Back to GetFilings.com
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, 1998 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3326724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 478-7808
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark 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. X
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $3,789,797 on February 1,
1999 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 February 1,
1999 was 39,132,760 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 36 California diagnostic imaging
facilities [seven of which are wholly-owned or in partnerships with unaffiliated
parties with the Company's 90% owned Diagnostic Imaging Services, Inc. ["DIS"]
subsidiary and one is in partnership with an unaffiliated party 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. PHS' executive offices are located at 1516 Cotner Avenue, Los
Angeles, California 90025 where its telephone number is [310] 478-7808.
RadNet Management.
The Company's wholly-owned subsidiary, RadNet Management, Inc.
["RadNet"], owns and operates 28 medical imaging centers and is a joint venture
partner in one other imaging center. Twenty-two 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 center,
RadNet performs non-medical management services. At all 29 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"], a partnership between Beverly
Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc., two
professional medical entities 99% owned by the Company's president, Howard G.
Berger, M.D. [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.
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. 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
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 four additional centers in 1996 and 1997.
In March and April 1997, DIS sold four of its imaging centers and its ultrasound
business to Diagnostic Health Services, Inc. ["DHS"], an unrelated third party,
for approximately $16 Million and $9 Million, respectively, less outstanding
capital lease obligations and other liabilities. Effective January 1, 1998, DHS
acquired the DIS partnership interest in the Scripps Chula Vista MRI Center in
exchange for 127,250 shares of its Common Stock which were sold in May 1998 for
approximately $1,230,000.
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 6,706,307 shares representing approximately 59% of the outstanding
shares. The Company acquired the shares by issuance of its five-year
interest-only promissory notes aggregating $3,272,046 together with its
five-year warrants to acquire approximately 4,000,000 shares of the Company's
common stock at $.60 per share. Since August 1996, the Company has acquired an
additional 3,472,137 shares of DIS common stock from certain third parties for
$4,190,820 in cash and notes thereby increasing the Company's ownership to
approximately 90% of
1
the outstanding DIS common shares as of February 1, 1999 [excluding treasury
shares]. In October 1998, the Company purchased DIS's outstanding preferred
stock from DVI Healthcare Operations, Inc.
for $5,207,900.
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
approximately 250 imaging centers primarily in California and also provides
related utilization review and quality assurance services. On September 8, 1997,
the Company sold FDI to an unrelated third party for $13,500,000 [$9,761,853
cash and a two year 10% interest bearing note for $2,000,000 [paid in full in
December 1997] with the balance of the purchase price consisting of the
asumption of liabilities]. The Company retained RadNet Managed Imaging Services,
Inc. ["RMIS"] which still provides utilization review and quality assurance
services.
Tower Imaging
Beginning in January 1999, the Company will relocate three of its Tower
Imaging locations (120 East, 444 San Vicente and 1 West/Women's) from locations
presently on the Cedars Sinai Hospital Campus in Los Angeles to a single
location in Beverly Hills. Fiscal 1998 net revenue from the three sites was
approximately $12,160,000 and while the new site is within the Cedars Sinai
market area, the Company is unable to assess if there will be a negative impact
to revenues as a result of the relocation, although any loss will be reduced by
the annual space lease savings of approximately $1,000,000. In addition, the
Company entered into a new lease agreement for additional space in Beverly Hills
adjacent to its Roxsan center to open a Tower Women's Center and consolidate its
mammography operations in Beverly Hills into one site.
(b) Financial Information About Industry Segments
The Company is principally engaged in only one industry segment, the
healthcare services industry.
(c) 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 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 $325,000 to $525,000.
Diagnostic Radiology- X-ray services, diagnostic tests employing x-ray
radiation on two planes; includes fluoroscopy and endoscopy.
2
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 $800,000 and $1,600,000.
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.
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 * * *
Wilshire * * *
1 West/Women's * *
Antelope Valley *
Camarillo** * * *
Corona** * * *
Fresno * * * * *
La Habra * *
Lancaster [Two Sites] * * * * * *
Long Beach [Three Sites] * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange * * * * * *
Oxnard * * * *
Riverside** * * * * *
Sacramento [DRI]
[Two Sites] * * * * *
San Francisco *
Santa Clarita * * * * *
Santa Monica** * *
Santa Rosa *
Stockton/Valley * * * * * *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * * *
Vacaville * * *
Ventura [Five Sites] * * * * * *
Westchester * * * * *
*Indicates availability
**Indicates a DIS facility
3
In addition, cancer care therapy is performed at Valley Regional Oncology
Center, a DIS center located in Temecula, California.
Management Services and Compensation
Radnet has entered into Management Agreements with respect to its
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 joint venture imaging center, 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 and DIS's wholly-owned imaging centers, the medical
services including medical supervision are supplied by Beverly Radiology Medical
Group ["BRMG"]. 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 and DIS 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 18 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, 1998, capital lease obligations totaled approximately $20 million through
September 30, 2005 including current installments totaling approximately $3.3
million. Also at October 31, 1998, installment notes payable totaled
approximately $59 million through October 31, 2005 including current
installments of approximately $21 million [including line of credit balances of
approximately $12 million]. Commitments under equipment operating leases at
October 31, 1998 were approximately $395,000 through October 2002 including
current obligations of approximately $205,000. 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.
4
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.
The Company currently employs seven full-time and four part-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 many areas.
Insurance
BRMG maintains a medical malpractice insurance policy in the amount of
$6,000,000 per occurrence and $8,000,000 in the aggregate covering each
physician obtained by it pursuant to its 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 in the amount of
$1,000,000 per occurrence and $3,000,000 in the aggregate. Although management
believes that such levels of insurance are adequate, there can be no assurance
in this regard. In addition, the Company maintains $33,000,000 of blanket
general liability insurance covering each center and its own principal offices
as well as all of its employees. BRMG, DIS, RMIS and RadNet are also named
insureds under this policy. During 1998, the Company also maintained two medical
equipment repair and maintenance policies covering each center with aggregate
annual limits of approximately $10.6 million.
