Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM__________________
COMMISSION FILE NO. 0-23311
RADIOLOGIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2648089
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 ROSS AVENUE
3600 JP MORGAN CHASE TOWER
DALLAS, TEXAS 75201-2776
(Address of principal executive offices, including zip code)
(214) 303-2776
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 30, 2003
- ------------------------------- -----------------------------
COMMON STOCK, $0.0001 PAR VALUE 21,695,153 SHARES
================================================================================
RADIOLOGIX, INC.
FORM 10-Q
INDEX
FORM 10-Q ITEM PAGE
- -------------- ----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (Audited) and
June 30, 2003 (Unaudited)................................................................... 1
Consolidated Statements of Operations (Unaudited) for the three and six months
ended June 30, 2002 and 2003................................................................ 2
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 2002 and 2003................................................................ 3
Notes to Consolidated Financial Statements (Unaudited)...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 36
Item 4. Controls and Procedures..................................................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders......................................... 37
Item 5. Other Information........................................................................... 38
Item 6. Exhibits and Reports on Form 8-K............................................................ 38
SIGNATURES.................................................................................................... 39
INDEX TO EXHIBITS............................................................................................. 40
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIOLOGIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, JUNE 30,
CURRENT ASSETS: 2002 2003
------------ ----------
(unaudited)
Cash and cash equivalents ......................................................... $ 19,153 $ 18,438
Accounts receivable, net of allowances ............................................ 69,377 65,656
Due from affiliates ............................................................... 5,100 6,490
Assets held for sale .............................................................. -- 39
Other current assets .............................................................. 7,225 7,284
--------- ---------
Total current assets ...................................................... 100,855 97,907
PROPERTY AND EQUIPMENT, net ......................................................... 62,103 63,164
INVESTMENTS IN JOINT VENTURES ....................................................... 10,149 10,546
GOODWILL ............................................................................ 28,510 21,610
INTANGIBLE ASSETS, net .............................................................. 72,151 70,290
DEFERRED FINANCING COSTS, net ....................................................... 9,719 8,913
OTHER ASSETS ........................................................................ 12,604 7,922
--------- ---------
Total assets .............................................................. $ 296,091 $ 280,352
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............................................. $ 19,145 $ 10,867
Accrued physician retention ....................................................... 8,216 8,979
Accrued salaries and benefits ..................................................... 8,268 8,891
Current portion of long-term debt ................................................. 266 266
Current portion of capital lease obligations ...................................... 4,052 3,168
Other current liabilities ......................................................... 458 460
--------- ---------
Total current liabilities ................................................. 40,405 32,631
DEFERRED INCOME TAXES ............................................................... 4,200 1,900
LONG-TERM DEBT, net of current portion .............................................. 160,412 160,224
CONVERTIBLE DEBT .................................................................... 11,980 11,980
CAPITAL LEASE OBLIGATIONS, net of current portion ................................... 1,519 533
DEFERRED REVENUE .................................................................... 7,721 7,516
OTHER LIABILITIES ................................................................... 147 123
--------- ---------
Total liabilities ......................................................... 226,384 214,907
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ..................................... 1,340 1,409
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 10,000,000 shares
authorized; no shares issued and outstanding .................................... -- --
Common stock, $.0001 par value; 50,000,000 shares authorized; 21,695,153
shares issued and outstanding in 2002 and 2003 .................................. 2 2
Treasury stock .................................................................... (180) (180)
Additional paid-in capital ........................................................ 13,662 13,665
Retained earnings ................................................................. 54,883 50,549
--------- ---------
Total stockholders' equity ................................................ 68,367 64,036
--------- ---------
Total liabilities and stockholders' equity ................................ $ 296,091 $ 280,352
========= =========
See accompanying notes to consolidated financial statements.
1
RADIOLOGIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
2002 2003 2002 2003
--------- --------- --------- ---------
SERVICE FEE REVENUE ............................................................ $ 71,495 $ 65,014 $ 142,486 $ 129,410
COSTS AND EXPENSES:
Salaries and benefits ........................................................ 20,130 20,692 40,249 42,000
Field supplies ............................................................... 4,508 4,579 8,675 8,707
Field rent and lease expense ................................................. 7,624 8,142 15,079 16,234
Other field expenses ......................................................... 11,096 10,983 22,723 21,474
Bad debt expense ............................................................. 6,065 5,595 11,977 11,145
Severance and other related costs ............................................ -- 311 -- 1,280
Corporate general and administrative ......................................... 3,960 3,375 7,865 7,016
Depreciation and amortization ................................................ 6,244 6,967 12,342 13,837
Interest expense, net ........................................................ 4,755 4,567 9,616 9,243
--------- --------- --------- ---------
Total costs and expenses ................................................. 64,382 65,211 128,526 130,936
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN
EARNINGS OF INVESTMENTS, MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES, AND INCOME TAXES ................................................. 7,113 (197) 13,960 (1,526)
Equity In Earnings of Investments .............................................. 1,086 1,314 2,207 2,512
Minority Interests In Income of Consolidated Subsidiaries ...................... (308) (331) (669) (530)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .......................... 7,891 786 15,498 456
Income Tax Expense ........................................................... 3,157 314 6,199 182
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ............................................ 4,734 472 9,299 274
Discontinued Operations:
Income (loss) from discontinued operations ................................... 63 (327) (163) (7,680)
Income tax expense (benefit) ................................................. 25 (131) (65) (3,072)
--------- --------- --------- ---------
Income (loss) from discontinued operations ............................... 38 (196) (98) (4,608)
--------- --------- --------- ---------
NET INCOME (LOSS) .............................................................. $ 4,772 $ 276 $ 9,201 $ (4,334)
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE
Income from continuing operations - basic .................................... $ 0.23 $ 0.02 $ 0.46 $ 0.01
Loss from discontinued operations - basic .................................... -- (0.01) (0.01) (0.21)
--------- --------- --------- ---------
Net income (loss) - basic ................................................ $ 0.23 $ 0.01 $ 0.45 $ (0.20)
Income from continuing operations - diluted .................................. $ 0.21 $ 0.02 $ 0.40 $ 0.01
Income (loss) from discontinued operations - diluted ......................... -- (0.01) -- (0.21)
--------- --------- --------- ---------
Net income (loss) - diluted .............................................. $ 0.21 $ 0.01 $ 0.40 $ (0.20)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ........................................................................ 20,712 21,695 20,370 21,695
Diluted ...................................................................... 24,256 21,823 24,113 21,768
See accompanying notes to unaudited consolidated financial statements.
2
RADIOLOGIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
2002 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 9,201 $ (4,334)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities; including discontinued operations:
Minority interests .......................................... 669 530
Depreciation and amortization ............................... 12,555 13,860
Equity in earnings of investments ........................... (2,207) (2,512)
Write-down of goodwill included in discontinued operations .. -- 6,900
Deferred revenue ............................................ -- (204)
Non-cash income from receipt of treasury stock .............. (180) --
Changes in operating assets and liabilities; net of acquisitions
and dispositions:
Accounts receivable, net .................................. (1,424) 3,720
Other receivables and current assets ...................... 2,569 (203)
Accounts payable and accrued expenses ..................... (751) (7,655)
-------- --------
Net cash provided by operating activities ............... 20,432 10,102
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................ (10,103) (12,357)
Contributions to joint ventures ................................ (282) (460)
Distributions from joint ventures .............................. 1,114 2,116
Other investments .............................................. (341) 1,888
-------- --------
Net cash used in investing activities ....................... (9,612) (8,813)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ..................................... (3,770) (2,007)
Financing costs ................................................ (373) --
Proceeds from exercise of stock options ........................ 945 --
Other items .................................................... -- 3
-------- --------
Net cash used in financing activities ....................... (3,198) (2,004)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................................... 7,622 (715)
CASH AND CASH EQUIVALENTS, beginning of year ..................... 10,761 19,153
-------- --------
CASH AND CASH EQUIVALENTS, end of period ......................... $ 18,383 $ 18,438
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
RADIOLOGIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Radiologix, Inc. (together with its subsidiaries referred to as
"Radiologix", the "Company," "we" or "us"), a Delaware corporation, is a leading
national provider of diagnostic imaging services through its ownership and
operation of free-standing, outpatient diagnostic imaging centers. Radiologix
utilizes sophisticated technology and technical expertise to perform a broad
range of imaging procedures, such as magnetic resonance imaging (MRI), computed
tomography (CT), positron emission tomography (PET), nuclear medicine,
ultrasound, mammography, bone densitometry (DEXA), general radiography (X-ray)
and fluoroscopy. Radiologix operates 115 diagnostic imaging centers, including
seven imaging centers that are included in discontinued operations in the
accompanying financial statements, located in 17 states, with a concentration of
diagnostic imaging centers in markets located in California, Florida, Kansas,
Maryland, New York, Texas and Virginia. Radiologix offers multi-modality imaging
services at 64 of its diagnostic imaging centers, which provide patients and
referring physicians access to advanced diagnostic imaging services in one
convenient location.
