insurance Company. Under the new policy, Management anticipates that our maximum
premium exposure will be less than the quoted renewal rates for our previous
guaranteed cost plan.
F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
Our report on the consolidated financial statements of Primedex Health Systems,
Inc. and its affiliates, as of October 31, 2003 and 2004 and for the three years
ended October 31, 2004, and for each of the years in the three-year period ended
October 31, 2004, is included on page F-1 of this Form 10-K. In connection with
our audits of such financial statements, which were conducted for purposes of
forming an opinion on the basic consolidated financial statements taken as a
whole, we have also audited the related accompanying financial statements
Schedule II -- Valuation and Qualifying Accounts for the years ended October 31,
2004, 2003, and 2002. In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/ Moss Adams LLP
Los Angeles, California
January 11, 2005
S-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance ---------------
at Beginning Charged Against Deductions from Balance at
of Year Income Reserves (a) End of Year
-------------- --------------- ------------- -------------
Year ended October 31, 2004:
Accounts receivable-contractual
allowances-current $ 54,650,000 $279,414,000 $281,103,000 $ 52,961,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-current $ 955,000 $ 3,577,000 $ 3,854,000 $ 678,000
============= ============= ============= =============
Accounts receivable-contractual
allowances-noncurrent $ 4,361,000 $ 26,056,000 $ 25,478,000 $ 4,939,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-noncurrent $ 76,000 $ 334,000 $ 347,000 $ 63,000
============= ============= ============= =============
Year ended October 31, 2003:
Accounts receivable-contractual
allowances-current $ 53,158,000 $261,594,000 $260,102,000 $ 54,650,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-current $ 1,593,000 $ 4,578,000 $ 5,216,000 $ 955,000
============= ============= ============= =============
Accounts receivable-contractual
allowances-noncurrent $ 4,271,000 $ 20,875,000 $ 20,785,000 $ 4,361,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-noncurrent $ 128,000 $ 366,000 $ 418,000 $ 76,000
============= ============= ============= =============
Year ended October 31, 2002:
Accounts receivable-contractual
allowances-current $ 48,746,000 $212,855,000 $208,443,000 $ 53,158,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-current $ 1,132,000 $ 6,380,000 $ 5,919,000 $ 1,593,000
============= ============= ============= =============
Accounts receivable-contractual
allowances-noncurrent $ 4,235,000 $ 17,099,000 $ 17,063,000 $ 4,271,000
============= ============= ============= =============
Accounts receivable-bad debt
allowances-noncurrent $ 98,000 $ 512,000 $ 482,000 $ 128,000
============= ============= ============= =============
(a) Deductions include sales and divestitures
S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Inapplicable.
ITEM 9A. CONTROLS AND PROCEDURES
- -------- -----------------------
As required by Rule 13a-15(b) of the Exchange Act, our management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation as of the end of the period covered by this Annual Report, of the
effectiveness of our disclosure controls and procedures as defined in Exchange
Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this Annual Report. As
required by Rule 13a-15(d), our management, including the Chief Executive
Officer and Chief Financial Officer, also conducted an evaluation of our
internal control over financial reporting to determine whether any changes
occurred during the period covered by this Annual Report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that there has been no such change during
the period covered by this Annual Report 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.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The following table sets forth certain information with respect to each
of our directors and executive officers as of January 25, 2004:
Director or
Name Age Officer Since Position
- ---- --- ------------- --------
Howard G. Berger, M.D. (1) 60 1992 President, Treasurer, Chief Executive Officer,
and Director
Norman R. Hames 48 1996 Vice President, Secretary, Chief Operating
Officer and Director
John V. Crues, III, M.D. 55 2000 Vice President and Director
David Swartz (2) 60 2004 Director
Jeffrey L. Linden 62 2001 Vice President and General Counsel
Mark D. Stolper 33 2004 Chief Financial Officer
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit and Compensation Committee
The following is a brief description of the business experience of each
director and executive officer during the past five years.
Howard G. Berger, M.D. has served as President and Chief Executive
Officer of our company and its predecessor entities since 1987. Dr. Berger is
also the president of the entities that own BRMG. Dr. Berger has over 25 years
of experience in the development and management of healthcare businesses. He
began his career in medicine at the University of Illinois Medical School, is
Board Certified in Nuclear Medicine and trained in an Internal Medicine
residency, as well as in a masters program in medical physics in the University
of California system.
Norman R. Hames has served as our Chief Operating Officer since 1996.
Applying his 20 years of experience in the industry, Mr. Hames oversees all
aspects of facility operations. His management team, comprised of regional
directors, managers and sales managers, are responsible for responding to all of
the day-to-day concerns of our facilities, patients, payors and referring
physicians. Prior to joining our company, Mr. Hames was President and Chief
Executive Officer of his own company, Diagnostic Imaging Services, Inc. (which
we have acquired), which owned and operated 14 multi-modality imaging facilities
throughout Southern California. Mr. Hames gained his initial experience in
operating imaging centers for American Medical International, or AMI, and was
responsible for the development of AMI's single and multi-modality imaging
centers.