Employees
At October 31, 1998, the Company [including DIS] had a total of 437
full-time employees of whom 10 served in executive positions, 181 supplied
technical and managerial services at the various imaging centers, and 246
provided administrative, transcription, 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.
5
Government Regulation
Substantially all of the Company's current operating revenues are
attributable to its operations in the health care services industry through
RadNet and DIS. 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,
billing/assignment, referral arrangements, 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.
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.
6
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 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.
7
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.
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
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
8
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.
Item 2. Properties
All of the imaging centers owned or managed by the Company are located
in leased facilities with the exception of the Northridge imaging center where
the Company owns the building and the land. Certain information with respect to
the imaging centers is as follows:
Annual
Center Rental Company's %
Wholly-Owned Approx. Sq. for Leased Ownership Lease
Ft. of Center Facility Interest Expiration
Tower Division:
[Beverly Hills and Environs]
Roxsan 8,143 $164,000 100% October 2001
120 East 5,349 $188,000 100% June 1999
1 West 4,577 $221,000 100% June 1999
Wilshire [New Tower]1 13,778 $454,674 100% September 2018
Womens Center [New]2 3,830 $ 40,000 100% February 2014
Antelope Valley 2,890 $ 66,000 100% June 2000
Fresno 3,807 $113,000 100% January 2003
La Habra 3,034 $ 38,000 100% December 2002
Lancaster [two sites] 7,827 $163,500 100% July 2002
Long Beach [three sites] 6,000 $122,400 100% December 1999
Northridge 7,500 Owned 100% N/A
Orange 4,201 $132,000 100% February 2001
Oxnard 5,100 $101,000 100% February 2002
Sacramento [DRI]
[two sites] 9,727 $322,000 100% June 2003
San Francisco 3,380 $114,000 100% March 2000
Santa Clarita 4,833 $109,000 100% October 2001
Santa Rosa 4,235 $125,700 100% July 2001
Stockton/Valley 4,588 $ 77,000 100% December 2001
Tustin 5,310 $106,000 100% April 2003
Vacaville 3,984 $ 48,000 100% March 2001
Ventura 9,440 $131,000 100% July 2002
Ventura -Loma Vista
[Four Sites] 3,585 $ 57,000 100% November 2001
DIS Centers
Camarillo 2,035 $ 35,000 90% May 2002
Corona 5,328 $ 93,000 90% October 2000
North County [San Diego] 2,042 $ 49,000 90% October 2000
Riverside 8,312 $149,000 90% July 2001
Santa Monica
[Parkside Womens] 3,103 $109,000 90% January 2001
Temecula 4,247 $121,000 90% November 2005
Temecula Oncology 5,418 $ 94,000 90% Pending
Thousand Oaks 8,300 $305,000 90% January 2001
Joint Venture
Westchester 6,763 $242,000 50% July 2001
Other Facilities
RadNet [Corp. office] 11,500 $232,000 N/A May 2003
Warehouse/Other 34,148 $418,000 N/A Various
(1) The Company has leased space consolidating all three locations to a new
facility in Beverly Hills.
(2) The Company has leased space to consolidate its mammography services into
one new facility in Beverly Hills.
9
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] 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, the settlement is
subject to final approval by the class and to final court approval, which has
not yet been obtained.
(b) In connection with the cessation of operations at its Beverly Hills
MRI location, lawsuits were filed against RadNet by the lessor of the property
for past due rent, future rent and damage to the premises plus costs. The
lessor's lawsuit against RadNet was settled in November 1997, with RadNet paying
the lessor $669,000.
(c) An action entitled Gerald E. Dalrymple, M.D. and Gerald E.
Dalrymple, M.D., Inc. v. Primedex Health Systems, Inc., Howard Berger, M.D.,
Diagnostic Imaging Services, Inc., a Delaware corporation, Diagnostic Imaging
Services, a California corporation, and Diagnostic Health Services, Inc. was
filed in the Los Angeles Superior Court, Case No. SC 047526 on June 3, 1997. The
Complaint alleges that Diagnostic Imaging Services, Inc. ["DIS"] failed to
properly pay plaintiffs fees for performing professional services to which they
were entitled as well as damages for violation of the implied covenant of good
faith and fair dealing, fraud, conversion, breach of fiduciary duty,
interference with existing and prospective business advantage, negligent and
intentional infliction of emotional distress and defamation, and seeks damages
for an unspecified amount in excess of $25,000. The Complaint also alleges that
by virtue of the investment by the Company in DIS and the sale of four of the
DIS imaging centers and its ultrasound business to Diagnostic Health Services,
Inc., that DIS has thereby effected either a reorganization, consolidation,
merger or transfer of all or substantially all of its assets to another entity
thereby permitting plaintiffs to convert a warrant for 319,488 shares of DIS's
common stock, issued in connection with the acquisition of Parkside Radiology,
to either $1,000,000 cash or stock with a market value of $1,000,000 in the
Company, at the election of the Company. A partial settlement was reached in
August 1997. Pursuant to the settlement, Dr. Dalrymple assumed ownership of
Parkside Radiology and assumed responsibility for expenses of the facility in
the future. Additionally, DIS sold certain of its equipment and leasehold
improvements to Dr. Dalrymple for approximately $400,000. Plaintiffs' remaining
claims, as well as the DIS cross-claims against Dr. Dalrymple alleging, among
other things, that Dr. Dalrymple pursued a plan to depress Parkside's business,
and therefore its value, thus enabling him to acquire the facility he previously
sold to DIS at a depressed price, are still in dispute. Discovery is not yet
complete and the trial is scheduled for March 1999. The Company and DIS intend
to vigorously defend against plaintiffs' claims and to pursue the DIS
cross-claims in the action.
(d) An action entitled Sterling Diagnostic Imaging, Inc. v. Primedex
Health Systems, Inc., Radnet Management, Inc. and Diagnostic Imaging Services,
Inc., was filed in New Castle County [Delaware] Superior Court, Case No.