Radiologix also provides administrative, management and information
services to certain radiology practices that provide professional services in
connection with its diagnostic imaging centers and to hospitals and radiology
practices with which the Company operates joint ventures. The Company's services
provide leverage to its existing infrastructure and improvement to the
efficiency and effectiveness of the radiology practice or joint venture
profitability.
Radiologix has two models by which it contracts with radiology
practices: a comprehensive services model and a technical services model. Under
the comprehensive services model, the Company enters into a long-term agreement
with a radiology practice group (typically 40 years). Under this arrangement, in
addition to obtaining technical fees for the use of Radiologix's diagnostic
imaging equipment and the provision of technical services, we provide management
services and receive a fee based on the practice group's professional revenue,
including revenue derived from outside of our diagnostic imaging centers.
Under the technical services model, the Company enters into a
shorter-term agreement with a radiology practice group (typically 10 to 15
years) and pays them a fee based on cash collections from reimbursements for
imaging procedures. In both the comprehensive services and technical services
models, the Company owns the diagnostic imaging assets and, therefore, receives
100% of the technical reimbursements associated with imaging procedures.
Additionally, in most instances, both the comprehensive services and the
technical services models contemplate an incentive technical bonus for the
radiology group if the net technical income exceeds specified thresholds. The
service agreements generally cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default. One physician of two of
the contracted radiology practices are members of the board of directors of the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
This quarterly report for Radiologix supplements our annual report to
security holders for the fiscal year ended December 31, 2002. As permitted by
the Securities and Exchange Commission for interim reporting, we have omitted
certain footnotes and disclosures that substantially duplicate those in the
annual report. In the opinion of management, all adjustments necessary for a
fair presentation have been included and are of a normal recurring nature, other
than those adjustments related to severance costs and discontinued operations
which are discussed separately in Note 5 and 6. Interim results are not
necessarily indicative of the results that may be expected for the year. For
further information refer to the audited consolidated financial statements and
footnotes included in our annual report to security holders for the year ended
December 31, 2002.
4
The unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its wholly owned and majority owned
subsidiaries. All significant intercompany transactions have been eliminated.
Investments in entities that the Company does not control, but in which it has a
substantial ownership interest and can exercise significant influence, are
accounted for using the equity method.
Certain prior-year balances in the accompanying consolidated financial
statements have been reclassified to conform to the current year's presentation
of financial information. These reclassifications have no impact on total
assets, liabilities, stockholder's equity, net income (loss), or cash flows.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, results of operations and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
We have identified seven imaging centers that have been designated for
sale or closure over the next 9 months. These imaging centers do not represent
centers around which we can build a market concentration. In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" the financial results from these
seven imaging centers are reported in discontinued operations for the three and
six months ended June 30, 2002 and 2003. The six months ended June 30, 2003
includes a $6.9 million pre-tax charge to write down the goodwill related to
these centers. For the three and six months ended June 30, 2002, the
consolidated statement of income in the accompanying financial statements has
been restated to reflect the results of operations for the seven imaging centers
as discontinued operations.
GOODWILL AND INTANGIBLE ASSETS
The value of intangible assets (consisting primarily of service
agreements and goodwill) is stated at the lower of cost or fair value.
At June 30, 2003, the Company has $21.6 million of goodwill related to
the acquired intangible assets of our Questar operations. During the first
quarter of 2003, in accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" we performed the annual
impairment test of our Questar operations. We engaged an independent third party
valuation specialist to determine the fair value of these operations. Their
valuation indicated that the fair value of the Questar operations exceeded the
carrying value after considering the write-down of goodwill for discontinued
operations and consequently, no impairment was recorded.
The intangible asset related to a service agreement is recorded on the
date of acquisition, and represents the difference between the cost of
purchasing the right to manage a radiology practice and the net assets acquired.
Under the initial 40-year term of the agreements, the contracted radiology
practices have agreed to provide medical services to facilities managed by
Radiologix. In the event a contracted radiology practice breaches the service
agreement, or if Radiologix terminates with cause, the contracted radiology
practice is required to purchase all related tangible and intangible assets,
including the unamortized portion of the service agreement intangible asset, at
the then net book value. The Company's service agreements, included in the
consolidated balance sheets as intangible assets, net, are not considered to
have an indefinite useful life and will continue to
5
be amortized over a useful life of 25 years. In connection with the
restructuring of certain management agreements during 2002, $6.0 million has
been capitalized as an addition to service agreements. Accumulated amortization
of intangible assets at June 30, 2002 and 2003 amounted to $13.0 and $16.7
million, respectively. Amortization expense for the three months ended June 30,
2002 and 2003 equated to $848,000 and $953,000, respectively. Amortization
expense for the six months ending June 30, 2002 and 2003 equated to $1.7 million
and $1.9 million, respectively. We expect amortization expense to approximate
$19.1 million over the next five years.
We regularly evaluate the carrying value of our finite lived intangible
assets in light of any events or circumstances that may indicate that the
carrying amount or amortization period should be adjusted. As of June 30, 2003,
we do not believe there are any indicators that the carrying values or the
useful lives of these assets need to be adjusted. Future disposals or
terminations of Questar operations may result in additional good will impairment
charges.
STOCK-BASED AWARDS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No.
148 provides companies alternative methods of transitioning to Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") fair value of accounting for stock-based employee compensation.
It also requires certain disclosure in both annual and quarterly financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 does not
mandate fair value accounting for stock-based employee compensation, but does
require all companies to meet the disclosure requirements. We do not recognize
compensation expense for our stock option grants, which are issued at fair value
at the date of grant. During the three months ended March 31, 2003, 500,000
options were issued which vest based on the Company's common stock exceeding
various stock closing sales prices for 20 consecutive days. During the three
months ended June 30, 2003, 125,000 options were issued that vest based on the
Company's common stock exceeding various stock closing sales prices for 20
consecutive days. None of these options vested during the six months ended June
30, 2003. Due to the volatility of the Company's most recent stock prices, the
Company was not able to estimate the fair value of the 500,000 options granted
in the first quarter or the 125,000 options granted in the second quarter that
vest at a determined sales price and therefore, did not recognize compensation
expense. Upon vesting, the Company will recognize compensation expense for these
variable options. The Company has not adopted fair value accounting for its
employee stock options. In addition, 125,000 options were issued as incentive
compensation at the time of employment and were not under the Company's 1996
Stock Option Plan and have similar vesting as options issued under the Company's
1996 Stock Option Plan.
The Company currently accounts for its employee stock-based
compensation arrangements under the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The
Company accounts for stock-based compensation of non-employees under the
provisions of SFAS No. 123. The Company did not have any stock-based
compensation to non-employees during 2002 and 2003.
