-----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, LZPFEpHExwGD0/K4oGlzzPDFkNdAUQNYHJ+chm9hwtHTTjiMDAelmcel7DmwxiVK apq++by8ftslHAmp/Ip8NA== 0001019687-03-001315.txt : 20030623 0001019687-03-001315.hdr.sgml : 20030623 20030623144943 ACCESSION NUMBER: 0001019687-03-001315 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030623 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19019 FILM NUMBER: 03753166 BUSINESS ADDRESS: STREET 1: 1516 COTNER AVE CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104787808 MAIL ADDRESS: STREET 1: 1516 COTNER AVE CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: CCC FRANCHISING CORP DATE OF NAME CHANGE: 19920703 10-Q 1 primedex_10q-043003.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended April 30, 2003 Commission File Number 0-19019 -------------- ------- PRIMEDEX HEALTH SYSTEMS, INC. ----------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) New York 13-3326724 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1510 Cotner Avenue Los Angeles, California 90025 ----------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (310) 478-7808 -------------- 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 ____ ------- Number of shares outstanding of the issuer's common stock as of June 10, 2003 was 41,100,734 [excluding treasury shares]. PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - --------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------------------------------
APRIL 30, OCTOBER 31, --------- ----------- 2003 2002 ---- ---- (UNAUDITED) ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 54,000 $ 36,000 Accounts receivable, net 29,441,000 29,453,000 Unbilled receivables and other receivables 137,000 1,451,000 Deferred income taxes 1,101,000 2,100,000 Other 1,305,000 1,518,000 -------------- -------------- Total current assets 32,038,000 34,558,000 -------------- -------------- PROPERTY AND EQUIPMENT, NET 88,407,000 87,875,000 -------------- -------------- OTHER ASSETS: Accounts receivable, net 2,474,000 2,366,000 Goodwill, net 23,064,000 23,064,000 Deferred income taxes 4,135,000 3,135,000 Other 544,000 641,000 -------------- -------------- Total other assets 30,217,000 29,206,000 -------------- -------------- $ 150,662,000 $ 151,639,000 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Cash disbursements in transit $ 5,475,000 $ 4,613,000 Accounts payable and accrued expenses 20,187,000 20,871,000 Subordinated debentures payable 7,143,000 16,291,000 Notes payable to related party 1,142,000 1,173,000 Current portion of notes and leases payable 44,083,000 36,278,000 -------------- -------------- Total current liabilities 78,030,000 79,226,000 -------------- -------------- LONG-TERM LIABILITIES: Subordinated debentures payable 9,148,000 -- Notes payable to related party 105,000 105,000 Notes and leases payable, net of current portion 114,409,000 121,031,000 Accrued expenses 597,000 694,000 -------------- -------------- Total long-term liabilities 124,259,000 121,830,000 -------------- -------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 560,000 1,504,000 -------------- -------------- STOCKHOLDERS' DEFICIT (52,187,000) (50,921,000) -------------- -------------- $ 150,662,000 $ 151,639,000 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 1
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - ------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- APRIL 30, APRIL 30, --------- --------- 2003 2002 2003 2002 ---- ---- ---- ---- REVENUE Revenue $ 103,968,000 $ 91,717,000 $ 204,737,000 $ 175,837,000 Less: Allowances 68,084,000 57,995,000 133,107,000 109,674,000 -------------- -------------- -------------- -------------- Net revenue 35,884,000 33,722,000 71,630,000 66,163,000 -------------- -------------- -------------- -------------- OPERATING EXPENSES Operating expenses 26,222,000 23,850,000 53,089,000 47,421,000 Depreciation and amortization 4,298,000 3,792,000 8,551,000 7,125,000 Provision for bad debts 2,040,000 1,347,000 3,989,000 2,547,000 (Gain) loss on sale of interest in center or equipment (2,953,000) 92,000 (2,953,000) 82,000 -------------- -------------- -------------- -------------- Total operating expenses 29,607,000 29,081,000 62,676,000 57,175,000 -------------- -------------- -------------- -------------- Income from operations 6,277,000 4,641,000 8,954,000 8,988,000 -------------- -------------- -------------- -------------- OTHER EXPENSE Interest expense, net (4,558,000) (3,987,000) (9,178,000) (7,785,000) Other (expense) income, net (886,000) 307,000 (792,000) 626,000 -------------- -------------- -------------- -------------- Total other expense (5,444,000) (3,680,000) (9,970,000) (7,159,000) -------------- -------------- -------------- -------------- INCOME BEFORE MINORITY INTEREST 833,000 961,000 (1,016,000) 1,829,000 -------------- -------------- -------------- -------------- MINORITY INTEREST IN EARNINGS OF SUBSIDIARY (132,000) (125,000) (279,000) (76,000) -------------- -------------- -------------- -------------- NET INCOME (LOSS) $ 701,000 $ 836,000 $ (1,295,000) $ 1,753,000 ============== ============== ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - ------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- APRIL 30, APRIL 30, --------- --------- 2003 2002 2003 2002 ---- ---- ---- ---- BASIC NET INCOME PER SHARE: $ .02 $ .02 $ (.03) $ .04 ================== ================= ================= ================= DILUTED NET INCOME PER SHARE: $ .02 $ .02 $ (.03) $ .04 ================== ================= ================= ================= WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 41,100,734 40,759,664 41,076,590 40,745,928 ================== ================= ================= ================= DILUTED 41,100,734 45,664,135 41,076,590 43,198,164 ================== ================= ================= ================= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 3
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT - ------------------------------------------------------------------------------------------------------------------------------------
Common Stock $.01 par value ----------------------- 100,000,000 shares authorized Treasury Stock, at cost Stock ----------------------- Paid-in ------------------------- Accumulated Stockholders' Shares Amount Capital Shares Amount Deficit Deficit ----------- --------- ------------- ----------- ---------- -------------- ------------- BALANCE - OCTOBER 31, 2002 42,830,734 $429,000 $100,328,000 (1,825,000) $(695,000) $(150,983,000) $(50,921,000) Issuance of common stock 95,000 1,000 28,000 -- -- -- 29,000 Net loss -- -- -- -- -- (1,295,000) (1,295,000) ----------- --------- ------------- ----------- ---------- -------------- ------------- BALANCE - APRIL 30, 2003 (UNAUDITED) 42,925,734 $430,000 $100,356,000 (1,825,000) $(695,000) $(152,278,000) $(52,187,000) =========== ========= ============= =========== ========== ============== ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 4
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - --------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ---------------------------------------------------------------------------------------------------
SIX MONTHS ENDED ---------------- APRIL 30, --------- 2003 2002 ---- ---- NET CASH FROM OPERATING ACTIVITIES $ 6,498,000 $ 7,071,000 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,116,000) (3,953,000) Proceeds from sale of imaging centers, property and equipment 1,367,000 1,700,000 Payments from related parties -- 77,000 ------------- ------------- Net cash used by investing activities (749,000) (2,176,000) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash disbursements in transit 901,000 531,000 Principal payments on notes and leases payable (13,179,000) (10,542,000) Proceeds from short-term and long-term borrowings 6,864,000 5,360,000 Proceeds from issuance of common stock 28,000 2,000 Loan fees (14,000) (10,000) Payments to related parties (31,000) (119,000) Joint venture proceeds -- 125,000 Joint venture distribution (300,000) (275,000) ------------- ------------- Net cash used by financing activities (5,731,000) (4,928,000) ------------- ------------- NET INCREASE (DECREASE) IN CASH 18,000 (33,000) CASH, beginning of period 36,000 40,000 ------------- ------------- CASH, end of period $ 54,000 $ 7,000 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 8,453,000 $ 7,145,000 ------------- ------------- Income taxes $ -- $ 156,000 ------------- ------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 5