98C-10-112[HLA], and a separate action entitled Diagnostic
10
Imaging Services, Inc. v. Sterling Diagnostic Imaging, Inc., was filed in Contra
Costa County [California] Superior Court bearing Case No. C98-04298. This matter
was initiated on June 5, 1998, when Sterling filed a demand for Arbitration
before the American Arbitration Association in Philadelphia, seeking to enforce
a film purchase agreement between DIS and E.I. du Pont de Nemours and Company
["DuPont"]. In October 1998, both DIS and Sterling commenced civil actions in
state court. Sterling's action, filed in the Delaware Superior Court, sought to
compel arbitration or, in the alternative, sought damages for breach of contract
against DIS, seeking to recover $5,000,000. DIS was also sued for civil
conspiracy, along with defendants Radnet Management, Inc. and the Company, who
were additionally sued on alternative theories of alter ego [of DIS] and
tortious interference with DIS's alleged contract with Sterling. Following the
filing of a motion to dismiss by DIS, Sterling filed an amended complaint
abandoning its attempt to compel arbitration. DIS and the other defendants filed
motions seeking to either dismiss the action entirely or, alternatively, to stay
the action pending the resolution of the California action. The Delaware court
dismissed the action as to the Company and Radnet Management, Inc. and stayed
the action as to DIS pending the hearing in California. The DIS action against
Sterling seeks declaratory relief on claims that Sterling was not a proper
assignee of the DIS contract with DuPont and thus has no standing. Sterling has
filed a motion to dismiss or stay the California action on the ground that
Delaware is the proper forum for the action. Sterling's motion is scheduled for
hearing on February 25, 1999. The Company intends to vigorously defend against
Sterling's claims, in whatever forum they are prosecuted.
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
11
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, mark-down or
commission, and may not necessarily represent actual transactions.
Bid Price(1) Asked Price(1)
Quarter Ended High Low High Low
January 31, 1997 .49 .33 .50 .48
April 30, 1997 .54 .34 .56 .36
July 31, 1997 .40 .31 .42 .33
October 31, 1997 .61 .29 .63 .31
January 31, 1998 .26 .26 .32 .28
April 30, 1998 .20 .20 .25 .22
July 31, 1998 .14 .13 .16 .15
October 31, 1998 .09 .09 .10 .10
- --------------
(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 February 1, 1999, were $.15 and $.16, respectively. As of
February 1, 1999, the number of holders of record of PHS Common Stock was 2,730.
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 2,730.
During fiscal 1997, PHS purchased an aggregate of 325,000 shares of its
outstanding common stock for an aggregate $133,220 and purchased $2,906,000 of
its outstanding debentures for a purchase price of $1,984,093 in open market
purchases from unaffiliated third parties. During fiscal 1998, PHS purchased
$2,205,000 outstanding debentures for a purchase price of $1,484,943. Subsequent
to fiscal 1998, PHS purchased an additional $676,000 of its outstanding
debentures for a purchase price of $337,215 from unaffiliated third parties. In
addition, effective December 18, 1998, a $5,000 face value debenture was
converted into 500 shares of the Company's common stock.
Recent Sales of Unregistered Securities
In reliance upon Section 4(2) of the Securities Act of 1933, as amended,
the Company issued five year warrants to purchase an aggregate of 920,100 shares
of its common stock exercisable at $.25 per share to five persons or entities in
connection with the acquisition of shares of DIS common stock by the Company.
12
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 8 1 9 9 7 1 9 9 6 1 9 9 5[A]1 9 9 4[A]
------- ------- ------- ------- -------
Operating Data:
Gross Revenues $132,595 $132,569 $ 111,381 $ 88,884 $ 69,942
Operating Expenses $ 75,329 $ 74,687 $ 58,372 $ 98,124 $ 50,289
[Loss] from Investee Transactions$ -- $ -- $ (314) $ -- $ (26)
Income [Loss] from Continuing
Operations [Exclusive of
Non-Recurring Items] -
Net of Taxes ** $(28,543) $ (748)$ (8,361) $(57,616) $(20,476)
Income [Loss] from Discontinued
Operations $ -- $ -- $ -- $ (3,813) $ (3,371)
Net [Loss] Income Before
Extraordinary Items and Change
in Accounting Principle $(29,497) $ (2,343)$ (9,511) $(62,370) $(20,912)
Extraordinary Items - Gain $ 955 $ 1,595 $ 1,150 $ 941 $ --
Change in Accounting Principle $ (779) $ -- $ -- $ -- $ --
[Loss] Income Per Common Share
From Continuing Operations
Before Extraordinary Items $ (.75) $ (.06)$ (.24) $ (1.54) $ (.44)
[Loss] Income Per Common Share
from Discontinued Operations $ -- $ -- $ -- $ (.09) $ (.08)
[Loss] Income Before
Extraordinary Items $ (.75) $ (.06)$ (.24) $ (1.63) $ (.52)
Net [Loss] Income Per Common
Share $ (.75) $ (.02)$ (.21) $ (1.61) $ (.52)
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 59 $ 130 $ 152 $ 3,929 $ 5,649
Total Assets * $ 62,656 $ 86,340 $ 105,931 $ 66,760 $153,551
Total Long-Term Liabilities $ 79,282 $ 76,843 $ 85,464 $ 54,088 $ 67,666
Total Liabilities $118,016 $111,270 $ 130,792 $ 82,002 $104,522
Working Capital [Deficit] $(20,191) $(12,027)$ (22,627) $ (4,337) $ 528
Stockholders' Equity [Deficit] $(55,360) $(24,930)$ (24,861) $(15,242) $ 49,029
13
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
[In thousands, except per share]
[A] 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, 1998, 1997, 1996, 1995 and 1994, includes $11,314,
$20,169, $31,822, $15,383 and $58,725 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)
========= ========
14
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, 1998, 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 [See Note 16]. The sale resulted in a loss of
approximately $3,800,000.
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, 1998 and
1997 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.
In November of 1995, the Company formed Radnet Managed Imaging Services, Inc.
["RMIS"] which 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. Effective
September 3, 1997, 100% of the outstanding capital stock of FDI was sold to
Preferred Health Management, Inc. ["PHM"] for approximately $13,500,000 in cash,
notes and assumed liabilities. The sale resulted in a gain of approximately
$10,400,000. The statement of operations and cash flows for the year ended
October 31, 1997 reflect the operations and cash transactions of FDI. . The
Company continues to operate RMIS which provides utilization review services.