John V. Crues, III, M.D. is a world-renowned radiologist. Dr. Crues
plays a significant role as a musculoskeletal specialist for many of our
patients as well as a resource for physicians providing services at our
facilities. Dr. Crues received his M.D. at Harvard University, completed his
internship at the University of Southern California in Internal Medicine, and
completed a residency at Cedars-Sinai in Internal Medicine and Radiology. Dr.
Crues has authored numerous publications while continuing to actively
participate in radiological societies such as the Radiological Society of North
America, American College of Radiology, California Radiological Society,
International Society for Magnetic Resonance Medicine and the International
Skeletal Society.
David Swartz is a C.P.A. with thirty-five years of experience providing
accounting and advisory services to clients. Since 1993, Mr. Swartz has been the
managing partner of Good, Swartz, Brown & Berns. Prior to this, Mr. Swartz
served as managing partner and was on the national Board of Directors of a 50
office international accounting firm. Mr. Swartz is also a former CFO of a
publicly held shopping center and development company.
Jeffrey L. Linden joined us in 2001 as our Vice President and General
Counsel. He is also associated with Cohen & Lord, a professional corporation,
outside general counsel to us. Prior to joining us, Mr. Linden had been engaged
in the private practice of law. He has lectured before numerous organizations on
various topics, including the California State Bar, American Society of
Therapeutic Radiation Oncologists, California Radiological Association, and
National Radiology Business Managers Association.
49
Mark Stolper had diverse experiences in investment banking, private
equity, venture capital investing and operations prior to joining us. Mr.
Stolper began his career as a member of the corporate finance group at Dillon,
Read and Co., Inc., executing mergers and acquisitions, public and private
financings and private equity investments with Saratoga Partners LLP, an
affiliated principal investment group of Dillon Read. After Dillon Read, Mr.
Stolper joined Archon Capital Partners, backed by the Milken Family and
NewsCorp, which made private equity investments in media and entertainment
companies. Mr. Stolper received his operating experience with Eastman Kodak,
where he was responsible for business development for Kodak's Entertainment
Imaging subsidiary ($1.5 billion in sales). Mr. Stolper was also co-founder of
Broadstream Capital Partners, a Los Angeles-based investment banking firm
focused on advising middle market companies engaged in financing and merger and
acquisition transactions.
None of the directors serves as a director of any other corporation
with a class of securities registered pursuant to Section 12 of the Exchange Act
or subject to the requirements of Section 15(d) of the Exchange Act. There are
no family relationships among any of the officers and directors. Furthermore,
none of the events described in Item 401(f) of Regulation S-K involve a director
or officer during the past five years.
The officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors. During the fiscal year ended October 31, 2004, while the Board of
Directors held numerous meetings, in all but one instance they took board action
by unanimous written consent, which was done on nine occasions. All directors
participated in all such actions, except Dr. Crues was not present at the
meeting in which directors were physically present.
AUDIT AND COMPENSATION COMMITTEES
The Audit Committee reviews the results and scope of the audit and
other services provided by our independent auditors, and the Compensation
Committee determines salaries and incentive compensation for our employees and
consultants.
David Swartz is designated our "audit committee financial expert" under
Item 401(h) of Regulation S-K under the Securities Act. Mr. Swartz is
"independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
DIRECTOR COMPENSATION
Independent directors receive compensation of $25,000 per year and a
warrant to purchase 50,000 shares of our common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 2004, all executive compensation was determined by the
then members of our Board of Directors, Howard G. Berger, M.D., Norman R. Hames,
John V. Crues, III, M.D. and David Swartz. In addition, no individual who served
as an executive officer of our company during fiscal 2004, served during fiscal
2004, on the board of directors or compensation committee of another entity
where an executive officer of the other entity also served on our Board of
Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and officers and persons who own more than 10% of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the SEC. Directors and officers and greater than 10%
stockholders are required by SEC regulation to furnish us with copies of the
reports they file. Based solely on the review of the copies of such reports and
written representations from certain persons that certain reports were not
required to be filed by such persons, we believe that all our directors,
officers and greater than 10% beneficial owners complied with all filing
requirements applicable to them with respect to transactions for the period
November 1, 2003 through October 31, 2004.
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
Our Board of Directors has adopted a Code of Ethics for Senior
Financial Officers. A copy of the Code of Ethics is available on our website at
www.radnetonline.com.