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- SIX MONTHS ENDED APRIL 30, 2003 AND 2002 - -------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The Company entered into capital leases or financed equipment through notes payable for approximately $7,092,000 and $21,505,000 for the six months ended April 30, 2003 and 2002, respectively. During the six months ended April 30, 2003 and 2002, the Company recorded imputed interest expense related to notes payable and capital lease deferred payments and restructuring charges of approximately $716,000 and $636,000, respectively. Effective March 31, 2003, the Company sold its 50% share in Westchester Imaging Group and recognized a gain on the sale of approximately $2,952,000. As part of the sale, the Company wrote-off approximately $239,000 in net property and equipment, $52,000 in other assets, $341,000 in notes and capital leases, $923,000 in minority interest and $612,000 in accounts payable and accrued expenses. In April 2003, the Company wrote-off approximately $218,000 in other current assets relating to its Tower Heartcheck operation. In April 2002, an officer of the Company exercised his option to purchase 300,000 shares of common stock at $.15 per share. As part of the transaction, the officer gave the Company 30,201 shares of its common stock previously held by the officer worth $45,000 ($1.49 per share public closing price on the transaction date). In addition, the officer gave the Company an additional 13,424 shares of common stock previously held by the officer worth $20,000 in payment of his note payable with accumulated interest (classified as Stock Subscription Receivable on the Company's financial statements). By combining the transaction, the Company issued a net 256,375 shares of common stock to the officer for his option exercise. In November 2001, the Company issued 132,850 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 6 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENATATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles for complete financial statements; however, in the opinion of the management of the Company, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods ended April 30, 2003 and 2002 have been made. The results of operations for any interim period are not necessarily indicative of the results for the full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto contained in the Company's Annual Report on Form 10-K for the year ended October 31, 2002. The consolidated financial statements include the accounts of Primedex Health Systems, Inc., and its subsidiaries outlined as follows: o Radnet Management, Inc. ["Radnet"] Subsidiaries o Radnet Sub, Inc. ["Tower"], o Radnet Heartcheck Management, Inc., o Radnet Managed Imaging Services, Inc. ["RMIS"], o SoCal MR Site Management, Inc., o Radnet Management I, Inc., o Radnet Management II, Inc. ["Modesto"], o Westchester Imaging Group (a 50% joint venture), o Burbank Advanced Imaging Center, LLC (75%), o Rancho Bernardo Advanced Imaging Center, LLC (75%) o Diagnostic Imaging Services, Inc. ["DIS"] Both Radnet and DIS are combined with Beverly Radiology Medical Group III ["BRMG"] 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. Westchester Imaging Group ("WIG") was consolidated with the Company based upon the criteria of EITF 97-2 insofar as the Company had a controlling financial interest in WIG through a contractual management arrangement. The Company's share of Westchester Imaging Group was sold on March 31, 2003. 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 and administrative services to BRMG for which they receive a management fee. NOTE 2 - NATURE OF BUSINESS Primedex Health Systems, Inc., incorporated on October 21, 1985, provides diagnostic imaging services through its 55 facilities. The Company arranges for the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology to the public. 7 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS During 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147 ("Acquisitions of Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"), No. 146 ("Accounting for Costs Associated with Exit or Disposal Activities") and No. 145, ("Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002"). SFAS No. 147 is effective for acquisitions after October 1, 2002. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 145 is effective for financial statements issued after May 15, 2002. The adoption of SFAS 145, SFAS 146, and SFAS 147 did not have a material impact on the financial statements. In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"), which amends SFAS No. 123. SFAS No. 148, for which certain provisions are effective for fiscal years ending after December 15, 2002, provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock based employee compensation and amends certain disclosure provisions of SFAS No. 123. The adoption of SFAS No. 148 did not have a material effect on the Company's financial statements. In April 2003, the FASB issued SFAS No. 149 ("Amendment of Statement 133 on Derivative Instruments and Hedging Activities"). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003. The Company does not believe SFAS No. 149 will have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150 ("Accounting for certain financial instruments with characteristics of both liabilities and equity"). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company believes the adoption of SFAS No. 150 will not have a material impact on the Company's financial statements. NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES Center openings: Effective December 1, 2002, the Company opened Rancho Bernardo Advanced Imaging Center, LLC, near San Diego, which provides MRI, CT, ultrasound and x-ray services. Prior to the opening, the Company invested approximately $1,050,000 primarily for leasehold improvements and the LLC partners invested $250,000 cash. The Company used its existing lines of credit for the payment of leasehold improvements. The equipment was financed by General Electric. 8 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES - CONTINUED Center sales: Effective March 31, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for $283,000, which represented 50% of the remaining liabilities, resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. Net revenue and net income of Westchester for the six months ended April 30, 2003 was $2,283,000 and $255,000, respectively. Net revenue and net income of Westchester for the six months ended April 30, 2002 was $2,415,000 and $161,000, respectively. During the second quarter of fiscal 2003, the Company closed two of its satellite x-ray facilities servicing its Riverside and Long Beach (Los Coyotes) locations, respectively. The closures were cost reduction measures where volume at these locations could be directed to other nearby facilities with existing equipment operating below capacity. NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Goodwill is recorded at cost of $29,330,000, less accumulated amortization of $6,266,000 as of April 30, 2003 and October 31, 2002. Other intangible assets consist of offering costs and loan fees which are expected to be fully amortized by June 2003 and December 2003, respectively. The Company implemented Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective November 1, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Application of the nonamortization provisions of the Statement resulted in an increase in income of approximately $730,000 ($0.02 per share) for each of the quarters ended April 30, 2003 and 2002. NOTE 6 - CAPITAL TRANSACTIONS In November 2001, the Company issued 132,850 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. Effective December 16, 2002, an officer of the Company exercised his options to purchase 95,000 shares of common stock at $.30 per share. The officer paid the Company $28,500 cash. During the six months ended April 30, 2003, the Company retired 17,500 options to purchase common stock at a weighted average price of approximately $.60 per share due to the termination of employees. In addition, the Company issued five-year warrants to two physicians for a combined 150,000 shares of common stock at a weighted average price of approximately $.64 per share upon entering employment agreements with the Company. 9 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - RELATED PARTY TRANSACTIONS The amount due to related parties at October 31, 2002 consisted of $1,173,000 of short-term notes payable due to an officer of the Company, and $105,000 of long-term notes payable due to an employee of the Company. Both notes payable were for the purchase of DIS common stock in 1996. The notes bear interest at 6.58%. The short-term notes payable interest is paid monthly, and the long-term note payable interest is paid annually. During the six months ended April 30, 2003, the Company repaid principal of $31,000 for the short-term note payable. NOTE 8 - SUBSEQUENT EVENTS Subsequent to the quarter's end, the Company retired 130,000 warrants to purchase common stock at a weighted average price of $.76 per share due to termination of two physicians, and issued 100,000 five-year warrants to purchase common stock at a weighted average price of $.36 per share to one physician upon entering an employment agreement with the Company. In addition, the Company retired an additional 8,500 stock options at a weighted average price of $.75 per share upon the termination of employees. In May 2003, the Company restructured sixteen of its existing notes payable with DVI Financial Services, Inc. reducing its monthly payments by approximately $210,000 per month for the next nine months. In the tenth month, the monthly payments increase to approximately $350,000 per month, an increase of $16,000 per month over historical payment levels. The short-term cash flow savings are approximately $1,845,000. The revised notes bear interest at approximately 8.5% to 10.5% and have terms from 45 to 71 months with six notes payable having balloon payments. Beginning in April 2003, the Company began receiving short-term working capital loans from GE Healthcare Financial Services for $200,000 per month for nine months, or $1,800,000. Subsequent to the quarter's end, the Company will still receive eight installments totaling $1,600,000. The notes will accrue interest only until the final installment with the first payment for all nine notes to be made in January 2004. The five-year notes payable bear interest at 9.00%. In May 2003, the Company sent out a solicitation requesting current subordinated debenture holders to extend its term from June 2003 to June 2008. In consideration for the deferral, the Company will increase the interest from 10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment. In addition, the Company will reduce the conversion rate from $12.00 to $2.50 per share for those consenting bondholders. The Company also agreed not to redeem the bonds prior to June 2005. As of June 10, 2003, the Company had received consents to extend for $9,148,000 of the bondholders. It is anticipated more consents will be received in the upcoming weeks. On July 1, 2003, the Company will pay the final interest payment at 10% (per annum) and intends to provide a mechanism for those bondholders who choose not to extend the term of the bonds to contact the Company for payment. As of October 1, 2003, the bondholders will be paid interest on their principal at 11.5% (per annum). Effective May 1, 2003, the Company received an increase in its capitation reimbursement from Oasis Medical Group averaging approximately $45,000 per month which will benefit the Company's Desert Advanced facilities (Palm Springs and Palm Desert). Effective July 1, 2003, the Company entered into a new capitation arrangement with Lakeside Medical Group for approximately 50,000 lives primarily benefiting the Company's Northridge, Burbank and Tower facilities. 