SFAS No. 123 also requires that companies electing to continue to use
the intrinsic value method make pro forma disclosure of net income (loss) and
net income (loss) per share as if the fair value method of accounting had been
applied. The effects of applying SFAS No. 123 during the six months ended June
30, 2002 and 2003 are as follows (in thousands, except per share amounts):
6
2002 2003
--------- ---------
Income from continuing operations ............................... $ 9,299 $ 274
Loss from discontinued operations, net of tax
benefit ..................................................... (98) (4,608)
--------- ---------
Net income (loss) ............................................... 9,201 (4,334)
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects .......................... (823) (1,054)
--------- ---------
Pro forma net income (loss) ..................................... $ 8,378 $ (5,388)
========= =========
Earnings (loss) per common share:
Income from continuing operations - basic ..................... $ 0.46 $ 0.01
Loss from discontinued operations - basic ..................... (0.01) (0.21)
--------- ---------
Net income (loss) - basic ..................................... $ 0.45 $ (0.20)
Proforma - basic .............................................. $ 0.41 $ (0.25)
Income from continuing operations - diluted ................... $ 0.39 $ 0.01
Loss from discontinued operations - diluted ................... -- (0.21)
--------- ---------
Net income (loss) - diluted ................................... $ 0.39 $ (0.20)
Proforma - diluted ............................................ $ 0.36 $ (0.25)
The fair value of each option grant is estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for grants during the six months ended June 30, 2002 and 2003,
respectively: risk-free interest rate of 4.61% and 3.33%; expected life of 7.09
and 7.52 years; expected volatility of 34.1%, and 78.8%; and dividend yield of
zero in 2002 and 2003, respectively. The weighted-average grant-date fair value
of new grants during the six months ended June 30, 2002 and 2003 was $11.65 per
share, and $5.68 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
REVENUE PRESENTATION
The Financial Accounting Standards Board's Emerging Issues Task Force
issued its abstract, Issue 97-2, "Application of FASB Statement No. 94 and APB
Opinion No. 16 to Physician Practice Management Entities and Certain Other
Entities with Contractual Arrangements" ("EITF 97-2"). Since Radiologix has not
established a "controlling financial interest" under EITF 97-2, Radiologix does
not consolidate the contracted radiology practices.
7
The following table sets forth the amounts of revenue for the
contracted radiology practices and diagnostic imaging centers that would have
been presented in the consolidated statements of operations had Radiologix met
the provisions of EITF 97-2 (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Revenue for contracted radiology practices
and diagnostic imaging centers, net of
contractual adjustments ........................ $ 98,194 $ 90,620 $ 195,668 $ 179,816
Less: amounts retained by contracted
radiology practices ............................ (26,699) (25,606) (53,182) (50,406)
--------- --------- --------- ---------
Service fee revenue .............................. $ 71,495 $ 65,014 $ 142,486 $ 129,410
========= ========= ========= =========
Revenue of the contracted radiology practices and diagnostic imaging
centers is recorded when services are rendered by the contracted radiology
practice and diagnostic imaging center based on established charges and reduced
by contractual allowances. In addition, bad debt expense related to established
charges is recognized as costs and expenses rather than a deduction of net
revenue. We use historical collection experience in estimating our contractual
adjustments and bad debt expense. The factors influencing the historical
collection experience include the contracted radiology practices' and diagnostic
imaging centers' patient mix, impact of managed care contract pricing and
contract revenue and the aging of patient accounts receivable balances. As these
factors change, the historical collection experience is revised accordingly in
the period known.
Service fee revenue represents the contracted radiology practices' and
diagnostic imaging centers' revenue less amounts retained by the contracted
radiology practices. The amounts retained by the contracted radiology practices
represents amounts paid to the physicians pursuant to the service agreements
between Radiologix and the contracted radiology practices. Under the service
agreements, the Company provides each contracted radiology practice with the
facilities and equipment used in its medical practice, assumes responsibility
for the management of the operations of the practice, and employs substantially
all of the non-physician personnel utilized by the contracted radiology
practice.
The Company's service fee revenue is dependent upon the operating
results of the contracted radiology practices and diagnostic imaging centers.
Where state law allows, service fees due under the service agreements for the
contracted radiology practices are derived from two distinct revenue streams:
(1) a negotiated percentage (typically 20% to 30%) of the adjusted professional
revenues as defined in the service agreements; and (2) 100% of the adjusted
technical revenues as defined in the service agreements. In states where the law
requires a flat fee structure, Radiologix has negotiated a base service fee,
which is equal to the estimated fair market value of the services provided under
the service agreements and which is renegotiated each year to equal the fair
market value of the services provided under the service agreements. Adjusted
professional revenues and adjusted technical revenues are determined by
deducting certain contractually agreed-upon expenses (non-physician salaries and
benefits, rent, depreciation, insurance, interest and other physician costs)
from the contracted radiology practices' revenue. Revenues of our subsidiary,
Questar Imaging, Inc. ("Questar") are primarily derived from technical revenues
generated from those imaging centers.
8
Service fee revenue consists of the following (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2003 2002 2003
-------- -------- -------- --------
Professional component ............ $ 14,773 $ 11,853 $ 29,567 $ 23,373
Technical component ............... 56,722 53,161 112,919 106,037
-------- -------- -------- --------
Service fee revenue .......... $ 71,495 $ 65,014 $142,486 $129,410
======== ======== ======== ========
SEVERANCE AND OTHER RELATED COSTS
During the six months ended June 30, 2003, we recorded severance costs
of $1,280,000. These costs include severance incurred in connection with changes
in the Company's senior management team and a cost reduction program that
resulted in a workforce reduction at the corporate office and among certain
field employees. We may incur additional severance costs of approximately
$440,000 as we move forward with our plans to reduce operating expenses. The
following table provides a reconciliation of the beginning and ending liability
balances in connection with severance and other related costs recorded in the
current and prior periods as of June 30, 2003 (in thousands):
Balance at December 31, 2002 .................. $ 773
Expense ....................................... 1,280
Cash payment .................................. (1,595)
-------
Balance at June 30, 2003 ...................... $ 458
=======
The above liability balances are included in accounts payable and
accrued expenses in the accompanying consolidated balance sheets.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Board Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46"), effective July 1,
2003. FIN 46 requires that a company consolidate or disclose information about a
variable interest entity. FIN 46 applies prospectively to all enterprises with
variable interests in variable interest entities created after January 31, 2003.
The disclosure provisions are effective for financial statements of interim
periods after July 1, 2003. The effect of FIN 46 on the Company has not yet been
determined.
3. LONG TERM DEBT
Senior Notes
The Company's $160 million senior notes due December 15, 2008 bear
interest at an annual rate of 10 1/2% payable semiannually in arrears on June 15
and December 15 of each year, commencing June 15, 2002. The senior notes are
redeemable on or after December 15, 2005 at various redemption prices, plus
accrued and unpaid interest to the date of redemption. The senior notes are
unsecured obligations, which rank senior in right of payment to all of our
subordinate indebtedness and equal in right of payment with all other senior
indebtedness. The senior notes are unconditionally guaranteed on a senior
unsecured basis by certain restricted existing and future subsidiaries.
9
Credit Facility
At June 30, 2003, no borrowings were outstanding under our credit
facility of $35 million. Under the credit facility, the interest rate is (i) an
adjusted LIBOR rate, plus an applicable margin which can vary from 3.0% to 3.5%
dependent on certain financial ratios or (ii) the prime rate, plus an applicable
margin which can vary from 1.75% to 2.25%. In each case, the applicable margin
varies based on financial ratios maintained by the Company. The credit facility
includes certain restrictive covenants including prohibitions on the payment of
dividends and the maintenance of certain financial ratios (including minimum
fixed charge coverage ratio and maximum leverage ratio, as defined). At June 30,
2003, the Company was in compliance with these covenants. At June 30, 2003
certain financial ratios have restricted the Company's ability to borrow $35
million. As a result of the financial covenant ratios, the Company has available
up to $25 million under the credit facility. Borrowings under the credit
facility are secured by all service agreements that the Company is or becomes a
party to, a pledge of the stock of the Company's subsidiaries and all of the
Company's and its wholly-owned subsidiaries' assets.