50
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The following table sets forth information concerning the annual,
long-term and all other compensation for services rendered in all capacities to
us and our subsidiaries for the years ended October 31, 2004, 2003 and 2002, of
(i) the person who served as our chief executive officer during the year ended
October 31, 2004, and (ii) our three most highly compensated executive officers
(other than the chief executive officer) serving as executive officers at
October 31, 2004 ("Other Executive Officers"), and whose aggregate cash
compensation exceeded $100,000 for the year ended October 31, 2004. We
collectively refer to them as the "Named Executive Officers":
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ ----------- ---------------------------------------
Year Other Securities Restricted
Ended Annual Underlying Stock LTIP All Other
Name and Principal Position 10/31 Salary($) Bonus ($) Comp.($)(1) Options (#)(8) Awards($) Pay-outs ($) Comp($)
- --------------------------- ----- --------- --------- ----------- -------------- --------- ------------ -------
Howard G. Berger, M.D., 2004 $225,000(2) -- -- -- -- -- --
Chief Executive Officer 2003 $328,846(2) -- -- -- -- -- --
2002 $375,000(3) -- -- -- -- -- --
Norman R. Hames, 2004 $229,000 -- -- 3,000,000 -- -- --
Vice President, Secretary 2003 $225,000 -- -- 3,000,000 -- -- --
and Chief Operating Officer 2002 $225,000 -- -- 3,000,000 -- -- --
John V. Crues, III, M.D., 2004 $370,000(4) -- -- 1,000,000 -- -- --
Vice President 2003 $363,000(5) -- -- 500,000 -- -- --
2002 $350,000(6) -- -- 500,000 -- -- --
Jeffrey L. Linden, 2004 $350,000(7) -- -- 1,574,910 -- -- --
Vice President and 2003 $303,015(7) -- -- 1,572,275 -- -- --
General Counsel 2002 $350,000(7) -- -- 1,367,365 -- -- --
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Executive Officers was less than $50,000 or 10% of salary
and bonus, the reporting thresholds established by the SEC.
(2) Includes $300,000 and $225,000 received from BRMG (see "Employment
Agreements") in 2003 and 2004, respectively. Dr. Berger voluntarily reduced
compensation payable by us in 2003 and 2004 to assist with our liquidity.
(3) Includes $300,000 received from BRMG.
(4) Includes $185,000 received from BRMG.
(5) Includes $200,000 received from BRMG.
(6) Includes $175,000 received from BRMG.
(7) Mr. Linden voluntarily reduced compensation payable by us in 2003 to assist
with our liquidity. Cohen & Lord, a professional corporation, a law firm
with which Mr. Linden is associated, received $655,603 in fees from us
during the year ended October 31, 2004. Mr. Linden has specifically waived
any interest in our fees paid to Cohen & Lord since becoming an officer.
(8) Shares of our common stock.
51
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
In fiscal 2004, we granted options to John V. Crues, III, M.D. and
Jeffrey L. Linden but to no other executive officer. The following table
provides information about that option grant and projects potential realizable
gains at hypothetical assumed annual compound rates of appreciation. Primedex
had outstanding 13,206,187 options to purchase common stock as of October 31,
2004.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATE OF
TOTAL OPTION GRANTS IN STOCK PRICE
NUMBER OF OPTIONS 2004 INDIVIDUAL APPRECIATION FOR
SECURITIES GRANTED TO GRANTS OPTION TERM (1)
UNDERLYING EMPLOYEES ------------------------ -----------------------
OPTIONS IN FISCAL EXERCISE EXPIRATION
NAME GRANTED YEAR PRICE DATE 5% 10%
--------------------------- ----------- ----------- ---------- ---------- ---------- ----------
John V. Crues, III, M.D. 500,000 32.0% $ 0.46 12/18/08 $ 60,000 $136,275
Jeffrey L. Linden 200,000 12.8% $ 0.30 07/30/09 $ 16,000 $ 36,000
- ----------
(1) These values are solely the mathematical results of hypothetical assumed
appreciation of the market value of the underlying shares at an annual rate of
5% and 10% over the full term of the options, less the exercise price. Actual
gains, if any, will depend on future stock market performance of the underlying
stock, market factors and conditions, and optionee's continued employment
through the applicable vesting periods. We make no prediction as to the future
value of these options or of the underlying stock, and these values are provided
solely as examples required by the SEC rules.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
There were no option exercises in the year ended October 31, 2004 by
the Named Executive Officers.
EMPLOYMENT AGREEMENTS
BRMG entered into a Management Consulting Agreement with Howard G.
Berger, M.D. as of January 1, 1994. The Agreement automatically renews annually
unless either party delivers notice of non-renewal to the other party no less
than 90 days prior to the scheduled termination date. Dr. Berger serves as the
manager of BRMG and the chief executive for BRMG's partnerships, and receives
compensation for his services from BRMG equal to $300,000 per year. Dr. Berger's
duties include the direction of day-to- day activities of BRMG, supervision of
personnel, and the implementation of policies and plans appropriate to carry out
the operational, financial and business objectives of BRMG. Under this
agreement, if we terminate his employment for cause, he will be entitled to
compensation equal to one year's base salary. If Dr. Berger terminates this
agreement without cause, he is entitled to compensation accrued through the
effective date of termination, and if his employment is terminated by BRMG
without cause, BRMG shall pay to Dr. Berger an amount equal to the sum of (i)
his base salary accrued through the effective date of termination; (ii) his base
salary for the balance of the term, but not less than his base salary for five
years; and (iii) an amount equal to the cost of all benefits he would receive
for the balance of the term. Dr. Berger's employment shall not terminate in the
event of a merger, consolidation, dissolution or other transaction whereby BRMG
would not be the surviving entity of such transaction, and Dr. Berger holds the
right to terminate this agreement upon 60 days notice in the event of any such
transaction.