10 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - SUBSEQUENT EVENTS - continued Effective August 1, 2003, the Company will form a new LLC with CTI Molecular Imaging which will provide PET services at its Tower Roxsan facility. CTI will provide the equipment and the Company will provide the facility, physician, employees and supplies necessary to provide the services. Roxsan currently has sufficient space to house the PET so the Company will only need to provide the variable expenditures necessary. NOTE 9 - LIQUIDITY 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. At April 30, 2003, the Company has a deficiency in equity of $52,187,000 compared to $50,921,000 as of October 31, 2002, and a working capital deficiency of $45,992,000 as of April 30, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. Over the past several years, management has been addressing the issues that have lead to these deficiencies, and the results of management's plans and efforts have been positive in two of the last three years. However, the results of the last twelve months show that continued effort is necessary in the future to allow the Company to operate profitably. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In December 2002, the Company opened a new center in Rancho Bernardo. The Company has no current plans to open any new facilities in the near future. o Increase revenue by expanding existing facilities or opening new locations close to existing sites. In order to obtain certain new large contracts, the Company has opened nearby x-ray or satellite offices to meet the increase in patient volume for a certain region. In January 2002, the Company opened two x-ray offices near its Temecula facility which allowed the Company to obtain a new capitation contract for approximately 62,000 lives. In addition, to meet demand and generate economies of scale, the Company has consolidated its mammography and ultrasound services at a few of its largest facilities into separate womens' centers. In September 2002, the Company opened a women's center adjacent to its Orange Imaging facility. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursements fall short of the Company's costs. The Company will renegotiate several of its existing capitation contracts with the goal of increasing net reimbursement for the current fiscal year. Effective May 1, 2003, the Company received an increase in its capitation reimbursement from Oasis Medical Group averaging approximately $45,000 per month which will benefit the Company's Desert Advanced facilities (Palm Springs and Palm Desert). o Continue to evaluate all facilities' operations and trim excess operating and general and administrative costs where it is feasible to do so including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. During the second quarter of fiscal 2003, the Company closed two of its satellite x-ray facilities servicing its Riverside and Long Beach (Los Coyotes) locations, respectively. The closures were cost reduction measures where volume at these locations could be directed to other nearby facilities with existing equipment operating below capacity. 11 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - LIQUIDITY - CONTINUED o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. Upgrades and new equipment would be acquired only when anticipated increases in patient volume support the increased debt service. o 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. In May 2003, the Company restructured sixteen of its existing notes payable with DVI Financial Services, Inc. reducing its monthly payments by approximately $210,000 per month for the next nine months. In the tenth month, the month payments increase to approximately $350,000 per month, an increase of $16,000 per month over historical payment levels. The short-term cash flow savings are approximately $1,845,000. The revised notes bear interest at approximately 8.5% to 10.5% and have terms from 45 to 71 months with six notes payable having balloon payments. Beginning in April 2003, the Company began receiving short-term working capital loans from GE Healthcare Financial Services for $200,000 per month for nine months, or $1,800,000. Subsequent to the quarter's end, the Company will still receive eight installments totaling $1,600,000. The notes will accrue interest only until the final installment with the first payment for all nine notes to be made in January 2004. The five-year notes payable bear interest at 9.00%. On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. As part of that process, the FDIC advised the Company that until its account was sold its credit line would be reduced to $15.5 million. During the second quarter of fiscal 2003, the FDIC sold the accounts receivable portfolio to GF Asset Management, Inc., a division of GE. As a result of the Company's relationship with GE, both companies are working on an arrangement to continue to provide a revolving line of credit with the Company past the December 31, 2003 termination possibly consolidating all of the Company's receivables into one line of credit. In May 2003, the Company sent out a solicitation requesting current subordinated debenture holders to extend its term from June 2003 to June 2008. In consideration for the deferral, the Company will increase the interest from 10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment. In addition, the Company will reduce the conversion rate from $12.00 to $2.50 per share for those consenting bondholders. The Company also agreed not to redeem the bonds prior to June 2005. As of June 10, 2003, the Company had received consents to extend for $9,148,000 of the bondholders. It is anticipated more consents will be received in the upcoming weeks. On July 1, 2003, the Company will pay the final interest payment at 10% (per annum) and intends to provide a mechanism for those bondholders who choose not to extend the term of the bonds to contact the Company for payment. As of October 1, 2003, the bondholders will be paid interest on their principal at 11.5% (per annum). The Company believes it will have sufficient funds under its available financing resources to purchase the remaining debentures, if necessary, but such action will severely affect the Company's liquidity. 12 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - LIQUIDITY - CONTINUED o Continue its attempt to settle historical notes payable, subordinated bond debentures and other debt at a discount. o Depending on price, market circumstances and strategic buyers, the Company may look to sell non core assets. Effective March 31, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for $283,000, which represented 50% of the remaining liabilities, resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. The Company operates in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expense of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment. To the extent the Company is unable to generate sufficient cash from operations, or the Company is unable to structure or obtain operating leases, it may be unable to meet its capital expenditure requirements. Furthermore, the Company may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to it, if at all. 13 ITEM 2: PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GENERAL Primedex Health Systems, Inc., incorporated on October 21, 1985, provides diagnostic imaging services through its 55 facilities. The Company arranges for the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology to the public. The consolidated financial statements include the accounts of Primedex Health Systems, Inc., and its subsidiaries outlined as follows: o Radnet Management, Inc. ["Radnet"] Subsidiaries o Radnet Sub, Inc. ["Tower"], o Radnet Heartcheck Management, Inc., o Radnet Managed Imaging Services, Inc. ["RMIS"], o SoCal MR Site Management, Inc., o Radnet Management I, Inc., o Radnet Management II, Inc. ["Modesto"], o Westchester Imaging Group (a 50% joint venture), o Burbank Advanced Imaging Center, LLC (75%), o Rancho Bernardo Advanced Imaging Center, LLC (75%) o Diagnostic Imaging Services, Inc. ["DIS"] Both Radnet and DIS are combined with Beverly Radiology Medical Group III ["BRMG"] 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. Westchester Imaging Group ("WIG") was consolidated with the Company based upon the criteria of EITF 97-2 insofar as the Company had a controlling financial interest in WIG through a contractual management arrangement. The Company's share of Westchester Imaging Group was sold on March 31, 2003. 