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NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
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Jun. 30, 2011
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| Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] |
NOTE
1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
At
June 30, 2011, we operated a group of regional networks
comprised of 206 diagnostic imaging facilities located in six
states with operations primarily in California, Maryland,
Florida, Delaware, New Jersey and New York. We
provide diagnostic imaging services including magnetic
resonance imaging (MRI), computed tomography (CT), positron
emission tomography (PET), nuclear medicine, mammography,
ultrasound, diagnostic radiology, or X-ray, fluoroscopy and
other related procedures. The Company’s operations
comprise a single segment for financial reporting
purposes.
The
unaudited condensed
consolidated financial statements include the accounts of
Radnet Management, Inc. (or “Radnet Management”)
and Beverly Radiology Medical Group III, a professional
partnership (“BRMG”). The unaudited
condensed consolidated financial statements also
include Radnet Management I, Inc., Radnet Management II,
Inc., Radiologix, Inc., Radnet Management Imaging
Services, Inc., Delaware Imaging Partners, Inc., New Jersey
Imaging Partners, Inc. and Diagnostic Imaging Services, Inc.
( “ DIS ” ), all wholly owned subsidiaries of
Radnet Management. All of these affiliated
entities are referred to collectively as
“RadNet”, “we”, “us”,
“our” or the “Company” in this
report.
Accounting
Standards Codification Section 810-10-15-14 stipulates that
generally any entity with (a)
insufficient equity to finance its activities without
additional subordinated financial support provided by any
parties, or (b)
equity holders that, as a group, lack the characteristics
specified in the Codification which evidence a controlling
financial interest, is considered a Variable Interest Entity
(“VIE”). We consolidate all voting
interest entities in which we own a majority voting interest
and all VIEs for which we are the primary beneficiary. We
determine whether we are the primary beneficiary of a VIE
through a qualitative analysis that identifies which variable
interest holder has the controlling financial interest in the
VIE. The variable interest holder who has both of the
following has the controlling financial interest and is the
primary beneficiary: (1) the power to direct the activities
of the VIE that most significantly impact the VIE’s
economic performance and (2) the obligation to absorb losses
of, or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. In performing our
analysis, we consider all relevant facts and circumstances,
including: the design and activities of the VIE, the terms of
the contracts the VIE has entered into, the nature of the
VIE’s variable interests issued and how they were
negotiated with or marketed to potential investors, and which
parties participated significantly in the design or redesign
of the entity.
Howard
G. Berger, M.D. is our President and Chief Executive Officer,
a member of our Board of Directors and owns approximately
14.5% of our outstanding common stock. Dr. Berger also owns,
indirectly, 99% of the equity interests in BRMG. BRMG
provides all of the professional medical services at the
majority of our facilities located in California under a
management agreement with us, and employs physicians or
contracts with various other independent physicians and
physician groups to provide the professional medical services
at most of our other California facilities. We generally
obtain professional medical services from BRMG in California,
rather than provide such services directly or through
subsidiaries, in order to comply with California’s
prohibition against the corporate practice of medicine.
However, as a result of our close relationship with Dr.
Berger and BRMG, we believe that we are able to better ensure
that medical service is provided at our California facilities
in a manner consistent with our needs and expectations and
those of our referring physicians, patients and payors than
if we obtained these services from unaffiliated physician
groups. BRMG is a partnership of ProNet Imaging Medical
Group, Inc. (99%), Breastlink Medical Group, Inc. (100%) and
Beverly Radiology Medical Group, Inc. (99%), each of which
are 99% or 100% owned by Dr. Berger. RadNet
provides non-medical, technical and administrative services
to BRMG for which it receives a management fee, per the
management agreement. Through the management agreement and
our relationship with Dr. Berger, we have exclusive authority
over all non-medical decision making related to the ongoing
business operations of BRMG. Through our management agreement
with BRMG we determine the annual budget of BRMG and make all
physician employment decisions. BRMG has
insignificant operating assets and liabilities, and de
minimis equity. Through the management agreement
with us, all of BRMG’s cash flows are transferred to
us. We have determined that BRMG is a variable
interest entity, and that we are the primary beneficiary, and
consequently, we consolidate the operations of BRMG. BRMG
recognized $27.8 million and $25.7 million of net revenues
for the six months ended June 30, 2011 and 2010,
respectively, and $26.6 million and $24.5 million of
operating expenses for the six months ended June 30, 2011 and
2010, respectively. RadNet recognized $98.9
million and $89.5 million of net revenues for management
services provided to BRMG relating primarily to the technical
portion of total billed revenue. The cash flows of
BRMG are included in the accompanying condensed consolidated
statements of cash flows. All intercompany
balances and transactions have been eliminated in
consolidation.