John V. Crues, III, M.D. entered into a renewable one-year employment
agreement dated as of January 15, 1996 with each of us and BRMG which requires
him to devote one-half of his time to each entity in exchange for annual
combined remuneration currently of $370,000. Dr. Crues' duties for us include
information management systems for radiology practices, imaging facility network
development and network marketing and management, utilization management,
utilization review, all forms of provider and payor contracts and physician
interaction. For BRMG, Dr. Crues' duties include diagnostic imaging,
professional physician services, utilization management, utilization review, all
forms of provider and payor contracts and physician interaction, some of which
require a license to practice medicine.
52
On April 16, 2001, we entered into a five-year employment agreement
with Jeffrey L. Linden for Mr. Linden to serve as vice president and general
counsel. The agreement provides for annual compensation of $350,000, together
with the option to purchase 1,000,000 shares of our common stock at a price of
$0.43 per share (the closing price reported on the OTC Bulletin Board on the
date the agreement was executed), exercisable throughout his employment, or by
June 1, 2006 if Mr. Linden's employment is terminated. The agreement also
extended Mr. Linden's ability to exercise 145,000 options previously held by him
through May 31, 2006. Under this agreement, if we terminate Mr. Linden's
employment for cause, he will be entitled to compensation equal to one year's
base salary. If Mr. Linden terminates this agreement without cause, he is
entitled to compensation accrued through the effective date of termination, and
if his employment is terminated by us without cause, we shall pay Mr. Linden an
amount equal to the sum of (i) his base salary accrued through the effective
date of termination; (ii) his base salary for the balance of the term, but not
less than his base salary for five years; and (iii) an amount equal to the cost
of all benefits he would receive for the balance of the term. Mr. Linden's
employment shall not terminate in the event of a merger, consolidation,
dissolution or other transaction whereby we would not be the surviving entity of
such transaction, and Mr. Linden holds the right to terminate this agreement
upon 60 days notice in the event of any such transaction. If Mr. Linden's
employment is terminated in connection with any such transaction he shall be
entitled to the same compensation he would have received if his employment had
been terminated by us without cause.
On May 1, 2001, we entered into a three year employment agreement with
Norman R. Hames. Pursuant to the agreement Mr. Hames agreed to continue his
employment with us as our vice president and chief operations officer. The
agreement provides for Mr. Hames to receive annual compensation of $225,000.
Additionally, in consideration of his entry into the agreement Mr. Hames
received the option to purchase 3,000,000 shares of our common stock at a price
of $0.55 per share (the closing price reported on the OTC Bulletin Board on the
date the agreement was executed) exercisable throughout his employment, or by
May 1, 2006 if Mr. Hames' employment is terminated. We also agreed to provide a
cash bonus to Mr. Hames of $0.20 for each share that he exercises under the
options, up to a maximum of $600,000. Under this agreement, if we terminate his
employment for cause, he will be entitled to compensation equal to one year's
base salary. If Mr. Hames terminates this agreement without cause, he is
entitled to compensation accrued through the effective date of termination, and
if his employment is terminated by us without cause, we shall pay Mr. Hames an
amount equal to the sum of (i) his base salary accrued through the effective
date of termination; (ii) his base salary for the balance of the term, but not
less than his base salary for three years; and (iii) an amount equal to the cost
of all benefits he would receive for the balance of the term. Mr. Hames'
employment shall not terminate in the event of a merger, consolidation,
dissolution or other transaction whereby we would not be the surviving entity of
such transaction.
On July 30, 2004, we entered into a three year employment agreement
with Mark Stolper for Mr. Stolper to serve as our chief financial officer. Mr.
Stolper received a $25,000 payment on entry into the agreement and receives
annual compensation during the first twelve months of $215,000 and thereafter
$250,000 per year. At the end of the first twelve months, Mr. Stolper receives a
one time payment of $10,000. In connection with his employment, Mr. Stolper
received five-year warrants to purchase 650,000 shares of our common stock at
$0.30 per share (the closing price reported on the OTC Bulletin Board on the
date the agreement was executed).
STOCK INCENTIVE PLANS
We have two stock incentive plans: our 2000 Long-Term Incentive Plan
and our Incentive Stock Option Plan.
We have reserved 2,000,000 shares of common stock for issuance under
our 2000 Long-Term Incentive Plan, or the 2000 Plan. The material features of
the 2000 Plan are as follows:
ADMINISTRATION
The 2000 Plan is presently administered by our Board of Directors, but
upon our locating non-employee directors who have the requisite qualifications
will then be administered by a compensation committee appointed by the Board
which will consist of two or more non-employee Directors. Subject to the terms
of the 2000 Plan, the Board, and the compensation committee, if established, has
full authority to administer the 2000 Plan in all respects, including: (i)
selecting the individuals who are to receive awards under the 2000 Plan; (ii)
determining the specific form of any award; and (iii) setting the specific terms
and conditions of each award. Our senior legal and human resources
representatives are also authorized to take ministerial actions as necessary to
implement the 2000 Plan and awards issued under the 2000 Plan.
ELIGIBILITY
Employees, directors and other individuals who provide services to us,
our affiliates and subsidiaries who, in the opinion of the Board, or the
compensation committee, if applicable, are in a position to make a significant
contribution to our success or the success of our affiliates and subsidiaries
are eligible for awards under the 2000 Plan.