Convertible Subordinated Debt
The Company has a $12.0 million convertible junior subordinated note,
which matures July 31, 2009, and bears interest, payable quarterly in cash or
payment in kind securities, at an annual rate of 8.00%. On August 1, 2003, the
closing price of Radiologix's common stock had not exceeded $7.52 for 45 of the
60 days of the determination period under the convertible junior subordinated
note agreement. Therefore, the interest rate will be increased to 8.5% from
8.00%.
4. DEFERRED REVENUE
In connection with the amendment of a service agreement in July 2002
with one of the contracted radiology practices, we have recorded deferred
revenue of $3.3 million in consideration recognized for the amended agreement,
which will be amortized over a 20-year period. In December 2002, we amended a
service agreement of another contracted radiology practice and recorded deferred
revenue of $4.8 million in consideration recognized for the amended agreement.
Beginning January 2003, the deferred revenue is being amortized over
approximately a 19-year period.
5. COMMITMENTS AND CONTINGENCIES
On May 12, 2003, the doctors currently employed by M&S Imaging
Associates, Inc. ("M&S") in San Antonio, Texas, served us with a lawsuit filed
in the 224th District Court, Bexar County, Texas, in a case styled Elaine L.
Brown, M.D., et al v. Radiologix, Inc. (Formerly American Physician Partners,
Inc.) Cause No. 2003-CI06759 (the "Lawsuit"). The plaintiffs request the court
to enter a declaratory judgment that the non-competition covenants contained in
each of the plaintiffs' employment agreements with M&S (i.e., the doctors'
agreements with their own professional association) is unenforceable in Texas by
M&S or by Radiologix as a third party beneficiary of those employment
agreements. On May 30, 2003, Radiologix filed its answer to the Lawsuit denying
all allegations contained in the plaintiffs' original petition. In addition,
Radiologix asserted counterclaims against the doctors who filed the Lawsuit and
also joined M&S as a third party defendant, for fraud, interference with
contractual and business relations, civil conspiracy, and breach of contract and
of nonsolicitation agreement (the "Countersuit"). Radiologix has also served M&S
with a separate notice of default and demand for indemnification under the
November 1997 service agreement (the "Service Agreement") from the doctors and
M&S for all of Radiologix's damages caused by the wrongful actions or omissions
of the doctors and M&S, as well as punitive and exemplary damages. The trial
date is currently scheduled for May 3, 2004. Given the number of outstanding
issues and the uncertainty of their ultimate disposition, management does not
believe that it is currently possible to estimate the impact, if any, that the
10
ultimate resolution of these matters will have on Radiologix's results of
operations, financial position or cash flows.
On July 16, 2003, M&S served Radiologix with a demand for arbitration
in the amount of approximately $10 million under the Service Agreement alleging
certain acts of mismanagement vis-a-vis its billing and collection operations on
behalf of M&S. Although Radiologix has not yet responded to this demand, it
intends to vigorously deny and defend itself against M&S's allegations. Given
the preliminary nature of this matter, Radiologix can give no assurances that
the results of the arbitration proceedings will not have a material adverse
impact on its financial position, cash flow and results of operations.
As part of a routine, ongoing compliance and legal review, Radiologix
has found that rents negotiated for the subletting of space from physician
landlords of several Radiologix locations may have exceeded fair market value.
Radiologix sent a letter to the U.S. Department of Health & Human Services'
Office of the Inspector General ("OIG"), informing them of the preliminary
findings and seeking their guidance and assistance to remedy this situation.
Accordingly, in the second quarter of 2003, we recorded $500,000 as an estimate
for potential payments we may incur directly or indirectly. Since the inquiry is
in its very early stages, it is not yet possible for Radiologix to give any
assurances that the OIG will not impose fines in excess of our estimate or that
any potential payments or findings would not have a material adverse effect on
its financial position, cash flow and results of operations.
6. DISCONTINUED OPERATIONS
We have identified seven imaging centers that have been designated for
sale or closure over the next 9 months. These imaging centers do not represent
centers around which we can build a market concentration. The seven imaging
centers are reported in discontinued operations for the three and six months
ended June 30, 2002 and 2003. The six months ended June 30, 2003 includes a $6.9
million pre-tax charge to write down the related goodwill of these centers.
Service fee revenue and income (loss) from discontinued operations were
as follows (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2003 2002 2003
------- ------- ------- --------
Service fee revenue $ 1,864 $ 1,255 $ 3,595 $ 2,472
Income (loss) from discontinued operations before income taxes $ 63 $ (327) $ (163) $ (7,680)
Income tax expense (benefit) 25 (131) (65) (3,072)
------- ------- ------- --------
Income (loss) from discontinued operations $ 38 $ (196) $ (98) $ (4,608)
======= ======= ======= ========
Assets and liabilities of discontinued operations as of June 30, 2002
and 2003 were as follows (in thousands):
2002 2003
------ ------
Assets $2,106 $ -
Liabilities 1,585 1,093
------ -------
Net assets $ 521 $(1,093)
====== =======
11
7. EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period (including shares to be issued). Options,
warrants, and other potentially dilutive securities are excluded from the
calculation of basic EPS. Diluted EPS includes the options, warrants, and other
potentially dilutive securities that are excluded from basic EPS using the
treasury stock method to the extent that these securities are not anti-dilutive.
Diluted EPS also includes the effect of the convertible junior subordinated note
using the "if converted" method to the extent the securities are not
anti-dilutive. For the three months ended June 30, 2003, approximately $144,000
of tax-effected interest savings and 1,593,098 weighted average shares related
to the convertible junior subordinated note were not included in the computation
of diluted EPS because to do so would be anti-dilutive for the period. For the
three months ended June 30, 2002, approximately $208,000 of tax-effected
interest savings and 2,153,802 weighted average shares related to the
convertible junior subordinated note were included in the computation of diluted
EPS. For the three months ended June 30, 2002 and 2003, 1,390,471 shares and
128,255 shares, respectively, related to stock options were included in diluted
EPS.
For the six months ended June 30, 2003, approximately $288,000 of
tax-effected interest savings and 1,593,098 weighted average shares related to
the convertible junior subordinated note were not included in the computation of
diluted EPS because to do so would be anti-dilutive for the period. For the six
months ended June 30, 2002, approximately $470,000 of tax-effected interest
savings and 2,468,717 weighted average shares related to the convertible junior
subordinated note were included in the computation of diluted EPS. For the six
months ended June 30, 2002 and 2003, 1,275,008 shares and 73,288 shares,
respectively, related to stock options were included in diluted EPS.
8. SEGMENT REPORTING
The Company reports the results of its operations through four
designated regions of the United States: Mid-Atlantic, Northeastern, Central and
Western. In addition, the Company reports the results of its operations of the
imaging centers of its subsidiary, Questar. The Company's operations in each of
the four designated regions are comprised of the ownership and operation of
diagnostic imaging centers and the provision of administrative, management and
information services to the contracted radiology practices that provide
professional interpretation and supervision services in connection with its
diagnostic imaging centers and to hospitals and radiology practices with which
the Company operates joint ventures. The Company's services provide leverage to
its existing infrastructure and improvement to the efficiency and effectiveness
of the radiology practice or joint venture profitability. The Company has
divided the operations into the four regions and Questar only for purposes of
the division of internal management responsibilities, but does not focus on each
of these regions as a separate product line or make financial decisions as if
they were separate product lines. The Questar operations are looked at as a
separate group only from the perspective that the imaging centers of Questar do
not have the same type of management service agreement with physicians as we
have with each of the contracted radiology practices in the four designated
regions. In addition, any imaging centers of Questar that are in the same market
as the operations of the contracted radiology practices in the four designated
regions are not included in the service agreements of the contracted radiology
practices.
