-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuOHiC4nU8XupJrqOwzcLVsWi+LaHxSza+jxSvzv7H6MXA5sC+toaFkfIGPSsdrr briJqQeCHuWkOwRkHksEOA== 0001019687-00-000140.txt : 20000216 0001019687-00-000140.hdr.sgml : 20000216 ACCESSION NUMBER: 0001019687-00-000140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIMEDEX HEALTH SYSTEMS INC CENTRAL INDEX KEY: 0000790526 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 133326724 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19019 FILM NUMBER: 546358 BUSINESS ADDRESS: STREET 1: 1516 COTNER AVE CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104787808 MAIL ADDRESS: STREET 1: PRIMEDEX HEALTH SYSTEMS INC STREET 2: 1516 COTNER AVE CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: CCC FRANCHISING CORP DATE OF NAME CHANGE: 19920703 10-K 1 PRIMEDEX HEALTH SYSTEMS, INC.'S 10-K 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, 1999 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 filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. ------- The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $2,805,236 on February 1, 2000 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, 2000 was 38,932,760 shares (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE NONE 1 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 35 California diagnostic imaging facilities [five of which are wholly-owned by 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 29 medical imaging centers and is a joint venture partner in one other imaging center. 23 of the imaging centers are located in Southern California [with three 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 30 centers, the medical services and medical supervision are provided by various independent physicians and physician groups [at most of the centers, the medical services are provided by Beverly Radiology Medical Group ["BRMG"] [see "Item 13"]. As compensation for its management and other services at the various centers, RadNet receives a management fee. In connection with the imaging centers in which it is a joint venture partner, RadNet, in addition to a management fee, also shares in joint venture net income. 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 $4,000,000 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 4,130,000 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 $4,181,841 in cash and notes thereby increasing the Company's ownership to approximately 90% of the outstanding DIS common shares as of February 10, 2000 [excluding 2 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. 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 assumption of liabilities]. (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 $350,000 to $800,000. DIAGNOSTIC RADIOLOGY - X-ray services, diagnostic tests employing x-ray radiation on two planes; includes fluoroscopy and endoscopy. MAGNETIC RESONANCE IMAGING [MRI] - Diagnostic imaging based on magnetism rather than radiation or conventional x-ray. MRI has become widely accepted as the standard diagnostic tool for a wide and fast-growing variety of clinical applications; MRI is painless, requiring only that the patient lie still on a motorized table that slides into a long cylinder. On some MRI studies, an injected contrast agent is used, and some require the use of special "coils," permitting highly accurate scanning of a particular part of the body. MRIs are the single most expensive pieces of equipment at RadNet imaging centers costing between $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 3 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. 4 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 * * * * * * Wilshire * * * * Women's * * Antelope Valley * Camarillo** * * * Fresno * * * * * La Habra * * Lancaster [Two Sites] * * * * * * Long Beach [Four Sites] * * * * * * Northridge * * * * * * North County** [San Diego] * * Orange [Two Sites] * * * * * * Oxnard * * * * Riverside** * * * * * Sacramento [DRI] [Two Sites] * * * * * San Francisco * Santa Clarita * * * * * Santa Rosa * Stockton/Valley * * * * * * Temecula** * * * * * Thousand Oaks** * * * * * * Tustin * * * Vacaville * * * Ventura [Five Sites] * * * * * * Westchester * * * * *
*Indicates availability **Indicates a DIS facility In addition, cancer care therapy is performed at Valley Regional Oncology Center, a DIS center located in Temecula, California. 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. 5 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"]. BRMG is 99% owned by Dr. Howard Berger [see "Items 11,12 and 13"]. RadNet has a Management and Services Agreement with BRMG for a ten-year term until June 2002, terminable prior thereto at RadNet's election upon the occurrence of certain events including a change in BRMG's ownership such that Dr. Berger is no longer an owner in the aggregate of at least 60% of the equity ownership of BRMG. As compensation for its services furnished under the Management and Services 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, 23 centers provide MRI services and 19 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, 1999, capital lease obligations totaled approximately $25 million through October 31, 2006 including current installments totaling approximately $4 million. Also at October 31, 1999, installment notes payable totaled approximately $72 million through September 30, 2006 including current installments of approximately $35 million [including line of credit balances of approximately $21.6 million]. Commitments under equipment operating leases at October 31, 1999 were approximately $10 million through December 2006 including current obligations of approximately $1.6 million. To the extent additional imaging centers are opened or acquired, these obligations could materially increase. See the above described chart as to the other equipment available at each imaging center. The MRI and CT systems and the other diagnostic medical equipment at the imaging centers owned or managed by the Company are subject to technological obsolescence as medical imaging is a field in which there is constant development of new techniques and technologies. MARKETING The patients who undergo diagnostic medical imaging procedures at the various Company owned or managed imaging centers are generally referred by individual independent physicians, by Independent Physician Associations ["IPAs"] consisting of groups of physicians, and by Health Maintenance Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar organizations which enroll subscribers on a contractual basis to whom they deliver healthcare services. Such organizations attempt to control the cost of healthcare services by directing their enrollees to participating physicians and institutions and often through aggressive utilization review and limitations on access to physician specialists, attempt to further limit the cost of medical service delivery. Such organizations typically develop on a regional basis where an appropriate enrollee population and mix of participating physicians and institutions are available. The Company currently employs nine full-time and one 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 6 organizations throughout Southern California as to the services provided at the Company's owned or managed imaging centers. Patients are obtained by direct referral or through contract. Some contracts, referred to as "capitation contracts," provide for a fixed fee per organization member, which is paid to the medical service provider. Under a "capitation" contract, the provider agrees to provide specified services to the organization members for a fixed, predetermined payment per member for a specified time period [usually one year], regardless of how many times the member uses the service. No assurances can be given that any of the current or future "capitation" contracts will be profitable as there is a possibility that management could underestimate the number of times the services at its imaging centers will be used by the contracting organization's members during the contract term. COMPETITION All of the imaging centers owned or managed by the Company compete with a substantial number of imaging centers and hospitals in California. Although no assurances can be given, management believes the imaging centers will be able to successfully compete with such other centers because of the up-to-date imaging equipment maintained at the Company's centers, the quality of the medical personnel affiliated with its centers and the fact that for widespread potential customer groups, it has locations throughout the area. INSURANCE BRMG maintains a medical malpractice insurance policy in the amount of $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 of $1,000,000 per occurrence and $5,000,000 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. EMPLOYEES At October 31, 1999, the Company [including DIS] had a total of 487 full-time employees of whom 11 served in executive positions, 214 supplied technical and managerial services at the various imaging centers, and 262 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. 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, corporate practice of medicine, and environmental. 7 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. 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. 8 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. 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. 9 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. 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. 10 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:
Center ------ Wholly-Owned Approx. Sq. Ft. Annual Rental for Company's % ------------ --------------- ----------------- ----------- of Center Leased Facility Ownership Interest Lease Expiration --------- --------------- ------------------ ---------------- Tower Division: [Beverly Hills and Environs] Roxsan 8,143 $ 220,000 100% March 2001 Women's 3,830 $ 60,000 100% February 2014 Wilshire 13,778 $ 455,000 100% September 2018 Antelope Valley 2,890 $ 39,000 100% June 2000 Fresno 5,360 $ 115,000 100% March 2003 La Habra 3,034 $ 39,000 100% December 2002 Lancaster [two sites] 7,827 $ 170,000 100% July 2002 Long Beach - Redondo [three sites] 6,000 $ 20,000 100% December 1999 Long Beach - Los Coyotes 3,062 $ 62,000 100% August 2004 Northridge 7,500 Owned 100% N/A Orange [two sites] 5,376 $ 174,000 100% February 2001 Oxnard 5,100 $ 101,000 100% February 2002 Sacramento [DRI] [two sites] 9,727 $ 330,000 100% June 2003 San Francisco 3,380 $ 49,000 100% March 2000 Santa Clarita 5,782 $ 111,000 100% June 2009 Santa Rosa 4,235 $ 129,000 100% July 2001 Stockton/Valley 4,588 $ 77,000 100% December 2001 Tustin 2,139 $ 53,000 100% January 2003 Vacaville 3,984 $ 53,000 100% September 2003 Ventura 9,440 $ 135,000 100% July 2002 Ventura -Loma Vista [Four Sites] 3,585 $ 57,000 100% November 2001 DIS Centers ----------- Camarillo 2,035 $ 36,000 90% May 2002 North County [San Diego] 2,042 $ 58,000 90% October 2000 Riverside 8,312 $ 121,000 90% July 2006 Temecula 5,824 $ 111,000 90% April 2006 Temecula Oncology 5,418 $ 96,000 90% Pending Thousand Oaks 8,300 $ 320,000 90% January 2001 Joint Venture ------------- Westchester 6,763 $ 256,000 50% July 2001 Other Facilities ---------------- RadNet [Corp. office] 11,500 $ 228,000 N/A May 2003 Warehouse/Other 40,657 $ 517,000 N/A Various
11 ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- (a) BACKGROUND. 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, Digial 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. 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 settlement with the plaintiff class in this lawsuit by the payment of $240,000 which was granted final court approval, in the first quarter of 1999. (b) 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 alleged 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 sought damages for an unspecified amount in excess of $25,000. The Complaint also alleged 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 had 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, were tried before a jury in Santa Monica, California, from July 28, 1999 through August 20, 1999. Having abandoned their claims for defamation and interference with existing and prospective business advantage prior to trial, plaintiffs went forward with their claim for breach of plaintiffs' professional services contract with DIS, their claim for breach of the implied covenant of good faith and fair dealing arising therefrom, their claims arising from the warrant, as well as their claims for fraud, conversion, breach of fiduciary duty, and for negligent and intentional infliction of emotional distress. During the trial, the Court granted verdict in the Company's favor on the latter claim and dismissed all punitive damages allegations. On the complaint, the jury awarded a verdict against the Company in the amount of $1,000,000 on the warrant claim, $259,345 on the claims based upon the professional services contract, $226,650 on the breach of fiduciary duty and conversion claims, $445,000 on the claim for negligent infliction of emotional distress, and interest thereon. On the cross-complaint, DIS was awarded $180,000 for breach of contract on its claim that the plaintiffs failed to deliver a valid and enforceable assignment of the leasehold premises when DIS purchased Parkside Radiology in 1994. Additionally, one of the Company's insurance 12 carriers has reimbursed the Company $691,683.42 against its attorney's fees. Both sides have sought an award of attorney fees and have filed appeals of the jury's awards against them. The Company intends to vigorously pursue its appellate rights and remedies. (c) 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 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 sought declaratory relief on claims that Sterling was not a proper assignee of the DIS contract with DuPont and thus had no standing. Sterling filed its claims as a cross-complaint in DIS's California action in April 1999. In the summer of 1999, the parties entered into settlement discussions which have resulted in a resolution of all actions. The settlement, which is in the process of being documented, requires DIS to pay Sterling $700,000 over five years on the following terms: an initial payment of $100,000, a payment of $100,000 one year later and the remaining $500,000 paid in monthly installments of $7,066.95 (starting after the first $100,000 payment) including five percent interest amortized over seven years, with a balloon payment of $161,083.34 at the end of five years. 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. 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, 1999 .27 .08 .29 .09 April 30, 1999 .16 .11 .18 .13 July 31, 1999 .21 .13 .23 .14 October 31, 1999 .15 .09 .17 .11 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 13 _____________ (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, 2000, were $.10 and $.11, respectively. As of February 1, 2000, 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 repurchased an aggregate of 325,000 shares of its outstanding common stock for an aggregate $133,220 and repurchased $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 repurchased $2,205,000 outstanding debentures for a purchase price of $1,484,943. During fiscal 1999, PHS repurchased 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, $5,000 of face value debentures were 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 its common stock to two individuals in connection with the exercise of outstanding options aggregating 325,000 shares. 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - ------- ------------------------------------
