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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended October 31, 1996 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-33326724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 479-0390
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. ___________
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $10,376,453 on June 6, 1997
based upon the mean between the closing bid and closing ask price for the common
stock in the over-the-counter market on said date.
The number of shares of the registrant's common stock outstanding on June 6,
1997 was 38,657,260 shares (excluding treasury shares).
Documents Incorporated by Reference
NONE
PART I
Item 1. Business
(a) Background. Primedex Health Systems, Inc. ["PHS" or the "Company"] is
a New York corporation organized in 1985 and principally engaged in the
healthcare services industry. Through its 29 California diagnostic imaging
facilities [eight of which are wholly-owned or in partnerships with
unaffiliated parties with the Company's 68% owned Diagnostic Imaging
Services, Inc. ["DIS"] subsidiary and two are in partnership
with unaffiliated parties with the company's Radnet subsidiary },
the Company arranges for the non-medical aspects of medical imaging offering
MRI, CT, ultrasound, mammography, nuclear medicine and
general diagnostic radiology to the public. DIS also operates a cancer care
therapy center. Through the Company's Future Diagnostics, Inc. ["FDI"]
subsidiary, PHS arranges for the provision of imaging services primarily
throughout California via a network of more than 250 contracted imaging centers
which, in turn, provide diagnostic imaging services to insurance companies,
health plans and other payors. Additionally, FDI provides a broad array of
healthcare management services to its contracted centers and to payors,
including utilization management, physician credentialing and information
management services. PHS' executive offices are located at 1516 Cotner Avenue,
Los Angeles, California 90025 where its telephone number is [310] 479-0399.
RadNet Management.
The Company's wholly-owned subsidiary, RadNet Management, Inc. ["RadNet"],
owns and operates 19 medical imaging centers and is a joint venture partner in
two other imaging centers. Fourteen of the imaging centers are located in
Southern California [with four centers located in Beverly Hills and known as the
Tower Division] with the remaining seven centers located in northern California.
At the wholly-owned centers, RadNet provides the imaging center facilities and
equipment as well as all non-medical operational, management, financial and
administrative services. At the joint venture centers, RadNet performs
non-medical management services. At all 21 centers, the medical services and
medical supervision are provided by various independent physicians and physician
groups [at most of the centers, the medical services are provided by Beverly
Radiology Medical Group ["BRMG"] [see "Item 13"]. As compensation for its
management and other services at the various centers, RadNet receives a
management fee. In connection with the imaging centers in which it is a joint
venture partner, RadNet, in addition to a management fee, also shares in joint
venture net income.
Future Diagnostics
In November 1995, the Company acquired the outstanding capital stock of
Future Diagnostics, Inc. ["FDI"] in exchange for the Company assuming
approximately $855,000 of FDI liabilities and paying an aggregate $2,345,000 to
the sellers. FDI arranges for the provision of imaging services for large payors
[such as large employers and insurance carriers] through a network of
aproximately 250 imaging centers primarily in California and also
provides related utilization review and quality assurance services.
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Diagnostic Imaging Services
On March 22, 1996, the Company acquired from Diagnostic Imaging Services,
Inc., a Delaware corporation 2,747,493 shares of DIS common stock [ with a
five-year warrant to purchase an additional 1,521,739 shares of DIS common stock
at an exercise price of $1.60 per share] for $3,000,000 and the
establishment of a five-year revolving $1,000,000 line of credit for DIS
bearing interest at four percent greater than the prime rate.
The Company also acquired an additional
730,768 shares of DIS common stock from a third party for $1,000,000. The
aggregate purchase price was Four Million Dollars and represented approximately
31% of the outstanding DIS common stock.
DIS at that time owned and operated 10 imaging centers providing high
quality diagnostic imaging services located in the Los Angeles and San Diego
areas, as well as 15 ultrasound laboratories located in hospitals, 13 mobile
ultrasound units servicing hospitals and office buildings, and one mobile MRI
servicing a single hospital. DIS also operates a cancer care therapy center in
Temecula, California. DIS acquired and/or opened three additional centers in
1996. In March and April, 1997, DIS sold four of its imaging centers and its
ultrasound business to an unrelated third party for approximately $16 Million
and $9 Million, respectively, less outstanding capital lease obligations and
other liabilities. As a part of that sale the Company retained a management
agreement for the MRI facilities sold whereby the Company will provide certain
administrative services for which it will receive five percent of revenues.
The Company, DIS and Norman Hames [president of DIS] also entered into a
Stockholders Agreement, which provides that so long as Mr. Hames and the Company
own five percent or more of DIS common stock they will vote their shares in such
a manner as to support the election of two directors selected by Mr. Hames and
two selected by the Company. Additionally, both agreed to neither take nor
recommend any material action not approved by Mr. Hames and Dr. Howard Berger,
president of the Company and a newly appointed director of DIS. Dr. Berger
became the chairman of the Board of Directors of DIS.
The Company also entered into two five-year management service agreements
with DIS. The first agreement relates to DIS's overall corporate operations and
provides that the Company will arrange for all office maintenance for the DIS
facilities, administer its personnel program, bookkeeping and payroll services
as well as certain of its accounting services. The Company provides advice to
DIS with regard to its accreditation program and negotiates on behalf of DIS for
equipment, supplies, service and insurance. DIS agreed to pay $45,000 per month
for these services. Additionally, the Company and DIS entered into a second
agreement which will be phased in on a center by center basis which provides for
the Company to supply transcription services, patient scheduling, billing and
collection services. All costs of equipment and training are the responsibility
of the Company. DIS will pay the Company an amount equal to 10% of its
collections from each covered center for such services.
As of August 1, 1996, the Company acquired additional shares of DIS's
common stock from the president of DIS and certain parties affiliated with him
thereby bringing the aggregate number of shares of DIS common stock owned by the
Company to 6,730,307 shares representing approximately 59% of the outstanding
shares [8,252,046 shares representing approximately 64% of the outstanding
shares if warrants held by the Company are exercised]. The Company acquired the
shares by issuance of its five-year interest-only promissory notes aggregating
$3,252,046 [$1.00 per share] together with its five-year warrants to acquire
approximately 4,000,000 shares of the Company's common stock at $.60 per share.
Subsequent to fiscal year end, the Company acquired an additional 1,095,663
shares of DIS common stock from certain third parties for $1,397,702 in cash
thereby increasing the
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Company's ownership to approximately 68% of the outstanding DIS common shares as
of June 6, 1997.
Viromedics, Inc. ["VMI"]
VMI is a privately owned development stage enterprise attempting to
acquire and develop a procedure or method utilizing an organic compound [the
"Procedure"] for the treatment of Acquired Immune Deficiency Syndrome ["AIDS"].
VMI was issued U.S. Patent No. 4,880,836 [the "Patent"] with respect thereto
which Patent has not been challenged to date. The Patent Abstract described the
Procedure as an invention related to contacting the HIV virus [the virus which
causes AIDS] or the host cells, with a lower-alkyl-urea [the "compound"] to
prevent viral penetration into the cells, thus preventing viral infection. VMI
assigned its entire interest and rights in the Patent to Albert Einstein College
of Medicine ["AECOM"] [located in New York City] in exchange for (a) the release
from all outstanding financial commitments due AECOM, and (b) a right to 20% of
any monetary consideration received by AECOM for VMI's patent rights and
know-how, as defined.
At October 31, 1996, PHS was a minority [approximately 19%] stockholder
with a passive investment in VMI. PHS had no involvement in VMI's management and
has no ability to verify the present status of the research effort or VMI's
ability to meet its financial obligations. No assurances can be given that PHS
will realize any future return on its investment in VMI [although it has been
repaid all of the cash which it originally invested in VMI].
(b) Discontinued Operations
In December 1993, the Company purchased Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to engage in providing
medical/surgical utilization review services for health insurers and other
health service organizations for Six Million Dollars cash and options to
purchase one million shares of PHS at an exercise price of Nine Dollars per
share. AHS subsequently was merged into CareAdvantage Health Systems, Inc.
["CAHS"], a wholly-owned subsidiary of CareAdvantage, Inc. ["CareAd"], a
wholly-owned subsidiary of PHS. On October 28, 1994 pursuant to a planned
separation of PHS and CareAd, the PHS Board of Directors divested PHS of
ownership of approximately 96% of the outstanding CareAd common stock by
declaration of a dividend of 40,026,510 shares of CareAd common stock payable on
a share for share basis to the shareholders of PHS common stock. During fiscal
1995, the Company made a number of cash advances to CareAd as capital
contributions and in April 1995, consummated a Separation Agreement with CareAd.
PHS retained 1,700,000 shares of CareAd Common Stock so that upon completion of
the distribution, there were 41,726,510 shares of CareAd Common Stock
outstanding [See "Item 1" of Form 10-K for year ended October 31, 1995]. As a
result of CareAd activities, the Company's ownership interest has been reduced
to less than 1/2 of 1% of the total shares outstanding.
Concerning the 1,700,000 shares of CareAd Common Stock [the "Retained
Shares"] to be retained by PHS after the Distribution, pursuant to the Second
Separation Agreement, PHS agreed to file for a registered exchange offer under
the Securities Act with the Securities and Exchange Commission within 18 months
after the June 1995 Distribution of the CareAd stock dividend, offering the
holders of the PHS Debentures the right to exchange the Debentures for the
Retained Shares. CareAd agreed within 18 months after the completion of the
exchange offer and subject to certain conditions, to file a registration
statement under the Securities Act with the Commission registering any of the
Retained Shares not distributed in the exchange offering [the "Remaining
Shares"] for public offer and sale by PHS for PHS' own account, PHS agreed
to sell such shares at such time. PHS agreed that CareAd's Board of Directors
will hold all voting rights with respect to the Retained Shares until transfer
of any such shares pursuant to the exchange offer, and thereafter, will continue
3
to hold all voting rights with respect to the Remaining Shares until the earlier
of a public sale of such shares or April 21, 2005. In view of the current
minimal market value of the CareAd retained shares, PHS has not attempted to
effectuate the exchange offer.