12
The following table summarizes the operating results and assets by the
five reportable segments (dollars in thousands):
FOR THE SIX MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------------------
Mid-Atlantic Northeastern Central Western
Region (1) Region (2) Region (3) Region (4) Questar (5) Total
------------ ------------ ---------- ---------- ----------- ---------
Service fee revenue ......................... $ 62,188 32,269 17,689 16,338 14,002 $ 142,486
Total costs and expenses .................... $ 46,535 25,316 13,055 14,888 11,113 $ 110,907
--------- --------- --------- --------- --------- ---------
Income from continuing operations
before equity in earnings of
investments and minority interests
in consolidated subsidiaries, and
income taxes .............................. $ 15,653 6,953 4,634 1,450 2,889 $ 31,579
Equity in earnings of investments ........... $ 1,707 -- 500 -- -- $ 2,207
Minority interests in income of
consolidated subsidiaries ................. $ (445) -- (222) -- (2) $ (669)
Income from continuing operations
before income taxes ....................... $ 16,915 6,953 4,912 1,450 2,887 $ 33,117
Loss from discontinued operations ........... $ -- -- -- -- (163) $ (163)
Income before income taxes .................. $ 16,915 6,953 4,912 1,450 2,724 $ 32,954
Assets ...................................... $ 68,297 43,856 25,175 19,832 20,263 $ 177,423
Purchases of property and equipment ......... $ 5,142 2,786 1,306 681 (105) $ 9,810
FOR THE SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------------------
Mid-Atlantic Northeastern Central Western
Region (1) Region (2) Region (3) Region (4) Questar (5) Total
------------ ------------ ---------- ---------- ----------- ---------
Service fee revenue ..................... $ 57,591 24,886 17,221 18,188 11,524 $ 129,410
Total costs and expenses ................ $ 47,735 24,529 13,281 16,479 11,029 $ 113,053
--------- --------- --------- --------- --------- ---------
Income from continuing operations
before equity in earnings of
investments and minority interests
in consolidated subsidiaries, and
income taxes .......................... $ 9,856 357 3,940 1,709 495 $ 16,357
Equity in earnings of investments ....... $ 1,995 -- 517 -- -- $ 2,512
Minority interests in income of
consolidated subsidiaries ............. $ (293) -- (197) -- (40) $ (530)
Income from continuing operations
before income taxes ................... $ 11,558 357 4,260 1,709 455 $ 18,339
Loss from discontinued operations ....... $ -- -- -- -- (7,680) $ (7,680)
Income (loss) before income taxes ....... $ 11,558 357 4,260 1,709 (7,225) $ 10,659
Assets .................................. $ 74,577 37,286 25,104 20,793 39,560 $ 197,320
Purchases of property and equipment ..... $ 6,391 2,039 611 559 2,539 $ 12,139
(1) Includes the Baltimore/Washington, D.C. Metropolitan area.
(2) Includes Rochester, New York, Rockland County, New York and the surrounding
areas.
(3) Includes San Antonio, Texas, St. Lucie County, Florida, Topeka, Kansas,
Northeast Kansas and the surrounding areas.
(4) Includes San Francisco/Oakland/San Jose, California and surrounding areas.
(5) Includes diagnostic imaging centers in Arizona, California, Colorado,
Delaware, Florida, Georgia, Illinois, Kansas, Minnesota, Missouri,
Nebraska, Nevada, Ohio and Pennsylvania that were acquired as part of the
Questar acquisition and that have not been integrated into pre-existing
Radiologix market areas and discontinued operations (See Note 6).
13
Corporate assets, including intangible assets, as of June 30, 2002 and
2003 were $113,142 and $81,867, respectively.
The following is a reconciliation of income (loss) before income taxes
and purchases of property and equipment by the Company's five reportable
segments to the Company's consolidated financial statements for the six months
ended June 30, 2002 and 2003 (in thousands):
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2002 2003
-------- --------
Segment income before income taxes .................... $ 32,954 $ 10,659
Unallocated amounts:
Corporate general and administrative ............... (7,865) (7,016)
Corporate severance and other related costs ........ -- (1,027)
Corporate other income ............................. 180 --
Corporate depreciation and amortization ............ (2,808) (3,165)
Corporate interest expense ......................... (7,126) (6,675)
-------- --------
Consolidated income (loss) before income taxes ........ $ 15,335 $ (7,224)
======== ========
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2003
------- -------
Purchases of property and equipment
Segment amounts ..................................... $ 9,810 $12,139
Corporate amount .................................... 293 218
------- -------
Total purchases of property and equipment ........... $10,103 $12,357
======= =======
9. JOINT VENTURE FINANCIAL INFORMATION
The Company has nine unconsolidated joint ventures with ownership
interests ranging from 22% to 50%. These joint ventures represent partnerships
with hospitals, health systems or radiology practices and were formed for the
purpose of owning and operating diagnostic imaging centers. Professional
services at the joint venture diagnostic imaging centers are performed by the
contracted radiology practices in such market area or a radiology practice that
participates in the joint venture. The following table is a summary of key
financial data for these joint ventures: (in thousands):
DECEMBER 31, JUNE 30,
2002 2003
------------ --------
Current assets .................... $18,873 $19,504
Noncurrent assets ................. 14,184 15,489
Current liabilities ............... 6,263 7,324
Noncurrent liabilities ............ 653 503
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2002 2003 2002 2003
------- ------- ------- -------
Minority interest ................. $ 1,086 $ 1,314 $ 2,207 $ 2,512
Net revenue ....................... 11,390 12,272 24,978 27,405
Net income ........................ 3,257 3,660 6,586 7,324
14
10. SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the senior notes, certain of the Company's
subsidiaries ("Subsidiary Guarantors") guaranteed, jointly and severally, the
Company's obligation to pay principal and interest on the senior notes on a full
and unconditional basis.
The following supplemental condensed consolidating financial
information presents the balance sheets as of December 31, 2002 and June 30,
2003, and the statements of operations and cash flows for the six months ended
June 30, 2002 and 2003. In the consolidating condensed financial statements, the
Subsidiary Guarantors account for their investment in the non-guarantor
subsidiaries using the equity method.
The non-guarantor subsidiaries include Advanced PET Imaging of
Maryland, L.P., Lakewood OpenScan MR, LLC, Lexington MR, Ltd., Montgomery
Community Magnetic Imaging Center Limited Partnership, Tower OpenScan MRI, and
MRI at St. Joseph Medical Center LLC. The Subsidiary Guarantors include all
wholly owned subsidiaries of Radiologix, Inc. (the "Parent").