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 and administrative services to BRMG for which they receive a management fee. HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT The administrative provisions of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") direct the federal government to adopt national electronic standards for automated transfer of certain health care data between health care payors, plans and providers. HIPAA is designed to enable the entire health care industry to communicate electronic data using a single set of standards, thus eliminating all nonstandard formats currently in use. The Company's contracted radiology practices and diagnostic imaging centers are "covered entities" under HIPAA, and as such, must comply with the HIPAA electronic data interchange mandates. The Company is required to be compliant by October 16, 2003. The Company is in the process of determining the readiness status of its software vendors, payors and claim clearinghouses to assess exposure with regard to this legislation. The Company is at risk for both its own HIPAA compliance and the compliance of those with whom it does business, particularly third party payors. There can be no assurance that HIPAA compliance issues will not have an adverse effect on the Company's business, results of operations or financial condition. 14 FORWARD LOOKING STATEMENTS: Throughout this report the Company makes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include words such as "may," "will," "would," "could," "likely," "estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate" and other similar words and include all discussions about the Company's acquisition and development plans. The Company does not guarantee that the transactions and events described in this report will happen as described or that any positive trends noted in this report will continue. The forward-looking statements contained in this report are generally located in the material set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," but may be found in other locations as well. These forward-looking statements generally relate to Company plans, objectives and expectations for future operations and are based upon management's reasonable estimates of future results or trends. Although the Company believes that its plans and objectives reflected in or suggested by such forward-looking statements are reasonable, the Company may not achieve such plans or objectives. You should read this report completely and with the understanding that actual future results may be materially different from what the Company expects. The Company will not update forward-looking statements even though the situation may change in the future. Specific factors that might cause actual results to differ from the Company's expectation include, but are not limited to: - economic, competitive demographic, business and other conditions in the Company's markets; - a decline in patient referrals; - change in the rates or methods of third-party reimbursement for diagnostic imaging services; - the termination of contracts with third party payers; - the availability of additional capital to fund capital expenditure requirements; - burdensome lawsuits against contracted radiology practices and the Company; - reduced operating margins due to managed care contracts and capitated fee arrangements; - any failure on the Company's part to comply with state and federal anti-kickback and anti-self-referral laws or any other applicable healthcare regulations; - the Company's substantial indebtedness, debt service requirements and liquidity constraints; - risks related to convertible subordinated debentures and healthcare securities generally; - unforeseen technological changes; and - other factors discussed elsewhere in this report. 15 All future written and verbal forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002 The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income bear to net revenue and the percentage dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR PERCENT OF NET REVENUE INCREASE SIX MONTHS ENDED APRIL 30, (DECREASE) --------------------------------------- --------------------- 2003 2002 `02 TO `03 ------------------- ------------------- --------------------- Revenue 285.8% 265.8 % 16.4% Less: Allowances (185.8) (165.8) 21.4 ------------------- ------------------- --------------------- Net revenue 100.0 100.0 8.3 Operating expense Operating expenses (74.1) (71.7) 12.0 Depreciation and amortization (11.9) (10.8) 20.0 Provision for bad debts (5.6) (3.8) 56.6 Gain (loss) on sale of centers and equipment 4.1 (0.1) (3701.2) ------------------- ------------------- --------------------- Total operating expense (87.5) (86.4) 9.6 ------------------- ------------------- --------------------- Income from operations 12.5 13.6 (0.4) Interest expense, net (12.8) (11.8) 17.9 Other (expense) income, net (1.1) 1.0 (226.5) ------------------- ------------------- --------------------- (Loss) Income before minority (1.4) 2.8 (155.5) interest Minority interest (0.4) (0.1) 267.1 ------------------- ------------------- --------------------- Net income (loss) (1.8) 2.7 (173.9) =================== =================== =====================
The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the six months ended April 30, 2003 compared to the six months ended April 30, 2002. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. 2003 2002 ---- ---- NET REVENUE $71,630,000 $ 66,163,000 - ----------- Revenue of the contracted radiology practices and diagnostic imaging centers is recorded when services are rendered based upon established charges and reduced by contractual allowances. The Company utilizes historical collection experience 16 in estimating contractual allowances. The factors influencing the historical collection experience include the contracted radiology practices' and diagnostic imaging centers' patient or insurance mix, impact of managed care contract pricing and contract revenue and the aging of the patient accounts receivable balances. As these factors change, the historical collection experience is revised accordingly in the period known. Net revenue as a percentage of gross revenue may change from period to period for a variety of reasons including changes in reimbursement and changes in fee schedules. As the Company consolidates its billing into one internal system, a universal gross fee schedule is being utilized which may differ from previous gross charge amounts from 5% to 30%. In those cases, the individual facility's collection percentage would decrease to accurately reflect the period's net revenue. The Company anticipates all facilities will be converted to its internal billing and collection system by fiscal year-end with the exception of its three Tower locations. Net revenue increased approximately $5,467,000, or 8.3%, for the six months ended April 30, 2003, compared to the same period last year. Of the net revenue increase, 40.2% was due to the addition of four new sites subsequent to November 1, 2001 (Burbank, Tarzana Advanced, Grove Diagnostic and Rancho Bernardo). The remaining 59.8% increase was due primarily to new contracts and increases in throughput at many sites due to the addition or upgrade of medical equipment and expansion of existing facilities. In particular were improvements at the Company's Orange facility where net revenue increased by approximately $1,374,000 during the six months ended April 30, 2003 versus the same period the prior year due to its expansion in late fiscal 2002. OPERATING EXPENSES 2003 2002 - ------------------ ---- ---- OPERATING EXPENSES $ 53,089,000 $ 47,421,000 DEPRECIATION AND AMORTIZATION 8,551,000 7,125,000 PROVISION FOR BAD DEBTS 3,989,000 2,547,000 (GAIN) LOSS ON SALE OF INTEREST IN CENTER OR EQUIPMENT (2,953,000) 82,000 ------------- ------------- TOTAL OPERATING EXPENSES $ 62,676,000 $ 57,175,000 Operating expenses for the six months ended April 30, 2003 increased approximately $5,668,000, or 12.0%, compared to the same period last year. The majority of this increase was due to a 8.3% increase in net revenue and the variable nature of many of the expense line items including, but not limited to, medical supplies, billing fees, percentage of revenue agreements relating to physician reading fees and the GE repair and maintenance agreement which increased contracted fees from 3.64% to 3.74% of net revenue effective November 1, 2002. In addition, many sites expanded their operations in late fiscal 2002 including Orange Imaging Center which opened two additional facilities across the street. Included in operating expenses for the six months ended April 30, 2003 and 2002 is approximately $31,668,000 and $28,703,000, respectively, for salaries and reading fees, approximately $4,758,000 and $4,184,000, respectively, for building and equipment rentals, and approximately $16,663,000 and $14,534,000, respectively, in general and administrative expenditures. The Company's general and administrative expenses include billing fees, medical supplies, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities and other expenses including marketing, auto expenses and travel. During fiscal 2002, the Company in negotiation with some of its outside physician groups converted some of its fixed fee agreements to percent of revenue arrangements. At these centers, including, but not limited to, DRI, Vacaville and Santa Rosa, the physician fees now range from 15% to 18% of net revenue as opposed to a fixed salary. During the six months ended April 30, 2003, these three sites generated increases in net revenue (less provision for bad debt) of approximately $800,000 resulting in additional professional reading fees of approximately $130,000 compared to last year. In addition, with the expansion of facilities and increases in the quantity of medical equipment, the Company was required to hire additional technologists and clinic personnel. 