Workers Compensation Activities
The Company's wholly-owned Primedex Corporation subsidiary ["PC"] acquired
in February, 1992, provided management, administrative and financial services to
four medical corporations which operated eight medical clinics in the greater
Los Angeles area providing medical/legal evaluation services and medical
services to workers' compensation claimants under the California workers'
compensation system. PC provided the entities with the clinic facilities
necessary for providing the medical services and also provided management
services and administration of all of the non-medical functions and services
relating to the operation of the medical practice at the clinics in exchange for
which PC was paid a management fee based upon medical practice billings
received. Due to changes in the California workers' compensation system,
including the enactment by the California State Legislature in July 1993 of new
legislation making significant changes to the system, the Company announced on
July 29, 1993 that PC would phase out its workers' compensation business. At
October 1, 1993, all eight medical clinics had been closed and PC's work force
had been reduced to employees who were primarily engaged in collection of
existing receivables.
On August 4, 1995 pursuant to a Medical Receivables Purchase and Sale
Agreement dated as of July 31, 1995 [the "Agreement"], PC sold its workers'
compensation portfolio of medical receivables [the "Portfolio"] to an
unaffiliated third party, Bristol A/R Inc. ["Bristol"] for a cash purchase price
of $9,448,061 paid in full on the Closing Date. The purchase price was
established in arms-length negotiations between management of both companies and
represented 19% of the face amount of the Portfolio of receivables being sold.
At July 31, 1995 after allowances for doubtful accounts, the net carrying value
of the Portfolio as stated on PC's financial statements was approximately
$22,000,000. The sale was made to Bristol without recourse to PC except in the
event of breach of PC's representations and warranties concerning the Portfolio
made pursuant to the Agreement. The bulk of such representations and warranties
concerning the Portfolio were made "to the best of Seller's knowledge after
reasonable inquiry and investigation." PC agreed to indemnify Bristol for any
damages suffered based upon any misrepresentation or breach of warranty
concerning the Portfolio. However, with respect to a then pending investigation
of PC's operations by the Los Angeles District Attorney's Office and by other
governmental agencies [see "Item 3"], such indemnification was limited to
damages arising from any indictment and conviction for criminal violations of
the matters under investigation. PC's obligations to Bristol have been
guaranteed by the Company.
(c) Financial Information About Industry Segments
The Company is principally engaged in only one industry segment, the
healthcare services industry.
(d) Narrative Description of Imaging Business
Medical Services
The following are the principle medical diagnostic procedures performed on
patients at the various imaging centers owned or managed by the Company. The
patient is normally referred to the center for such diagnostic procedures by his
or her treatment physician who may be independent or may be affiliated with an
Independent Physician Association ["IPA"], a Health Maintenance
4
Organization ["HMO"], a Preferred Provider Organization ["PPO"], or a similar
organization who has contracted for such services. See "Marketing" herein. Not
all of such procedures are performed at each center.
Computed Axial Tomography [CT] - CT is 100 times more sensitive than
conventional x-ray. It is used to see inside any of the body's organs, including
the brain, to detect disease and damage. CT focuses an x-ray on a specific plane
of the body, processes the image by computer, and constructs a picture on a
monitor, and later on film. Tissues of various density appear as different
shades of gray, bone [the most dense] as white, and air and fluid is black. The
procedure is painless and takes about one-half hour per study; more than one
study is often ordered on each patient. The patient simply lies on a special,
monitored table which is guided into the scanner. Some CT studies involve the
use of an injected contrast agent to better visualize anatomy and pathology. The
Company primarily uses non-ionic CT contrast agents to minimize contrast
reactions. A CT system costs in the range of $500,000 to $750,000.
Diagnostic Radiology- X-ray services, diagnostic tests employing x-ray
radiation on two planes; includes fluoroscopy and endoscopy.
Magnetic Resonance Imaging [MRI] - Diagnostic imaging based on magnetism
rather than radiation or conventional x-ray. MRI has become widely accepted as
the standard diagnostic tool for a wide and fast-growing variety of clinical
applications: MRI is painless, requiring only that the patient lie still on a
motorized table that slides into a long cylinder. On some MRI studies, an
injected contrast agent is used, and some require the use of special "coils,"
permitting highly accurate scanning of a particular part of the body. MRIs are
the single most expensive pieces of equipment at RadNet imaging centers costing
between $1,500,000 and $2,000,000.
Mammography - Provides an x-ray picture of the breast, and is used to
detect tumors and cysts, and to help differentiate between benign and malignant
tumors.
Nuclear Medicine - Involves the use of a small amount of radioactive
material and is used to obtain information about the anatomy and functioning of
various organs. Nuclear medicine is based on the principle that organs absorb or
concentrate scientific minerals or hormones. These substances are not visualized
on conventional x-ray, but if they are made radioactive by the addition of a
radioisotope, they can be seen. If an organ is not functioning properly, too
little or too much of the substance will be taken up or concentrated in some
parts of the organ, but not other parts. The organ will thus appear different on
a screen. The amount of radiation is extremely low, and the isotope usually
disappears from the body within a day or less.
Ultrasound - A painless imaging technique that uses sound waves and their
echoes to visualize and locate internal organs. It is particularly useful in
looking at soft tissues that does 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.
5
Imaging Centers
The following table indicates the principal diagnostic procedures
available at each of the imaging centers in which the Company has a management
and/or ownership interest.
Mammo- Ultra- Diagnostic Nuclear
Center MRI CT graphy sound Radiology Medicine
Tower Division:
Roxsan * * * * * *
120 East * * *
444 San Vicente * * *
1 West/Women's * *
Antelope Valley *
Camarillo** * * *
Corona** * * * * * *
Fresno * * * * *
Lancaster * * * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange * * * * *
Oxnard * * *
Riverside** * * * * *
Sacramento [DRI] * * * * *
Scripps-Chula Vista**
[San Diego] *
San Francisco * *
Santa Clarita * * * * * *
Santa Monica** * * * * *
Santa Rosa *
Stockton/Valley * * * * *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * * * * * *
Vacaville *
Ventura * * * * * *
La Habra * *
Westchester * * * * * *
- -----------------
*Indicates availability
**Indicates a DIS facility
In addition, cancer care therapy is performed at Valley Regional Oncology
Center, a DIS center located in Temecula, California.
6
Management Services and Compensation
Radnet has entered into Management Agreements with respect to their
wholly-owned imaging centers with various physicians and physician groups [the
"Physician Group"]. Pursuant to the typical Management Agreement, the Company
makes available the imaging center facilities and all of the furniture and
medical equipment at such facilities for use by the Physician Group and the
Physician Group is responsible for staffing the center with qualified medical
personnel. In addition, the Company provides management services and
administration of the non-medical functions and services relating to the medical
practice at the center including among other functions, provision of clerical
and administrative personnel, bookkeeping and accounting services, billings and
collections, provision of medical and office supplies, secretarial, reception
and transcription services, maintenance of medical records, advertising,
marketing and promotional activities and the preparation and filing of all
forms, reports and returns required in connection with unemployment insurance,
workers' compensation insurance, disability, social security and similar laws.
As compensation for the services furnished under the Management Agreement, the
Company is paid a Management Fee equal to an agreed percentage of the medical
practice billings, as and when collected, varying between 70% to 85% of such
collections.
At the two joint venture imaging centers, Radnet has entered into a
Management Agreement to provide management, administrative and billing and
collection services for a management fee approximating eight percent of the
gross monthly receipts received for services performed at the center. In
addition, as a joint venture partner, the Company is entitled to 50% of joint
venture income after deduction of all expenses including amounts paid for
medical services and medical supervision.
At most of RadNet's wholly-owned imaging centers and three DIS centers,
the medical services including medical supervision are supplied by Beverly
Radiology Medical Group ["BRMG"]. The sole owner of BRMG is Dr. Howard Berger
[see "Items 11,12 and 13"]. RadNet has a Management and Services Agreement with
BRMG for a ten-year term until June 2002, terminable prior thereto at RadNet's
election upon the occurrence of certain events including a change in BRMG's
ownership such that Dr. Berger is no longer an owner in the aggregate of at
least 60% of the equity ownership of BRMG. As compensation for its services
furnished under the Management and Service Agreement, BRMG has agreed to pay a
Management Fee to RadNet equal to 81% of its medical practice receipts at the
contracted centers, as and when collected.
Equipment
The two most expensive types of diagnostic medical equipment found at the
imaging centers owned or managed by the Company are the MRI and the CT systems.
As set forth in the chart under "Imaging Centers" above, 22 centers provide MRI
services and 21 centers provide CT services. A majority of the MRI systems and
CT systems at the Company's imaging centers are manufactured by General Electric
or Siemens. The acquisition of these systems as well as the acquisition of the
other relatively expensive diagnostic medical equipment at the various imaging
centers has been effected through various financing arrangements directly with
the manufacturer involving the use of capital leases with purchase options at
minimal prices at the end of the lease term, the issuance of long term
installment notes and the use of operating leases with purchase options at
substantial prices at the end of the lease term. At October 31, 1996, capital
lease obligations totaled approximately $36 million through May 31, 2003
including current installments totaling approximately $6.8 million. Also at
October 31, 1996, installment notes payable totaled approximately $49 million
through October 31, 2005 including current installments of approximately $21.4
million. Commitments under equipment operating leases at October 31, 1996 were
approximately $800,000 through October 31, 1999
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including current obligations of approximately $500,000. To the extent
additional imaging centers are opened or acquired, these obligations could
materially increase. See the above described chart as to the other equipment
available at each imaging center.