YEARS ENDED OCTOBER 31, -------------------------------------------------------------------------------- (000's except per share amounts) OPERATING DATA: 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Gross Revenues $ 170,518 $ 132,595 $ 132,569 $ 111,381 $ 88,884 Operating Expenses 70,359 75,329 74,687 58,372 98,124 [Loss] from Investee Transactions -- -- -- (314) -- Income [Loss] from Continuing Operations (9,071) (28,543) (748) (8,361) (57,616) [Exclusive of Non-Recurring Items] Net of Taxes** Income [Loss] from Discontinued Operations -- -- -- -- (3,813) Net [Loss] Income Before Extraordinary Items and (10,627) (29,497) (2,343) (9,511) (62,370) Change in Accounting Principle Extraordinary Items- Gain 1,556 955 1,595 1,150 941 Change in Accounting Principle -- (779) -- -- -- [Loss] Income Per Common Share From Continuing (.27) (.75) (.06) (.24) (1.54) Operations Before Extraordinary Items [Loss] Income Per Common Share from Discontinued .04 .02 .04 -- (.09) Operations [Loss] Income Before Extraordinary Items (.23) (.75) (.06) (.24) (1.63) Net [Loss] Income Per Common Share (.23) (.75) (.02) (.21) (1.61) Cash Dividends Per Common Share -- -- -- -- -- BALANCE SHEET DATA: 3 59 130 152 3,929 Cash and Cash Equivalents Total Assets* 72,247 62,656 86,340 105,931 66,760 Total Long-Term Liabilities 79,023 79,282 76,843 85,464 54,088 Total Liabilities 136,604 118,016 111,270 130,792 82,002 Working Capital [Deficit] (38,007) (20,191) (12,027) (22,627) (4,337) Stockholders' Equity [Deficit] (64,357) (55,360) (24,930) (24,861) (15,242)
ITEM 7. 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. 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 15 party for approximately $9,448,000. The sale resulted in a loss of approximately $3,800,000. 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 Company continues to operate RMIS which provides utilization review services. The statements of operations and cash flows for the years ended October 31, 1999, 1998 and 1997 reflect the operations and cash transactions with RMIS. 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. 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 4,130,000 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 10, 2000, the Company acquired or purchased an additional 3,472,137 shares of DIS common stock for $4,181,841 increasing its total ownership to approximately 90% [excluding treasury shares]. The Statements of Operations and Cash Flows for the years ended October 31, 1999, 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 16 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. BASIS OF PRESENTATION The financial information included in this Form 10-K has been prepared without audit (refer to report on page F-1 of financial statements included herein). In the opinion of management, financial information includes all adjustments and disclosures necessary for a fair presentation in accordance with generally accepted accounting principles. DISCUSSION OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1999 VS. OCTOBER 31, 1998 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, 1999 and 1998. For the year ended October 31, 1999, the Company had operating income from continuing operations of $1,898,524 which includes impairment losses of $478,646. For the year ended October 31, 1998, the Company had operating losses from continuing operations of $16,508,162 which includes impairment losses of $12,677,324. The Company generated gross revenue of $170,517,885 and $132,594,891 and net revenue of $72,257,665 and $58,820,543 for the years ended October 31, 1999 and 1998, respectively. During the years ended October 31, 1999 and 1998, Radnet generated gross revenue of $147,533,961 and $111,648,718, respectively, PHS generated gross billing revenue of $-0- and $215,975, respectively, and DIS generated gross revenue of $22,983,924 and $20,730,198, respectively [net of elimination entries]. During the years ended October 31, 1999 and 1998, Radnet generated net revenue of $59,845,230 and $47,555,149, respectively, RMIS generated net revenue of $-0- and $37,427, respectively, PHS generated net billing revenue of $-0- and $215,975, respectively, and DIS generated net revenue of $12,412,436 and $11,011,992, respectively [net of elimination entries]. The Company's net revenue increased approximately 23% for the year ended October 31, 1999 primarily due to the addition of new centers, including but not limited to, Redondo Imaging Center and Loma Vista, the addition or improvement of medical equipment and the addition of new contracts. 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 two 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. 17 For the years ended October 31, 1999 and 1998, operating expenses totaled $70,359,141 and $75,328,705, respectively. For the year ended October 31, 1999, Radnet's operating expenses were $55,841,840, RMIS's operating expenses were $40,080, DIS's operating expenses were $12,183,666 and PHS's overhead expenses were $2,293,556 [net of elimination entries]. 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]. During the years ended October 31, 1999 and 1998, the Company recognized impairment losses, included in operating expenses, of $478,646 and $12,677,324, respectively. For the years ended October 31, 1999 and 1998, the Company incurred expenses for salaries and professional reading fees of $30,991,224 and $25,919,490, respectively, building and equipment rental expenses of $5,562,000 and $5,412,407, respectively, general and administrative expenses of $22,124,194 and $19,978,762, respectively, provisions for bad debt of $3,110,962 and $2,698,139, respectively, and depreciation and amortization expense of $7,708,976 and $8,642,583, respectively. For the year ended October 31, 1999 and 1998, interest income was approximately $398,000 and $140,000, respectively. During fiscal 1999, no interest income was recognized on a related party note receivable in which the due date was extended to February 2002. For the years ended October 31, 1999 and 1998, interest expense was approximately $10,713,000 and $9,279,000, respectively. For the years ended October 31, 1999 and 1998, the gain on sale of subsidiaries and Divisions was approximately $-0- and $965,000 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. For the year ended October 31, 1999 and 1998, other income was approximately $398,000 and $394,000, respectively. Other income consisted primarily of professional fee income, record copy income, net gains on the sale or disposal of assets, rental income, covenant not-to-compete income and rebates. Other expenses consisted primarily of modification fee costs, discounts on notes receivable, net losses on the sale or disposal of assets and write-offs of offering costs associated with bond repurchases. During fiscal 1998, the Company also recognized a net gain of approximately $297,000 from 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. 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, 1999 and 1998, the Company had gains on early extinguishment of debt of $1,556,121 and $954,533, respectively. During the years ended October 31, 1999 and 1998, gains from the retirement of bonds were approximately $339,000 and $720,000, respectively, and gains from the settlement of notes were approximately $1,217,000 and $235,000, respectively. For the year ended October 31, 1998, the Company wrote-off capitalized fees and organization 18 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." For the years ended October 31, 1999 and 1998, the Company had net losses of $9,071,221 and $29,321,832, respectively. For the year ended October 31, 1999, Radnet realized net losses of $841,970, RMIS realized net losses of $40,080, DIS realized net losses of $3,606,927 and PHS realized net losses of $4,582,244 [net of elimination entries]. 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 and PHS realized net losses of $3,600,805 [net of elimination entries]. LIQUIDITY AND CAPITAL RESOURCES Cash decreased for the years ended October 31, 1999 and 1998 by $56,857 and $70,022, respectively. Cash utilized for investing activities for the year ended October 31, 1999 was $5,865,555. Cash generated from investing activities for the year ended October 31, 1998 was $1,282,607. During the year ended October 31, 1999, the Company purchased property and equipment for $6,657,055, acquired an additional 390,100 shares of DIS common stock for $50,000 in cash [and $437,625 in notes payable], acquired the assets of Tarzana Imaging Center ["Tarzana"] for $50,000, paid loan fees of $117,500, made loans to related parties of $80,000 and received proceeds from the sale of medical equipment of $1,089,000. 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. Cash generated from financing activities for the years ended October 31, 1999 and 1998 was $4,464,109 and $134,066, respectively. For the year ended October 31, 1999 and 1998, the Company made principal payments on notes payable and capital lease obligations of $14,527,872 and $8,077,336, respectively. The fiscal 1999 increase was primarily due to increases in obligations as well as the settlement of one of the Company's notes payable at a 20% discount utilizing proceeds borrowed from another lending source. 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, 1999 and 1998 the Company received proceeds from borrowings on lines of credit 19 and notes payable of $18,860,523 and $8,180,082, respectively. During fiscal 1999, the Company increased its lines of credit borrowing $9,719,983 from fiscal 1998 and received working capital proceeds from other outside lendors of $9,140,540. For the years ended October 31, 1999 and 1998, the Company purchased $676,000 face value subordinated bond debentures for $337,215 and purchased $2,205,000 debentures for $1,484,943, respectively. For the years ended October 31, 1999 and 1998, the Company increased its cash overdraft by $623,673 and $1,410,513, respectively. For the year ended October 31, 1999, the Company distributed $100,000 to its joint venture partner and purchased $55,000 of treasury stock. 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. At October 31, 1999 and 1998, the Company had working capital deficits of $38,007,447 and $20,191,252, respectively. The 1999 increase in working capital deficit of $17,816,195 was primarily due to the increase in net lines of credit borrowings of approximately $9,720,000 and the classification of the Company's $5,225,000 note payable for the acquisition of DIS's preferred stock from DVI [due October 31, 2000] as a current liability. Included in 1999 and 1998 current liabilities of the Company are approximately $21.6 million and $11.9 million of revolving lines of credit liabilities, respectively. The Company's future payments for debt and equipment under capital leases for the next five years, excluding operating lines of credit, will be approximately $46,050,000, $20,900,000, $16,225,000, $15,000,000 and $11,550,000. Interest expense, excluding interest expense on operating lines of credit, for the Company for the next five years, included in the above payments, will be approximately $6,700,000, $4,900,000, $3,425,000, $2,200,000 and $1,025,000, 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 $4,000,000 in annual payments over the next five years. The Company estimates interest payments on its bond debentures to be approximately $1,995,000 for fiscal 2000. 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 10, 2000, the Company purchased $84,000 face value bond debentures for $43,680. The Company will retire all of these bonds. The Company's working capital needs are currently provided under three lines of credit. Under one agreement with Coast Business Credit, due December 31, 2001, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, $20,000,000 or the prior 120-days' cash collections. In any scenario, the Company may borrow up to the aggregate collection of receivables in the prior 120-days as long as the collections in any one month do not decrease by more than 25% from the prior month. 