15
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
ASSETS:
Cash and cash equivalents ........................ $ 15,775 $ (381) $ 3,759 $ -- $ 19,153
Accounts receivable, net of allowances ........... -- 66,190 3,187 -- 69,377
Other current assets ............................. 82 13,099 (856) -- 12,325
--------- --------- --------- --------- ---------
Total current assets ................... 15,857 78,908 6,090 -- 100,855
Property and equipment, net ...................... 2,314 57,071 2,718 -- 62,103
Investment in subsidiaries ....................... 140,667 -- -- (140,667) --
Goodwill ......................................... -- 28,510 -- -- 28,510
Intangible assets, net ........................... -- 70,581 1,570 -- 72,151
Other assets ..................................... 17,120 15,318 34 -- 32,472
--------- --------- --------- --------- ---------
$ 175,958 $ 250,388 $ 10,412 $(140,667) $ 296,091
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses ............ $ 7,490 $ 26,380 $ 1,759 $ -- $ 35,629
Current portion of long-term obligations ......... 13 3,681 624 -- 4,318
Other current liabilities ........................ -- 458 -- -- 458
--------- --------- --------- --------- ---------
Total current liabilities .............. 7,503 30,519 2,383 -- 40,405
Long-term obligations, net of current
portion ...................................... 171,567 1,090 1,254 -- 173,911
Other noncurrent liabilities ..................... (71,479) 86,638 (3,091) -- 12,068
Minority interests in consolidated
subsidiaries ................................. -- -- 1,340 -- 1,340
Stockholders' equity ............................. 68,367 132,141 8,526 (140,667) 68,367
--------- --------- --------- --------- ---------
$ 175,958 $ 250,388 $ 10,412 $(140,667) $ 296,091
========= ========= ========= ========= =========
16
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
JUNE 30, 2003
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
ASSETS:
Cash and cash equivalents ................... $ 15,985 $ 127 $ 2,326 $ -- $ 18,438
Accounts receivable, net of allowances ...... -- 62,706 2,950 -- 65,656
Other current assets ........................ 505 14,295 (987) -- 13,813
--------- --------- --------- --------- ---------
Total current assets .............. 16,490 77,128 4,289 -- 97,907
Property and equipment, net ................. 2,526 58,214 2,424 -- 63,164
Investment in subsidiaries .................. 146,354 -- -- (146,354) --
Goodwill .................................... -- 21,610 -- -- 21,610
Intangible assets, net ...................... -- 62,296 7,994 -- 70,290
Other assets ................................ 14,434 12,829 118 -- 27,381
--------- --------- --------- --------- ---------
$ 179,804 $ 232,077 $ 14,825 $(146,354) $ 280,352
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses ....... $ 4,260 $ 16,870 $ 7,607 $ -- $ 28,737
Current portion of long-term obligations .... 13 2,782 639 -- 3,434
Other current liabilities ................... 70 390 -- -- 460
--------- --------- --------- --------- ---------
Total current liabilities ......... 4,343 20,042 8,246 -- 32,631
Long-term obligations, net of current
portion ................................. 171,527 309 901 -- 172,737
Other noncurrent liabilities ................ (60,102) 74,763 (5,122) -- 9,539
Minority interests in consolidated
subsidiaries ............................ -- -- 1,409 -- 1,409
Stockholders' equity ........................ 64,036 136,963 9,391 (146,354) 64,036
--------- --------- --------- --------- ---------
$ 179,804 $ 232,077 $ 14,825 $(146,354) $ 280,352
========= ========= ========= ========= =========
17
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
Service fee revenue .............................. $ -- $ 65,725 $ 5,770 $ -- $ 71,495
Costs and expenses:
Salaries and benefits ........................ -- 19,399 731 -- 20,130
Field supplies ............................... -- 4,212 296 -- 4,508
Field rent and lease expense ................. -- 7,133 491 -- 7,624
Other field expenses ......................... -- 9,333 1,763 -- 11,096
Bad debt expense ............................. -- 5,662 403 -- 6,065
Corporate general and administrative ......... 3,960 -- -- -- 3,960
Depreciation and amortization ................ 692 5,301 251 -- 6,244
Interest expense, net ........................ 3,501 1,216 38 -- 4,755
-------- -------- -------- ----------- --------
Total costs and expenses ................ 8,153 52,256 3,973 -- 64,382
-------- -------- -------- ----------- --------
Income (loss) from continuing operations
before equity in earnings of
investments, minority interests in
consolidated subsidiaries, and income
taxes ........................................ (8,153) 13,469 1,797 -- 7,113
Equity in earnings of investments ................ -- 1,086 -- -- 1,086
Minority interests in income of
consolidated subsidiaries .................... -- -- (308) -- (308)
-------- -------- -------- ----------- --------
Income (loss) from continuing operations
before income................................. (8,153) 14,555 1,489 -- 7,891
Income tax expense (benefit) ................. (3,261) 5,822 596 -- 3,157
-------- -------- -------- ----------- --------
Income (loss) from continuing operations.......... (4,892) 8,733 893 -- 4,734
-------- -------- -------- ----------- --------
Discontinued operations:
Income from discontinued operations .......... -- 63 -- -- 63
Income tax expense ........................... -- 25 -- -- 25
-------- -------- -------- ----------- --------
Income from discontinued operations .............. -- 38 -- -- 38
-------- -------- -------- ----------- --------
Net income (loss) ................................ $ (4,892) $ 8,771 $ 893 $ -- $ 4,772
======== ======== ======== =========== ========
18
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
Service fee revenue .............................. $ -- $ 131,019 $ 11,467 $ -- $ 142,486
Costs and expenses:
Salaries and benefits ........................ -- 38,759 1,490 -- 40,249
Field supplies ............................... -- 8,086 589 -- 8,675
Field rent and lease expense ................. -- 14,086 993 -- 15,079
Other field expenses ......................... (180) 19,507 3,396 -- 22,723
Bad debt expense ............................. -- 11,187 790 -- 11,977
Corporate general and administrative ......... 7,865 -- -- -- 7,865
Depreciation and amortization ................ 1,351 10,491 500 -- 12,342
Interest expense, net ........................ 7,126 2,349 141 -- 9,616
--------- --------- --------- ----------- ---------
Total costs and expenses ................ 16,162 104,465 7,899 -- 128,526
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations
before equity in earnings of investments,
minority interests in consolidated
subsidiaries, and income taxes ............... (16,162) 26,554 3,568 -- 13,960
Equity in earnings of investments ................ -- 2,207 -- -- 2,207
Minority interests in income of
consolidated subsidiaries .................... -- -- (669) -- (669)
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations
before income ................................ (16,162) 28,761 2,899 -- 15,498
Income tax expense (benefit) ................. (6,465) 11,504 1,160 -- 6,199
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations.......... (9,697) 17,257 1,739 -- 9,299
--------- --------- --------- ----------- ---------
Discontinued operations:
Loss from discontinued operations ............ -- (163) -- -- (163)
Income tax benefit ........................... -- (65) -- -- (65)
--------- --------- --------- ----------- ---------
Loss from discontinued operations ................ -- (98) -- -- (98)
--------- --------- --------- ----------- ---------
Net income (loss) ................................ $ (9,697) $ 17,159 $ 1,739 $ -- $ 9,201
========= ========= ========= =========== =========
19
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
Service fee revenue .............................. $ -- $ 60,363 $ 4,651 $ -- $ 65,014
Costs and expenses:
Salaries and benefits ........................ -- 19,992 700 -- 20,692
Field supplies ............................... -- 4,297 282 -- 4,579
Field rent and lease expense ................. -- 7,642 500 -- 8,142
Other field expenses ......................... -- 9,534 1,449 -- 10,983
Bad debt expense ............................. -- 5,269 326 -- 5,595
Severance and other related costs ............ 281 30 -- -- 311
Corporate general and administrative ......... 3,375 -- -- -- 3,375
Depreciation and amortization ................ 744 6,012 211 -- 6,967
Interest expense, net ........................ 3,260 1,267 40 -- 4,567
-------- -------- -------- ----------- --------
Total costs and expenses ................ 7,660 54,043 3,508 -- 65,211
-------- -------- -------- ----------- --------
Income (loss) from continuing operations
before equity in earnings of investments,
minority interests in consolidated
subsidiaries, and income taxes................ (7,660) 6,320 1,143 -- (197)
Equity in earnings of investments ................ -- 1,314 -- -- 1,314
Minority interests in income of
consolidated subsidiaries .................... -- -- (331) -- (331)
-------- -------- -------- ----------- --------
Income (loss) from continuing operations
before income ................................ (7,660) 7,634 812 -- 786
Income tax expense (benefit) ................. (3,064) 3,054 324 -- 314
-------- -------- -------- ----------- --------
Income (loss) from continuing operations.......... (4,596) 4,580 488 -- 472
-------- -------- -------- ----------- --------
Discontinued operations:
Loss from discontinued operations ............ -- (327) -- -- (327)
Income tax benefit ........................... -- (131) -- -- (131)
-------- -------- -------- ----------- --------
Loss from discontinued operations ................ -- (196) -- -- (196)
-------- -------- -------- ----------- --------