The MRI and CT systems and the other diagnostic medical equipment at the
imaging centers owned or managed by the Company are subject to technological
obsolescence as medical imaging is a field in which there is constant
development of new techniques and technologies.
Marketing
The patients who undergo diagnostic medical imaging procedures at the
various Company owned or managed imaging centers are generally referred by
individual independent physicians, by Independent Physician Associations
["IPAs"] consisting of groups of physicians, and by Health Maintenance
Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar
organizations which enroll subscribers on a contractual basis to whom they
deliver healthcare services. Such organizations attempt to control the cost of
healthcare services by directing their enrollees to participating physicians and
institutions and often through aggressive utilization review and limitations on
access to physician specialists, attempt to further limit the cost of medical
service delivery. Such organizations typically develop on a regional basis where
an appropriate enrollee population and mix of participating physicians and
institutions are available. Approximately 50% of the revenues generated for
diagnostic medical services performed at the Company's imaging centers are
attributable to various IPAs, HMOs, PPOs and similar organizations with the
balance primarily attributable to individual referring physicians.
The Company currently employs 12 full-time marketing and sales personnel
who are compensated on a salary or salary plus commission basis and who
periodically inform the medical community including individual physicians and
the administrators of IPAs, HMOs, PPOs, and similar organizations throughout
Southern California as to the services provided at the Company's owned or
managed imaging centers. Patients are obtained by direct referral or through
contract. Some contracts, referred to as "capitation contracts," provide for a
fixed fee per organization member, which is paid to the medical service
provider. Under a "capitation" contract, the provider agrees to provide
specified services to the organization members for a fixed, predetermined
payment per member for a specified time period [usually one year], regardless of
how many times the member uses the service. No assurances can be given that any
of the current or future "capitation" contracts will be profitable as there is a
possibility that management could underestimate the number of times the services
at its imaging centers will be used by the contracting organization's members
during the contract term.
Competition
All of the imaging centers owned or managed by the Company compete with a
substantial number of imaging centers and hospitals in California. Although no
assurances can be given, management believes the imaging centers will be able to
successfully compete with such other centers because of the up-to-date imaging
equipment maintained at the Company's centers, the quality of the medical
personnel affiliated with its centers and the fact that for widespread potential
customer groups, it has locations throughout the area.
Insurance
BRMG maintains a medical malpractice insurance policy in the amount of
$1,000,000 per occurrence and $3,000,000 in the aggregate covering each
physician obtained by it pursuant to its
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medical staffing obligations at the various imaging centers. The policy provides
ongoing coverage from any claims made by patients seen by the physicians as well
as coverage for all of the Company's non-medical personnel at each center
against medical malpractice claims. RadNet, DIS and PHS are also named insureds
under the policy. All other physicians who perform medical services at the
various imaging centers are required to maintain medical malpractice insurance
coverage with similar limits. Although management believes that such levels of
insurance are adequate, there can be no assurance in this regard. In addition,
the Company maintains $32,000,000 of blanket general liability insurance
covering each center and its own principal offices as well as all of its
employees. BRMG, DIS, FDI and PHS are also named insureds under this policy.
Employees
At December 31, 1996, the Company [including DIS] had a total of 505
full-time employees of whom 13 served in executive positions, 149 supplied
technical and managerial services at the various imaging centers, and the
balance provided administrative, bookkeeping, clerical and similar services.
None of the Company's employees are subject to a collective bargaining
agreement nor had the Company experienced any work stoppages. The Company
believes that its employee relations are good.
Government Regulation
All of the Company's current operating revenues are attributable to its
operations in the health care services industry through RadNet, DIS and FDI. The
health care services industry in which the Company operates is subject to a wide
range of federal and state governmental regulatory requirements and prohibitions
affecting all aspects of the Company's operations. Government regulation of the
health care services industry in general, and the occupational health care
industry in particular, may adversely affect the Company's business through,
among other things, potential reduction in payment for health care services.
Government regulation of the Company's health care service operations fall
into the following general areas: licensing, reimbursement, fraud/abuse,
corporate practice of medicine, and environmental.
Licensing - Health care facilities are subject to federal, state and local
regulation, and periodic inspection by licensing agencies to determine whether
the standards of medical care provided therein comply with licensing standards.
California law requires that professional health care services be provided only
by licensed physicians, a licensed facility, or a facility that qualifies for a
statutory exemption from licensure. The Company periodically verifies that the
physician providers at each of its centers maintain valid licenses to furnish
services, although the Company is to some extent dependent upon the physician
providers to which it furnishes management services to maintain such licensure.
Third Party Reimbursement - Providers of health care services, including
physicians, laboratories, and suppliers, receive payment for medical services
from their patients, from third party payors, or from a combination of both, but
third party reimbursement constitutes the great majority of revenues for most
health care providers. Third party payors include insurance companies,
government agencies, health maintenance organizations, preferred provider
organizations, and third party administrators for self-insured companies.
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A significant portion of the Company's revenues is derived from the
operation or management of facilities that furnish diagnostic imaging services
to patients for which payment is made by third party payors such as the
government-sponsored health care programs, Medicare and Medicaid, the workers'
compensation program, and private insurers. The scope and amount of third party
reimbursement has become increasingly unpredictable during the past several
years due to changes in reimbursement formulas, utilization review mechanisms,
and administrative procedures effectuated by third party payors as part of their
cost-containment efforts, such as radiology fee schedules and a resource-based
relative value scale payment system for physician services.
Under most participation arrangements with governmental or third party
payors, including Medicare, Medicaid, Blue Cross/Blue Shield plans, and most
health maintenance organizations, health care providers are required to accept
as payment in full, amounts which may be less than established charges. Nearly
all governmental and third party payors require patients to pay a portion of the
approved payment amount in the form of deductibles and co-payments for services
received. Health care providers are often unable to collect deductibles and
co-payments at the time services are rendered, and in some cases not at all.
Claims submitted to third party payors for reimbursement may be denied,
returned, or reduced for many reasons, including ineligible beneficiary status,
non-covered services, lack of medical necessity, failure to provide sufficient
services to support the claim, secondary payor liability, failure to submit
required information and submission of incorrect billing information.
Coordination of benefits and subrogation rights also require special handling.
Corrections and resubmission of claims add to the cost of operations for health
care facilities.
Third party payors also usually engage in utilization review of claims to
verify that services are medically necessary and eligible for coverage. This
process further complicates and delays collections. Third party payors are, with
increasing frequency, replacing prospective [prior to services being rendered]
utilization review with retrospective [after services are delivered] review.
Such audits, which can relate to claims for service furnished several years
earlier, often result in efforts by the payor to recoup payments previously
approved.
Fraud and Abuse Issues - Federal and state laws establish a large number
of prohibitions against billing and referral practices in the health care
services industry and impose criminal and civil penalties upon health care
providers found to have violated them.
Billing and Assignment - Under the Medicare and Medicaid programs,
patients usually assign their rights to payment to health care providers in
exchange for certain assurances from the health care providers, e.g., an
agreement not to collect for more than the Medicare approved amount. Health care
providers are generally restricted in their ability to reassign rights to
Medicare or Medicaid payment to third parties; an exception exists for billing
and collection services under specified conditions. Violation of the
requirements for assignment or reassignment can subject the health care provider
to a range of criminal and civil penalties, including fines and exclusion from
the program.
Health care providers and management companies are also subject to
criminal and civil penalties under federal and state law prohibitions against
submitting false claims for payments. Generally, criminal penalties subjecting
participants to fines and imprisonment require that the entity act knowingly or
willfully, or with fraudulent intent. Civil statutes provide penalties for
submitting claims with "reckless disregard" of the truth or falsely submitting
information. The federal civil penalties statute provides for civil penalties
against anyone who presents or causes to be presented a false or improper claim
under Medicare or Medicaid, including billing agents. Liability is imposed
10
on persons who "know or should know" that a claim is "false," "fraudulent," or
for services "not provided as claimed."
In addition, health care providers and management companies are subject to
various other laws that provide for monetary sanctions for technical billing
violations and for failure to disclose known Medicare or Medicaid overpayments.
Health care providers and management companies are also subject to certain
federal and state credit collection agency laws and regulations and federal and
state anti-trust laws which, among other penalties, provide criminal penalties
for conspiring to fix prices. The Federal Fair Debt Collection Practices Act
[the "Federal Fair Debt Act"] sets forth various provisions designed to
eliminate abusive, deceptive, and unfair debt collection practices by debt
collectors. The Federal Fair Debt Act also provides for a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states, including California, also have promulgated laws and regulations
that govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties, injunctions and jail terms for collection
agencies and collection agency personnel who fail to comply with such laws and
regulations. Although the Company does not provide past due or delinquent credit
collection services, the management services that it furnishes to its health
care providers may subject it to regulation as a "debt collector" under the
Federal Fair Debt Act and as a "collection agency" under certain state
collection agency laws and regulations.
Referral Arrangements - The Social Security Act [governing Medicare and
Medicaid] and many state laws impose civil and criminal penalties upon persons
who make or receive kickbacks, bribes, or rebates in connection with the
provision of health care services.