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 [Beverly Radiology'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. At October 31, 1999, approximately $16,100,000 was outstanding under this line. Under a second line of credit with DVI Business Credit, 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, 1999, approximately $2,200,000 was outstanding under this line. 20 The Company entered into an additional line of credit agreement with DVI Business Credit, due October 31, 2000, where 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, 1999, approximately $3,300,000 was outstanding under this line. As of October 31, 1999, the bank's prime rate was 8.25%. Under the various formulas, total funds available for borrowing under the three lines of credit was approximately $4.2 million at October 31, 1999. OPERATING PLANS The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has experienced recurring losses from operations and has a deficiency in equity of $64,357,000 and a working capital deficiency of $38,007,000, which raise substantial doubt about its ability to continue as a going concern. Over the past several years, management has been addressing the issues that have led to these deficiencies. Results of management's plans and efforts have been positive, as indicated by recent improvement in operating income, however, continued effort is planned in the future to allow the Company to continue to operate and ultimately return the Company to profitability. Such actions and plans include: - - Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In November 1999, the Company opened a new center in Long Beach, California, which has experienced favorable performance in its initial months of operations. - - Increase revenue by negotiating new and existing managed care contracts for additional services and more favorable terms. In January 2000, the Company entered into three new capitation contracts that will significantly increase business in at least four Southern California facilities. - - Increase revenue through new fee for service arrangements where opportunities exist. In January 2000, the Company was successful in negotiating a new fee for service arrangement that will substantially increase patient volume in four Southern California facilities. - - Consolidate underperforming facilities to reduce operating cost duplication. - - Continue to evaluate all facilities' operations and trim excess operating costs as well as general and administrative costs where it is feasible to do so. - - Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. In 1999, this was done in many of the facilities, resulting in increased revenue. - - Selectively seek opportunities to hire physicians who have the requisite skills and knowledge to deliver new and additional services where deficiencies have been identified in underperforming facilities. - - Continue to work with lessors and lenders to extend terms of leases and financing to accommodate cash flow requirements for ongoing agreements and upon the expiration of leases and notes. The company has demonstrated success doing so in the past, and in December 1999, successfully refinanced a portion of existing notes and obtained additional working capital. 21 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]. 22 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." 23 NEW AUTHORITATIVE PRONOUNCEMENTS 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. 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 prepared its systems and applications for the year 2000 (Y2K) through its Company wide Y2K program. The issue the Y2K program addressed was the use of a two-digit year field instead of a four digit year field in computer systems. If computer systems cannot distinguish between the year 1900 and the year 2000, system failures or other computer errors could result. To date, the Company is not aware of the occurrence of any significant Y2K problems being reported. The Company estimates it expended somewhat less than the $100,000 it estimated it might incur in connection with Y2K expenses. Any further expenditures necessary would likely be in connection with verification of third party interface with the Company's systems. 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 on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS - ------- --------------------------------------------- See Form 8-K and Amendment No. 1 to From 8-K filed for the event of December 1, 1999 with respect to information concerning the change in the Company's Accountants. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- The following table sets forth certain information with respect to each of the directors and those executive officers of the Company performing a policy-making function for PHS as of February 1, 2000:
Name Age Director or Officer Since Position with Company - ---- --- ------------------------- --------------------- Howard G. Berger, M.D.* 54 1992 President, Treasurer, Chief Executive and Financial Officer, and Director Norman R. Hames 42 1996 Vice President, Secretary, Chief Operating Officer and Director Jaana Shellock* 37 1996 Director Michael J. Krane, M.D. 55 1992 Vice President, Director of Medical Operations
- -------- *Member of the Stock Option Committee The following is a brief account of the business experience of each PHS director and executive officer during the past five years. HOWARD G. BERGER, M.D. is the President and Chief Executive Officer of PHS. Dr. Berger is the 99% owner of BRMG which supplies the medical services at a number of the Company's imaging centers. Dr. Berger has been principally engaged since 1987 in the same capacities for the predecessor entities. (See Item 13.) Dr. Berger also serves as a director of Diagnostic Imaging Services, Inc. NORMAN R. HAMES, was a founder of Diagnostic Imaging Services, Inc. and has since 1986, served as the president and a director of that entity. JAANA SHELLOCK has, since 1989, served as the president and a director of Future Diagnostics, Inc. MICHAEL J. KRANE, M.D. is the vice president and director of medical operations at RadNet. Dr. Krane has been principally engaged since 1987 in the same capacities for the predecessor entities. None of the Company's directors serve as directors of any other corporation with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act, except Dr. Berger and Mr. Hames who serve as officers and directors of Diagnostic Imaging Services, Inc. Furthermore, none of the events described in Item 401(f) of Regulation S-K involving a director or an executive officer of the Company occurred during the past five years. The officers are elected annually and serve at the discretion of the Board of Directors. There are no family relationships among any of the officers and directors. During the fiscal year ended October 31, 1999, while the Board of Directors held numerous meetings, they took board action by unanimous written consent, which was done on one occasion. All directors participated in all such action. The Board of Directors intends to establish an Audit Committee, which reviews the results and scope of the audit and other services provided by the Company's independent auditors, and a compensation committee, which makes recommendations concerning salaries and incentive compensation for employees of and consultants to the Company. 25 COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Company believes that with respect to fiscal 1997, all Section 16(a) filing requirements applicable to its officers, directors and beneficial owners of more than 10% of its equity securities were complied with. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The following table sets forth information concerning the compensation earned during the three years ended on October 31, 1999 by any individual serving as the Company's Chief Executive Officer at any time during fiscal 1999 and by any other executive officer of the Company who earned at least $100,000 during fiscal 1999.
SUMMARY COMPENSATION TABLE Annual Compensation(1) Long-Term Compensation ----------------------------------------------- ------------------------------------------------------ Other Securities Restricted Name and Year Ended Annual Underlying Stock LTIP All Other Principal Position 10/31 Salary($)(2) Bonus($) Comp.($) Options (#) Awards($) Pay-outs($) Comp($) - ------------------ ----- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Howard G. Berger, M.D. 1999 $ 75,000 -- -- -- -- -- -- Chief Executive Officer 1998 $ 100,000 -- -- -- -- -- [beginning 9/1/96] 1997 $ 78,000 -- -- -- -- -- -- Norman Hames Vice President, Secretary 1999 $ 150,000 -- -- -- -- -- and Chief Operating Officer 1998 $ 139,000 -- -- -- -- -- of PHS and President of DIS 1997 $ 150,000 -- -- -- -- -- -- Michael J. Krane, M.D. 1999 $ 100,000 -- -- -- -- -- -- Vice President 1998 $ 96,000 -- -- -- -- -- -- 1997 $ 103,846 -- -- -- -- --
(1) The dollar value of perquisites and other personal benefits, if any, for each of the named executive officers was less than the reporting thresholds established by the Securities and Exchange Commission. (2) Does not include $300,000 per annum received from Beverly Radiology Medical Group (see "Employment Contracts"). 26 EMPLOYMENT CONTRACTS As of January 1, 1994, Beverly Radiology Medical Group entered into an eight year Management Consulting Agreement with Howard G. Berger, M.D. whereby Dr. Berger agreed to serve as the chief executive for the partnership entities for $300,000 per year. Norman Hames has an employment agreement with Diagnostic Imaging Services, Inc. ending in 2001 whereby he serves as president of that company and receives annual compensation of $150,000. STOCK OPTIONS During the fiscal year ended October 31, 1999, no options were granted to a person who served as chief executive officer of PHS during such year or to a PHS executive officer, or chief executive officer of a PHS subsidiary, who earned at least $100,000 in compensation during such year. At October 31, 1999, the Company had an Incentive Stock Option Plan in force. Under the Plan, an aggregate 2,000,000 shares of Common Stock are reserved for issuance upon exercise of outstanding incentive stock options. Outstanding options are held by eight Company employees at exercise prices ranging from $.15 to $.53 per share. Other than the warrants held by Norman Hames (see "Item 13. Certain Relationships and Related Transactions") there are no options outstanding at October 31, 1999, held by the individuals named in the Summary Compensation Table. DIRECTOR COMPENSATION Directors do not receive a fee for their services as a director. 27 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1999 all executive compensation has been determined by the three member board of directors of PHS, Howard G. Berger, M.D., Norman Hames and Jaana Shellock. In addition, no individual who served as an executive officer of the Company during fiscal 1997, served during fiscal 1999 on the board of directors or compensation committee of another entity where an executive officer of the other entity also served on the board of directors of the Company, except that Howard G. Berger, M.D., chairman and president of RadNet and Norman Hames, vice president and a director of the Company serves as a director and as president and a director of Diagnostic Imaging Services, Inc., respectively. See "Summary Compensation Table" herein in this Item 11 and Item 13 herein as to transactions involving the Company and Dr. Berger and Mr. Hames. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- The following table sets forth certain information regarding the beneficial ownership of PHS Common Stock as of February 1, 2000, by (i) each holder known by the Company to beneficially own more than five percent of the outstanding Common Stock, (ii) each of the Company's directors and executive officers [including officers listed in the Summary Compensation Table] as a group. The percentages set forth in the table have been calculated on the basis of treating as outstanding, for purposes of computing the percentage ownership of a particular holder, all shares of PHS Common Stock outstanding at such date and all shares of Common Stock purchasable upon exercise of options and warrants owned by such holder which are exercisable at or within 60 days after such date. Name of Shares of Common Stock Beneficial Owner Beneficially Owned(1) Percent of Class - ---------------- --------------------- ---------------- Howard G. Berger, M.D.* 12,809,428(2) 26.6% Jaana Shellock* 500,000(3) 1.0% Norman Hames* 2,913,550(4) 6.1% Michael J. Krane, M.D. 2,216,228 4.6% All directors and executive officers of the Company as a group [four persons] 18,439,206(5) 38.3% - ----------- *The address of all of the Company's officers and directors is c/o the Company, 1516 Cotner Avenue, Los Angeles, California 90025. (1) Subject to applicable community property statutes and except as otherwise noted, each holder named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned. (2)Includes 343,200 shares issuable upon conversion of PHS outstanding convertible debentures convertible at $10 per share. On June 5, 1995, Howard G. Berger, M.D. president and a director of PHS consummated the purchase of 10,000,000 shares of PHS' common stock from Robert E. Brennan, PHS' then principal shareholder. The purchase price for the shares was $.14 per share or $1,400,000 in the aggregate consisting of (a) a $300,000 cash payment paid by Dr. Berger using personal funds, (b) Dr. Berger's five-year 8% promissory note in the principal amount of $700,000 and (c) the assignment by Dr. Berger of rights to receive 2,466,228 shares of CareAd Common Stock upon the Distribution of same. Mr. Brennan also had the right to receive additional payments based upon future market prices for PHS' common stock equal to 25% of the difference between the market price for the shares sold and the initial $.14 purchase price per share, payable at various times over a nine-year period. As Dr. Berger was granted the right to make "additional payments" in cash or in shares of PHS' common stock [or combination thereof], Mr. Brennan was granted certain rights to register any stock so transferred to him as additional payments under the Securities Act of 1933, at PHS' expense, so as to permit the public offer and 28 sale of such shares. On August 7, 1995, Mr. Brennan filed for bankruptcy under Chapter 11. On June 10, 1998, the trustees in the bankruptcy proceeding commenced a legal action to impose a trust over the PHS common stock and to require the Company to pay the estate $1,000,000 plus interest from August 1994. In September 1999, all rights of Mr. Brennan were terminated in exchange for Dr. Berger's payment of $488,872.34 and the Company's delivery of all 283,334 shares of CareAd Common Stock owned by the Company. (3)Represents options exercisable at $.15 per share. (4)Represents options exercisable at $.60 per share. (5)See the above footnotes. Includes 12,216,228 shares owned of record and 3,756,750 shares issuable upon exercise of presently exercisable options and convertible debentures. As a result of his stock ownership and his positions as president and a director of the Company, Howard G. Berger, M.D. may be deemed to be a controlling person of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- Howard G. Berger, M.D. [see "Items 10 and 12"] is the 99% owner of Beverly Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc., who together have formed the partnership known as Beverly Radiology Medical Group, which has executed a Management and Services Agreement with RadNet and DIS pursuant to which it supplies the professional medical services at most of the Company's imaging centers and Temecula Oncology Center [see "Item 1] through 2002. In April 1996, the Company renegotiated the Agreement with BRMG whereby the management fees paid to the Company by BRMG were increased from 79% of collections to 81% in consideration of the Company's payment to BRMG of $1,100,000. The amount paid was determined based upon the discounted value of the estimated additional benefit to the Company over the remaining term of the agreement of the increased percentage to be received by the Company. In fiscal 1999, Dr. Berger was paid $ 300,000 and Dr. Krane was paid $150,000 by BRMG. At October 31, 1995 Howard G. Berger and Michael J. Krane were each indebted to PHS in the amount of $1,500,000 based on loans extended to Drs. Berger and Krane at the time of the Company's acquisition of RadNet in June 1992. In April 1996, Dr. Krane discharged his obligation by paying the Company $1,400,000 and agreeing to renegotiate his employment contract with the Company to provide for reduced compensation and a reduced time commitment. Dr. Berger, in August 1996, paid $500,000 against his obligation. In consideration of the early payment the Company offered to extend the remaining one million dollars due to February 1998. The note has been extended to February 28, 2002. On August 1, 1996, the Company acquired from Norman Hames, [not then an officer or director of the Company] all of his common stock and warrants to purchase shares of common stock of Diagnostic Imaging Services, Inc., a Delaware corporation [3,042,704 shares] which then represented 21.6% of the outstanding shares of that entity in exchange for five year warrants to purchase 2,913,550 shares of the Company's common stock at $.60 per share as well as the Company's five year promissory note, payable interest only annually at 6.58% for $2,448,862. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------- ---------------------------------------------------------------