The statements of operations and cash flows for the years ended October 31, 1998
and 1997 reflect the operations and cash transactions with RMIS.
15
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 $3,272,046, and five-year
warrants to purchase approximately 4,000,000 shares of PHS common stock at $.60
per share, to acquire an additional 3,228,046 shares of DIS common stock. The
purchase made PHS the majority shareholder in DIS with approximately 59%
ownership.
In subsequent purchases through February 1, 1999, the Company acquired or
purchased an additional 3,472,137 shares of DIS common stock for $4,190,820
increasing its total ownership to approximately 90% [excluding treasury shares].
In connection with the DIS common stock purchases through October 31, 1998, the
Company recorded goodwill of $10,896,417 of which $1,555,154 was written off in
conjunction with the disposal of Parkside, $3,522,595 was written off in
conjunction with the sale of the ultrasound division and five of DIS's
hospital-based MRI facilities to Diagnostic Health Services, Inc. ["DHS"] and
$8,631,944 was written off pursuant to Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The Statements of Operations and
Cash Flows for the years ended October 31, 1998 and 1997 reflect the operations
and cash transactions of DIS.
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
Forward Looking Information
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and that there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgment with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions, future business decisions, and future governmental medical
reimbursement decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the forward
looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward looking statements will be realized. There are a number of other
risks presented by the Company's business and operations which could cause the
Company's financial performance to vary markedly from prior results or results
contemplated by the forward looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause the Company to alter its capital investment and other expenditures, which
may also adversely affect the Company's results of operations. In light of
significant uncertainties inherent in forward-looking information included in
this Annual Report on Form 10-K, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
16
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, 1998 vs. October 31,
1997
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 PHS, Radnet,
RMIS and DIS for the year ended October 31, 1998. The discussion of the results
of continuing operations includes PHS, Radnet, RMIS, DIS and FDI for the year
ended October 31, 1997.
For the years ended October 31, 1998 and 1997, the Company had operating losses
from continuing operations of $16,508,162 and $7,668,385, respectively, which
included impairment losses of $12,677,324 and $4,553,783, respectively.
The Company generated gross revenue of $132,594,891 and $132,569,387 and net
revenue of $58,820,543 and $67,018,507 for the years ended October 31, 1998 and
1997, respectively. The Company's net revenue decreased approximately 12% for
the year ended October 31, 1998. During the years ended October 31, 1998 and
1997, Radnet generated gross revenue of $111,648,718 and $100,169,718,
respectively, FDI generated gross revenue of $0 and $7,103,525, respectively,
PHS generated gross billing revenue of $215,975 and $225,701, respectively, and
DIS generated gross revenue of $20,730,198 and $25,070,443, respectively [net of
elimination entries]. During the years ended October 31, 1998 and 1997, Radnet
generated net revenue of $47,555,149 and $44,952,132, respectively, FDI and RMIS
generated net revenue of $37,427 and $7,010,470, respectively, PHS generated net
billing revenue of $215,975 and $225,701, respectively, and DIS generated net
revenue of $11,011,992 and $14,830,204, respectively [net of elimination
entries]. The decrease in net revenue is primarily attributable to the sale of
FDI which during fiscal 1997 generated net revenue of $7,010,470 which was
billed at net and required minor contractual adjustments. Even though Radnet's
gross revenue increased approximately $11.5 million during fiscal 1998,
contractual adjustments on those charges were approximately $6.5 million.
In addition, during the year ended October 31, 1998, the Company began the
process of consolidating many of its internal and external billing systems into
three systems company-wide based upon geographic considerations. With this
process, the balances on the Company's previous systems were sent to collection
agencies and the values were written-down considerably to account for their age
and higher one-time collection fees. In addition, historical workers
compensation [pre-1994] and personal injury files were written-off or adjusted
for current trends in collection yields, increased age and uncollectibility, and
bad debts were recorded on a few of the Company's contracted payors who did not
pay or defaulted on note or payment arrangements. During the year ended October
31, 1998, approximately $4 million in additional contractual adjustments or
provisions for bad debt were recorded for these accounts receivable adjustments.
For the years ended October 31, 1998 and 1997, operating expenses totaled
$75,328,705 and $74,686,892, respectively. For the year ended October 31, 1998,
Radnet's operating expenses were $51,294,476, RMIS's operating expenses were
$334,293, DIS's operating expenses were $21,313,209 and PHS's overhead expenses
were $2,386,727 [net of elimination entries]. For the year ended October 31,
1997, Radnet's operating expenses were $44,880,065, FDI's and RMIS's operating
expenses were $6,090,612, DIS's operating expenses were $20,753,338 and PHS's
overhead expenses were $2,962,877 [net of elimination entries].
17
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, 1998 vs. October 31,
1997
Results of Operations [Continued]
During the years ended October 31, 1998 and 1997, the Company recognized
impairment losses, included in operating expenses, of $12,677,324 and
$4,553,783, respectively. For the years ended October 31, 1998 and 1997, the
Company incurred expenses for salaries and professional reading fees of
$25,919,490 and $26,328,082, respectively, building and equipment rental
expenses of $5,412,407 and $6,226,423, respectively, general and administrative
expenses of $19,978,762 and $21,915,419, respectively, provisions for bad debt
of $2,698,139 and $1,962,837, respectively, and depreciation and amortization
expense of $8,642,583 and $8,783,419, respectively. In addition, during the year
ended October 31, 1997, the Company incurred restructuring costs of $662,026 and
FDI vendor site costs of approximately $4,254,903. Even with the Company
incurring an increase in 1998 impairment losses of approximately $8.1 million,
overall operating expenses only increased approximately $650,000 due primarily
to the sale of FDI, the sales of DIS's Ultrasound Division and five of its
hospital-based MRI facilities during fiscal 1997 [Tarzana, SMIC, SGV and Chino]
and 1998 [SCV] and the closures of Parkside and West L.A..