The federal anti-kickback rules prohibit individuals and entities from
knowingly and willfully soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for (a) referring someone for a good,
facility, service or item, (b) purchasing, leasing, ordering or arranging for a
good, facility, service or item or (c) recommending that an individual purchase,
lease or order a good, facility, service or item reimbursable under the Medicare
or Medicaid programs. In addition to other penalties, violation of the
prohibitions can lead to exclusion from participation in the Medicare and
Medicaid programs, which would preclude a health care provider or health care
clients of a management company from receiving reimbursement for services
furnished by the excluded entity. The Company believes that arrangements for the
management of medical practices such as it has established have in fact become
common in California, and have not generally been challenged with regard to
these issues. However, the Company cannot substantiate its belief. There can be
no assurance that the Company's present arrangements will not be challenged,
and, if challenged, that it will not be found to violate such prohibitions, thus
subjecting the Company to potential damages, injunction and/or civil and
criminal penalties.
California Business and Professions Code Section 650 sets forth a
comprehensive prohibition against the payment of compensation by or to a
physician or other health professional in exchange for patient referrals. An
even more broadly worded prohibition on payments for referrals is found in
California Health and Safety Code Section 445, which applies by its terms to all
persons, not only physicians and other health care professionals, and prohibits
referrals for profit to "health-related facilities". The imaging centers
operated or managed by the Company are deemed "health-related facilities" under
the statute. However, the Company does not believe that its present arrangements
violate the prohibition against referrals for profit contained in the statutes.
11
All of the payment relationships under the management agreements entered
into by the Company are subject to review under the above statutes, as to
whether any portion of the payments is being made in exchange for the referral
of patients. Moreover, payment relationships with other persons and entities
providing goods or services to the Company, BRMG or the Company's other medical
service providers are also subject to review under the above statute as to
whether any of the payments for the goods or services are being made at least in
part in exchange for the referral of patients. Even if the Company were deemed
to be referring patients to the providers, the Company does not believe that any
portion of its management fee is being paid for such referrals, but rather
constitutes reasonable compensation for the services provided by the Company to
the providers pursuant to the management agreements. However, there can be no
assurance that the relationship between the Company and the health care
providers with which it contracts will not be characterized as violating the
statutes.
Future judicial, legislative or administrative action which interprets
state and federal "kickback" prohibitions could have a materially adverse effect
on the Company and its assets. Further, new legislation or regulations are
proposed periodically relating to referral patterns in the health care services
industry and there can be no assurance that the Company will be able to operate
in conformity with such laws and regulations or will be able to do so
profitably.
Both federal and California law prohibit referrals of patients by
physicians to a medical facility [including a diagnostic imaging center] in
which the physician or the physician's immediate family has a financial
interest. The federal law [the so-called "Stark Law"] applies to referrals of
Medicare and Medicaid patients. The California version [the so-called "Speier
Law"] extends the referral prohibition to all patients. The Company believes it
is in substantial compliance with these laws.
Corporate Practice of Medicine - In California, a lay person or any entity
other than a professional corporation is not allowed to practice any of the
healing arts including by employing professional persons , or have any
ownership interest or profit participation in or control over
any healing arts professional practice. This doctrine is
commonly referred to as the prohibition on the "corporate practice" of medicine.
The Company believes that arrangements for the management of medical practices
have in fact become quite common in California, and have not generally been
challenged with regard to the corporate practice issue. However, because these
types of arrangements are not required to be reported, the Company cannot
substantiate its belief. There can be no assurance that the Company's present
arrangements with BRMG or the physicians providing medical services and medical
supervision at the Company's imaging centers will not be challenged, and, if
challenged, that they will not be found to violate the corporate practice
prohibition, thus subjecting the Company to potential damages, injunction and/or
civil and criminal penalties.
The Company has not received a legal opinion from counsel with regard to
the effect of the corporate practice prohibition on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the lack of court cases relevant to the issue.
Environmental - The facilities operated or managed by the Company generate
hazardous and medical waste subject to federal and state requirements regarding
handling and disposal.
The Company believes that the facilities that it operates and manages are
currently in compliance in all material respects with applicable federal, state
and local statutes and ordinances regulating the handling and disposal of such
materials. The Company does not believe that it will be required to expend any
material amounts in order to remain in compliance with these laws and
12
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
The Company has not received a legal opinion from counsel with regard to
the effect of the prohibitions discussed above on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the fluid interpretation of the law relevant to the issue.
13
Item 2. Properties
All of the imaging centers owned or managed by the Company are located in
leased facilities with the exception of La Habra joint venture imaging center
where the joint venture owns the building in which the center is located,
subject to a land lease, and the Northridge imaging center where the Company
owns the building and the land. Certain information with respect to the imaging
centers is as follows:
center date of Approximate annual rental company %
Acquistion square feet for leased ownership
center facility interest
Wholly-Owned
Tower Division:
[Beverly Hills and Environs]
Roxsan 1984 8,143 $205,000 100%
120 East 1994 5,350 $281,000 100%
444 San Vicente 1994 9,900 $669,000 100%
1 West/Women's 1994 4,600 $309,000 100%
Antelope Valley 1992 2,900 $ 66,200 100%
Fresno 1997 3,807 $ 76,000 100%
Lancaster 1992 3,327 $111,000 100%
Northridge 1990 7,500 Owned 100%
Orange 1994 4,200 $144,000 100%
Oxnard 1997 5,100 $101,000 100%
Sacramento [DRI]a 1993 9,771 $302,000 100%
San Francisco 1993 3,380 $108,000 100%
Santa Clarita 1992 4,833 $ 67,000 100%
Santa Rosa 1992 4,235 $119,000 100%
Stockton/Valley 1993 6,800 $138,000 100%
Tustin 1993 5,310 $ 98,000 100%
Vacaville 1993 1,743 $ 48,000 100%
Ventura 1992 9,440 $132,000 100%
DIS Centers
Camarillo 1996 1,200 $ 36,000 68%
Corona 1996 5,328 $ 85,000 68%
North County [San Diego] 1996 2,042 $ 44,000 68%
Riverside 1996 8,312 $146,000 68%
Santa Monica 1996 9,235 $365,000 68%
Scripps Chula Vista
[San Diego] 1996 1,512 $ 60,000 34%
Temecula 1996 4,247 $141,000 45%
Temecula Oncology 1996 5,418 $104,000 51%
Thousand Oaks 1996 8,300 $281,000 68%
Joint Ventures
La Habra 1988 2,500 Owned 50%
Westchester 1991 6,763 $200,000 50%
Other Facilities
RadNet [Corp. office] 1990 11,500 $199,000
Warehouses/Other various 32,148 $367,000
FDI 1995 6,046 $ 87,000
- ---
aIncludes two Sacramento locations.
The Company maintains its principal executive offices in approximately
11,500 square feet of leased office space at 1516 Cotner Avenue, Los Angeles,
California 90025 pursuant to a lease expiring in May 2003, which provides for
annual average lease payments of $199,000. Effective June 15, 1997, FDI also
will have moved its offices to such location.
14
Item 3. Legal Proceedings
(a) At November 1, 1993, the Company was a defendant in a putative class
action pending in the United States District Court for the District of New
Jersey entitled "In re Hibbard Brown & Company Securities Litigation. The
plaintiffs subsequently amended the Consolidated Class Action Complaint and in
July 1994, filed a Second Amended and Consolidated Class Action Complaint [the
"Second Consolidated Complaint"] in the matter. In the Second Consolidated
Complaint, the plaintiff identified certain alleged "control" companies
including among others, the Company, ITI, Digital Products Corporation and Site
and alleged that the defendants violated the federal securities laws and the
Racketeer Influenced Corrupt Organizations Act ["RICO"] by initiating and/or
joining in a conspiracy and course of conduct designed to manipulate and
artificially inflate the market prices of the stocks of the various "control"
companies [allegedly controlled by the Company, the Company's former
principal stockholder
and others] companies in order to permit the defendants to sell "large" amounts
of the "control" companies' securities to the public at manipulated prices and
reap "huge" profits. The Second Consolidated Complaint claimed damages as well
as punitive damages [including a trebling of damages pursuant to the RICO
statute], interest, attorneys' fees and costs, all of which were unspecified in
amount. In September 1994, the Court certified the matter as a class action.
Subsequent thereto, certain of the defendants, including the Former Principal
Stockholder, FNW, WFG and Hibbard filed for protection from creditors pursuant
to the federal bankruptcy laws. See Part II, Item 1 of the Company's Form 10-Q
for the quarter ended January 31, 1996.
Management contended that the Company was not a party to any conspiracy
and did not engage in any illegal course of conduct. The Company entered into a
preliminary settlement with the plaintiff class in this lawsuit by the payment
of $240,000 in April 1996. Although the settlement between the Company and the
plaintiff class was granted preliminary court approval in April 1996, the
settlement is subject to final approval by the class and to final court
approval, which has not yet been obtained.
(b) The Company had previously announced completion of an investigation by
the Los Angeles District Attorney's office. No charges were filed against the
Company, any of its subsidiaries, or any of the current management of the
Company or any of its subsidiaries. The investigation related to the Company,
its subsidiaries and others regarding alleged violations of California penal
laws concerning securities and tax fraud, grand theft and criminal conspiracy.