17 During the last quarters of fiscal 2002, the Company experienced significant insurance rate increases upon policy renewals. From July to October 2002, general liability rates increased 50%, workers compensation insurance rates increased 45% and malpractice rates increased 80%. For the six months ended April 30, 2003, the Company's costs for insurance increased 48%, or $850,000, compared to the same period last year. Depreciation and amortization for the six months ended April 30, 2003 increased approximately $1,426,000, or 20.0%, compared to the same period last year. The increase is due to the addition of new sites and the upgrade or addition of equipment throughout fiscal 2002 and early fiscal 2003. As of April 30, 2003, gross property and equipment was approximately $139 million compared to approximately $121 million as of April 30, 2002. During the twelve-month period from April 30, 2002 to April 30, 2003, the Company purchased or acquired equipment under lease of approximately $23.8 million and disposed or sold equipment of approximately $5.6 million. The increase in equipment resulted in increased business property taxes of approximately $240,000, or 36%, for the six months ended April 30, 2003 as compared to the same period in the prior year. Provision for bad debt for the six months ended April 30, 2003 increased approximately $1,442,000, or 56.6%, compared to the same period last year. Coupled with the increase in net revenue, the Company's overall bad debt percentage increased from approximately 1.4% of gross revenue to approximately 1.9% during fiscal 2002. The Company's historical percentage was primarily affected by the write-off of one individual contract during fiscal 2002. Gain on sale of centers and equipment for the six months ended April 30, 2003 increased $3,035,000, or 3701.2%, compared to the same period last year. The increase is primarily due to the sale of the Company's interest in a center. During the six months ended April 30, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for 50% of the remaining liabilities, approximately $283,000, resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. 2003 2002 ---- ---- INTEREST EXPENSE, NET $ 9,178,000 $ 7,785,000 - --------------------- Net interest expense for the six months ended April 30, 2003 increased approximately $1,393,000, or 17.9%, compared to the same period last year. The increase is primarily a result of acquisitions coupled with new equipment financing offset by decreases in line of credit interest charges with the reductions in the prime interest rate during the respective periods. 2003 2002 ---- ---- OTHER (EXPENSE) INCOME, NET $(792,000) $ 626,000 - --------------------------- Other income, net of other expense, for the six months ended April 30, 2003 decreased approximately $1,418,000, or 226.5%, compared to the same period last year. Other income consists of professional reading income, record copy income, deferred income on the sale and leaseback of the Company's Orange facility and other miscellaneous receipts. Other expenses consist primarily of modification fee amortization and other miscellaneous expenses or write-offs. During the six months ended April 30, 2003, the Company incurred a one-time charge for the write-off of approximately $218,000 in other current assets relating to its Tower Heartcheck operation and expensed approximately $780,000 for actual and anticipated expenditures relating to pending litigation involving covenants not to compete (see Part II). These expenses were offset by other income including professional reading, record copy and deferred revenue. In addition to other 18 income, during the six months ended April 30, 2002, the Company received approximately $80,000 in general insurance refund checks for losses sustained at its Northridge and Tustin facilities, and received approximately $150,000 for an insurance reimbursement for a business interruption loss at its Roxsan facility when its MRI sustained water damage and was out of service for approximately six weeks. 2003 2002 ---- ---- MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 279,000) ($ 76,000) - ------------------------------------------- Minority interest expense for the six months ended April 30, 2003 increased approximately $203,000, or 267.1%, compared to the same period last year. Minority interest is primarily comprised of 25% of the earnings of Burbank Advanced Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of the earnings of Westchester Imaging Group. The Company's share in Westchester Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in December 2002. During the six months ended April 30, 2003 and 2002, minority interest related to Westchester was approximately ($255,000) and ($161,000), respectively. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2003 AND 2002 The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income bear to net revenue and the percentage dollar increase (decrease) of such items from period to period.
PERCENTAGE DOLLAR PERCENT OF NET REVENUE INCREASE THREE MONTHS ENDED APRIL 30, (DECREASE) --------------------------------------- --------------------- 2003 2002 `02 TO `03 ------------------- ------------------- --------------------- Revenue 289.7% 272.0 % 13.4% Less: Allowances (189.7) (172.0) 17.4 ------------------- ------------------- --------------------- Net revenue 100.0 100.0 6.4 Operating expense Operating expenses (73.1) (70.7) 9.9 Depreciation and amortization (11.9) (11.2) 13.3 Provision for bad debts (5.7) (4.0) 51.4 (Gain) loss on sale of interest in center or equipment 8.2 (0.3) (3309.8) ------------------- ------------------- --------------------- Total operating expense (82.5) (86.2) 1.8 ------------------- ------------------- --------------------- Income from operations 17.5 13.8 35.3 Interest expense, net (12.7) (11.8) 14.3 Other, net (2.5) 0.9 (388.6) ------------------- ------------------- --------------------- Income before minority interest 2.3 2.9 (13.3) Minority interest (0.4) (0.4) 5.6 ------------------- ------------------- --------------------- Net income 1.9 2.5 (16.1) =================== =================== =====================
19 The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the three months ended April 30, 2003 compared to the three months ended April 30, 2002. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. 2003 2002 ---- ---- NET REVENUE $35,884,000 $ 33,722,000 - ----------- Net revenue increased approximately $2,162,000, or 6.4%, for the three months ended April 30, 2003, compared to the same period last year. The majority of the increase was due primarily to new contracts and increases in throughput at many sites due to the addition or upgrade of medical equipment and expansion of existing facilities. In particular were improvements at the Company's Orange facility where net revenue increased by approximately $718,000 during the three months ended April 30, 2003 versus the same period the prior year due to its expansion in late fiscal 2002. In addition, the quarter showed dramatic improvements in two of its newest centers, Burbank and Tarzana Advanced, which opened in late November 2001 and January 2002, respectively, where net revenues increased approximately $369,000 and $337,000, respectively, for the three months ended April 30, 2003 versus the same period the prior year. OPERATING EXPENSES 2003 2002 - ------------------ ---- ---- OPERATING EXPENSES $ 26,222,000 $ 23,850,000 DEPRECIATION AND AMORTIZATION 4,298,000 3,792,000 PROVISION FOR BAD DEBTS 2,040,000 1,347,000 (GAIN) LOSS ON SALE OF INTEREST IN CENTER OR EQUIPMENT (2,953,000) 92,000 ------------- ------------- TOTAL OPERATING EXPENSES $ 29,607,000 $ 29,081,000 Operating expenses for the three months ended April 30, 2003 increased approximately $2,372,000, or 9.9%, compared to the same period last year. The majority of this increase was due to a 6.4% increase in net revenue and the variable nature of many of the expense line items including, but not limited to, medical supplies, billing fees, percentage of revenue agreements relating to physician reading fees and the GE repair and maintenance agreement which increased contracted fees from 3.64% to 3.74% of net revenue effective November 1, 2002. In addition, many sites expanded their operations in late fiscal 2002 including Orange Imaging Center which opened two additional facilities across the street. Coupled with the expansion of facilities and increases in the quantity of medical equipment, the Company was required to hire additional technologists and clinic personnel. Included in operating expenses for the three months ended April 30, 2003 and 2002 is approximately $15,502,000 and $14,475,000, respectively, for salaries and reading fees, approximately $2,385,000 and $2,129,000, respectively, for building and equipment rentals, and approximately $8,335,000 and $7,246,000, respectively, in general and administrative expenditures. The Company's general and administrative expenses include billing fees, medical supplies, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities and other expenses including marketing, auto expenses and travel. During the last quarters of fiscal 2002, the Company experienced significant insurance rate increases upon policy renewals. From July to October 2002, general liability rates increased 50%, workers compensation insurance rates increased 45% and