For the year ended October 31, 1998 and 1997, interest income was approximately
$140,000 and $295,000, respectively. During fiscal 1997, the Company recorded
interest income of approximately $131,000 related to the sale of DIS's four
hospital-based MRI facilities to DHS. For the years ended October 31, 1998 and
1997, interest expense was approximately $9,279,000 and $9,845,000,
respectively.
For the years ended October 31, 1998 and 1997, the gain on sale of subsidiaries
and Divisions was approximately $965,000 and $16,000,000 respectively. Fiscal
1998's gain primarily consisted of additional proceeds of approximately $595,000
for the Company's agreement to a IRS Section 338 (h)(10) Election as part of the
FDI sale transaction, a final FDI sale reconciliation adjustment of
approximately $70,000, a gain from the partnership dissolution of LaHabra of
approximately $48,000, and a gain from the sale of SCV of approximately
$252,000. Fiscal 1997's gain primarily consisted of the sale of DIS's ultrasound
division and four of its hospital-based MRI facilities to DHS in March 1997 and
the sale of FDI to PHM in September 1997. The Company recognized gains from the
sales of DIS's sites and FDI of approximately $5,600,000 and $10,400,000,
respectively.
For the year ended October 31, 1998, other income was approximately $394,000.
For the year ended October 31, 1997, other expense was approximately $640,000.
Fiscal 1998's increase in other income was primarily due to the conversion of
DHS common stock received as payment on the $1,500,000 in post closing payments
from the sales of four of DIS's hospital-based MRI facilities, and the sale of
SCV into cash generating a net gain of approximately $297,000. In addition,
during the year ended October 31, 1997, the Company wrote-off a large portion of
its deposits and disposed of fixed assets.
For the years ended October 31, 1998 and 1997, the Company had gains on early
extinguishment of debt of $954,533 and $1,595,106, respectively. For the year
ended October 31, 1998, the Company wrote-off capitalized fees and organization
costs of approximately $780,000 upon the early adoption of Statement of Position
["SOP"] No. 98-5, "Reporting on the Costs of Start-up Activities."
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
For the years ended October 31, 1998 and 1997, the Company had net losses of
$29,321,832 and $748,095, respectively. For the year ended October 31, 1998,
Radnet realized net losses of $8,839,831, RMIS generated net losses of $182,136,
DIS realized net losses of $16,699,060 [including write-offs of net acquisition
goodwill of $11,331,299] and PHS realized net losses of $3,600,805 [net of
elimination entries]. For the year ended October 31, 1997, Radnet realized net
losses of $4,138,831, FDI and RMIS generated net income of $11,283,923, DIS
realized net losses of $2,747,775 [including write-offs of net acquisition
goodwill of $4,193,662], and PHS realized net losses of $5,145,412 [net of
elimination entries].
18
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1998 and 1997 by $70,022 and
$22,353, respectively.
Cash generated from investing activities for the years ended October 31, 1998
and 1997 was $1,282,607 and $20,741,396, respectively.
During the year ended October 31, 1998, the Company received proceeds of
$595,645 for a IRS Section 338 (h)(10) Election related to the sale of FDI,
$69,393 of additional proceeds from PHM for final reconciling adjustments,
$420,000 from the sale of medical equipment, $2,059,179 from PHM in full payment
of the FDI sale note receivable, $1,232,691 from the sale of SCV in the form of
common stock [which was subsequently sold], and $1,849,936 from the conversion
of a note receivable due from the sale of DIS's MRI facilities into common stock
[which was subsequently sold]. During the year ended October 31, 1998, the
Company acquired an additional 1,788,374 shares of DIS common stock for
$1,739,120 in cash [and approximately $325,000 in notes payable], received
$94,515 from the dissolution of the La Habra partnership, purchased property and
equipment for $3,089,632, made loans of $235,000 to related parties and received
$25,000 in payments from related parties.
During the year ended October 31, 1997, the Company received proceeds of
$9,761,853 from the sale of FDI to PHM, $266,500 from the sale of certain
medical equipment and other assets, and $15,972,720 from the sale of DIS's
Ultrasound Division and four of its hospital based MRI facilities to DHS. The
DHS sale proceeds were as follows: $6,519,475 from the sale of the Ultrasound
Division, $7,453,245 from the sale of the MRI facilities and $2,000,000 in
covenant not-to-compete income split equally between PHS and DIS. During the
year ended October 31, 1997, the Company acquired an additional 1,293,663 shares
of DIS common stock for $1,639,623, purchased the outstanding limited
partnership units in Valley Regional Oncology Center ["VROC"] for $260,000,
purchased additional limited partnership units in Temecula Valley Imaging Center
["TVIC"] for $196,875 and purchased the assets of Las Posas Medical Imaging for
$35,000. In addition, during the year ended October 31, 1997, the Company
purchased property and equipment for $3,098,179 and made loans of $30,000 to
related parties.
Cash generated from financing activities for the year ended October 31, 1998 was
$134,066. Cash utilized for financing activities for the year ended October 31,
1997 was $17,894,237. For the year ended October 31, 1998 and 1997, the Company
made principal payments on notes payable and capital lease obligations of
$8,077,336 and $17,741,045, respectively. The fiscal 1997 increase was primarily
due to the Company reducing its lines of credit by $6,938,183 with proceeds from
the sales of certain assets, facilities and divisions. In addition, during
fiscal 1998, the Company restructured its capital lease obligations and notes
payable with its two primary lendors extending terms, reducing monthly payments
and skipping at least one principal payment during the year. For the years ended
October 31, 1998 and 1997 the Company received proceeds from borrowings on lines
of credit and notes payable of $8,180,082 and $2,373,554, respectively. During
fiscal 1998, the Company increased its lines of credit borrowing $4,231,579 from
fiscal 1997 and received working capital proceeds from other outside lendors of
$3,948,503. For the years ended October 31, 1998 and 1997, the Company purchased
$2,205,000 face value subordinated bond debentures for $1,484,943 and purchased
$2,906,000 debentures for $1,984,093, respectively. For the years ended October
31, 1998 and 1997, the Company increased its cash overdraft by $1,410,513 and
$68,689, respectively. For the year ended October 31, 1998, the Company received
proceeds of $30,750 from the issuance of common stock and received joint venture
proceeds of $75,000. For the year ended October 31, 1997, the Company purchased
325,000 shares of its stock for $133,220 and distributed $478,122 to its joint
venture partners.