On March 19, 1996, the Company issued a press release announcing that although
the Los Angeles District Attorney's Office was investigating the activities of
certain individuals who had been part of the management of the Company's
Primedex Corporation subsidiary through fiscal 1993, the District Attorney's
Office had confirmed that it was not investigating any members of the current
management or the present business activities of Primedex Health Systems, Inc.
or those of its operating subsidiaries including RadNet. The Primedex
Corporation subsidiary, acquired by the Company in February 1992, subsequently
ceased all business operations. [See "Item 1. Discontinued Operations"] The
Workers' Compensation Fraud Division of the Los Angeles District Attorney's
Office approved the text of the Company's press release.
On May 31, 1996, the District Attorney's Office announced that a Los
Angeles Grand Jury had issued a two count indictment against three individuals
formerly associated with the Company's Primedex Corporation subsidiary. The
three individuals under the indictment are David G. Gardner, former president of
the Primedex Corporation subsidiary and a former director of the Company,
Vincent A. Punturere, a former vice president and medical director of the
Primedex Corporation subsidiary and Stanley Goldblum, a former consultant to the
subsidiary. None of the three individuals have any present employment or
consulting positions with the Company. The cases against these three individuals
remain pending as of May 30, 1997. Management believes that the indictment
15
marked the culmination of the above described investigation of the Company by
the District Attorney's Office.
(c) In connection with its cessation of operations at certain of its
imaging centers [Beverly Hills MRI - October 1993], [Beverly - October 1994] and
[Downtown Los Angeles - October 1994], lawsuits were filed against RadNet by the
lessors of the properties for past due rent, future rent and damage to the
premises plus costs. The lessor's lawsuit against RadNet relating to the
Downtown Los Angeles premises was settled in fiscal 1995 with RadNet paying the
lessor a $425,000 settlement amount. The lessor's lawsuit against RadNet and
others relating to the Beverly premises was settled in July 1996 with the
payment of $950,000 to the lessor in the settlement of all claims. The Beverly
Hills-MRI lease litigation is still pending. The approximate monthly rent for
this facility was $17,370, and the lease expiration date is January, 2000.
Under California law, a landlord is required to use his best efforts to
mitigate damages. One method is by seeking to rent any vacated premises to
another tenant. The Beverly Hills MRI premises are presently occupied by a
successor tenant, thus mitigating RadNet's damage exposure. RadNet has asserted
certain defenses in the lawsuit on the lease with respect to the Beverly Hills
MRI premises lease. RadNet intends to continue its vigorous defense of this
case. No assurances can be given as to whether this lawsuit will be settled or
as to the amount of damages which RadNet will suffer under it.
(d) In October 1995, the Company and RadNet were sued in a Cross-Complaint
by a number of individuals and entities led by Medical Imaging Center of Los
Angeles ["MICLA"]. The litigation relates to the Downtown Los Angeles facility,
which was closed in October 1994. The Company and RadNet counter-sued the
individuals and entities who initiated this suit. All of this litigation was
settled in November 1996 by all parties agreeing to drop their lawsuits, and
various of the parties making payments to the third party equipment lender which
had been involved with MICLA. RadNet paid $125,000 to this lender as its part in
the overall settlement.
(e) In March 1994, RadNet and Drs. Berger and Krane [the two then owners
of BRMG], as plaintiffs, filed a lawsuit in Federal District Court against TME,
Inc. and others. This Complaint alleges violations of federal securities law,
fraud, negligent misrepresentation, and a number of other related causes of
action arising out of the sale by TME of the Beverly Hills MRI facility to Drs.
Berger and Krane. On June 26, 1995, the Court granted RadNet's and the other
plaintiff's motion for partial summary judgment against TME, thus holding that
TME in certain respects breached its contract for the sale of the Beverly Hills
MRI facility. The litigation was settled in June 1996, with TME canceling over
$350,000 in promissory notes plus accrued interest owed to TME, and TME's
agreeing to pay to RadNet the sum of $400,000 plus interest in monthly
installments. TME also agreed to additional contingent settlement payments of up
to $700,000.
The Company's subsidiaries are currently parties to other litigation, none
of which is deemed by management to be material in nature.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
16
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters
PHS Common Stock is traded in the over-the-counter market on the OTC
Bulletin Board [symbol, "PMDX"]. The following table indicates the high and low
bid and asked prices for PHS Common Stock for the periods indicated based upon
information supplied by the National Quotation Bureau, Inc. Such quotations
reflect interdealer prices without adjustment for retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.
Bid Price(1) Asked Price(1)
Quarter Ended High Low High Low
January 31, 1995 .94 .41 1.00 .44
February 1, 1995
through April 13, 1995 .78 .41 .88 .44
April 17, 1995
through April 30, 1995 .56 .09 .84 .47
July 31, 1995 .91 .03 .03 .13
October 31, 1995 .16 .03 .31 .08
January 31, 1996 .25 .12 .52 .21
April 30, 1996 .50 .20 .81 .32
July 31, 1996 .54 .52 .77 .61
October 31, 1996 .41 .36 .71 .54
- --------------
(1) The above information reflects inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
The last reported bid and asked prices for PHS Common Stock on the OTC
Bulletin Board on June 6, 1997 were $.39 and $.41, respectively. As of June 6,
1997, the number of holders of record of PHS Common Stock was 2,731. However, a
substantial number of PHS' outstanding shares of Common Stock were owned of
record on said date by "Cede & Co.," the nominee for Depository Trust Company,
the clearing agency for most broker-dealers. Management believes that these
shares are beneficially owned by customers of these broker-dealers and that the
number of beneficial owners of PHS Common Stock is substantially greater than
2,731.
During fiscal 1996, PHS repurchased an aggregate 1,300,000 shares of its
outstanding common stock for an aggregate $481,727 in open market purchases from
unaffiliated third parties. Subsequent to fiscal 1996, PHS repurchased an
additional 275,000 shares for an aggregate purchase price of $112,716 and
repurchased $459,000 of its outstanding debentures for a purchase price of
$259,553 from unaffiliated third parties.
Recent Sales of Unregistered Securities
In reliance upon Section 4(2) of the Securities Act of 1933, as amended, the
Company issued its five year warrants to acquire approximately 4,000,000 shares
of its common stock for $.60 per share in connection with its acquisition of DIS
[see "Item 1."].
17
Item 6. Selected Consolidated Financial Data
[In thousands, except per share data]
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 6 1 9 9 5 [B] 1 9 9 4 [B] 1 9 9 3 1 9 9 2[A]
Operating Data:
Gross Revenues $111,381 $ 88,884 $ 69,942 $70,122 $ 36,599
Operating Expenses $ 58,372 $ 98,124 $ 50,289 $50,414 $ 20,951
[Loss] from Investee Transactions $ (314) $ -- $ (26) $ (648) $ (215)
Income [Loss] from Continuing Operations
[Exclusive of Non-Recurring Items] -
Net of Taxes ** $ (8,361) $(57,616) $(20,476) $(16,004) $ 1,009
Income [Loss] from Discontinued
Operations $ -- $ (3,813) $ (3,371) $(39,646) $ 3,715
Net [Loss] Income Before Extraordinary
Items $ (9,511) $(62,370) $(20,912) $(47,787) $ 18,457
Extraordinary Items - Gain $ 1,150 $ 941 $ -- $ -- $ --
[Loss] Income Per Common Share
From Continuing Operations
Before Extraordinary Items $ (.24) $ (1.54) $ (.44) $ (.21) $ .51
[Loss] Income Per Common Share from
Discontinued Operations $ -- $ (.09) $ (.08) $ (1.04) $ .13
[Loss] Income Before Extraordinary Items $ (.24) $ (1.63) $ (.52) $ (1.25) $ .64
Net [Loss] Income Per Common Share$ (.21) $ (1.61) $ (.52) $ (1.25) $ .64
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 152 $ 3,929 $ 5,649 $24,557 $ 27,323
Total Assets * $105,931 $ 66,760 $153,551 $188,151 $209,710
Total Long-Term Liabilities $ 85,464 $ 54,088 $ 67,666 $58,668 $ 63,363
Total Liabilities $130,792 $ 82,002 $104,522 $107,698 $110,628
Working Capital [Deficit] $(22,627) $ (4,337) $ 528 $16,970 $ 34,130
Stockholders' Equity [Deficit] $(24,861) $(15,242) $ 49,029 $80,452 $ 99,082
18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
[In thousands, except per share]
[A] The operating data for October 31, 1992, gives retroactive effect to
discontinued operations of the Primedex Subsidiary.
[B] The operating data for October 31, 1994, gives effect to the spin off of
the Care Advantage, Inc. subsidiary as of October 31, 1994.
* At October 31, 1996, 1995, 1994 and 1993, includes $31,822, $15,383, $58,725
and $50,820 of net goodwill, respectively.
** Reconciliation of Income from Continuing Operations - Net of Taxes
O c t o b e r 3 1,
----------------------------
1 9 9 5 1 9 9 4
------------------ -------------
Net [Loss] $ (61,429) $(20,912)
Loss from Discontinued Operations 3,813 3,371
--------- --------
[Loss] from Continuing Operations
[Inclusive of Non-Recurring Items] -
Net of Taxes (57,616) (17,541)
Less: Nonoperating Gain from Investee Stock
Transactions [See Note 2] $ -- $ 2,935
Net of Approximate Taxes -- -- -- 2,935
----- --------- ------- -------
[Loss] from Continuing Operations [Exclusive of
Non-Recurring Items] - Net of Taxes $(57,616) $(20,476)
======== ========
19
ITEM 7.
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Background
Primedex Health Systems, Inc. ["PHS"] [formerly CCC Franchising Corp.] was
incorporated on October 21, 1985.
On November 1, 1990, the Company acquired a 51% interest in Viromedics, Inc.