53
AMOUNT OF AWARDS
The value of shares or other awards to be granted to any recipient
under the 2000 Plan are not presently determinable. However, the 2000 Plan
restricts the number of shares and the value of awards not based on shares which
may be granted to any individual during a calendar year or performance period.
In order to facilitate our compliance with Section 162(m) of the Internal
Revenue Code of 1986, as amended, or the Code, which deals with the
deductibility of compensation for any of the chief executive officer and the
four other most highly-paid executive officers, the 2000 Plan limits to 500,000
the number of shares for which options, stock appreciation rights or other stock
awards may be granted to an individual in a calendar year and limits to
$1,000,000 the value of non-stock-based awards that may be paid to an individual
with respect to a performance period. These restrictions were adopted by the
Board of Directors as a means of complying with Code Section 162(m) and are not
indicative of historical or contemplated awards made or to be made to any
individual under the 2000 Plan.
STOCK OPTIONS
The 2000 Plan authorizes the grant of options to purchase shares of
common stock, including options to employees intended to qualify as incentive
stock options within the meaning of Section 422 of the Code, as well as
non-statutory options. The term of each option will not exceed ten years and
each option will be exercisable at a price per share not less than 100% of the
fair market value of a share of common stock on the date of the grant.
Generally, optionees will pay the exercise price of an option in cash or by
check, although the Board, and the compensation committee, if established, may
permit other forms of payment including payment through the delivery of shares
of common stock. Options granted under the 2000 Plan are generally not
transferable, except at death or as gifts to certain Family Members, as defined
in the 2000 Plan. At the time of grant or thereafter, the Board, and the
compensation committee, if established, may determine the conditions under which
stock options vest and remain exercisable.
Unless otherwise determined by the Board, and the compensation
committee, if established, unexercised options will terminate if the holder
ceases for any reason to be associated with us, our affiliates and subsidiaries.
Options generally remain exercisable for a specified period following
termination for reasons other than for Cause, as defined in the 2000 Plan,
particularly in circumstances of death, Disability and Retirement, as defined in
the 2000 Plan. In the event of a Change in Control or Covered Transaction, as
defined in the Incentive 2000 Plan, of our company, options become immediately
exercisable and/or are converted into options for securities of the surviving
party as determined by the Board, and the compensation committee, if
established.
OTHER AWARDS
The Board, and the compensation committee, if established, may grant
stock appreciation rights which pay, in cash or common stock, an amount
generally equal to the difference between the fair market values of the common
stock at the time of exercise of the right and at the time of grant of the
right. In addition, the Board, and the compensation committee, if established,
may grant awards of shares of common stock at a purchase price less than fair
market value at the date of issuance, including zero. A recipient's right to
retain these shares may be subject to conditions established by the Board, and
the compensation committee, if established, if any, such as the performance of
services for a specified period or the achievement of individual or company
performance targets. The Board, and the compensation committee, if established,
may also issue shares of common stock or authorize cash or other payments under
the 2000 Plan in recognition of the achievement of certain performance
objectives or in connection with annual bonus arrangements.
PERFORMANCE CRITERIA
The Board, and the compensation committee, if established, may
condition the exercisability, vesting or full enjoyment of an award on specified
Performance Criteria. For purposes of Performance Awards, as defined in the 2000
Plan, that are intended to qualify for the performance-based compensation
exception under Code Section 162(m), Performance Criteria means an objectively
determinable measure of performance relating to any of the following as
specified by the Board, and the compensation committee, if established,
determined either on a consolidated basis or, as the context permits, on a
divisional, subsidiary, line of business, project or geographical basis or in
combinations thereof: (i) sales; revenue; assets; liabilities; costs; expenses;
earnings before or after deduction for all or any portion of interest, taxes,
depreciation, amortization or other items, whether or not on a continuing
operations or an aggregate or per share basis; return on equity, investment,
capital or assets; one or more operating ratios; borrowing levels, leverage
ratios or credit rating; market share; capital expenditures; cash flow; working
capital requirements; stock price; stockholder return; sales, contribution or
gross margin, of particular products or services; particular operating or
financial ratios; customer acquisition, expansion and retention; or any
combination of the foregoing; or (ii) acquisitions and divestitures, in whole or
in part; joint ventures and strategic alliances; spin-offs, split-ups and the
like; reorganizations; recapitalizations, restructurings, financings of debt or
equity and refinancings; transactions that would constitute a change of control;
or any combination of the foregoing. Performance Criteria measures and targets
determined by the Board, and the compensation committee, if established, need
not be based upon an increase, a positive or improved result or avoidance of
loss.
54
AMENDMENTS
The Board, and the compensation committee, if established, may amend
the 2000 Plan or any outstanding award for any purpose permitted by law, or may
at any time terminate the 2000 Plan as to future grants of awards. The Board,
and the compensation committee, if established, may not, however, increase the
maximum number of shares of common stock issuable under the 2000 Plan or change
the description of the individuals eligible to receive awards. In addition, no
termination of or amendment to the 2000 Plan may adversely affect the rights of
a participant with respect to any award previously granted under the 2000 Plan
without the participant's consent, unless the compensation committee expressly
reserves the right to do so in writing at the time the award is made. To the
extent the Board, and the compensation committee, if established, desires the
2000 Plan to qualify under the Code, certain amendments may require stockholder
approval.