Net income (loss) ................................ $ (4,596) $ 4,384 $ 488 $ -- $ 276
======== ======== ======== =========== ========
20
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ----------- ------------
Service fee revenue .............................. $ -- $ 120,179 $ 9,231 $ -- $ 129,410
Costs and expenses:
Salaries and benefits ........................ -- 40,524 1,476 -- 42,000
Field supplies ............................... -- 8,133 574 -- 8,707
Field rent and lease expense ................. -- 15,226 1,008 -- 16,234
Other field expenses ......................... -- 18,462 3,012 -- 21,474
Bad debt expense ............................. -- 10,476 669 -- 11,145
Severance and other related costs ............ 1,027 253 -- -- 1,280
Corporate general and administrative ......... 7,016 -- -- -- 7,016
Depreciation and amortization ................ 1,487 11,908 442 -- 13,837
Interest expense, net ........................ 6,675 2,489 79 -- 9,243
--------- --------- --------- ----------- ---------
Total costs and expenses ................ 16,205 107,471 7,260 -- 130,936
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations
before equity in earnings of
investments, minority interests in
consolidated subsidiaries, and
income taxes ................................. (16,205) 12,708 1,971 -- (1,526)
Equity in earnings of investments ................ -- 2,512 -- -- 2,512
Minority interests in income of
consolidated subsidiaries .................... -- -- (530) -- (530)
--------- --------- --------- ----------- ---------
Income (loss) from continuing operations
before income ............................... (16,205) 15,220 1,441 -- 456
Income tax expense (benefit) ................. (6,482) 6,088 576 -- 182
--------- --------- --------- ----------- ---------
Income (loss) from continuing
operations ................................. (9,723) 9,132 865 -- 274
--------- --------- --------- ----------- ---------
Discontinued operations:
Loss from discontinued operations ............ -- (7,680) -- -- (7,680)
Income tax benefit ........................... -- (3,072) -- -- (3,072)
--------- --------- --------- ----------- ---------
Loss from discontinued operations ................ -- (4,608) -- -- (4,608)
--------- --------- --------- ----------- ---------
Net income (loss) ................................ $ (9,723) $ 4,524 $ 865 $ -- $ (4,334)
========= ========= ========= =========== =========
21
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................................ $ (6,962) $ 27,681 $ (287) $ -- $ 20,432
-------- -------- -------- ------------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ................. (1,579) (8,367) (157) -- (10,103)
Joint ventures ...................................... -- 832 -- -- 832
Other investments ................................... 117 (360) (98) -- (341)
-------- -------- -------- ------------- --------
Net cash used in investing activities ....... (1,462) (7,895) (255) -- (9,612)
-------- -------- -------- ------------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds (payments) on long-term debt ............... (1,249) (3,235) 714 -- (3,770)
Due to/from parent/subsidiaries ..................... 16,492 (16,598) 106 -- --
Other items ......................................... 489 409 (326) -- 572
-------- -------- -------- ------------- --------
Net cash provided by (used in)
financing activities .................... 15,732 (19,424) 494 -- (3,198)
-------- -------- -------- ------------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................ 7,308 362 (48) -- 7,622
CASH AND CASH EQUIVALENTS,
beginning of period ................................. 7,670 (953) 4,044 -- 10,761
-------- -------- -------- ------------- --------
CASH AND CASH EQUIVALENTS,
end of period ....................................... $ 14,978 $ (591) $ 3,996 $ -- $ 18,383
======== ======== ======== ============= ========
22
RADIOLOGIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
NON-
SUBSIDIARY GUARANTOR TOTAL
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ................................ $(12,108) $ 14,157 $ 8,053 $ -- $ 10,102
-------- -------- -------- ------------ --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ................. (1,699) (10,510) (148) -- (12,357)
Joint ventures ...................................... -- 1,656 -- -- 1,656
Other investments ................................... 321 8,536 (6,969) -- 1,888
-------- -------- -------- ------------ --------
Net cash used in investing activities ....... (1,378) (318) (7,117) -- (8,813)
-------- -------- -------- ------------ --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds (payments) on long-term debt ............... (40) (1,630) (338) -- (2,008)
Due to/from parent/subsidiaries ..................... 13,732 (11,691) (2,041) -- --
Other items ......................................... 4 (10) 10 -- 4
-------- -------- -------- ------------ --------
Net cash provided by (used in)
financing activities .................... 13,696 (13,331) (2,369) -- (2,004)
-------- -------- -------- ------------ --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................ 210 508 (1,433) -- (715)
CASH AND CASH EQUIVALENTS,
beginning of period ................................. 15,775 (381) 3,759 -- 19,153
-------- -------- -------- ------------ --------
CASH AND CASH EQUIVALENTS,
end of period ....................................... $ 15,985 $ 127 $ 2,326 $ -- $ 18,438
======== ======== ======== ============ ========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2002, and with the Company's
consolidated financial statements and notes included in this Form 10-Q.
OVERVIEW
We are a leading national provider of diagnostic imaging services
through our ownership and operation of free-standing, outpatient diagnostic
imaging centers. We utilize sophisticated technology and technical expertise to
perform a broad range of imaging procedures, such as magnetic resonance imaging
(MRI), computed tomography (CT), positron emission tomography (PET), nuclear
medicine, ultrasound, mammography, bone densitometry (DEXA), general radiography
(X-ray) and fluoroscopy. For the six months ended June 30, 2003, we derived 82%
of our service fee revenue from the ownership, management and operation of our
radiology and imaging center network and 18% of our service fee revenue from
administrative, management and information services provided to contracted
radiology practices. As of June 30, 2003, we owned, operated or maintained an
ownership interest in imaging equipment at 115 locations, including seven
imaging centers that are included in discontinued operations in the accompanying
financial statements. In addition, we provided management services to ten
radiology practices. As of June 30, 2003, our imaging centers are located in 17
states, with concentrated geographic coverage in markets located in California,
Florida, Kansas, Maryland, New York, Texas and Virginia.
We focus on providing quality patient care and service to ensure
patient and referring physician satisfaction. Our development of comprehensive
radiology networks permits us to invest in technologically advanced imaging
equipment, including MRI, open MRI, spiral CT and PET. Our consolidation of
diagnostic imaging centers into coordinated networks improves response time,
increases overall patient accessibility, permits us to standardize certain
customer relations procedures and permits us to develop "best practices" for our
diagnostic imaging centers. We seek the input and participation of the
contracted radiology practices to which we provide administrative, management
and information services to develop best practices and to improve productivity
and the quality of services. By focusing on further improving and, where
appropriate, standardizing the operations of our diagnostic imaging centers, we
believe that we can increase patient and referring physician satisfaction, which
should lead to increased referrals and increased utilization of our diagnostic
imaging centers.
We contract with radiology practices to provide professional services,
including the supervision and interpretation of diagnostic imaging procedures
performed in our diagnostic imaging centers. We believe that we do not engage in
the practice of medicine nor do we employ physicians. The radiology practices
maintain full control over the provision of professional radiological services.
The contracted radiology practices generally have outstanding physician and
practice credentials and reputations; strong competitive market positions; a
broad sub-specialty mix of physicians; a history of growth and potential for
continued growth; and a willingness to embrace our strategy for the delivery of
diagnostic imaging services.
For the six months ended June 30, 2003, payment for diagnostic imaging
services came primarily from commercial third-party payors (65%), governmental
payors (28%, including Medicare and Medicaid) and private and other payors (7%).
In January 2002, Medicare decreased the payment rates for physician and
outpatient services, including diagnostic imaging services, by approximately
5.4%. This payment rate schedule was effective through February 2003. Effective
March 1, through December 31, 2003, Congress legislated an increase of
approximately 1.6% in the overall reimbursement rates for physician and
outpatient services, including diagnostic imaging services. Our diagnostic
imaging centers are principally dependent on our ability to attract referrals
from primary care physicians, specialists and other healthcare providers. The
referral often depends on the existence of a contractual arrangement with the
referred patient's health benefit plan. For the six months ended June 30, 2003,
approximately 5% of our revenue generated at our diagnostic imaging centers was
generated from capitated arrangements.