["VMI"] for $700,000. On February 18, 1992, Future Medical Products, the parent
corporation of VMI, exercised its right to repurchase one-half of the VMI stock
from PHS at a price of $700,000. The Company owns approximately 19% of VMI's
outstanding capital stock at October 31, 1996, which is accounted for using the
cost method at $-0-.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of ImmunoTherapeutics, Inc. ["ITI"]. As of October 31, 1995, the Company owned
approximately 19% of ITI and accounted for this investment using the cost
method, which was $-0-. In November of 1995, this investment was sold for
$143,750.
As of January 31, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. I, entered into an asset purchase agreement with Primedex
Corporation ["PC"] for approximately $46,250,000. On July 29, 1993, the Company
announced its plans to restructure its Primedex subsidiary and to wind down its
involvement in the California worker's compensation industry. Accordingly, the
operating results of this subsidiary were reclassified as a discontinued
operation and the appropriate prior period amounts were restated. Effective
August 1, 1995, substantially all of the assets of PC were sold to an unrelated
party for approximately $9,448,000. The sale resulted in a loss of approximately
$3,800,000. Approximately $157,000 remains on the Company's books for accrued
estimated closing costs associated with the closing and sale of PC [See Note
20].
As of April 30, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. II, entered into a purchase agreement with Radnet Management,
Inc. and certain related companies [Radnet] for approximately $66,000,000. The
Statements of Operations and Cash Flows for the years ended October 31, 1996 and
1995 reflect the operations and cash transactions of Radnet.
On December 23, 1993, the Company acquired Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to provide medical and surgical
utilization reviews for major providers of health insurance, for $6,000,000 in
cash. On August 26, 1994, the Company announced a plan to spin-off its
subsidiary, Care Advantage, Inc. ["CareAd"] which owns AHS.
On November 1, 1995, the Company acquired most of the assets of Future
Diagnostics, Inc. ["FDI"] by purchasing 100% of its outstanding stock for
approximately $3.2 million consisting of cash, notes and assumed assets and
liabilities. Founded in 1989, FDI is a leading Radiology management service
organization providing network development and management along with diagnostic
imaging cost containment and utilization review services. The Statements of
Operations and Cash Flows for the year ended October 31, 1996 reflect the
operations and cash transactions with FDI.
20
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Background [Continued]
On March 25, 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ["DIS"] for $4,000,000 and acquired a
five-year warrant to purchase an additional 1,521,739 shares of DIS stock at
$1.60 per share. The $4 million was borrowed by the Company from a primary
lending source. In addition, the Company established a five-year $1 million
revolving loan with DIS. During the four-month period ended July 31, 1996, the
investment yielded a loss to the Company of $313,649. Effective August 1, 1996,
the Company issued a five-year promissory note for $3,252,046, and five-year
warrants to purchase approximately 4,000,000 shares of PHS common stock at $.60
per share, to acquire an additional 3,252,046 shares of DIS common stock. The
purchase made PHS the majority shareholder in DIS with approximately 59%
ownership. The Statements of Operations and Cash Flows for the year ended
October 31, 1996 reflect the operations and cash transactions of DIS from August
1, 1996. In connection with the acquisition, goodwill of $7,173,220 was
recorded.
Discussion of Operations for the Year Ended October 31, 1996 vs.
October 31, 1995
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc.
Results of Operations
The discussion of the results of continuing operations includes Radnet for the
year ended October 31, 1995. The discussion of the results of continuing
operations includes Radnet, FDI and DIS for the year ended October 31, 1996.
For the years ended October 31, 1996 and 1995, the Company had operating losses
from continuing operations of $1,833,120 and $52,779,293, respectively.
The Company generated net revenue of $56,538,507 and $45,344,879 for the years
ended October 31, 1996 and 1995, respectively. The increase in net revenue in
1996 is primarily attributable to the acquisitions of FDI and DIS; Radnet
generated net revenue of $43,439,338, FDI generated net revenue of $7,482,487,
and DIS generated net revenue of approximately $5,616,682 for the partial period
from August to October 1996. Radnet was the sole generator of revenue for the
year ended October 31, 1995.
For the years ended October 31, 1996 and 1995, operating expenses totaled
$58,371,627 and $98,124,172, respectively. For the year ended October 31, 1996,
Radnet's operating expenses were $43,754,174, FDI's operating expenses were
$6,332,934, DIS's operating expenses were $5,687,219 and PHS's overhead expenses
were $2,597,300. For the year ended October 31, 1995, Radnet's operating
expenses were $95,883,525 and PHS's overhead expenses were $2,240,647. Fiscal
1995 operating expenses were higher due to Radnet's recognition of an impairment
loss of $47,744,453 with the implementation of FASB 121 [See Note 6 to the
financial statements]. In addition, Radnet's depreciation and amortization
expense decreased from $8,321,841 to $4,474,614 in 1996 due primarily to the
writedown in assets. Increases in operating expenses were primarily attributable
to the acquisitions of FDI and DIS.
For the years ended October 31, 1996 and 1995, interest income was approximately
$258,000 and $296,000, respectively. For the years ended October 31, 1996 and
1995, interest expense was approximately $7,900,000 and $6,200,000,
respectively. Approximately $915,000 of interest expense in 1996 is related to
the acquisitions. PHS's interest expense increased from $1,677,311 in fiscal
1995 to $2,901,643 in fiscal 1996 due primarily to approximately $8.2 million in
promissory notes used to fund the acquisition of DIS. In addition, for the year
ended October 31, 1995, PC recognized a portion of the parent company's interest
expense as part of discontinued operations.
21
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
Results of Operations [Continued]
For the years ended October 31, 1996 and 1995, the Company had net losses from
continuing operations of $8,361,096 and $57,615,465, respectively. For the year
ended October 31, 1996, Radnet realized net losses of $2,596,218, FDI generated
net income of $241,545, DIS realized net losses of $1,494,829 (including the
investment loss for the interim period of $313,649), and PHS realized net losses
of $4,511,594. For the year ended October 31, 1995, Radnet realized net losses
of $53,786,375 and PHS realized net losses of $3,829,090. For the years ended
October 31, 1996 and 1995, the Company had net losses from discontinued
operations of $ -0- and $3,813,314, respectively.
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1996 and 1995 by $3,776,962 and
$1,720,398, respectively.
Cash generated from investing activities for the year ended October 31, 1996 was
$1,565,076. Cash utilized for investing activities for the year ended October
31, 1995 was $3,623,510. In fiscal 1995, the Company utilized approximately $2
million buying and selling marketable securities. In fiscal 1996, all of the
marketable securities were converted into cash. In addition, in fiscal 1996, the
Company received approximately $1.9 million in payments on notes due from
related parties.
Cash utilized for financing activities for the years ended October 31, 1996 and
1995 was $4,369,019 and $9,980,884, respectively. For the year ended October 31,
1996, $481,727 was utilized to repurchase Company stock, $440,000 was paid to
joint venture partners, and approximately $1,640,000 was advanced to DIS prior
to the Company's acquisition of additional shares in August 1996. For the years
ended October 31, 1996 and 1995, debt and lease payments were $7,515,599 and
$8,268,319, respectively. The fiscal 1996 decrease was primarily due to the
deferral of payments while renegotiating balances and terms, and the arrangement
of new notes and leases with interest-only payments or deferred principal
payments during the first year. In addition, during fiscal 1995, many of the
Company's acquisition notes were paid in full. For the years ended October 31,
1996 and 1995, $5,460,229 and $1,784,067 was advanced from short-term
borrowings, respectively. During fiscal 1995, the Company had use of the
proceeds from the sale of PC's assets to invest in marketable securities and
reduce short-term borrowings.
At October 31, 1996, the Company had a working capital deficit of $22,626,650 as
compared to working capital deficit of $4,337,438 at October 31, 1995, a
decrease of $18,289,212. A primary reason for the decrease was the acquisition
of DIS which had a working capital deficit of $11,358,169 as of October 31,
1996. DIS's working capital deficit increased from its calendar 1995 year-end
due to the reclassification of its line of credit and many of its limited
partner acquisition notes as current liabilities. Included in current
liabilities for both Radnet and DIS are approximately $10.7 million and $3.9
million, respectively, of line of credit payables. In April 1997, DIS's working
capital improved with the sale of its ultrasound division and four of its
hospital-based MRI facilities to an unrelated party [See Note 2 to the financial
statements]. At fiscal year-end, Radnet's working capital deficit was
$9,142,010, FDI's working capital deficit was $1,112,118 and PHS's working
capital deficit was $1,014,353 after the elimination of all intercompany
transactions.
22
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
Liquidity and Capital Resources [Continued]
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $34,855,000, $16,655,000, $16,600,000, $16,860,000 and
$14,255,000. Radnet's, FDI's and PHS's future payments will be approximately
$20,185,000, $9,975,000, $9,580,000, $11,300,000 and $10,125,000. DIS's future
payments will be approximately $14,670,000, $6,680,000, $7,020,000, $5,560,000
and $4,130,000. The October 31, 1996 lines of credit balances are approximately
$14,620,000 which includes $3,875,000 with DIS. Interest expense for the Company
for the next five years, included in the above payments, will be approximately
$6,650,000, $4,790,000, $3,620,000, $2,415,000 and $1,140,000, respectively. In
addition, the Company has noncancellable operating leases for use of its
facilities and certain medical equipment which will average approximately
$4,070,000 in annual payments over the next five years.
In fiscal 1995, the Company successfully renegotiated the majority of its
equipment under capital lease liabilities and some notes payable with a major
outside lender deferring all payments until February 1996, standardizing
favorable interest rates, eliminating large balloon payments, and extending
remaining lease terms to seven to ten years from October 31, 1995. In addition,
during fiscal 1996, the Company settled a dispute with an outside lendor that
required that approximately $5.2 million in notes to be classified as a current
liability at October 31, 1995.