Our stockholders have adopted our Incentive Stock Option Plan, or the
Incentive Plan. The Incentive Plan is designed to qualify as an "incentive stock
option plan" under Section 422A of the Code. Under the Incentive Plan, options
to purchase up to 1,600,000 shares of common stock were authorized for grant to
key employees, including officers and directors. A committee of three directors
appointed by the Board of Directors administers the Incentive Plan and
designates the optionees, the number of shares subject to the options, and the
terms and conditions of each option.
In May 1992, our Board of Directors authorized amendments to the
Incentive Plan, subject to stockholder approval, increasing the number of shares
reserved under the Incentive Plan to 2,000,000 shares of our common stock and
amending the Incentive Plan in accordance with changes adopted in 1986 to the
Code. These proposed amendments to the Incentive Plan were adopted by
stockholders at the annual meeting of stockholders held on November 17, 1992.
Under the Incentive Plan, as amended, except for options granted to
holders of 10% or more of our outstanding stock, the exercise price of an option
must be at least 100% of the fair market value of the common stock on the
effective date of grant. Options granted under the Incentive Plan to
stockholders possessing more than 10% of our outstanding stock must be at an
exercise price equal to not less than 110% of such fair market value. We are not
issuing any additional options under the Incentive Plan because the Incentive
Plan terminated in 2002. All options granted must be exercised within 10 years
of date of grant. The aggregate fair market value of our common stock with
respect to which options are exercisable for the first time by a grantee under
the Incentive Plan during any calendar year may not exceed $100,000. Options
must be exercised by an optionee, if at all, within three months after the
termination of such optionee's employment for any reason other than for cause,
and within one year after termination of employment due to death or permanent
disability, unless by its terms the option expires sooner.
55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of January 15, 2005, by (i) each
holder known by us to beneficially own more than five percent of the outstanding
common stock and (ii) each of our directors and executive officers. The
percentages set forth in the table have been calculated on the basis of treating
as outstanding, for purposes of computing the percentage ownership of a
particular holder, all shares of our common stock outstanding at such date and
all shares of common stock purchasable upon exercise of options and warrants
owned by such holder which are exercisable at or within 60 days after such date.
SHARES OF COMMON PERCENT
STOCK OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS
- ------------------------ --------------------- -----
Howard G. Berger, M.D.* 13,137,400(2) 21.6%
John V. Crues, III, M.D.* 1,493,875(3) 2.5%
Norman R. Hames* 3,000,000(4) 4.9%
David Swartz* 50,000(5) --(5)
Jeffrey L. Linden* 1,669,910(6) 2.7%
Mark Stolper* 708,800(7) 1.2%
All directors and executive officers
as a group (six persons) 20,059,985(8) 33.0%
- ----------
* The address of all of our officers and directors is c/o Primedex, 1510
Cotner Avenue, Los Angeles, California 90025.
(1) Subject to applicable community property statutes and except as otherwise
noted, each holder named in the table has sole voting and investment power
with respect to all shares of common stock shown as beneficially owned.
(2) Includes 122,400 shares issuable upon conversion of our outstanding
convertible debentures convertible at $2.50 per share. As a result of his
stock ownership and his positions as president and a director of our
company, Howard G. Berger, M.D. may be deemed to be a controlling person of
our company.
(3) Includes warrants for 1,000,000 shares exercisable between $0.40 and $0.46
per share.
(4) Represents warrants exercisable at $0.55 per share.
(5) Represents warrants exercisable at $0.60 per share and is less than 1.0% of
the class.
(6) Includes 1,574,910 options and warrants exercisable at prices between $0.19
and $0.47 per share.
(7) Represents warrants for 700,000 shares exercisable at prices between $0.30
and $0.60 per share.
(8) See the above footnotes. Includes 13,612,675 shares owned of record and
6,397,310 shares issuable upon exercise of presently exercisable options,
warrants and convertible debentures.
56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Howard G. Berger, M.D. 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). 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 79% for fiscal 2004, is adjusted
annually to ensure that the parties receive the fair value for the services they
render. 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. In fiscal 2004, Dr. Berger received a salary of
$225,000 from BRMG. See "Business - Radiology Professionals."
Dr. Berger has guaranteed $1,000,000 of our obligations to U.S. Bank.
On August 27, 2003, Dr. Berger advanced to us $1.0 million which we
transferred to BRMG, which in turn used these funds to reduce outstanding
borrowings under its credit facility. The advance bears interest at the same
rate paid by BRMG to its lender under its working capital facility and is due on
demand. At October 31, 2004, $1,073,676 was outstanding, including accrued
interest at a rate of 6.58% per annum. Dr. Berger agreed to subordinate his loan
to our obligation to Wells Fargo Foothill under our revolving line of credit.
We maintain a $5.0 million key-man life insurance policy on the life of Dr.
Berger. We are the beneficiary under the policy.