(a) FINANCIAL STATEMENTS - The following financial statements are filed herewith: Page No. -------- Independent Auditor's Report....................................................................... F-1 Consolidated Balance Sheets........................................................................ F-2 29 Consolidated Statements of Operations.............................................................. F-3 Consolidated Statements of Stockholders' Deficit................................................... F-4 Consolidated Statements of Cash Flows.............................................................. F-5 to F-7 Notes to Consolidated Financial Statements......................................................... F-8 to F-27 SCHEDULES - The Following financial statement schedules are filed herewith: Independent Auditor's Report on Supplemental Schedule.............................................. S-1 Schedule II - Valuation and Qualifying Accounts.................................................... S-2 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) EXHIBITS - The following exhibits are filed herewith or incorporated by reference herein:
Incorporated by Exhibit No. Description of Exhibit Reference to - ----------- ---------------------- ------------ 3.1.1 Certificate of Incorporation as amended (A) 3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A) 3.2 By-laws 4.1 Form of Common Stock Certificate (AA) 4.2 Form of Indenture between Registrant and American Stock Transfer and Trust Company as Incorporated by Indenture Trustee with respect to the 10% Series A Convertible Subordinated Debentures due 2003 (B) 4.3 Form of 10% Series A Convertible Subordinated Debenture Due 2003 [Included in Exhibit 4.2] (B) 10.1 Agreement and Plan of Reorganization, dated as of April 30, 1992 by and among PHS, CCC Franchising Acquisition Corp. II ["New RadNet"], RadNet Management, Inc., Beverly Hills MRI, Dr. Berger and Dr. Krane (C) 10.2 Partnership Purchase Agreement, dated as of April 30, 1992 by and among PHS, New RadNet and Dr. Berger and Dr. Krane (C)
30
10.3 Promissory Note dated June 12, 1992 ["Purchaser Note"] issued by New RadNet in the principal amount of $10,000,000 payable to Dr. Berger ["Purchaser Note"]. [An identical note payable to Dr. Krane was issued to him.] (C) 10.4 PHS Guarantee, dated as of June 12, 1992, of payment of the Purchaser Notes (C) 10.5 Stock Pledge Agreement, dated as of June 12, 1992 pursuant to which PHS as pledgor pledged the outstanding capital stock of New RadNet to Drs. Berger and Krane to secure its guarantee (C) 10.6 Secured Promissory Note, dated June 12, 1992 ["Sellers' Note"] issued by Drs. Berger and Krane, jointly in the principal amount of $6,000,000 payable to New RadNet (C) 10.7 Stock Pledge Agreement dated as of June 12, 1992 pursuant to which Drs. Berger and Krane as pledgors pledged the 5,000,000 shares of PHS Common Stock issued to them in the acquisition, to PHS to secure repayment of the Sellers' Note (C) 10.8 Employment Agreement dated as of June 12, 1992 between New RadNet and Howard G. Berger. [Dr. Krane executed a substantially identical employment agreement with New RadNet on said date.] (C) 10.11 Asset Purchase Agreement dated as of October 1, 1994 between the Tower Group and RadNet Sub (D) 10.12 Management Agreement dated as of October 1, 1994 between the Tower Group and RadNet Sub (D) 10.15 Stock Purchase Agreement dated as of November 9, 1993 for the acquisition of Advantage Health Systems, Inc. ["AHS"] between PHS, John T. Lincoln and Paul G. Shoffeitt (D) 10.16 Employment Services Agreement dated November 9, 1993 between AHS and Paul G. Shoffeitt [John T. Lincoln executed a similar employment services agreement with AHS on the same date] (D) 10.17 Deposit Agreement for stock dividend of CareAd common stock dated October 31, 1994 and Midlantic bank, N.A., PHS and CareAd (D) 10.18 Separation Agreement dated January 31, 1995 between PHS and CareAd (D) 10.19 Separation Agreement dated April 20, 1995 between PHS and CareAd (E) 10.20 Stock Purchase Agreement made as of June 2, 1995 among PHS, CareAd, Howard G. Berger and Robert E. Brennan (E) 10.21 Medical Receivable Purchase and Sale Agreement made as of July 31, 1995 between Bristol A/R and Primedex Corporation [relating to the sale of the Primedex Corporation portfolio of workers' compensation receivables] (F) 10.22 Employment Agreement dated as of September 14, 1995 between PHS and Steven R. Hirschtick (G) 10.24 Incentive Stock Option Agreement dated as of July 21, 1995 between PHS and Steven R. Hirschtick (G)
31
10.25 Stock Purchase Agreement dated as of November 14, 1995 among PHS, RadNet Managed Imaging Services, Inc. ["RMIS"], Future Diagnostics, Inc. ["FDI"] and the shareholders of FDI relating to the purchase by RMIS of all of the outstanding stock of FDI (G) 10.26 Securities Purchase Agreement dated March 22, 1996, between the Company and Diagnostic Imaging Services, Inc. (G) 10.27 Stockholders Agreement by and among the Company, Diagnostic Imaging Services, Inc. and Norman Hames (G) 10.28 Securities Purchase Agreement dated June 18, 1996 between the Company and Norman Hames (G) 10.29 Stock Purchase Agreement dated September 3, 1997 between the Company and Preferred Health Management, Inc. whereby the Company sold its Future Diagnostics, Inc. subsidiary (H) 10.30 Consulting Agreement and Stock Put with Steven R. Hirschtick (I)
- ------------------ (A) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-1 [File No. 33-51870]. (AA) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-3 [File 33-73150]. (B) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-3 [File No. 33-59888]. (C) Incorporated by reference to exhibit filed in an amendment to Form 8-K report for June 12, 1992. (D) Incorporated by reference to exhibit filed with PHS' annual report on Form 10-K for the year ended October 31, 1994. (E) Incorporated by reference to exhibit filed with PHS' Form 8-K report for June 5, 1995. (F) Incorporated by reference to exhibit filed with PHS' Form 8-K report for August 4, 1995. (G) Incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 1996. (H) Incorporated by reference to exhibit filed with Form 8-K report for September 8, 1997. (I) Incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 1997. 32
22 Subsidiaries PHS % Ownership State of Incorporation ------------ --------------- ---------------------- RadNet Management, Inc. 100% California RadNet Managed Imaging Services, Inc. 100% California RadNet Sub, Inc. (1) California Diagnostic Imaging Services, Inc. 90% Delaware
-- (1) Wholly-owned subsidiary of RadNet Management, Inc. (c) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended October 31, 1998. 33 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors of Primedex Health Systems, Inc. We have audited the accompanying consolidated balance sheets of Primedex Health Systems, Inc. and affiliates as of October 31, 1999 and the related consolidated statement of operations, stockholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Primedex Health Systems, Inc. and affiliates as of October 31, 1999, and the consolidated results of their operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 18 the Company has experienced recurring losses from operations, and has a substantial deficit of capital and working capital. These matters raise substantial doubt about the company's ability to continue as a going concern. Management's plans with regard to these matters are also described in Note 18. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The accompanying consolidated balance sheet as of October 31, 1998, and the consolidated statements of operations, stockholders' deficit, and cash flows for the years ended October 31, 1998 and 1997 were previously reported upon by other auditors, whose report dated January 15, 1999 expressed an unqualified opinion on those statements. In March 1999, the Securities and Exchange Commission ruled that the auditors were not independent and therefore not in compliance with the requirements of the federal securities laws and Rule 2-01 of Regulation S-X, and that the financial statements reported upon are considered to be unaudited. We have not audited the 1998 and 1997 financial statements and, accordingly, express no opinion or other form of assurance on them. MOSS ADAMS LLP Los Angeles, California January 28, 2000 - -------------------------------------------------------------------------------- F-1 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 1999 - ----------------------------------------------------------------------------------------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 59,495 $ 2,638 Accounts receivable, net 15,429,057 16,694,368 Unbilled receivables and other receivables 58,545 441,208 Due from related party 140,000 206,200 Other 1,940,230 1,628,999 ------------- ------------- Total current assets 17,627,327 18,973,413 ------------- ------------- PROPERTY AND EQUIPMENT, net 26,970,584 37,666,620 ------------- ------------- OTHER ASSETS Accounts receivable, net 3,713,956 3,040,416 Due from related parties 133,260 87,795 Goodwill, net 11,313,907 10,594,678 Other 2,897,380 1,883,917 ------------- ------------- Total other assets 18,058,503 15,606,806 ------------- ------------- $ 62,656,414 $ 72,246,839 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Cash overdraft $ 1,729,994 $ 2,353,667 Accounts payable, accrued expenses and other 11,500,158 15,085,479 Current portion of notes and leases payable 24,388,427 39,341,714 Deferred revenue 200,000 200,000 ------------- ------------- Total current liabilities 37,818,579 56,980,860 LONG-TERM LIABILITIES Subordinated debentures payable 20,718,000 20,037,000 Notes payable to related party 2,553,854 2,553,854 Notes and leases payable, net of current portion 54,143,158 54,882,513 Accrued expenses 399,872 283,024 Deferred revenue 1,466,666 1,266,666 ------------- ------------- Total long-term liabilities 79,281,550 79,023,057 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 676,114 440,063 REDEEMABLE STOCK 240,000 160,000 STOCKHOLDERS' DEFICIT (55,359,829) (64,357,141) ------------- ------------- $ 62,656,414 $ 72,246,839 ============= =============
- -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-2 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997 1998 1999 - -------------------------------------------------------------------------------------------------------------- (unaudited) (unaudited) REVENUE Revenue $132,569,387 $132,594,891 $170,517,884 Less: Allowances 65,550,880 73,774,348 98,260,219 ------------- ------------- ------------- Net revenue 67,018,507 58,820,543 72,257,665 OPERATING EXPENSES Operating expenses 58,724,827 51,310,658 59,060,558 Depreciation and amortization 8,783,419 8,642,584 7,708,976 Provision for bad debts 1,962,837 2,698,139 3,110,961 Restructuring costs 662,026 - - Impairment loss on long-lived assets 4,553,783 12,677,324 478,646 ------------- ------------- ------------- Total operating expenses 74,686,892 75,328,705 70,359,141 ------------- ------------- ------------- Income (loss) from operations (7,668,385) (16,508,162) 1,898,524 ------------- ------------- ------------- OTHER INCOME (EXPENSE) Interest expense, net (9,549,337) (9,138,911) (10,674,256) Financing costs - (5,207,900) - Loss on legal judgments and settlements - - (2,455,995) Gain on sale of subsidiaries, divisions and assets 16,082,302 965,616 70,214 Other (637,850) 393,898 398,119 ------------- ------------- ------------- Total other income (expense) 5,895,115 (12,987,297) (12,661,918) ------------- ------------- ------------- LOSS BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,773,270) (29,495,459) (10,763,394) ------------- ------------- ------------- MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (569,931) (1,612) 136,052 ------------- ------------- ------------- LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (2,343,201) (29,497,071) (10,627,342) EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT (NET OF INCOME TAXES OF $-0-) 1,595,106 954,533 1,556,121 ------------- ------------- ------------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (748,095) (28,542,538) (9,071,221) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF INCOME TAXES OF $-0-) - (779,294) - ------------- ------------- ------------- NET LOSS $ (748,095) $(29,321,832) $ (9,071,221) ============= ============= ============= BASIC EARNINGS PER SHARE Loss before extraordinary gain and change in accounting principle $ (0.06) $ (0.75) $ (0.27) Extraordinary gain 0.04 0.02 0.04 Change in accounting principle - (0.02) - ------------- ------------- ------------- BASIC NET LOSS PER SHARE $ (0.02) $ (0.75) $ (0.23) ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 38,853,904 39,069,178 38,973,908 ============= ============= =============