malpractice rates increased 80%. For the three months ended April 30, 2003, the Company's costs for insurance increased 39%, or $370,000, compared to the same period last year. 20 Depreciation and amortization for the three months ended April 30, 2003 increased approximately $506,000, or 13.3%, compared to the same period last year. The increase is due to the addition of new sites and the upgrade or addition of equipment throughout fiscal 2002 and early fiscal 2003. As of April 30, 2003, gross property and equipment was approximately $139 million compared to approximately $121 million as of April 30, 2002. During the twelve-month period from April 30, 2002 to April 30, 2003, the Company purchased or acquired equipment under lease of approximately $23.8 million and disposed or sold equipment of approximately $5.6 million. The increase in equipment resulted in increased business property taxes of approximately $112,000, or 32%, for the three months ended April 30, 2003 as compared to the same period in the prior year. Provision for bad debt for the three months ended April 30, 2003 increased approximately $693,000, or 51.4%, compared to the same period last year. Coupled with the increase in net revenue, the Company's overall bad debt percentage increased from approximately 1.4% of gross revenue to approximately 1.9% during fiscal 2002. The Company's historical percentage was primarily affected by the write-off of one individual contract during fiscal 2002. Gain on sale of centers and equipment for the three months ended April 30, 2003 increased $3,045,000, or 3309.8%, compared to the same period last year. The increase is primarily due to the sale of the Company's interest in a center. During the three months ended April 30, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for 50% of the remaining liabilities, approximately $283,000, resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. 2003 2002 ---- ---- INTEREST EXPENSE, NET $ 4,558,000 $ 3,987,000 - --------------------- Net interest expense for the three months ended April 30, 2003 increased approximately $571,000, or 14.3%, compared to the same period last year. The increase is primarily a result of acquisitions coupled with new equipment financing offset by decreases in line of credit interest charges with the reductions in the prime interest rate during the respective periods. 2003 2002 ---- ---- OTHER (EXPENSE) INCOME, NET $ (886,000) $ 307,000 - --------------------------- Other income, net of other expense, for the three months ended April 30, 2003 decreased approximately $1,193,000, or 388.6%, compared to the same period last year. Other income consists of professional reading income, record copy income, deferred income on the sale and leaseback of the Company's Orange facility and other miscellaneous receipts. Other expenses consist primarily of modification fee amortization and other miscellaneous expenses or write-offs. During the three months ended April 30, 2003, the Company incurred a one-time charge for the write-off of approximately $218,000 in other current assets relating to its Tower Heartcheck operation and expensed approximately $780,000 for actual and anticipated expenditures relating to pending litigation involving covenants not to compete (see Part II). These expenses were offset by other income including professional reading, record copy and deferred revenue. In addition to other income, during the three months ended April 30, 2002, the Company recognized deferred income from the sale and leaseback of its Orange facility of $23,000 and received approximately $80,000 in general insurance refund checks for losses sustained at its Northridge and Tustin facilities. 2003 2002 ---- ---- MINORITY INTEREST IN EARNINGS OF SUBSIDIARY ($ 132,000) ($ 125,000) - ------------------------------------------- 21 Minority interest expense for the three months ended April 30, 2003 increased approximately $7,000, or 5.6%, compared to the same period last year. Minority interest is primarily comprised of 25% of the earnings of Burbank Advanced Imaging Center and Rancho Bernardo Advanced Imaging Center and 50% of the earnings of Westchester Imaging Group. The Company's share in Westchester Imaging Group was sold on March 31, 2003. Rancho Bernardo Advanced opened in December 2002. During the three months ended April 30, 2003 and 2002, minority interest related to Westchester was approximately ($113,000) and ($108,000), respectively. LIQUIDITY AND CAPITAL RESOURCES Cash increased for the six months ended April 30, 2003 by $18,000 and decreased for the six months ended April 30, 2002 by $33,000. Cash used by investing activities for the six months ended April 30, 2003 was $749,000 compared to $2,176,000 for the six months ended April 30, 2002. For the six months ended April 30, 2003 and 2002, the Company purchased property and equipment for approximately $2,116,000 and $3,953,000, respectively, received proceeds from the sale of imaging centers or property and equipment of $1,367,000 and $1,700,000, respectively. During the six months ended April 30, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for 50% of the remaining liabilities of approximately $283,000 resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. During the six months ended April 30, 2002, the Company sold the land and building at its Northridge facility for $1,700,000 and leased the existing facility for ten years with a beginning base rent of $13,458 per month. The Company recognized a loss on the sale of approximately $147,000. In addition, during the six months ended April 30, 2002, the Company received payments from related parties of $77,000. Cash used for financing activities for the six months ended April 30, 2003 was $5,731,000 compared to $4,928,000 for the same period in 2002. For the six months ended April 30, 2003 and 2002, the Company made principal payments on capital leases and notes payable of approximately $13,179,000 and $10,542,000, respectively, increased its cash disbursements in transit by $901,000 and $531,000, respectively, received proceeds from the sale of common stock of $28,000 and $2,000, respectively, received proceeds from borrowing under existing lines of credit and refinancing arrangements of approximately $6,864,000 and $5,360,000, respectively, paid loan fees of $14,000 and $10,000, respectively, received payments from related parties of $31,000 and $119,000, respectively, and made joint venture distributions of $300,000 and $275,000, respectively. In addition, during the six months ended April 30, 2002, the Company received joint venture proceeds of $125,000 for its new center in Rancho Bernardo. 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. At April 30, 2003, the Company has a deficiency in equity of $52,187,000 compared to $50,921,000 as of October 31, 2002, and a working capital deficiency of $45,992,000 as of April 30, 2003 compared to a deficiency of $44,668,000 as of October 31, 2002. Over the past several years, management has been addressing the issues that have lead to these deficiencies, and the results of management's plans and efforts have been positive in two of the last three years. However, the results of the last twelve months show that continued effort is necessary in the future to allow the Company to operate profitably. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In December 2002, the Company opened a new center in Rancho Bernardo. The Company has no current plans to open any new facilities in the near future. 22 o Increase revenue by expanding existing facilities or opening new locations close to existing sites. In order to obtain certain new large contracts, the Company has opened nearby x-ray or satellite offices to meet the increase in patient volume for a certain region. In January 2002, the Company opened two x-ray offices near its Temecula facility which allowed the Company to obtain a new capitation contract for approximately 62,000 lives. In addition, to meet demand and generate economies of scale, the Company has consolidated its mammography and ultrasound services at a few of its largest facilities into separate womens' centers. In September 2002, the Company opened a women's center adjacent to its Orange Imaging facility. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursements fall short of the Company's costs. The Company will renegotiate several of its existing capitation contracts with the goal of increasing net reimbursement for the current fiscal year. Effective May 1, 2003, the Company received an increase in its capitation reimbursement from Oasis Medical Group averaging approximately $45,000 per month which will benefit the Company's Desert Advanced facilities (Palm Springs and Palm Desert). o Continue to evaluate all facilities' operations and trim excess operating and general and administrative costs where it is feasible to do so including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. During the second quarter of fiscal 2003, the Company closed two of its satellite x-ray facilities servicing its Riverside and Long Beach (Los Coyotes) locations, respectively. The closures were cost reduction measures where volume at these locations could be directed to other nearby facilities with existing equipment operating below capacity. o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. Upgrades and new equipment would be acquired only when anticipated increases in patient volume support the increased debt service. o 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. In May 2003, the Company restructured sixteen of its existing notes payable with DVI Financial Services, Inc. reducing its monthly payments by approximately $210,000 per month for the next nine months. In the tenth month, the month payments increase to approximately $350,000 per month, an increase of $16,000 per month over historical payment levels. The short-term cash flow savings are approximately $1,845,000. The revised notes bear interest at approximately 8.5% to 10.5% and have terms from 45 to 71 months with six notes payable having balloon payments. Beginning in April 2003, the Company began receiving short-term working capital loans from GE Healthcare Financial Services for $200,000 per month for nine months, or $1,800,000. Subsequent to the quarter's end, the Company will still receive eight installments totaling $1,600,000. The notes will accrue interest only until the final installment with the first payment for all nine notes to be made in January 2004. The five-year notes payable bear interest at 9.00%. On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. As part of that process, the FDIC advised the Company that until its account was sold its credit line would be reduced to $15.5 million. During the second quarter of fiscal 2003, the FDIC sold the accounts receivable portfolio to GF Asset Management, Inc., a division of GE. As a result of the Company's relationship with GE, both companies are working on an arrangement to continue to provide a revolving line of credit with the Company past the December 31, 2003 termination possibly consolidating all of the Company's receivables into one line of credit. 23 In May 2003, the Company sent out a solicitation requesting current subordinated debenture holders to extend its term from June 2003 to June 2008. In consideration for the deferral, the Company will increase the interest from 10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment. In addition, the Company will reduce the conversion rate from $12.00 to $2.50 per share for those consenting bondholders. The Company also agreed not to redeem the bonds prior to June 2005. As of June 10, 2003, the Company had received consents to extend for $9,148,000 of the bondholders. It is anticipated more consents will be received in the upcoming two weeks. On July 1, 2003, the Company will pay the final interest payment at 10% (per annum) and intends to provide a mechanism for those bondholders who choose not to extend the term of the bonds to contact the Company for payment. As of October 1, 2003, the bondholders will be paid interest on their principal at 11.5% (per annum). The Company believes it will have sufficient funds under its available financing resources to purchase the remaining debentures, if necessary, but such action will severely affect the Company's liquidity. o Continue its attempt to settle historical notes payable, subordinated bond debentures and other debt at a discount. o Depending on price, market circumstances and strategic buyers, the Company may look to sell non core assets. Effective March 31, 2003, the Company sold its 50% share of Westchester Imaging Group for $2,500,000. As part of the transaction, the Company purchased 100% of the accounts receivable generated through March 31, 2003 for $850,000 and reimbursed the joint venture for $283,000, which represented 50% of the remaining liabilities, resulting in net proceeds of approximately $1,367,000. The Company recognized a gain on the transaction of approximately $2,952,000. The Company operates in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expense of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment. To the extent the Company is unable to generate sufficient cash from operations, or the Company is unable to structure or obtain operating leases, it may be unable to meet its capital expenditure requirements. Furthermore, the Company may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to it, if at all. The Company's future obligations for existing notes payable, equipment under capital lease, lines of credit, subordinated bond debentures and equipment and building operating leases for the next five years and thereafter are as follows (numbers in thousands):
05/01/03 05/01/04 05/01/05 05/01/06 05/01/07 to to to to to There- 04/30/04 04/30/05 04/30/06 04/30/07 04/30/08 after Total -------- -------- -------- -------- -------- -------- -------- Notes payable $14,834 $15,211 $23,216 $12,151 $ 8,944 $ 3,054 $77,410 Interest $ 7,695 $ 6,066 $ 4,190 $ 2,157 $ 1,065 $ 201 $21,374 -------- -------- -------- -------- -------- -------- -------- Total $22,529 $21,277 $27,406 $14,308 $10,009 $ 3,255 $98,784 Capital leases $12,663 $13,098 $13,203 $10,960 $ 8,439 $ 6,133 $64,496 Interest $ 5,639 $ 4,393 $ 3,116 $ 1,925 $ 996 $ 336 $16,405 -------- -------- -------- -------- -------- -------- -------- Total $18,302 $17,491 $16,319 $12,885 $ 9,435 $ 6,469 $80,901 ======== ======== ======== ======== ======== ======== ======== Lines of credit $16,586 $ -- $ -- $ -- $ -- $ -- $16,586 ======== ======== ======== ======== ======== ======== ======== Bond debentures $ 7,143 $ -- $ -- $ -- $ -- $ 9,148 $16,291 ======== ======== ======== ======== ======== ======== ======== Operating Leases: Building $ 7,088 $ 6,154 $ 5,788 $ 5,110 $ 3,951 $16,470 $44,561 Equipment $ 2,300 $ 2,010 $ 1,686 $ 908 $ 336 $ -- $ 7,240 -------- -------- -------- -------- -------- -------- -------- Total $ 9,388 $ 8,164 $ 7,474 $ 6,018 $ 4,287 $16,470 $51,801 ======== ======== ======== ======== ======== ======== ========
24 The Company's line of credit with Coast Business Credit, due December 2003, is classified as a current liability primarily because it is collateralized by account receivable and the eligible borrowing base is also classified as a current asset. On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. As part of that process, the FDIC advised the Company that until its account was sold its credit line would be reduced to $15.5 million. During the second quarter of fiscal 2003, the FDIC sold the accounts receivable portfolio to GF Asset Management, Inc., a division of GE. As a result of the Company's relationship with GE, both Companies are working on an arrangement to continue to provide a revolving line of credit with the Company past the December 31, 2003 termination possibly consolidating all of the Company's receivables into one line of credit. Effective March 1, 2000, the Company entered into an agreement with GE Medical Systems for the maintenance of the majority of its medical equipment for a fee based upon a percentage of net revenues with minimum aggregate net revenue requirements. In August 2001, the agreement was amended and expires on October 31, 2005. The service fee ranges from 2.82% to 3.74% of net revenue (less provisions for bad debt) and the aggregate minimum net revenue ranges from $85,000,000 to $125,000,000 during the term of the agreement. For the six months ended April 30, 2003, the monthly service fees were 3.74% of net revenue. On August 31, 2001, the Company entered into a sale-leaseback transaction in which it sold its Orange Imaging facility for $2,250,000 and leased it back for 10 years. Rental commenced at $18,750 per month and increases by 3% per annum. The Company has an option to repurchase the property at any time prior to August 31, 2006, at fair market value (but not less than $2,350,000 nor more than $2,550,000). On March 18, 2002, the Company entered into a sale-leaseback transaction in which it sold its Northridge Imaging facility for $1,700,000 and leased it back for 10 years. Rental commenced at $13,458 per month and increases to $14,167 in 2003 to $14,167 in 2004 to $14,875 in 2005 to $15,583 in 2006 and thereafter based upon a cost of living adjustment. The Company has an option to repurchase the property from 2004 until 2007 at an exercise price commencing at $1,775,000 and increasing by $25,000 in the next year and an additional $50,000 in the third year. The Company's working capital needs currently are provided under three lines of credit. Under one agreement with the GF Asset Management (previously Coast Business Credit), due December 31, 2003, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, the prior four months' cash collections, or $22,000,000. In any scenario, the Company may borrow up to the aggregate collection of receivables in the prior four months as long as the collections in any one month do not decrease by more than 25% from the prior month. 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 $30,000. At April 30, 2003 approximately $14,371,000 was outstanding under this line. 