Historically, BRMG has regularly advanced to us the funds that it drew
under its working capital facility, which we used for our own working capital
purposes. We repaid or offset these advances with periodic payments from BRMG to
us under the management agreement. We guaranteed BRMG's obligations under this
working capital facility. Because under current GAAP principles we are required
to include BRMG as a consolidated entity in our consolidated financial
statements, any borrowings or advances we have received from or made to BRMG are
not reflected in our consolidated balance sheets.
On August 1, 1996, we acquired from Norman Hames (not then an officer or
director of our company) all of his common stock and warrants to purchase shares
of common stock of Diagnostic Imaging Services, Inc., a Delaware corporation, or
DIS, which then represented 21.6% of the outstanding shares of that entity, in
exchange for five year warrants to purchase 3,000,000 shares of our common stock
at $0.60 per share, as well as a 6.58% note having a principal balance at
October 31, 2004 of $940,185, payable interest only annually and due on June 30,
2004. The warrant expired unexercised. Pursuant to his May 1, 2001 employment
agreement, we granted to him a new warrant, which expires on May 1, 2006, to
purchase 3,000,000 shares at $0.55 per share plus a bonus to purchase $600,000
of shares at $0.20 per share at the time he exercises the warrant.
John V. Crues, III, M.D. agreed to continue his employment and leadership
roles with us in consideration of our agreement on December 18, 2003, to issue
to him our five year warrant to purchase 500,000 shares of our common stock at
an exercise price of $0.46 per share (the price of our common stock on the date
of the agreement in the public market in which it trades).
At October 31, 2003, we owed Jeffrey L. Linden $104,992 in connection with
our acquisition of his interest in DIS. The obligation accrues interest at the
rate of 6.58% per annum and is due July 1, 2005. In the acquisition transaction,
we issued to Mr. Linden warrants to purchase 197,365 shares of common stock at a
price of $0.60 per share expiring June 30, 2004. In connection with an agreement
to extend our obligation to Mr. Linden until July 1, 2005, we issued to him
warrants to purchase 300,000 shares of common stock at a price of $0.19 per
share expiring July 1, 2005. On July 30, 2004, we issued to Mr. Linden a five
year warrant to purchase 200,000 shares of our common stock at an exercise price
of $0.30 per share in consideration of Mr. Linden's agreement to subordinate our
obligation to him to our debt with Wells Fargo Foothill for our revolving line
of credit.
Cohen & Lord, a professional corporation, a law firm with which Mr. Linden
is associated, received $655,603 in fees from us during the year ended October
31, 2004. Mr. Linden has specifically waived any interest in our fees since
becoming an officer of our company.
On July 30, 2004, we issued to Mark Stolper five-year warrants to purchase
650,000 shares of our common stock at $0.30 per share in consideration of his
entry into a three year employment agreement with us under which he became our
chief financial officer and his assistance in refinancing our outstanding
institutional debt. The warrant exercise price is the price of our common stock
on the date of the agreement in the public market in which it trades.
57
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- -------- ---------------------------------------
The following table presents information about fees that Moss Adams LLP
charged us to audit our annual financial statements for 2004 and 2003, and fees
billed for other services rendered by Moss Adams LLP during those years.
2004 2003
---------- ----------
Audit Fees (1) $ 221,000 $ 132,000
Audit Related Fees (2) 239,000 11,000
Tax Fees (3) 104,000 80,000
---------- ----------
Subtotal 564,000 223,000
All other Fees (4) -- 1,000
---------- ----------
Total $ 564,000 $ 224,000
---------- ----------
- ----------
(1) Audit Fees -- Audit fees billed to us by Moss Adams LLP for auditing our
annual financial statements and reviewing the financial statements included in
our Quarterly Reports on Form 10-Q.
(2) Audit-Related Fees -- Audit-related fees billed to us by Moss Adams LLP
include the audit of our 401(k) benefit plan and offering memorandum.
(3) Tax Fees -- Tax fees billed to us by Moss Adams LLP include services
provided to prepare federal, state, and local income and franchise tax returns
for 2003, and related tax services and estimated tax payments for 2004.
(4) All Other Fees -- All other fees billed to us by Moss Adams LLP include
discussions related to Sarbanes-Oxley.
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF INDEPENDENT AUDITOR
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services, and other services. Pre-approval
is generally provided for up to 12 months from the date of pre-approval and any
pre-approval is detailed as to the particular service or category of services.
The Audit Committee may delegate pre-approval authority to one or more of its
members when expedited services are necessary. The Audit Committee has
determined that the provision of non-audit services by Moss Adams LLP is
compatible with maintaining Moss Adams' independence.
58
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K PAGE NO.