24
Revenue of the contracted radiology practices and diagnostic imaging
centers is recorded when services are rendered by the contracted radiology
practices and diagnostic imaging centers based on established charges and
reduced by contractual allowances. In addition, bad debt expense related to
established charges is recognized as costs and expenses rather than a deduction
from revenue. We use historical collection experience in estimating contractual
adjustments and bad debt expense. The factors influencing the historical
collection experience include the contracted radiology practices' and diagnostic
imaging centers' patient mix, impact of managed care contract pricing and
contract revenue and the aging of patient accounts receivable balances. As these
factors change, the historical collection experience is revised accordingly in
the period known. Service fee revenue represents the contracted radiology
practices' and diagnostic imaging centers' revenue less amounts retained by the
contracted radiology practices. The amounts retained by the contracted radiology
practices represent amounts paid to the physicians pursuant to the service
agreements between us and the contracted radiology practices. Under the service
agreements, we provide each contracted radiology practice with the facilities
and equipment used in its medical practice, assume responsibility for managing
the operations of the practice, and employ substantially all of the
non-physician personnel utilized by the contracted radiology practice. Although
we assist in negotiating managed care contracts for the contracted radiology
practices, we assume no risk under these arrangements.
Our service fee revenue is dependent upon the operating results of the
contracted radiology practices and diagnostic imaging centers. Where state law
allows, service fees due under the service agreements for the contracted
radiology practices are derived from two distinct revenue streams: (1) a
negotiated percentage (up to 30%) of the adjusted professional revenues as
defined in the service agreements; and (2) 100% of the adjusted technical
revenues as defined in the service agreements. In states where the law requires
a flat fee structure, we have negotiated a base service fee, which is equal to
the estimated fair market value of the services provided under the service
agreements and which is renegotiated each year to equal the fair market value of
the services provided under the service agreements. Adjusted professional
revenues and adjusted technical revenues are determined by deducting
contractually agreed-upon expenses (non-physician salaries and benefits, rent,
depreciation, insurance, interest and other physician costs) from the contracted
radiology practices' revenue. Revenues of our subsidiary, Questar Imaging, Inc.
("Questar") are primarily derived from technical revenues generated from those
imaging centers.
RESULTS OF OPERATIONS
We report the results of our operations through four designated regions
of the United States: Mid-Atlantic, Northeastern, Central and Western regions.
In addition, we report separately the results of our operations of the imaging
centers of our subsidiary, Questar. Our operations in each of the four
designated regions are comprised of the ownership and operation of diagnostic
imaging centers and the provision of administrative, management and information
services to the contracted radiology practices that provide professional
interpretation and supervision services in connection with our diagnostic
imaging centers and to hospitals and radiology practices with which we operate
joint ventures. Our services provide leverage to its existing infrastructure and
improvement to the efficiency and effectiveness of the radiology practice or
joint venture profitability. We have divided the operations into the four
regions and Questar only for purposes of the division of internal management
responsibilities, but do not focus on each of these regions as a separate
product line or make financial decisions as if they were separate product lines.
The Questar operations are treated as a separate group only from the perspective
that the imaging centers of Questar do not have the same type of management
service agreement with physicians as we have with each of the contracted
radiology practices in the four designated regions. In addition, any imaging
centers of Questar that are in the same region as the operations of the
contracted radiology practices in the four designated regions are not included
in the service agreements of the contracted radiology practices.
25
Our results of operations during the six months ended June 30, 2003 was
affected by such factors as increased competition, the current recession,
increased payor pre-authorization activity, a shortage of technologists, and
harsh weather conditions during January and February. Although we continue to be
faced with such factors other than weather conditions, we believe the affect on
our results of operations is beginning to stabilize. Beginning in the second
half of 2002, and continuing into 2003, increased competition resulted in lower
volumes of diagnostic imaging procedures performed. Pre-authorization programs
implemented by many of our larger payors and the recruitment and retention of
additional technologists have impacted our operating margin. An increasing
number of payors with which we do business have instituted more comprehensive
pre-authorization programs on certain procedures. Under pre-authorization
programs, the referring physician must justify medical necessity based on the
payor's specific guidelines prior to the services being rendered. The current
recession in the United States' economy has contributed to the decline in our
volumes of diagnostic imaging procedures performed due to the decrease in the
demand for elective procedures within the general population who are no longer
covered by health insurance or have higher deductibles and coinsurance. Also, in
early fiscal 2002 the shortage of qualified technologists resulted in scheduling
backlogs and lost procedure volumes. As many of the open technologist positions
were filled by mid-2002, salaries and benefits increased. These costs continued
to increase or remained stable, while volume began to decline resulting in lower
revenues from contracted radiology practices and diagnostic imaging centers. The
combined effect of increased salaries and benefits and lower revenues decreased
our operating margins during the six months ended June 30, 2003. We cannot give
any assurance that any of the factors discussed above will not continue to have
an adverse effect on our business, results of operations or financial condition.
Income before income taxes for each of the regions, excluding the
Western region, and Questar decreased from the six months ended June 30, 2002 to
the six months ended June 30, 2003. For the six months ended June 30, 2002 and
2003, the Mid Atlantic region decreased from $16.9 million to $11.6 million,
respectively, the Northeastern region decreased from $7.0 million to $357,000,
respectively, the Central region decreased from $4.9 million to $4.3 million,
respectively, and Questar decreased from $2.7 million to a loss of $7.2 million,
respectively. For the six months ended June 30, 2002 and 2003 for the Western
region income before income taxes increased from $1.5 million to $1.7 million,
respectively. The decline in the income before income taxes for three of the
four regions and Questar was primarily affected by each of the factors discussed
above. Additional factors in specific regions also contributed to the decrease
in income before income taxes. Questar's income (loss) before income taxes was
also affected by each of the above factors due to the relative fixed salaries
and benefits costs. Due to the relative fixed cost structure of Questar, the
decline in volume and therefore, lower revenue for diagnostic imaging centers
resulted in a decline in the income (loss) before taxes. In addition, we have
identified seven imaging centers of the Questar subsidiary that have been
designated for sale or closure over the next 9 months. These imaging centers do
not represent centers around which we can build a market concentration. In
accordance with Financial Accounting Standards Board Statement 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," the financial results from
these seven imaging centers are included in discontinued operations in the
accompanying consolidated financial statements. The six months ended June 30,
2003 includes a $6.9 million pre-tax charge to write down the related goodwill
of these centers.
We completed no acquisitions or dispositions in the six months ended
June 30, 2002 and June 30, 2003, respectively.
26
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Service Fee Revenue
The following table sets forth the amounts of revenue from contracted
radiology practices and diagnostic imaging centers and the amounts retained by
the contracted radiology practices (in thousands):
FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------------------
PERCENT
2002 2003 CHANGE
---------- --------- -------
Revenue from contracted radiology practices and (7.7%)
diagnostic imaging centers, net of contractual allowances........ $ 98,194 $ 90,620
Less: amounts retained by contracted radiology practices........... (26,699) (25,606) (4.1%)
---------- ---------
Service fee revenue................................................ $ 71,495 $ 65,014 (9.1%)
========== =========
Revenue from contracted radiology practices and diagnostic imaging
centers, net of contractual allowances, decreased $7.6 million, from $98.2
million for the three months ended June 30, 2002 to $90.6 million for the three
months ended June 30, 2003. This decrease was primarily due to decreased
revenues derived from decreased volume at the diagnostic imaging centers, which
decreased our revenue from contracted radiology practices and diagnostic imaging
centers. Amounts retained by contracted radiology practices decreased from $26.7
million for the three months ended June 30, 2002 to $25.6 million for the same