In addition to the approximately $3,500,000 of new capital equipment leases
added during fiscal 1996, the Company estimates additional expenditures over the
next few years to develop a centralized scheduling, transcription, billing and
collection system. At this time, the project's final cost is unknown.
The Company acquired Future Diagnostics, Inc. for approximately $3,200,000
in cash, notes and assumed liabilities on November 1, 1995. During fiscal 1996,
approximately $1,050,000 in principal payments were made on the note.
In late March 1996, the Company purchased 2,747,493 shares of DIS common stock
for $3,000,000 with a five-year warrant to acquire an additional 1,521,739
shares of DIS stock at $1.60 per share. In addition, the Company established a
five-year $1 million revolving loan with DIS. At the same time, the Company
purchased 730,768 shares of DIS common stock from DVI for $1,000,000. The
combined transactions gave the Company approximately 31% interest in DIS. Out of
the total of $5 million for the purchase price and loan, the Company used
$500,000 of cash and borrowed $4.5 million from DVI. The notes accrue interest
at 10% annually and require interest-only payments during the first year.
Thereafter, monthly payments of principal and interest are required with final
payments due in April and May of 2002. The $3 million purchase price was used by
DIS to retire debt owed to DVI. The notes are collateralized by the assets of
certain subsidiaries. In August 1996, the Company purchased an additional
3,252,046 shares of DIS common stock from the President of DIS and other related
parties for $1 per share, and five-year warrants to acquire approximately
4,000,000 shares of PHS common stock at $.60 per share. The Company issued a
five-year interest only promissory note for $3,252,046 at 6.58%. The principal
is due in June 2001 and interest paid annually.
The March and August purchases made PHS the largest
shareholder of DIS with approximately 59% of the outstanding common stock.
The Company estimates interest payments on its bond debentures to be
approximately $2,582,900 for fiscal 1997. The quarterly payments of
approximately $645,725 are paid on January 1, April 1, July 1 and October 1 of
each year. Subsequent to year-end, the Company repurchased 459,000 of its
outstanding bond debentures. These bonds were not retired.
23
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
Liquidity and Capital Resources [Continued]
The Company's working capital needs are currently provided under three lines of
credit. Under one agreement with Coast Business Credit, due December 31, 1998,
the Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$10,000,000 or the prior 120-days' cash collections. Borrowings under this line
are repayable together with interest at an annual rate equal to the greater of
(a) the bank's prime rate plus 3%, or (b) 10%. The lender holds a first lien on
substantially all of Radnet's and FDI's assets. At October 31, 1996,
approximately $7,470,000 was outstanding under this line. A second line of
credit with DVI Business Credit was obtained in December of 1994 subsequent to
the acquisition of the Tower Imaging Group. Under this agreement, due December
1997, the Company may borrow the lesser of 75% of the eligible accounts
receivable, $4,000,000 or the prior 120-days' cash collections. The credit line
is collateralized by approximately 80% of the Tower division's accounts
receivable. Borrowings under this line are repayable together with interest at
an annual rate equal to the bank's prime rate plus 3.5%. At October 31, 1996,
approximately $3,275,000 was outstanding under this line. A third line of
credit, also with DVI Business Credit, was obtained by DIS in June of 1994 and
is due in June of 1997. Under the agreement, the Company may borrow the lesser
of $4,000,000 or approximately 53% of the eligible accounts receivable.
Borrowings under this line are repayable together with interest at an annual
rate equal to the bank's prime rate plus 3.5%. At October 31, 1996,
approximately $3,875,000 was outstanding under this line. As of October 31, 1996
and April 30, 1997, the bank's prime rates were 8.25% and 8.0%, respectively.
Under the various formulas, total funds available for borrowing under the three
lines of credit was approximately $1.8 million at October 31, 1996.
In connection with ceasing operations at certain of the Company's imaging
centers, lawsuits have been filed against the Company by three of Radnet's
property lessors for past due rent, future rent and damages to the properties
plus other costs. In 1995 and 1996, two lawsuits were settled. One lawsuit was
settled for $425,000 in 1995, and the second lawsuit was settled for $950,000 in
July 1996. As of October 31, 1996, accrued restructuring costs include
approximately $396,000 of the second settlement remaining to be paid as well as
an additional $500,000 reserved for the third remaining lawsuit.
In March of 1997, the Company sold certain assets of DIS consisting of
ultrasound division and four hospital based MRI sites for cash and a
non-interest bearing receivable of approximately $25 million, including
$2 million of covenants-not-to-compete. Of the proceeds,
$7.6 million was used to retire existing debt.
New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board [APB] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial statement note disclosure purposes in any event. The
accounting requirements of SFAS No. 123, if adopted by the Company, will be
effective for transactions entered into in fiscal years that begin after
December 15, 1995; the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995.
24
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1996 vs.
October 31, 1995
New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.
The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
Inflation
To date, inflation has not had a material effect on the Company's operations.
25
ITEM 7.
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Year Ended October 31, 1995 vs.
October 31, 1994
Results of Operations
The discussion of the results of continuing operations includes Radnet for the
year ended October 31, 1995 and 1994.
On August 1, 1995, the Company sold substantially all of the assets of Primedex
Corporation, a discontinued line of business, to an unrelated party for
$9,448,000. The sale generated a loss of approximately $3,800,000. On August 26,
1994, the Company announced a plan to spin-off the CareAd subsidiary.
Accordingly, the operating loss of this subsidiary was classified as a
discontinued line of business
For the years ended October 31, 1995 and 1994, the Company had operating losses
from continuing operations of $52,779,293 and $15,849,869, respectively. In
fiscal 1995, Radnet realized an operating loss of approximately $50,600,000. For
the year ended October 31, 1995 and 1994, Radnet realized net revenues of
$45,344,879 and $34,439,271, respectively. The increase was due to the
acquisition of the Tower Imaging Group in October 1994.
For the year ended October 31, 1995 and 1994, operating expenses totaled
approximately $98,124,172 and $50,289,140, respectively. Radnet's October 31,
1995 operating expenses totaled approximately $95,883,525; Radnet's operating
expense increase was primarily attributable to the implementation of FASB 121
and the resulting recognition of an impairment loss of approximately $47,744,453
for the write-down of related goodwill and property and equipment [See Note 6 to
the financial statements]. Other October 31, 1995 Radnet operating expenses
included approximately $20,195,000 of wages and compensation, $8,300,000 of
depreciation and amortization, and $19,645,000 of other general and
administrative expenses. Wages and compensation of approximately $1,100,000 were
incurred by PHS.
For the years ended October 31, 1995 and 1994, interest income was approximately
$296,000 and $244,000, respectively. For the years ended October 31, 1995 and
1994, interest expense was approximately $6,200,000 and $6,100,000,
respectively. Interest expense of Radnet was primarily attributable to equipment
financing, acquisition notes payable and lines of credit charges. In December of
1995, interest rates on the Company's two revolving lines of credit were each
reduced by 1%.
For the years ended October 31, 1995 and 1994, the Company had net losses from
continuing operations of $57,615,465 and $17,541,282, respectively.
For the year ended October 31, 1995 and 1994, the company had net losses from
discontinued operations of $3,813,314 and $3,370,771, respectively.
Liquidity and Capital Resources
The following discussion on liquidity and capital resources includes Radnet as
of October 31, 1995 and 1994.
26
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1995 vs.
October 31, 1994
Liquidity and Capital Resources [Continued]
Cash decreased for the years ended October 31, 1995 and 1994 by $1,720,398 and
$18,907,810, respectively. The October 31, 1994 decrease in cash was primarily
attributable to approximately $6,800,000 in advances to AHS, $6,500,000 in
payments on stockholder's notes payable, and approximately $10,000,000 in
acquisition costs. Cash utilized for investing activities for the years
ended October 31, 1995 and
1994 was $3,623,510 and $9,724,499, respectively. Cash utilized for financing
activities for the year ended October 31, 1995 and 1994 was $9,980,884 and
$13,080,425, respectively. For the year ended October 31, 1995, approximately
$8,300,000 was made in debt and lease payments, approximately $1,800,000 was
advanced from short-term borrowings, approximately $500,000 was paid on a
stockholder's notes payable, and approximately $2,900,000 was advanced to CareAd
as part of the separation agreement. The Company capitalized this advance to
CareAd and $6,800,000 advanced in fiscal 1994 as part of the separation
agreement [See Note 21 to the financial statements].
At October 31, 1995, the Company had a working capital deficit of $4,337,438 as
compared to working capital of $527,201 at October 31, 1994, a decrease of
$4,864,639. A primary reason for the decrease was the reclassification of
approximately $5,200,000 of notes payable as current debt in which the Company
had suspended making payments and is in negotiation with an outside lender. In
August of 1996, this negotiation was finalized and the note was reclassified to
the specified terms.
The Radnet operation utilized cash of approximately $1,076,000 to purchase the
remaining joint venture interests of three centers including Lancaster Imaging
Group, Antelope Valley MRI and Santa Clarita Imaging Center, as well as
purchasing 100% of Women's Diagnostic Imaging Center, which was subsequently
merged into the Tower division.
During the year ended October 31, 1995, the Company's working capital needs were
provided under two lines of credit. At October 31, 1995, approximately
$4,800,000 was outstanding under the line of credit with Coast Business Credit
and $1,200,000 was outstanding under the line of credit with DVI Business
Credit.