- -------- --------------------------------------------------------------- --------
(a) Financial Statements - The following financial statements are filed
herewith:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Deficit F-4
Consolidated Statements of Cash Flows F-5 to F-7
Notes to Consolidated Financial Statements F-8 to F-23
Schedules - The Following financial statement schedules are filed herewith:
Report of Independent Registered Public Accounting Firm on Supplemental Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
(b) Exhibits - The following exhibits are filed herewith or incorporated by
reference herein:
INCORPORATED BY
EXHIBIT NO. DESCRIPTION OF EXHIBIT REFERENCE TO
- ----------- ---------------------- ------------
3.1.1 Certificate of Incorporation as amended (A)
3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A)
3.1.3 December 27, 2000 amendment to the Certificate of Incorporation (E)
3.2 By-laws (A)
4.1 Form of Common Stock Certificate (AA)
4.2 Form of Supplemental Indenture between Registrant and American
Stock Transfer and Trust Company as Incorporated by Indenture
Trustee with respect to the 11.5% Series A Convertible
Subordinated Debentures due 2008 (B)
4.3 Form of 11.5% Series A Convertible Subordinated Debenture Due
2008 [Included in Exhibit 4.2] (B)
10.1 Employment Agreement dated as of June 12, 1992 between RadNet
and Howard G. Berger, M.D. (C)
and amendment to Agreement. (I)
10.6 Securities Purchase Agreement dated March 22, 1996, between the
Company and Diagnostic Imaging Services, Inc. (D)
10.7 Stockholders Agreement by and among the Company, Diagnostic
Imaging Services, Inc. and Norman Hames (D)
10.8 Securities Purchase Agreement dated June 18, 1996 between the
Company and Norman Hames (D)
10.10 DVI Securities Purchase Agreement (E)
10.11 General Electric Note Purchase Agreement (E)
10.12 Securities Purchase Agreement between the Company and Howard G.
Berger, M.D. (E)
10.13 2000 Long-Term Incentive Plan (F)
10.14 Employment Agreement dated April 16, 2001, with Jeffrey L. Linden (G)
and amendment to agreement (I)
59
10.15 Employment Agreement with Norman R. Hames dated May 1, 2001 (G)
and amendment to agreement (I)
10.16 Amended and Restated Management Agreement with Beverly Radiology
Medical Group III dated as of January 1, 2004 (H)
10.17 Code of Financial Ethics (H)
10.18 Incentive Stock Option Plan (H)
10.19 DVI Agreement as amended (J)
10.20 Master Amendment Agreement with General Electric Capital Corporation,
General Electric Company and GE Healthcare Financial Services (K)
10.21 Amended, Restated and Consolidated Loan and Security Agreement with DVI
Financial Services, Inc. (K)
10.22 Amendment to Loan Documents re US Bank Portfolio Services (K)
10.23 Credit Agreement with Wells Fargo Foothill, Inc. (K)
10.24 Employment Agreement with Mark Stolper dated July 30, 2004 (L)
23 Consent of Independent Public Accountants (L)
31.1 CEO Certification pursuant to Section 302 (L)
31.2 CFO Certification pursuant to Section 302 (L)
32.1 CEO Certification pursuant to Section 906 (L)
32.2 CFO Certification pursuant to Section 906 (L)
- ----------
(A) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-1 [File No. 33-51870].
(AA) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-3 [File 33-73150].
(B) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form T-3 [File No. 022-28703].
(C) Incorporated by reference to exhibit filed in an amendment to Form 8-K
report for June 12, 1992.
(D) Incorporated by reference to exhibit filed with Form 10-K for the year
ended October 31, 1996.
(E) Incorporated by reference to exhibit filed with the Form 10-K for the year
ended October 31, 2000.
(F) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended January 31, 2000.
(G) Incorporated by reference to exhibit filed with the Form 10-K for the year
ended October 31, 2001.
(H) Incorporated by reference to exhibit filed with the Form 10-K for the year
ended October 31, 2003.
(I) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended January 31, 2004.
(J) Incorporated by reference to exhibit filed with the Form 10-Q for the
quarter ended April 30, 2004.
(K) Incorporated by reference to exhibit filed with the Form 8-K report for
August 2, 2004.
(L) Filed herewith.
60
REGISTRANT'S PERCENTAGE STATE OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- ------------ --------- -------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging Services, Inc. 100% California
Diagnostic Imaging Services, Inc. 100% Delaware
Primedex Corporation 100% California
Radnet Management I, Inc. 100% California
Radnet Management II, Inc. 100% California
Radnet Sub, Inc. 100% California
SoCal MR Site Management, Inc. 100% California
(c) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October 31,
2004.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIMEDEX HEALTH SYSTEMS, INC.
Date: January 28, 2005 /s/ HOWARD G. BERGER, M.D.
---------------------------------
HOWARD G. BERGER, M.D., PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By /s/ HOWARD G. BERGER, M.D.
-----------------------------------------------
HOWARD G. BERGER, M.D., DIRECTOR
Date: January 28, 2005
By /s/ JOHN V. CRUES, III, M.D.
-----------------------------------------------
JOHN V. CRUES, III, M.D., DIRECTOR
Date: January 28, 2005
By /s/ NORMAN R. HAMES
-----------------------------------------------
NORMAN R. HAMES, DIRECTOR
Date: January 28, 2005
By /s/ DAVID SWARTZ
-----------------------------------------------
DAVID SWARTZ, DIRECTOR
Date: January 28, 2005
By /s/ MARK D. STOLPER
-----------------------------------------------
MARK D. STOLPER, CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: January 28, 2005
62