- -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-3 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 - -------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value, ----------------------------- 100,000,000 shares authorized Treasury Stock, at cost ----------------------------- Paid-in ---------------------------- Shares Amount Capital Shares Amount ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1996 40,232,260 $ 402,322 $ 99,411,150 (1,300,000) $ (481,727) (unaudited) Issuance of common stock 200,000 2,000 23,000 - - Amortization and write-off of deferred compensation - - - - - Purchase of treasury stock - - - (325,000) (133,220) Net loss - - - - - ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1997 40,432,260 404,322 99,434,150 (1,625,000) (614,947) (unaudited) Issuance of common stock 325,000 3,250 57,500 - - Common stock subscribed - - - - - Issuance of stock put - - (240,000) - - Reclass due from related party - - - - - Net loss - - - - - ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1998 40,757,260 407,572 99,251,650 (1,625,000) (614,947) (unaudited) Conversion of subordinated debentures to common stock 500 5 4,995 - - Purchase of stock put - - 80,000 (200,000) (80,000) Discounted note, net - - - - - Net loss - - - - - ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1999 40,757,760 $ 407,577 $ 99,336,645 (1,825,000) $ (694,947) ============= ============== ============= ============= ============= (CONTINUED BELOW) Stock Total Deferred Accumulated Due from Subscription Stockholders' Compensation Deficit Related Party Receivable Deficit ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1996 $ (788,025) $(123,405,034) $ - $ - $(24,861,314) (unaudited) Issuance of common stock - - - - 25,000 Amortization and write-off of deferred compensation 788,025 - - - 788,025 Purchase of treasury stock - - - - (133,220) Net loss - (748,095) - - (748,095) ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1997 - (124,153,129) - - (24,929,604) (unaudited) Issuance of common stock - - - - 60,750 Common stock subscribed - - - (30,000) (30,000) Issuance of stock put - - - - (240,000) Reclass due from related party - - (899,143) - (899,143) Net loss - (29,321,832) - - (29,321,832) ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1998 - (153,474,961) (899,143) (30,000) (55,359,829) (unaudited) Conversion of subordinated debentures to common stock - - - - 5,000 Purchase of stock put - - - - - Discounted note, net - - 68,909 - 68,909 Net loss - (9,071,221) - - (9,071,221) ------------- -------------- ------------- ------------- ------------- BALANCE - OCTOBER 31, 1999 $ - $(162,546,182) $ (830,234) $ (30,000) $(64,357,141) ============= ============== ============= ============= =============
- -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-4 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997 1998 1999 - -------------------------------------------------------------------------------------------------------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (748,095) $(29,321,832) $ (9,071,221) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,783,419 8,642,584 7,708,976 Amortization of management fee modification 143,296 161,070 181,049 Write-off offering costs 187,524 138,811 34,818 Amortization of purchase discount (889,083) (946,542) (378,600) Minority interest in income (loss) of subsidiaries 569,931 1,612 (136,052) Provision for bad debts and allowance adjustments 1,505,344 1,346,272 2,039,434 Loss (gain) on sale of assets, subsidiaries and divisions (15,257,769) (743,493) (70,214) Provision for restructuring 662,026 - (55,000) Imputed interest (income) expense (96,247) (131,918) 190,823 Deferred revenue - covenant not-to-compete (133,334) (200,000) (200,000) Write-off of deposits and other assets 258,748 37,849 - Gain of sale of marketable securities - (297,376) - Write down of long-lived assets 4,553,783 12,677,324 478,646 Financing costs - 5,207,900 - Loss on legal judgments and settlements - - 2,455,995 Loss on write down of related party receivable - - 68,909 Extraordinary gain, change in accounting principle, and discontinued operations (1,752,198) (175,239) (1,555,588) Changes in assets and liabilities: Other assets (218,731) (648,269) 253,738 Accounts receivable 479,918 1,696,031 (2,593,204) Unbilled receivables (402,682) 683,172 (407,314) Due to/from related parties (88,567) - - Accounts payable, accrued expenses and other liabilities (426,795) 385,349 2,196,955 ------------- ------------- ------------- Net cash from operating activities (2,869,512) (1,486,695) 1,142,150 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of imaging centers - net of cash acquired (2,131,498) (1,739,120) (100,000) Purchase of property and equipment (3,098,179) (3,089,632) (6,657,055) Proceeds from sale of divisions, centers, and equipment 26,001,073 3,144,217 1,089,000 Loan fees - - (117,500) Proceeds from sale of marketable securities - 3,082,627 - Proceeds from dissolution of partnership - 94,515 - Loans to related parties (30,000) (235,000) (80,000) Receipts from related parties - 25,000 - ------------- ------------- ------------- Net cash from investing activities 20,741,396 1,282,607 (5,865,555) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft 68,689 1,410,513 623,673 Principal payments on notes and leases payable (17,741,045) (8,077,336) (14,325,433) Proceeds from short and long-term borrowings 2,373,554 8,180,082 18,860,523 Purchase of treasury stock (133,220) - (55,000) Purchase of subordinated debentures (1,984,093) (1,484,943) (337,215) Proceeds from issuance of common stock - 30,750 - Joint venture proceeds - 75,000 - Joint venture distributions (478,122) - (100,000) ------------- ------------- ------------- Net cash from financing activities (17,894,237) 134,066 4,666,548 ------------- ------------- ------------- NET DECREASE IN CASH (22,353) (70,022) (56,857) CASH, beginning of period 151,870 129,517 59,495 ------------- ------------- ------------- CASH, end of period $ 129,517 $ 59,495 2,638 ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for Interest $ 10,070,345 $ 9,290,539 $ 10,719,283 ============= ============= ============= Income taxes $ - $ - $ - ============= ============= =============
- -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-5 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED OCTOBER 31, 1997, 1998 AND 1999 - -------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCIAL ACTIVITIES - The Company entered into capital leases or financed equipment through notes payable for approximately $12,000,000, $4,780,000 and $5,965,000 for the years ended October 31, 1999, 1998 and 1997, respectively. During the year ended October 31, 1999, the Company acquired the assets of an entity for $72,500 and recorded the liability as accrued expenses. During the year ended October 31, 1998, the Company wrote-off approximately $1,565,000 in net property and equipment, $285,000 in net accounts receivable, $735,000 in net goodwill, $19,000 in other assets, $865,000 in notes and lease obligations, $160,000 in other current liabilities and $398,000 of minority interest related to the sale of a joint venture. During the year ended October 31, 1998, the Company dissolved a partnership and upon the dissolution, the Company wrote-off approximately $270,000 of accounts receivable, $365,000 in net property, $155,000 of accrued expenses and $435,000 in minority interests. During the year ended October 31, 1998, the Company wrote-off approximately $4,008,000 in net property and equipment, $13,840,000 in net goodwill, $37,000 in other tangible assets and recorded an impairment loss of $17,885,000. During the year ended October 31, 1997, the Company wrote-off approximately $1,515,000 in net property and equipment, $2,875,000 in net goodwill, $230,000 in other assets and $785,000 in deferred compensation related to the closure of a service facility. The Company recorded an impairment loss of approximately $4,550,000 during the year ended October 31, 1997 after receiving $400,000 in exchange for the assets subsequent to closing the center. During the year ended October 31, 1997, the Company acquired the assets and related liabilities of an entity, and the Company recorded approximately $2,075,000 in net property and equipment, $725,000 in other receivables, and $2,600,000 in notes payable and capital leases related to the sale of the Ultrasound Division and four of its hospital-based MRI facilities. During the year ended October 31, 1999, $5,000 face value subordinated bond debentures were converted into 500 shares of the Company's common stock. During the year ended October 31, 1998, the Company issued 300,000 shares of common stock and recorded $30,000 as due from related parties. - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-6 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED OCTOBER 31, 1997, 1998 AND 1999 - -------------------------------------------------------------------------------- During the year ended October 31, 1997, the Company issued 200,000 shares of common stock and recorded $25,000 as due from employee. During the year ended October 31, 1999, a prior employee exercised his stock put for 200,000 shares of the Company's common stock at $.40 per share. As part of the transaction, $25,000 in prior loans due from this related party were utilized as payment. During the year ended October 31, 1998, the Company received medical equipment of approximately $730,000 in lieu of cash rebates from a vendor. During the year ended October 31, 1998, the Company issued a stock put and recorded $240,000 as redeemable stock and a decrease to paid-in capital. During the years ended October 31, 1999 and 1998, the Company recorded goodwill and notes payable of approximately $429,000 and $325,000, respectively, to acquire shares of a subsidiary's common stock. During the year ended October 31, 1999, the Company financed $688,410 of accounts payable and accrued liabilities as long-term debt. During the year ended October 31, 1999, the Company received $942,645 in credits for equipment returns and trade-ins which was offset against the outstanding debt. - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-7 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- THE ACCOMPANYING FINANCIAL STATEMENTS FOR 1998 AND 1997 AND RELATED FOOTNOTES HAVE BEEN PREPARED WITHOUT AUDIT. IN THE OPINION OF MANAGEMENT, SUCH FINANCIAL STATEMENTS INCLUDE ALL ADJUSTMENTS AND DISCLOSURES NECESSARY FOR PRESENTATION IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. NOTE 1 - NATURE OF BUSINESS Primedex Health Systems, Inc., incorporated on October 21, 1985, provides diagnostic imaging services in the state of California. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPALS OF CONSOLIDATION - The consolidated financial statements include the accounts of Primedex Health Systems, Inc.; Radnet Management, Inc.; Diagnostic Imaging Services, Inc.["DIS"]; Primedex Corporation and Radnet Managed Imaging Services, Inc.["Radnet"] (collectively referred to as "the Company"). Radnet Management, Inc. is combined with Beverly Radiology Medical Group III ["BRMG"] and consolidated with Radnet Sub, Inc., Woodward Park Imaging Center and Westchester Imaging Group (a joint venture). Diagnostic Imaging Services is consolidated with a joint venture Scripps Chula Vista Imaging Center, L.P, which was sold during the year ended October 31, 1998. Radnet Managed Imaging Services, Inc is consolidated with Future Diagnostics, Inc, which was sold during the year ended October 31, 1997. Operating activities of subsidiary entities are included in the accompanying financial statements from the date of acquisition. All intercompany transactions and balances have been eliminated in consolidation and combinations. Medical services and supervision at most of the Company's imaging centers are provided through BRMG and through other independent physicians and physician groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly Radiology Medical Group, both of which are 99% owned by a shareholder and president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical, technical and administrative services to BRMG for which they receive a management fee. CASH AND CASH EQUIVALENTS - For purposes of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates their fair market value. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization and valuation impairment allowances. Depreciation and amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 39 years. Leasehold improvements are amortized over their estimated useful life, which range from 10 to 20 years. - -------------------------------------------------------------------------------- F-8 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are stated at gross amounts billed, less allowances. A significant portion of the Company's accounts receivable involve third-party payors, primarily insurance companies. The collection cycle on accounts receivable from continuing operations extends up to 36 months, with most personal injury cases having the longest collection cycle. The current portion of accounts receivable are the amounts which are reasonably expected to be collected within one year, based upon historical collection data. Accounts receivable as of October 31, 1999, are shown net of contractual allowances and allowances for doubtful accounts totaling $30,099,367, of which $25,304,788 has been deducted from current receivables and $4,794,579 has been deducted from noncurrent receivables. Accounts receivable as of October 31, 1998, are shown net of contractual allowances and allowances for doubtful accounts of $24,790,058, of which $19,980,513 has been deducted from current receivables and $4,809,545 has been deducted from noncurrent receivables. INTANGIBLES - Goodwill is recognized in certain business combinations and represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is amortized using the straight-line method over twenty years. Offering costs, loan fees, covenants not to compete and management fee reduction buyout are recorded at cost and amortized over the estimated useful lives which range from one to twenty years. REVENUE RECOGNITION - NET PATIENT SERVICE REVENUE - Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services in the period in which services are provided. Billing is usually completed by the following month. Gross revenue for the period ending October 31, 1999 was approximately $159,978,000. PREPAID PLAN REVENUE - The company contracts with health maintenance organizations and other third parties to provide health care services to plan enrollees. Under the various contracts, the Company receives a per enrollee amount (capitated payment) each month covering all contracted services needed by the plan enrollees. Capitation payments are recognized as premium revenue during the period in which the Company is obligated to provide services to the plan enrollees. Gross revenue for the period ending October 31, 1999 was approximately $10,540,000. INCOME TAXES - Income tax expense is computed using an asset and liability method, using expected annual effective tax rates. Under this method, deferred income taxes are recorded resulting from differences in the financial reporting basis and the income tax reporting basis of assets and liabilities. Income tax are further explained in Note 9. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk are primarily cash equivalents and accounts receivable. The Company has placed its cash and cash equivalents with one major financial institution. At times, the cash in the financial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC). - -------------------------------------------------------------------------------- F-9 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) With respect to accounts receivable, the Company routinely assesses the financial strength of its customers and third-party payors and, based upon factors surrounding their credit risk, establishes an allowance for uncollectible accounts. Gross charges by payor for the year ended October 31, 1999 were: Capitation contracts 25.2% Special group contract 19.1% HMO/PPO/Managed care 15.2% Medicare 13.8% Blue Cross/Sheild/Champus 9.5% Commercial insurance 6.7% Workers Comp 4.4% MEDI-CAL 2.5% Other 3.6% Management believes that its accounts receivable credit risk exposure, beyond allowances that have been provided, is limited. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT ON LONG-LIVED ASSETS - Certain long-lived assets of the Company are reviewed at least annually as to whether their carrying values have become impaired in accordance with Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." Management considers assets to be impaired if the carrying value exceeds the undiscounted projected cash flows from operations. If impairment exists, the assets are written down to fair value or the projected cash flows from related operations. As of October 31, 1999, the Company expects the remaining carrying value of assets to be fully recoverable. STOCK OPTIONS - The Company has elected not to adopt SFAS 123, "Accounting for Stock-Based Compensation" and continues to apply APB Opinion No. 25 (APB 25) and related Interpretations in accounting for its option plans. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under APB 25, compensation cost is the excess, if any, of the quoted market price of the stock at the measurement date over the amount that must be paid to acquire the stock. The new standard allows the Company to continue to account for stock-based compensation under APB 25, with disclosure of the effects of the new standard. The proforma effect on income as if the Company had adopted SFAS 123 is disclosed in Note 10. - -------------------------------------------------------------------------------- F-10 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the current year presentation. These changes have no effect on net earnings. CHANGE IN ACCOUNTING PRINCIPLE - During the year ended October 31, 1998, the Company elected early adoption of Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-up Activities" which required that organization costs be expensed as they are incurred. As a result the Company reduced historical net organizational costs and capitalized fees by approximately $780,000. The net effect of this change was to decrease net income for the year ended October 31, 1998 by $.02 per share. EARNINGS PER SHARE - Earnings per share are based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock held in treasury. NEW ACCOUNTING PRONOUNCEMENTS - During 1999, the Financial Accounting Standards Board issued Statements of Financial Accounting Standard No. 135 ("Rescission of FASB Statement No. 75 and Technical Corrections"), No. 136 ("Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions to Others"), and No. 137 ("Accounting for Derivative Instruments and Hedging Activities"), which were effective for years after fiscal 1999. Management believes these pronouncements will not have a material effect on the Company's financial statements or disclosures. NOTE 3 - BUSINESS COMBINATIONS - ACQUISITIONS, SALES AND DIVESTITURES During fiscal 1997 the Company sold all of the outstanding capital stock of a wholly owned subsidiary, Future Diagnostics, Inc. for approximately $13,500,000 in cash, notes receivable and buyer-assumed liabilities. The sale resulted in a gain of approximately $10,400,000. During fiscal 1998 the Company received an additional $595,000 by agreeing to an IRS Section 388 (h)(10) election for "Corporations Making Qualified Stock Purchases." During the year ended October 31, 1997 the Company purchased 1,293,663 shares of DIS outstanding common stock for approximately $1,640,000. During the year ended October 31, 1998 the Company purchased 1,788,374 shares of DIS outstanding common stock for approximately $2,063,000. During the year ended October 31, 1999 the Company purchased 390,100 shares of DIS outstanding common stock for approximately $480,000, receiving 390,100 warrants to purchase common stock of the Company at $.25 per share. The Company has a 90% ownership interest in DIS at October 31, 1999. - -------------------------------------------------------------------------------- F-11 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - BUSINESS COMBINATIONS -ACQUISITIONS, SALES AND DIVESTITURES (CONTINUED) In October 1998, the Company purchased 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 the preferred stock holder. The Company recorded financing costs of $5,207,900, which were charged to operations during the year ended October 1998 as a result of this transaction. In March 1997, the Company sold the assets and related liabilities of four MRI facilities and its ultrasound division for approximately $16,000,000 in cash including $2,000,000 in ten year covenants not-to-compete. The covenants have been classified as deferred revenue and are being amortized over the covenant period. The Company recognized a gain on the sale of approximately $5,600,000. In addition the Company recorded a discounted receivable of approximately $1,190,000 utilizing an imputed interest rate of 11.75% for post-closing payments of $500,000 each to be made on the first, second and third anniversaries of the closing date. During the year ended October 31, 1998 the Company exercised its option to receive these payments in the form of 200,000 shares of the purchasers common stock, which were sold for approximately $1,850,000 yielding a gain of approximately $496,000. In June 1997 the Company decided to close its Santa Monica facility. At that time, the Company recognized an impairment loss of approximately $4,550,000, which included the write-off of $1,530,000 of acquisition goodwill. The Company sold the assets of the facility for approximately $465,000. In January 1998, the Company sold the its interest in Scripps Chula Vista MRI, L.P. for 127,250 shares of the purchasers stock which was valued at approximately $1,431,000 resulting in a gain of approximately $252,000. The Company sold the stock in May 1998 for approximately $1,230,000 and recorded a loss of approximately $202,000. In February 1998, the Company dissolved its partnership with Friendly Hills Healthcare Network, Inc. and wrote-off approximately $45,000 of net assets including $435,000 in minority interests. The Company received $95,000 from Friendly Hills upon dissolution and recognized a gain of approximately $50,000. - -------------------------------------------------------------------------------- F-12 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation and amortization as of October 31, 1999 and 1998 are: 1998 1999 ------------- ------------- Land $ 1,763,773 $ 1,763,773 Building 1,876,144 1,876,144 Medical equipment 10,367,312 12,281,617 Office equipment, furniture and fixtures 4,071,029 4,451,288 Leasehold improvements 5,721,582 9,935,266 Equipment under capital lease 24,775,274 30,564,702 ------------- ------------- 48,575,114 60,872,790 Accumulated depreciation and amortization (21,604,530) (23,206,170) ------------- ------------- $ 26,970,584 $ 37,666,620 ============= ============= Depreciation and amortization expense on property and equipment for the year ended October 31, 1999, 1998 and 1997 was approximately $6,680,000, $6,725,000 and $4,300,000, respectively. Accumulated amortization under capital leases for the year ended October 31, 1999 and 1998 was approximately $10,668,000 and $12,200,000, respectively. Amortization expense under capital leases for the year ended October 31, 1999, 1998 and 1997 was approximately$3,000,000, $3,000,000 and $3,300,000, respectively. NOTE 5 - INTANGIBLE ASSETS Intangible assets consists of goodwill recorded at cost of $14,604,195, less accumulated amortization of $4,009,517 and $3,290,288 for the year ended October 31, 1999 and 1998, respectively. Amortization expense of approximately $1,030,000, $1,915,000 and $2,130,000 was recognized for the years ended October 31, 1999, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- F-13 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 - INTANGIBLE ASSETS (CONTINUED) During the year ended October 31, 1999 and 1998, the Company recorded goodwill in connection with the acquisition of additional shares of DIS stock of approximately $478,000 and $2,063,000, respectively which were written off as impairment losses. During the year ended October 31, 1998, net goodwill of $735,036 was written off in connection with the sale of a joint venture. During the year ended October 31, 1997, the Company recorded $614,375 in goodwill related to the acquisition of additional units of two centers, and the Company recorded goodwill of $92,382 in connection with the acquisition of a subsidiary. Effective September 3, 1997, the Company wrote-off $2,925,312 of goodwill in connection with the sale of a subsidiary. During the year ended October 31, 1998, pursuant to SFAS No. 121, the Company recorded an impairment loss of $12,677,324 consisting of net goodwill of $8,631,944, net property and equipment of $4,007,880 and other net long-lived assets of $37,500. During the year ended October 31, 1997, net goodwill of $9,688,034 was written-off in connection with the closure and eventual sale of several facilities. During the same year, the Company recorded an impairment loss of $4,553,783 from writing down goodwill, property and equipment and other long-lived assets. NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1998 1999 ------------- ------------- Accounts payable $ 5,747,988 $ 5,569,911 Accrued expense 3,535,840 5,126,527 Accrued professional fees 2,153,859 1,897,364 Accrued loss on legal judgments - 2,455,995 Other 462,343 318,706 ------------- ------------- 11,900,030 15,368,503 Less long-term portion of accrued professional fees (399,872) (283,024) ------------- ------------- $ 11,500,158 $ 15,085,479 ============= ============= Accrued professional fees consist of outside professional agreements, which are paid out of net cash collections. The long-term portion relates to the accounts receivable classified as long-term. - -------------------------------------------------------------------------------- F-14 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES Notes payable, long-term debt and capital lease obligations at October 31, 1999 and 1998 consists of the following: 1998 1999 ------------- ------------- Revolving lines of credit $ 11,911,416 $ 21,631,399 Note payable bearing interest at the bank's prime rate plus 1%, due October 2000, collateralized by certain accounts receivable 5,225,000 5,225,000 Various notes payable at interest rates ranging between 7.5% and 11%, due through 2006, collateralized by medical equipment 34,544,543 40,381,029 Note payable bearing interest at 9.25%, due in 2005, collateralized by real estate 1,697,948 1,517,055 Obligations from a Company acquisition bearing interest at 8%, due through 2002 5,407,706 668,766 Various obligations under capital leases at interest rates ranging between 8.4% and 13.2%, due through 2006, collateralized by medical and office equipment originally costing approximately $30,565,000 and $29,150,000, in 1999 and 1998, respectively. 