In fiscal 1995, Radnet successfully settled its outstanding liability with one
building lessor for $425,000. In addition, a discrimination lawsuit detailed in
the October 31, 1994 10-K was settled for $210,000.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements are attached hereto and begin at page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
27
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report..................................... F-1.....
Consolidated Balance Sheets...................................... F-2.....F-3
Consolidated Statements of Operations............................ F-4.....F-5
Consolidated Statements of Stockholders' Equity [Deficit]........ F-6.....
Consolidated Statements of Cash Flows............................ F-7.....F-9
Notes to Consolidated Financial Statements....................... F-10....F-27
Independent Auditor's Report on Supplemental Schedule............ S-1.....
Schedule II - Valuation and Qualifying Accounts.................. S-2..... S-4
. . . . . . . . . . . . . . .
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Primedex Health Systems, Inc. and its affiliates as of October 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity [deficit], and cash flows for each of the three fiscal years in the
period ended October 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 its affiliates as of October 31,
1996 and 1995, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 31, 1996,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 24 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has negative working capital which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 24. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in the accompanying notes to the financial statements,
for the year ended October 31, 1995, the Company adopted two new accounting
standards promulgated by the Financial Accounting Standards Board, changing its
methods of accounting for impairments of long-lived assets and goodwill related
to those assets, and certain investments in debt and equity securities.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey March 28, 1997, except as to Note 10 for which the date is
June 6, 1997
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
October 31,
1 9 9 6 1 9 9 5
Assets:
Current Assets:
Cash and Cash Equivalents $ 151,870 $ 3,928,832
Marketable Security -- 1,956,707
Accounts Receivable - Net 19,751,419 16,011,324
Unbilled Receivables 532,138 304,871
Due from Related Party -- 87,500
Due from Employee 100,333 --
Other 826,826 264,452
----------- -----------
Total Current Assets 21,362,586 22,553,686
----------- -----------
Property, Plant and Equipment - Net 38,737,846 17,270,032
----------- -----------
Other Assets:
Accounts Receivable - Net 6,104,012 5,653,654
Due from Related Parties 899,143 2,697,437
Goodwill - Net 31,821,606 15,382,944
Other 7,005,979 3,201,951
----------- -----------
Total Other Assets 45,830,740 26,935,986
----------- -----------
Total Assets $105,931,172 $66,759,704
============ ===========
See Notes to Consolidated Financial Statements.
F-2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
October 31,
1 9 9 6 1 9 9 5
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 250,792 $ --
Accounts Payable 5,743,410 1,918,337
Accrued Expenses - Current 7,619,634 4,182,150
Notes and Leases Payable - Current 28,200,547 17,565,435
Accrued Estimated Closing Costs - Current 157,092 487,447
Accrued Restructuring Costs 895,622 1,250,000
Due to Related Party 88,567 --
Other 1,033,571 1,487,755
----------- -----------
Total Current Liabilities 43,989,235 26,891,124
----------- -----------
Long-Term Liabilities:
Subordinated Debentures Payable 25,829,000 25,841,000
Notes and Leases Payable 57,199,989 26,741,081
Accrued Estimated Closing Costs -- 243,723
Accrued Expenses 2,435,283 1,261,899
----------- -----------
Total Long-Term Liabilities 85,464,272 54,087,703
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Minority Interest 1,338,979 1,023,343
----------- -----------
Stockholders' Equity [Deficit]:
Common Stock - $.01 Par Value, 100,000,000 Shares
Authorized; 40,232,260 and 40,230,760 Shares Issued;
38,932,260 and 40,230,760 Shares Outstanding at
October 31, 1996 and 1995, Respectively 402,322 402,307
Paid-in Capital 99,411,150 99,399,165
Deferred Compensation - Net (788,025) --
Retained Earnings [Deficit] (123,405,034) (115,043,938)
------------ ------------
Totals (24,379,587) (15,242,466)
Less: Treasury Stock - 1,300,000 Shares at Cost (481,727) --
----------- -----------
Total Stockholders' Equity [Deficit] (24,861,314) (15,242,466)
----------- -----------
Total Liabilities and Stockholders' Equity
[Deficit] $105,931,172 $66,759,704
See Notes to Consolidated Financial Statements.
F-3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Revenue:
Revenue $111,380,904 $88,884,136 $69,942,395
Less: Allowances 54,842,397 43,539,257 35,503,124
------------ ----------- -----------
Net Revenue 56,538,507 45,344,879 34,439,271
------------ ----------- -----------
Operating Expenses:
Operating Expenses 49,800,034 40,599,493 37,277,623
Depreciation and Amortization 6,040,256 8,625,336 7,012,087
Provision for Bad Debts 2,531,337 1,154,890 2,669,914
Restructuring Costs -- -- 3,329,516
Impairment Loss of Long-Lived Assets -- 47,744,453 --
------------ ----------- -----------
Total Operating Expenses 58,371,627 98,124,172 50,289,140
------------ ----------- -----------
Loss from Operations (1,833,120) (52,779,293) (15,849,869)
------------ ----------- -----------
Other [Expenses] and Revenue:
Interest Expense (7,892,653) (6,184,302) (6,057,769)
Interest Income 258,390 295,609 243,733
Other Income 1,078,255 409,741 487,226
Non-Operating Income -- -- 2,934,504
------------ ----------- -----------
Total Other [Expenses] (6,556,008) (5,478,952) (2,392,306)
------------ ----------- -----------
Loss Before Minority Interest in [Income]
Loss of Subsidiaries, Equity in Loss of
Investees, and Extraordinary Item (8,389,128) (58,258,245) (18,242,175)
Minority Interest in [Income] Loss of
Subsidiaries (808,136) (298,104) 726,740
Equity in Loss of Investees (313,649) -- (25,847)
------------ ----------- -----------
Loss from Continuing Operations-Forward $(9,510,913) $(58,556,349)$(17,541,282)
See Notes to Consolidated Financial Statements.
F-4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Loss from Continuing Operations
- Forwarded $(9,510,913) $(58,556,349) $(17,541,282)
Discontinued Operation:
Loss from Operations of Discontinued
Business Segments [Net of Income
Taxes of $-0- for the Years Ended
October 31, 1995 and 1994] -- (3,813,314) (3,370,771)
------------ ----------- -----------
Loss Before Extraordinary Item (9,510,913) (62,369,663) (20,912,053)
Extraordinary Items - Gains from
Extinguishment of Debt [Net of
Income Taxes of $-0- for the Years
ended October 1996 and 1995] 1,149,817 940,884 --
------------ ----------- -----------
Net Loss $ (8,361,096) $(61,428,779)$(20,912,053)
============ ============ ============
Loss Per Share:
Loss from Continuing Operations $ (.24) $ (1.54) $ (.44)
Loss from Operations of Discontinued
Business Segment [Net of Income
Taxes] -- (.09) (.08)
------------ ----------- -----------
Loss Before Extraordinary Items [Net
of Income Taxes] (.24) (1.63) (.52)
Extraordinary Item .03 .02 --
------------ ----------- -----------
Net Loss Per Share $ (.21) $ (1.61) $ (.52)
============ =========== ===========
Weighted Average Common Shares
Outstanding 39,176,281 40,031,461 40,026,510
============ =========== ===========
See Notes to Consolidated Financial Statements.
F-5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
Total
Common Stock Retained Stockholders'
Number of Par Value Treasury Paid-in Deferred Earnings Equity
Shares Amount Stock Capital Compensation [Deficit] [Deficit]
Balance - October 31, 1993 40,026,510 $400,265 $ -- $110,125,655 - $(30,073,878) $80,452,042
Decrease in Equity from the Sale of
ImmunoTherapeutics Stock -- -- -- (2,078,385) -- -- (2,078,385)
Forgiveness of Debt - Shareholder -- -- -- 1,000,000 -- -- 1,000,000
Capitalization of Advances - Care Advantage -- -- -- (6,803,435) -- -- (6,803,435)
Stock Dividend - Care Advantage -- -- -- -- -- (2,629,228) (2,629,228)
Net [Loss] for the Year Ended -- -- -- -- -- (20,912,053) (20,912,053)
---------- -------- ----- ----------- ----- ----------- ----------
Balance - October 31, 1994 40,026,510 400,265 -- 102,243,835 -- (53,615,159) 49,028,941
Capitalization of Additional Advances-CareAd -- -- -- (2,896,628) -- -- (2,896,628)
Issuance of Common Stock 200,000 2,000 -- 18,000 -- -- 20,000
Conversion of Subordinated
Debentures to Common Stock 4,250 42 -- 33,958 -- -- 34,000
Net [Loss] for the Year Ended
October 31, 1995 -- -- -- -- -- (61,428,779) (15,242,466)
-------- -------- ----- ----------- ------ ----------- -----------
Balance - October 31, 1995 40,230,760 402,307 -- 99,399,165 -- (115,043,938) (15,242,466)
Conversion of Subordinated
Debentures to Stock 1,500 15 -- 11,985 -- -- 12,000
Acquisition of DIS--Deferred Compensation -- -- -- -- (796,653) -- (796,653)
Amortization of Deferred Compensation -- -- -- -- 8,628 -- 8,628
Purchase of Treasury Stock -- -- (481,727) -- -- -- (481,727)
Net [Loss] for the Year Ended
October 31, 1996 -- -- -- -- -- (8,361,096) (8,361,096)
-------- -------- ------- ---------- ---------- ---------- -----------
See Notes to Consolidated Financial
Statements.
F-6
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Operating Activities:
Net [Loss] $(8,361,096) $(61,428,779) $(20,912,053)