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 $10,000,000 of the line. The line is further secured by a $5,000,000 life insurance policy on the life of the president and C.E.O. The second and third agreements are with DVI Business Credit. Under the first of these arrangements, 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 April 30, 2003, approximately $2,208,000 was outstanding on this line. This line of credit is on a month-to-month basis. This credit line is collateralized by approximately 80% of the Tower division's eligible accounts receivable. Under the second agreement with DVI, the Company may borrow the lesser of 85% of eligible accounts receivable or $5,000,000. The credit line is collateralized by six of the Company's newest facilities [Desert Advanced, Grove, Tarzana Advanced, Rancho Bernardo, Burbank and Modesto]. At April 30, 2003, approximately $7,000 was outstanding on this line. 25 The Company's convertible subordinated debentures mature in June 2003. In May 2003, the Company sent out a solicitation requesting current subordinated debenture holders to extend its term from June 2003 to June 2008. In consideration for the deferral, the Company will increase the interest from 10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment. In addition, the Company reduced the conversion rate from $12.00 to $2.50 per share for those consenting bondholders. As of June 10, 2003, the Company had consents to extend for $9,148,000 of the current bondholders. It is anticipated more consents will be received in the upcoming weeks. On July 1, 2003, the Company will pay the final interest payment at 10% (per annum) and provide a mechanism for those bondholders who choose not to extend to contact the Company for payment of principal. Upon surrender of their bond certificates, the individuals will be paid and the bonds retired with the transfer agent. As of October 1, 2003, the remaining bondholders will be paid interest on their principal at 11.5% (per annum). The Company believes it will have sufficient funds under its available financing resources to purchase the remaining debentures, if necessary, but such action will severely affect the Company's liquidity. The Company operates in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expense of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment. To the extent the Company is unable to generate sufficient cash from operations, or the Company is unable to structure or obtain operating leases, it may be unable to meet its capital expenditure requirements. Furthermore, the Company may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to it, if at all. 26 ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company sells its services exclusively in the United States and receives payment for its services exclusively in United States dollars. As a result, the financial results are unlikely to be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The majority of the Company's interest expense is not sensitive to changes in the general level of interest in the United States because the majority of the Company's indebtedness has interest rates which were fixed when the Company entered into the note payable or capital lease obligation. None of the Company's long-term liabilities have variable interest rates. Only the Company's lines of credit, classified as current liabilities on the Company's financial statements, is interest expense sensitive to changes in the general level of interest because it is based upon the current prime rate plus a margin. ITEM 4 - CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's principal executive officer and principal financial officer has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act") are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. 27 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS a) On or about February 12, 2003, the Company commenced an action against Tower Radiology Medical Group ("Tower") and certain affiliated entities with respect to Tower's breach of the existing Agreement between them. The Company contracts with Tower to provide professional medical services at its largest facility located in Beverly Hills, California. In the matter which is presently pending before the American Arbitration Association in Los Angeles, California, the Company alleges that Tower breached certain non-competition provisions of the Agreement existing between them by entering into agreements with St. John's Health Center in Santa Monica, California and Mission Community Hospital in Panorama City, California. Tower disputes the validity of the non-competition provisions. In the event Tower is correct in its view that the non-compete provision is invalid the Company seeks return of approximately $9 million paid to Tower in conjunction with obtaining the non-compete. The Company intends to vigorously prosecute the action. b) On or about March 11, 2003, a cross-complaint was filed by the Company's Modesto Imaging Center landlord against the Company entitled Radnet Management II, Inc. v. HCT Modesto LLC currently pending in the California Superior Court of Alameda and bearing Case No. RG 03080062. The Cross-Complaint arose out of the Company's action against the landlord in which the Company alleged that the landlord withheld information that the Modesto facility was subject to a putative 10 year extension, through 2014, of the expiration of an above-market lease, knowing that the Company had been provided information on or prior to the date the Company acquired the Modesto facility that the lease would expire in 2004. The Company seeks damages in excess of $1.8 million. The landlord's Cross-Complaint seeks damages alleged to be in excess of $800,000 against the Company for interfering with its opportunity to sell the property by denying the assumption and/or enforceability of the putative 10 year lease extension. The Company intends to vigorously prosecute its action and defend the Cross-Complaint. ITEM 2. CHANGES IN SECURITIES There are no matters to be reported under this heading. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There are no matters to be reported under this heading. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There are no matters to be reported under this heading. ITEM 5. OTHER INFORMATION a) On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. As part of that process, the FDIC advised the Company that until its account was sold its credit line would be reduced to $15.5 million. During the second quarter of fiscal 2003, the FDIC sold the Company's accounts receivable portfolio to GF Asset Management, Inc., a division of GE. As a result of the Company's existing relationship with GE, both companies are working on an arrangement to continue to provide a revolving line of credit with the Company past the Coast December 31, 2003 termination date, possibly consolidating all of the Company's receivables into one line of credit. The Company continues to explore with others besides GE the possibility of assuming its credit line. 28 b) Effective March 31, 2003, the Company sold its 50% interest in its Westchester Imaging facility to its partner for $2.5 million. The Company also purchased 100% of the accounts receivable in existence as of March 31, 2003 and reimbursed the partnership for 50% of its then liabilities resulting in net proceeds to the Company of approximately $1,367,000. The Company entered into an agreement with the purchaser whereby it will provide certain ongoing management services to the Westchester facility for which it will receive an amount equal to 8% of the revenues collected at the facility. The Company was also granted an option exercisable through March 31, 2005, whereby it could repurchase it 50% interest in the facility for approximately $2.5 million plus or minus certain adjustments. c) In April 2003, the Company sent out a solicitation requesting subordinated debenture holders to extend its term fro June 2003 to June 2008. In consideration for the deferral, the Company will increase the interest from 10% to 11.5% (per annum) paid quarterly beginning with the October 1, 2003 payment. In addition, the Company will reduce the conversion rate from $12.00 to $2.50 per share for those consenting bondholders. The Company also agreed not to redeem the bonds prior to June 2005. As of June 10, 2003, the Company has received consents to extend for $9,148,000 of the bondholders. It is anticipated more consents will be received in the upcoming weeks. On July 1, 2003, the Company will pay the final interest payment at 10% (per annum) and intends to provide a mechanism for those bondholders who choose not to extend the term of the bonds to contact the Company for payment. As of October 31, 2003, bondholders will be paid interest on their principal at 11.5% (per annum). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 - Computation of Earnings Per Share (b) No reports on Form 8-K have been filed during the quarter for which this report is filed 29 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES SIGNATURE - -------------------------------------------------------------------------------- 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. ---------------------------------------------- (Registrant) June 10, 2003 By: Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D., President, Treasurer and Principal Financial Officer 30 CERTIFICATION I, Howard G. Berger, M.D., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Primedex Health Systems, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 31 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 10, 2003 /s/ Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D. President and Principal Financial Officer 32 EX-11 3 primedex_10qex-11.txt PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE - -----------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended April April ------------------------------ ------------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- ------------- BASIC Weighted average number of common shares outstanding used in computing basic earnings per share 41,100,734 40,759,664 41,076,590 40,745,928 (Loss) Income available to common stockholders $ 701,000 $ 836,000 $ (1,295,000) $ 1,753,000 Basic (loss) earnings per share $ 0.02 $ 0.02 $ (0.03) $ 0.04 DILUTED Weighted average number of common shares outstanding used in computing basic earnings per share 41,100,734 40,759,664 41,076,590 40,745,928 Assumed exercise of stock options and warrants -- 4,904,471 -- 2,452,236 ------------- ------------- ------------- ------------- 41,100,734 45,664,135 41,076,590 43,198,164 (Loss) Income available to common stockholders plus assumed conversions $ 701,000 $ 836,000 $ (1,295,000) $ 1,753,000 Diluted (loss) earnings per share $ 0.02 $ 0.02 $ (0.03) $ 0.04
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