19,744,972 24,800,978 ------------- ------------- 78,531,585 94,224,227 Less current portion (24,388,427) (39,341,714) ------------- ------------- $ 54,143,158 $ 54,882,513 ============= ============= The Company's working capital needs are provided under three lines of credit. Under one line of credit, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, the prior four months' cash collections, or $20,000,000. Interest on outstanding borrowings is payable monthly at the greater of 8% or the bank's prime rate plus 2.5%, with a minimum interest paid each month of $60,000. At October 31, 1999 approximately $16,115,000 was outstanding under this line and is due December 31, 2001. The lender holds a first lien position on substantially all of Radnet's assets. The president and C.E.O of the Company has personally guaranteed $6,000,000 of line and the line is collateralized by a $5,000,000 life insurance policy of the president and C.E.O. - -------------------------------------------------------------------------------- F-15 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED) Under the second line of credit, the Company may borrow the lesser of 110% of eligible accounts receivable or $5,000,000. Interest on the outstanding balance is payable monthly at the bank's prime rate plus 1%. At October 31, 1999, approximately $2,220,000 was outstanding on this line and is due October 31, 2000. Under the third line with the same lender, the Company may borrow up to $3,500,000 to either pay off in full the promissory note issued to Tower Radiology et.al. or purchase, on the open market, the subordinated debentures of the Company at a price not to exceed 60% of their face value. Borrowings under this line are repayable monthly at a rate of 1.4% of the line balance, including principal and interest at the bank's prime rate plus 1%. Theses credit lines are collateralized by approximately 80% of the Tower division's eligible accounts receivable. The banks prime rate at October 31, 1999 was 8.25%. The total funds available for borrowing under the three lines were approximately $4 million at October 31, 1999. For the year ended October 31, 1999 and 1998, the weighted average interest rate on short-term borrowings was 10.2% and 11.4%, respectively. Annual principal maturities of long-term obligations exclusive of capital leases, for future years ending October 31, are: 2000 $ 35,158,195 2001 9,019,782 2002 8,377,306 2003 8,303,237 2004 6,462,657 Thereafter 2,102,072 ------------- $ 69,423,249 ============= - -------------------------------------------------------------------------------- F-16 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED) The Company leases equipment under capital lease arrangements. Future minimum lease payments under capital leases as of October 31, 1999 are: 2000 $ 6,380,627 2001 6,194,619 2002 5,762,341 2003 5,400,645 2004 4,558,821 Thereafter 3,483,022 ------------- Total minimum payments 31,780,075 Amount representing interest (6,979,097) ------------- Present value of net minimum lease payments 24,800,978 Current portion (4,183,519) ------------- Long-term portion $ 20,617,459 ============= At October 31, 1999, the Company is in default on approximately $835,000 under various note agreements, pertaining to the acquisition of imaging centers, for non-payment of principal and interest. These notes have been classified as currently payable. During the year ended October 31, 1999, 1998 and 1997, the Company paid off and renegotiated various obligations at discounts resulting in extraordinary gains of $1,217,336, $234,475 and $673,199, respectively. NOTE 8 - SUBORDINATED DEBENTURES In June of 1993, the Company's registration for a total of $25,875,000 of 10% Series A Convertible subordinated debentures due 2003 was declared effective by the Securities and Exchange Commission. The net proceeds to the Company were approximately $23,000,000. Costs of $3,000,000 associated with the original offering are being amortized over ten years to result in a constant yield. The unamortized portion is classified as other assets. The debentures are convertible into shares of common stock at any time before maturity into $1,000 principal amounts at a conversion price of $10 per share through June 1999 and $12 per share thereafter. As debentures are being converted or retired, a pro-rata share of the offering costs are written-off. Amortization expense of the offering costs for the years ended October 31, 1999, 1998 and 1997 was $233,271, 244,650 and $298,545, respectively. Interest expense for the years ended October 31, 1999, 1998 and 1997 was approximately $2,040,000, $2,125,000 and $2,525,000, respectively. During the year ended October 31, 1999, debentures totaling $5,000 were converted into 500 shares of common stock. There were no conversions during the year ended October 31, 1998 or 1997. - -------------------------------------------------------------------------------- F-17 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - SUBORDINATED DEBENTURES (CONTINUED) During the years ended October 31, 1999, 1998 and 1997, the Company repurchased debentures with face amounts of $676,000, $2,205,000 and $2,906,000, for $337,215, $1,484,943 and $1,984,093, respectively, resulting in gains on early extinguishments of $338,785, $720,058 and $921,907, respectively. In connection with these transactions, $34,818, $138,811 and $187,524 of net offering costs were written-off during the years ended October 31, 1999, 1998 and 1997, respectively. NOTE 9 - INCOME TAXES Income taxes have been recorded under SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net tax effects of temporary difference between carrying amounts of assets and liabilities for financial reporting purposes and operating loss carryforwards. At October 31, 1999 and 1998, the Company's deferred tax assets are comprised of the following items: October 31, ---------------------------- 1998 1999 ------------- ------------- DEFERRED TAX ASSETS, noncurrent Net operating loss carryforward $ 39,000,000 $ 43,400,000 Tax basis of intangible assets in excess of books 12,400,000 11,300,000 Other - 1,100,000 ------------- ------------- 51,400,000 55,800,000 DEFERRED TAX LIABILITY, noncurrent Book basis of fixed assets in excess of tax basis 9,500,000 1,500,000 ------------- ------------- 41,900,000 54,300,000 Valuation allowance (41,900,000) (54,300,000) ------------- ------------- NET DEFERRED TAX ASSET $ - $ - ============= ============= The valuation allowance of $54,300,000 and $41,900,000 at October 31, 1999 and 1998, respectively, represents increases of $12,400,000 and $11,300,000, respectively, over the preceding year. Reconciliation between the effective tax rate and the statutory tax rates for the years ended October 31, 1999, 1998 and 1997 are as follows: 1997 1998 1999 ---------- ---------- ---------- Federal tax at 34% (34.0)% (34.0)% (34.0)% Earnings on unconsolidated subsidiaries, joint ventures and affiliates 22.0 8.0 - Change in valuation allowance 12.0 26.0 34.0 ---------- ---------- ---------- Effective tax rate - % - % - % ========== ========== ========== - -------------------------------------------------------------------------------- F-18 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (CONTINUED) The Company has net operating loss carryforward of approximately $108,500,000 which expire as follows: 2002 $ 200,000 2003 600,000 2004 1,000,000 2005 800,000 2006 4,100,000 2007 4,100,000 2008 23,100,000 2009 16,200,000 2010 13,400,000 2011 16,800,000 2012 1,700,000 2018 15,800,000 2019 10,700,000 ------------- Total $108,500,000 ============= As of October 31, 1999, $26,500,000 the Company's federal net operating loss carryforwards are subject to limitations related to their utilization under Section 382 of the Internal Revenue Code. NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS PREFERRED STOCK The Company authorized 10,000,000 shares of preferred stock with a par value of $.01 per share. There are no preferred shares issued or outstanding at October 31, 1999, 1998 or 1997. Shares may be issued in one or more series. REDEEMABLE STOCK In January 1998, the Company entered into a five-year agreement with a former officer of the Company whereby the Company agreed to purchase up to 600,000 shares of the Company's stock from the former officer at $.40 per share, in minimum increments of 100,000 shares, upon his election any time prior to February 28, 2003. In January 1999, the Company repurchased 200,000 shares under this agreement. - -------------------------------------------------------------------------------- F-19 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) STOCK OPTION PLANS The Company has an incentive stock option plan which reserves 2,000,000 shares of common stock. The options granted under the plan are intended to quality as incentive stock options under existing tax regulations. In addition, the Company has issued non-qualified stock options from time to time in connection with acquisitions and for other purposes. The following table summarizes the activity for the three years ended October 31, 1999: Outstanding Options ---------------------------- Exercise Number Price ------------- ------------- Balance, October 31, 1996 2,995,060 $ 4.49 Granted 200,000 0.43 Exercised (200,000) 0.13 ------------- ------------- Balance, October 31, 1997 2,995,060 4.51 Granted 295,000 0.25 Exercised (325,000) 0.19 Canceled or expired (635,000) 2.78 ------------- ------------- Balance, October 31, 1998 2,330,060 5.04 Granted 500,000 0.15 Canceled or expired (1,368,197) 8.42 ------------- ------------- Balance, October 31, 1999 1,461,863 $ 0.21 ============= ============= The following summarizes information about stock options outstanding at October 31, 1999: Outstanding Options ------------------------------------------------------------ Range of exercise Number Weighted average remaining Weighted average prices outstanding contractual life exercise price ----------------- ------------- -------------------------- ----------------- $.15 - $.30 1,236,863 2.66 years $ 0.17 $.31 - $.60 225,000 1.76 years 0.78 ------------- 1,461,863 2.52 years $ 0.21 ============= - -------------------------------------------------------------------------------- F-20 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) Had compensation cost for the Company's options granted been determined consistent with SFAS 123, the Company's net loss and loss per share would be affected as follows:
Year Ended October 31, ------------------------------------------- 1997 1998 1999 ------------- ------------- ------------- Net loss As reported $ (748,095) $(29,321,832) $ (9,071,221) ============= ============= ============= Pro Forma $ (793,390) $(29,355,049) $ (9,134,051) ============= ============= ============= Loss per share: As reported $ (.02) $ (.75) $ (.23) ============= ============= ============= Pro Forma $ (.02) $ (.75) $ (.23) ============= ============= =============
The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The following is the average of the data used for to calculate the fair value:
Risk-free Expected Expected Expected October 31, interest rate life volatility dividends - ------------------------- ------------------- ------------ ------------- ------------------ 1999 5.42% 4 years 134.01% N/A 1998 5.51% 5 years 60.37% N/A 1997 6.35% 5 years 61.47% N/A
The following table summarizes the activity in common shares subject to warrants: Outstanding warrants ---------------------------- Shares Price range ------------- ------------- Balance, October 31, 1996 and 1997 9,014,000 $0.60 - $7.43 Granted 530,000 0.25 Canceled or expired (4,932,000) 0.60 - 7.43 ------------- ------------- Balance, October 31, 1998 4,612,000 0.25 - 0.60 Granted 390,000 0.25 ------------- ------------- Balance, October 31, 1999 5,002,000 $0.25 - $0.60 ============= ============= Warrants outstanding at October 31, 1999 expire at various times through December 2003. - -------------------------------------------------------------------------------- F-21 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) CAPITAL TRANSACTIONS During the year ended October 31, 1999, debentures totaling $5,000 were converted into 500 shares of common stock. During the year ended October 31, 1998, a former officer of the Company, who had existing options for 200,000 shares of the Company's common stock, was granted options for an additional 100,000 shares at $.30 per share as part of his contract buyout and renegotiation. In January 1998, he exercised all of the remaining options for 300,000 shares of the Company's common stock at a weighted average price of $.183 per share. In connection with the transaction, the Company lent the former officer $30,000, with interest at 6.5%, which is classified as stock subscription receivable on the Company's financial statements. During the year ended October 31, 1999, the Company repurchased 200,000 shares from the former officer at $.40 per share under a stock repurchase agreement. During the year ended October 31, 1997, the Company purchased 325,000 shares of its stock for an aggregate purchase price of $133,220. During the same year, an officer of the Company exercised his options for 200,000 shares of Company's common stock at $.125 per share. In connection with the transaction, the Company lent the officer $25,000, with interest at 6%, which was paid in full in February 1998. During the year ended October 31, 1998, a former employee of the Company exercised his options for 25,000 shares of the Company's common stock at $.23 per share. NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimates the fair value of financial instruments as follows:
1998 1999 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- Accounts Receivable, current $ 15,429,057 $ 15,429,057 $ 16,694,368 $ 16,694,368 Accounts Receivable, long term $ 3,713,956 $ 3,713,956 $ 3,040,416 $ 3,040,416 Due from related party - long-term $ 1,062,403 $ 1,062,403 $ 948,029 $ 948,029 Debt maturing within one year $(21,083,111) $(21,083,111) $ 35,158,192 $ 35,158,192 Long-term debt $(37,703,502) $(31,679,349) $ 36,818,910 $ 31,227,238 Notes payable related parties long-term $ (2,553,854) $ (2,164,305) $ (2,553,854) $ (2,315,081) Subordinated debentures $(20,718,000) $(13,445,982) $(20,037,000) $(14,479,533)