At October 31, 1998 and 1997, the Company had working capital deficits of
$20,191,252 and $12,027,033, respectively. The 1998 increase in working capital
deficit of $8,164,219 was primarily due to the increase in lines of credit
borrowings of $4,231,579. In addition, current assets decreased approximately
$3.3 million due to the write-down of accounts receivable and the conversion of
PHM's and DHS's note receivables. Included in 1998 current liabilities of the
Company is $11,911,416 of revolving lines of credit liabilities.
19
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, 1998 vs. October 31,
1997
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 $30,175,000, $19,875,000, $14,075,000, $12,830,000 and
$11,150,000. Interest expense [assuming lines of credit are paid in full] for
the Company for the next five years, included in the above payments, will be
approximately $5,800,000, $4,550,000, $3,125,000, $2,125,000 and $1,150,000,
respectively. Interest on subordinated bond debentures is excluded. In addition,
the Company has noncancellable operating leases for use of its facilities and
certain medical equipment which will average approximately $3,000,000 in annual
payments over the next five years.
At three of the Company's Tower locations [120 East, 444 San Vicente and 1
West/Womens], the Company was unable to extend the respective leases which
expire at various times beginning in January 1999. Due to this, the Company has
entered into a new lease agreement for space in Beverly Hills ["Wilshire"] and
will consolidate the assets and business of these three Tower locations to the
new space during fiscal 1999. The Company cannot predict whether the move will
negatively impact the volume of business previously obtained from these three
centers, but the new site will reduce respective average building rental
disbursements by approximately $1,000,000 per year [including note payment
disbursements assumed upon the acquisition of Tower in October 1994]. Fiscal
1998 net revenue for these three sites was approximately $12,160,000.
The Company estimates interest payments on its bond debentures to be
approximately $2,005,000 for fiscal 1999. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year. Subsequent to year-end,
as of February 1, 1999, the Company purchased $676,000 face value bond
debentures for $337,215. The Company has or will retire all of these bonds. In
addition, effective December 18, 1998, a $5,000 face value debenture was
converted into 500 shares of the Company's common stock.
The Company's working capital needs are currently provided under two lines of
credit. A third line of credit for DIS was paid in full and terminated, at the
Company's request, in September 1997. Under one agreement with Coast Business
Credit, originally 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%. At October 31, 1998, approximately $8,770,000 was
outstanding under this line. This line of credit was renewed on January 14,
1999, extending the due date to December 31, 2000. Under the new agreement, the
Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$20,000,000 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 2.5%, or (b) 8%. The lender holds a first lien on
substantially all of Radnet's assets, the president and C.E.O. of PHS has
personally guaranteed $6,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the president and C.E.O.
of PHS. A second line of credit with DVI Business Credit was renewed on October
31, 1998. Under this agreement, now due October 31, 2000, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. 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 1.0%. At October 31, 1998,
approximately $3,140,000 was outstanding under this line. As of October 31,
1998, the bank's prime rate was 8.0%. Under the various formulas, total funds
available for borrowing under the two lines of credit was approximately $3.09
million at October 31, 1998.
20
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, 1998 vs. October 31,
1997
Liquidity and Capital Resources [Continued]
The Company entered into an additional line of credit agreement with DVI
Business Credit on October 31, 1998. Under this line, due October 31, 2000, the
Company may borrow up to $3,500,000 to either (a) pay off in full the promissory
note dated 10/1/94 issued to Tower Radiology, et. al. ["Tower Goodwill"], or (b)
purchase, on the open market, the subordinated debentures of the Company at a
price not to exceed 60% of the face value of such debentures. Borrowings under
this line are repayable monthly, at the rate of 1.4% of the line balance,
including principal and interest, at an annual rate equal to the bank's prime
rate plus 1.0%. This line is also collateralized by the Tower division's
accounts receivable. At October 31, 1998, $0 was outstanding under this line and
the full amount was available. Subsequent to year-end, as of February 1, 1999,
the Company borrowed the entire line of $3,500,000 [See Note 22].
In connection with ceasing operations at certain of the Company's imaging
centers, selling certain divisions and the restructure of Corporate operations,
the Company set up an additional restructuring reserve of $662,026 during the
year ended October 31, 1997. Total accrued restructuring costs of $1,062,026 as
of October 31, 1997 included $500,000 remaining on the Company's books from
October 31, 1996 for estimated legal and settlement costs associated with one
final building lessor. This final lessor settled with the Company and was paid
in full $669,000 in November 1997. During fiscal 1998, corporate operations
reserves of $288,026 were utilized leaving approximately $105,000 on the
Company's books at October 31, 1998, which amount is included with accrued
expenses.
New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. Management is in the process of evaluating the disclosure
requirements. SFAS No. 131 is not expected to have a material impact on the
Company.
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it its designated, for example, gain or losses related to
changes in the fair value of a derivative not designated as a hedging instrument
is recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive income
[outside earnings] until the consummation of the underlying transaction.
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, 1998 vs. October 31,
1997
New Authoritative Pronouncements [Continued]
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
Year 2000
The Company relies significantly on computer systems and applications in its
daily operations. Some of these systems are not presently year 2000 compliant,
which means that because they have historically used only two digits to identify
the year in a date, they will fail to distinguish dates in the "2000's" from
dates in the "1900's." The Company's business, financial condition and results
of operations could be materially and adversely affected by the failure of the
Company's systems and applications [and those provided by or operated by third
parties interfacing with the Company's systems and applications] to properly
operate or manage these dates.
The Company has embarked on a program to repair or replace these noncompliant
systems and to obtain similar assurances from third parties providing the
Company with computer software or interfacing with the Company's systems and
applications. The Company estimates it will incur expenditures in this regard
not in excess of $100,000. The Company presently anticipates being fully
operational at the year 2000. Additionally, it has received verbal assurances
from those who supply computer systems for its operations that such systems will
also be operational at the year 2000. Such parties included those who provide
computer software for its sophisticated and complex medical equipment. However,
there can be no assurance that such parties will complete their year 2000
conversions in a timely fashion or will not suffer a year 2000 business
disruption that may adversely affect the Company's financial condition and
results of operations.