- -------------------------------------------------------------------------------- F-22 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) In assessing the fair value of these financial instruments, the Company has used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, cash overdraft, accounts receivable, current, due from/to related parties and current and short-term debt, it was assumed that the carrying amount approximated fair value for the majority of these instruments because of their short maturities. The fair value of the long term amounts for accounts receivable, due from related party, notes payable related parties and debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The fair value of the subordinated debentures is the estimated value of debentures available to repurchase at current market rates over the bond term including an estimated interest payment stream. NOTE 12 - MARKETABLE SECURITIES During the year ended October 31, 1998, the Company sold available for sale securities for approximately $3,080,000 resulting in a gain of approximately $297,000. The Company had no marketable securities at October 31, 1999 or 1998. NOTE 13 - RELATED PARTY TRANSACTIONS The amount due from related party relates to a $6,000,000 note receivable issued in connection with the acquisition of Radnet. The outstanding balance of $1,500,000 on the note was originally due in February 1997, but in consideration for an advance payment of $500,000, the Company offered to extend the remaining $1,000,000 through February 1998. During the year ended October 31, 1998 the note was extended through February 2000, which was discounted at 8% resulting in a discounted value of $899,143. The note was reclassified to stockholders' equity. During the year ended October 31, 1999 the note was extended through February 2001 and rediscounted at 8% resulting in a new discounted value of $830,234 and a charge to miscellaneous expense of $68,909. The note is secured by the stock of the Company, which was issued in connection with the Radnet acquisition. During the year ended October 31, 1999, 1998 and 1997, the Company advanced $80,000 $85,000 and $30,000, respectively, to an officer of the Company, which will be repaid within the next year. During the year ended October 31, 1998, the Company lent a former officer of the Company $180,000 of which $30,000 was used to purchase Company stock and classified as stock subscription receivable. During the year ended October 31, 1999, $25,000 was due and $50,000 has been forgiven in exchange for consulting services. The remaining balance of $105,000 is due within four years with interest at 6.5%. As of October 31, 1999, approximately $24,000 of interest has been accrued on these loans. The notes payable related parties of $2,553,854 are due to an employees and officers of the Company. The notes bear interest at 6.58% annually and the outstanding principal is due June 2001. During the Years ended October 31, 1999, 1998, and 1997 interest expense was approximately $168,000 each year, respectively. - -------------------------------------------------------------------------------- F-23 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - COMMITMENTS AND CONTINGENCIES LEASES - The Company leases various operating facilities and certain medical equipment under operating leases expiring through 2018. Certain leases contain renewal options from two to ten years and escalation based primarily on the consumer price index. Future minimum annual payments under noncancellable operating leases are as follows:
Year ending October 31, Facilities Equipment Total ----------------------- ------------- ------------- ------------- 2000 $ 4,158,664 $ 1,550,882 $ 5,709,546 2001 3,069,204 1,514,918 4,584,122 2002 2,243,673 1,489,755 3,733,428 2003 1,605,832 1,426,559 3,032,391 2004 1,185,443 1,410,305 2,595,748 Thereafter 11,250,272 2,063,716 13,313,988 ------------- ------------- ------------- $ 23,513,088 $ 9,456,135 $ 32,969,223 ============= ============= =============
Total rent expense, including equipment rentals, for the years ended October 31, 1999, 1998 and 1997 amounted to approximately $5,562,000, $5,410,000 and $6,225,000, respectively. SALARIES AND CONSULTING AGREEMENTS - The Company has a variety of arrangements for payment of professional and employment services. The agreements provide for the payment of professional fees to physicians under various arrangements including a percentage of revenue collected from 15% to 29%, fixed amounts per periods and combinations thereof. The Company also has employment agreements with officers and key employees at annual compensation rates ranging from $50,000 to $150,000 and for periods extending up to four years. Total commitments under the agreements are approximately $2,100,000 as of October 31, 1999, of which $650,000 is due to a related party. The Company renegotiated and bought out the remaining years of an employment contract with one officer. Terms of the settlement include the establishment of a legal consulting arrangement which expires February 2003. The remaining commitment under this agreement is approximately $200,000. Additionally, the Company is required to repurchase, at the former officer's option, up to 600,000 shares of Common stock at $.40 per share any time through February 2003. During the year ended October 31, 1999, the Company repurchased 200,000 shares under this agreement. PURCHASE COMMITMENT - On February 19, 1999 the Company entered into a five year purchase agreement with an imaging film provider whereby the Company must purchase $9,990,000 of film at a rate of approximately $1,800,000 annually over the term of the agreement. - -------------------------------------------------------------------------------- F-24 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED) LITIGATION - The Company is currently in settlement negotiations with a former vendor of the Company alleging, among other matters, breach of contract. The settlement would require the Company to pay the vendor $700,000 over five years with an initial payment of $100,000, a payment of $100,000 in one year and the remaining paid in monthly installments of $7,067 starting after the first $100,000 payment including interest at 5% amortized over seven years, with a balloon payment of $161,083 due at the end of five years. The Company has accrued the full amount of the potential settlement in accrued liabilities. The Company is currently appealing a judgment between the Company and a former professional service provider. The jury awarded a verdict in the net amount of $1,750,995 on the complaint. Both parties have sought an award of attorney fees, and the Company has filed an appeal of the jury's awards against it. The Company plans to vigorously pursue its appellate rights and remedies. The Company has accrued the full amount of the jury award in accrued liabilities and has also posted a letter of credit in accordance with the requirements of the judgment (Note 17). A former employee filed a complaint against the Company for damages for, among other matters, employment discrimination, emotional distress, and violation of civil rights. There is no trial date set and discovery has not yet commenced. The Company intends to defend vigorously against the plaintiffs claim and believes the suit is without merit. NOTE 15 - EMPLOYEE BENEFIT PLAN The Company adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue Code, that covers substantially all employees. Eligible employees may contribute on a tax deferred basis a percentage of compensation, up to the maximum allowable under tax law. Employee contributions vest immediately. The plan does not require a matching contribution by the Company. There was no expense for the years ended October 31, 1999, 1998 or 1997. NOTE 16 - MALPRACTICE INSURANCE The Company and physicians employed by the Company are insured by First Insurance Funding Corp. of California. The Company's financial obligation is limited to its premiums for malpractice insurance coverage. First Insurance Funding Corp. of California provides claims-based malpractice insurance coverage which covers only asserted malpractice claims within policy limits. The Company purchases tail insurance coverage when necessary and includes the cost of the premiums in the year the tail is purchased. Management does not believe there are material uninsured malpractice costs at October 31, 1999 and 1998. - -------------------------------------------------------------------------------- F-25 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 17 - SUBSEQUENT EVENTS In December 1999, the Company obtained a $2,000,000 loan through one of the line of credit providers by obtaining an increase in the borrowing base. The loan is due June 2000 and bears interest at the bank's prime rate plus 2.5%. The president and C.E.O of the Company increased his personal guarantee on the line of credit to $8,000,000. In December 1999, the Company refinanced approximately $3,714,000 of its capital leases and obtained additional long-term financing of approximately $2,360,000, of which approximately $1,870,000 was applied to a line of credit. In November 1999, the Company borrowed $3,000,000 on a line of credit to issue a letter of credit. The letter of credit was issued to secure a bond posted in connection with a judgment and jury award for $1,750,995, which the Company is currently appealing (See Note 14). NOTE 18 - GOING CONCERN The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has experienced recurring losses from operations and has a deficiency in equity of $64,357,000 and a working capital deficiency of $38,007,000, which raise substantial doubt about its ability to continue as a going concern. Over the past several years, management has been addressing the issues that have lead to these deficiencies. Results of management's plans and efforts have been positive, as indicated by recent improvement in operating income; however, continued effort is planned in the future to allow the Company to continue to operate and ultimately return the Company to profitability. Such actions and plans include: - Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In November 1999, the Company opened a new center in Long Beach, California, which has experienced favorable performance in its initial months of operations. - Increase revenue by negotiating new and existing managed care contracts for additional services and more favorable terms. In January 2000, the Company entered into 3 new capitation contracts that will significantly increase business in at least 4 Southern California facilities. - Increase revenue through new fee for service arrangements where opportunities exist. In January 2000, the Company was successful in negotiating a new fee for service arrangement that will substantially increase patient volume in 4 Southern California facilities. - -------------------------------------------------------------------------------- F-26 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 18 - GOING CONCERN (CONTINUED) - Consolidate underperforming facilities to reduce operating cost duplication. - Continue to evaluate all facilities' operations and trim excess operating costs as well as general and administrative costs where it is feasible to do so. - Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. In 1999, this was done in many of the facilities, resulting in increased revenue. - Selectively seek opportunities to hire physicians who have the requisite skills and knowledge to deliver new and additional services where deficiencies have been identified in underperforming facilities. - Continue to work with lessors and lenders to extend terms of leases and financing to accommodate cash flow requirements for ongoing agreements and upon the expiration of leases and notes. The company has demonstrated success doing so in the past, and in December 1999, successfully refinanced a portion of existing notes and obtained additional working capital. - -------------------------------------------------------------------------------- F-27 INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE To the Stockholders and Board of Directors of Primedex Health Systems, Inc. Our report on the consolidated financial statements of Primedex Health Systems, Inc. and its affiliates, as of October 31, 1999 and for the year then ended is included on page F-1 of this Form 10-K. In connection with our audit of such financial statements, we have also audited the related accompanying financial statements Schedule II Valuation and Qualifying Accounts for the year ended October 31, 1999. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Los Angeles, California MOSS ADAMS LLP January 28, 2000 - -------------------------------------------------------------------------------- S-1 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
Additions -------------- Deductions Beginning of Charged from Reserves Balance at End Year Against Income (a) of Year -------------- -------------- -------------- -------------- YEAR ENDED OCTOBER 31, 1999: Accounts receivable allowances - current $ 19,980,513 $ 85,753,552 $ 80,429,277 $ 25,304,788 ============== ============== ============== ============== Accounts receivable allowances - noncurrent $ 4,809,545 $ 15,617,630 $ 15,632,596 $ 4,794,579 ============== ============== ============== ============== Goodwill amortization $ 3,290,288 $ 719,229 $ - $ 4,009,517 ============== ============== ============== ============== YEAR ENDED OCTOBER 31, 1998: Accounts receivable allowances - current $ 19,637,802 $ 61,635,980 $ 61,293,269 $ 19,980,513 ============== ============== ============== ============== Accounts receivable allowances - noncurrent $ 6,752,507 $ 14,836,507 $ 16,779,469 $ 4,809,545 ============== ============== ============== ============== Goodwill amortization $ 3,160,715 $ 1,463,268 $ 1,333,695 $ 3,290,288 ============== ============== ============== ============== Other intangibles amortization $ 412,500 $ 110,000 $ 522,500 $ - ============== ============== ============== ============== YEAR ENDED OCTOBER 31, 1997: Accounts receivable allowances - current $ 18,386,423 $ 54,835,973 $ 53,584,594 $ 19,637,802 ============== ============== ============== ============== Accounts receivable allowances - noncurrent $ 6,871,881 $ 13,502,744 $ 13,622,118 $ 6,752,507 ============== ============== ============== ============== Goodwill amortization $ 3,077,716 $ 1,405,911 $ 1,322,912 $ 3,160,715 ============== ============== ============== ============== Other intangibles amortization $ 1,172,317 $ 196,726 $ 956,543 $ 412,500 ============== ============== ============== ==============
(a) Deductions include sales and divestitures - -------------------------------------------------------------------------------- S-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRIMEDEX HEALTH SYSTEMS, INC. Date: February 15, 2000 /s/ Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D., President, Treasurer and Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By /s/ Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D., Director Date: February 15, 2000 By /s/ Jaana Shellock ----------------------------------------- Jaana Shellock, Director Date: February 15, 2000 By /s/ Norman Hames ----------------------------------------- Norman Hames, Director Date: February 15, 2000 34 EX-27 2 FINANCIAL DATA SCHEDULE
5 1 YEAR OCT-31-1999 NOV-01-1998 OCT-31-1999 59,495 0 15,429,057 0 0 17,627,327 26,970,584 0 62,656,414 37,818,579 0 0 0 240,000 (55,359,829) 62,656,414 132,569,387 67,018,507 0 74,686,892 0 0 9,549,337 (1,773,270) 0 (1,773,270) 0 1,595,106 0 (748,095) (0.02) (0.02)
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