Inflation
To date, inflation has not had a material effect on the Company's operations.
22
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 Years Ended October 31, 1997 vs. October 31,
1996
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 PHS, Radnet, FDI
and DIS for the years ended October 31, 1997 and 1996.
For the years ended October 31, 1997 and 1996, the Company had operating losses
from continuing operations of $7,668,385 and $1,833,120, respectively.
The Company generated net revenue of $67,018,507 and $56,538,507 for the years
ended October 31, 1997 and 1996, respectively. The increase in net revenue in
1997 is primarily attributable to the acquisition of DIS. During the year ended
October 31, 1997, Radnet generated net revenue of $44,952,132, FDI generated net
revenue of $7,010,470, PHS generated net billing revenue of $225,701 and DIS
generated net revenue of $14,830,204 [net of elimination entries]. During the
year ended October 31, 1996, 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]
[net of elimination entries].
For the years ended October 31, 1997 and 1996, operating expenses totaled
$74,686,892 and $58,371,627, respectively. For the year ended October 31, 1997,
Radnet's operating expenses were $44,880,065, FDI's operating expenses were
$6,090,612, DIS's operating expenses were $20,753,338 and PHS's overhead
expenses were $2,962,877 [net of elimination entries]. 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 [for the
partial period from August to October 1996] and PHS's overhead expenses were
$2,597,300 [net of elimination entries]. The increase in fiscal 1997 operating
expenses is primarily attributable to DIS given its fiscal 1996 operating
expenses included only three months of consolidated financial information. In
addition, DIS recognized an impairment loss on the closure of Parkside during
the twelve months ended October 31, 1997.
For the years ended October 31, 1997 and 1996, the Company incurred expenses for
salaries and professional reading fees of $26,328,082 and $22,563,519,
respectively, FDI vendor site costs of $4,254,903 and $4,433,907, respectively,
building and equipment rental expenses of $6,226,423 and $5,535,652,
respectively, general and administrative expenses of $21,915,419 and
$17,266,956, respectively, provisions for bad debt of $1,962,837 and $2,531,337,
respectively, and depreciation and amortization expense of $8,783,419 and
$6,040,256, respectively. In addition, during fiscal 1997, the Company incurred
restructuring costs of $662,026 and recorded an impairment loss on the closure
of Parkside of $4,553,783.
For the year ended October 31, 1997 and 1996, interest income was approximately
$295,000 and $258,000, respectively. For the years ended October 31, 1997 and
1996, interest expense was approximately $9,845,000 and $7,893,000,
respectively. For the consolidated three month period ended October 31, 1996,
DIS's interest expense was approximately $855,000; for the twelve months ended
October 31, 1997, DIS's interest expense was approximately $2,505,000. The
remaining increase in interest expense is primarily attributable to PHS
promissory notes payable issued with the August 1996 acquisition of DIS common
stock.
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, 1997 vs. October 31,
1996
Results of Operations [Continued]
For the year ended October 31, 1997 and 1996, the gain on sale of subsidiaries
and Divisions was $16,082,302 and $143,750, respectively. Fiscal 1997's gain
primarily consisted of the sale of DIS's ultrasound division and four of its
hospital-based MRI facilities to DHS in March 1997 and the sale of FDI to PHM in
September 1997. The Company recognized gains from the sales of DIS's sites and
FDI of approximately $5,600,000 and $10,400,000, respectively. Fiscal 1996's
gain was the result of the sale of ITI stock.
For the year ended October 31, 1997, other income [expense] was an expense of
approximately $640,000. For the year ended October 31, 1996, other income
[expense] was income of approximately $935,000. Fiscal 1997's other expense
primarily consisted of the sale, disposal and abandonment of fixed assets of
approximately $825,000. Fiscal 1996's other income primarily consisted of
$335,000 of pre-consolidation DIS management fee income and a $500,000 legal
settlement gain.
For the years ended October 31, 1997 and 1996, the Company had gains on early
extinguishment of debt of $1,595,106 and $1,149,817, respectively.
For the years ended October 31, 1997 and 1996, the Company had net losses of
$748,095 and $8,361,096, respectively. For the year ended October 31, 1997,
Radnet realized net losses of $4,138,831, FDI generated net income of
$11,283,923, DIS realized net losses of $2,747,775 [including write-offs of net
acquisition goodwill of $4,193,662], and PHS realized net losses of $5,145,412
[net of elimination entries]. 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 [net of
elimination entries].
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1997 and 1996 by $22,353 and
$3,776,962, respectively.
Cash generated from investing activities for the year ended October 31, 1997 was
$20,741,396. Cash utilized for investing activities for the year ended October
31, 1996 was $77,638. During the year ended October 31, 1997, the Company
received proceeds of $9,761,853 from the sale of FDI to PHM, $266,500 from the
sale of certain medical equipment and other assets, and $15,972,720 from the
sale of DIS's Ultrasound Division and four of its hospital based MRI facilities
to DHS. The DHS sale proceeds were as follows: $6,519,475 from the sale of the
Ultrasound Division, $7,453,245 from the sale of the MRI facilities and
$2,000,000 in covenant not-to-compete income split equally between PHS and DIS.
During the year ended October 31, 1997, the Company acquired an additional
1,293,663 shares of DIS common stock for $1,639,623, purchased the outstanding
limited partnership units in Valley Regional Oncology Center ["VROC"] for
$260,000, purchased additional limited partnership units in Temecula Valley
Imaging Center ["TVIC"] for $196,875, and purchased the assets of Las Posas
Medical Imaging for $35,000. During the year ended October 31, 1996, the Company
paid $1,100,000 in modification of its management fee [See Note 7], received
proceeds from the sale of its marketable securities of $1,998,458, received
proceeds from the sale of ITI stock of $143,750, acquired imaging centers for
$732,160, advanced approximately $1,640,000 to DIS prior to the Company's
consolidation in August 1996 and was repaid $1,937,500 on notes due from related
parties. During the years ended October 31, 1997 and 1996, the Company purchased
property and equipment of $3,098,179 and $682,472, respectively.
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, 1997 vs. October 31,
1996
Liquidity and Capital Resources [Continued]
Cash utilized for financing activities for the years ended October 31, 1997 and
1996 was $17,894,237 and $2,726,305, respectively. For the year ended October
31, 1997 and 1996, the Company made principal payments on notes payable and
capital lease obligations of $17,741,045 and $7,515,599, respectively. The
fiscal 1997 increase was primarily due to the Company reducing its lines of
credit by $6,938,183 with proceeds from the sales of certain assets, facilities
and divisions. The remaining increase is primarily attributable to DIS and its
first full year of consolidated operating activity. In addition, fiscal 1996
principal payments were lower than average primarily due to the deferral of
payments while renegotiating balances and terms, and the arrangements of new
notes and leases with interest-only payments or deferred principal payments
during the first year. For the years ended October 31, 1997 and 1996, the
Company received proceeds from borrowings on notes payable of $2,373,554 and
$5,460,229, respectively. In fiscal 1996, a large portion of the borrowings were
from revolving lines or credit paid down or eliminated in fiscal 1997. For the
year ended October 31, 1997, the Company repurchased $2,906,000 face value
subordinated bond debentures for $1,984,093, repurchased 325,000 shares of
Company stock for $133,220 and distributed $478,122 to its joint venture
partners. For the year ended October 31, 1996, $481,727 was utilized to
repurchase 1,300,000 shares of Company stock and $440,000 was paid to joint
venture partners.
At October 31, 1996, the Company had a working capital deficit of $22,626,649;
at October 31, 1997, the Company had a working capital deficit of $12,027,033, a
decrease of $10,599,616. A primary reason for the improvement was due to the
proceeds from the sale of FDI and DIS's Ultrasound Division and its MRI sites
during the fiscal year. Included in current liabilities of the Company is
$7,679,837 of revolving line of credit liabilities.
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 $25,945,000, $15,825,000, $15,585,000, $14,400,000 and
$12,200,000. Interest expense [assuming lines of credit are paid in full] for
the Company for the next five years, included in the above payments, will be
approximately $5,605,000, $4,285,000, $3,135,000, $1,895,000 and $915,000,
respectively. Interest on subordinated bond debentures is excluded. In addition,
the Company has noncancellable operating leases for use of its facilities and
certain medical equipment which will average approximately $3,300,000 in annual
payments over the next five years.
At three of the Company's Tower locations [120 East, 444 San Vicente and 1
West/Womens], the Company was unable to extend the respective leases which
expire at various times beginning in January 1999. Due to this, the Company has
entered into a new lease agreement for space in Beverly Hills ["Wilshire"] and
will consolidate the assets and business of these three Tower locations to the
new space during fiscal 1999. The Company cannot predict whether the move will
negatively impact the volume of business previously obtained from these three
centers, but the new site will reduce respective average building rental
disbursements by approximately $1,015,000 per year [including note payment
disbursements assumed upon the acquisition of Tower in October 1994]. Fiscal
1997 net revenue for these three sites was approximately $13,225,000.
The Company estimates interest payments on its bond debentures to be
approximately $2,100,000 for fiscal 1998. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year. Subsequent to year-end,
as of February 27, 1998, the Company repurchased $1,736,000 face value bond
debentures for $1,207,050. The Company has or will retire all of these bonds.
25
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, 1997 vs. October 31,
1996
Liquidity and Capital Resources [Continued]
The Company's working capital needs are currently provided under two lines of
credit. A third line of credit for DIS was paid in full and terminated, at the
Company's request, in September 1997. 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 assets. At
October 31, 1997, approximately $6,452,000 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,
originally due December 1997 and extended on a month-to-month basis, 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, 1997, approximately $1,228,000 was
outstanding under this line. As of October 31, 1997, the bank's prime rate was
8.50%. Under the various formulas, total funds available for borrowing under the
two lines of credit was approximately $5.8 million at October 31, 1997.
In connection with ceasing operations at certain of the Company's imaging
centers, selling certain divisions and the restructure of Corporate operations,
the Company set up an additional restructuring reserve of $662,026 during the
year ended October 31, 1997. During fiscal 1997, $495,622 of the Company's
reserves were utilized or paid. Total accrued restructuring costs of $1,062,026
as of October 31, 1997 include $500,000 remaining on the Company's books from
October 31, 1996 for estimated legal and settlement costs associated with one
final building lessor. This final lessor settled with the Company and was paid
in full $669,000 in November 1997.
New Authoritative Pronouncements
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.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
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, 1997 vs. October 31,
1996
New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. Management is in the process of evaluating the disclosure
requirements. SFAS No. 131 is not expected to have a material impact on the
Company.
Inflation
To date, inflation has not had a material effect on the Company's operations.
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-10
Notes to Consolidated Financial Statements................... F-11..... F-32
Independent Auditor's Report on Supplemental Schedule........ S-1......
Schedule II - Valuation and Qualifying Accounts.............. S-2...... S-4
. . . . . . . . . . . . . . .
28
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, 1998 and
1997, 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, 1998. 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,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 31, 1998,
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 21 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 21. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in the accompanying Note 1[M] to consolidated financial
statements, effective November 1, 1997, the Company adopted a new accounting
standard promulgated by the Financial Accounting Standards Board, changing its
method of accounting for start-up costs.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 15, 1999
F-1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
October 31,
1 9 9 8 1 9 9 7
Assets:
Current Assets:
Cash and Cash Equivalents $ 59,495 $ 129,517
Accounts Receivable - Net 15,429,057 16,933,340
Unbilled Receivables 10,675 693,847
Other Receivables 47,870 2,390,755
Due from Related Party 140,000 55,568
Other 1,940,230 765,467
----------- -----------
Total Current Assets 17,627,327 20,968,494
----------- -----------
Property and Equipment - Net 26,970,584 33,401,161
---------