The
creditors of BRMG do not have recourse to our general credit
and we do not believe
other arrangements would
expose us to material
losses. However, BRMG is managed to recognize no
net income or net loss and, therefore, RadNet may be required
to provide financial support to cover any operating expenses
in excess of operating revenues.
Aside
from centers in California where we contract with BRMG for
the provision of professional medical services, at the
remaining centers in California and at all of the centers
which are located outside of California, we have entered into
long-term contracts with independent radiology groups in each
area to provide physician services at those
facilities. These third party radiology practices
provide professional services, including supervision and
interpretation of diagnostic imaging procedures, in our
diagnostic imaging centers. The radiology
practices maintain full control over the provision of
professional services. The contracted radiology practices
generally have outstanding physician and practice credentials
and reputations; strong competitive market positions; a broad
sub-specialty mix of physicians; a history of growth and
potential for continued growth. In these
facilities we enter into long-term agreements with radiology
practice groups (typically 40 years). Under these
arrangements, in addition to obtaining technical fees for the
use of our diagnostic imaging equipment and the provision of
technical services, we provide management services and
receive a fee based on the practice group’s
professional revenue, including revenue derived outside of
our diagnostic imaging centers. We own the
diagnostic imaging equipment and, therefore, receive 100% of
the technical reimbursements associated with imaging
procedures. The radiology practice groups retain
the professional reimbursements associated with imaging
procedures after deducting management service
fees. We have no financial controlling interest in
the independent (non-BRMG) radiology practices; accordingly,
we do not consolidate the financial statements of those
practices in our consolidated financial statements.
The
accompanying unaudited condensed 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 U.S.
generally accepted accounting principles for complete
financial statements; however, in the opinion of our
management, all adjustments consisting of normal recurring
adjustments necessary for a fair presentation of the
financial position, results of operations and cash flows for
the interim periods ended June 30, 2011 and 2010 have been
made. The results of operations for any interim period are
not necessarily indicative of the results for a full year.
These interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes thereto contained in our annual
report on Form 10-K for the year ended December 31,
2010.
Significant
accounting policies
As
of the period covered in this report, there have been no
material changes to the significant accounting policies we
use, and have explained, in our annual report on Form 10-K
for the fiscal year ended December 31, 2010.
Liquidity
and Capital Resources
We
had a working capital balance of $20.5 million and $5.8
million at June 30, 2011 and December 31, 2010,
respectively. We had net income attributable to
RadNet, Inc.’s common stockholders of $2.6 million for
the six months ended June 30, 2011. We had a net loss
attributable to RadNet, Inc.’s common stockholders of
$15.9 million for the six months ended June 30,
2010. We also had an equity deficit of $77.1
million and $82.5 million at June 30, 2011 and
December 31, 2010, respectively.
We
operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund
operations. In addition to operations, we require
a significant amount of capital for the initial start-up and
development expense of new diagnostic imaging facilities, the
acquisition of additional facilities and new diagnostic
imaging equipment, and to service our existing debt and
contractual obligations. Because our cash flows
from operations have been insufficient to fund all of these
capital requirements, we have depended on the availability of
financing under credit arrangements with third
parties.
Our
business strategy with regard to operations focuses on the
following:
On
April 6, 2010, we completed a series of transactions
which we refer to as our "debt refinancing plan" for an
aggregate of $585 million. As part of the debt
refinancing plan, our wholly owned subsidiary Radnet
Management, Inc. issued and sold $200,000,000 in
10 3/8% senior notes due 2018 (the "senior notes"). All
payments of the senior notes, including principal and
interest, are guaranteed jointly and severally on a senior
unsecured basis by RadNet, Inc. and all of Radnet
Management’s current and future domestic wholly owned
restricted subsidiaries. The senior notes were issued
under an indenture, dated April 6, 2010, by and among Radnet
Management, as issuer, RadNet, Inc., as parent
guarantor, the subsidiary guarantors thereof and
U.S. Bank National Association, as trustee, in a private
placement that was not subject to the registration
requirements of the Securities Act. The senior
notes initially issued on April 6, 2010 in a private
placement were subsequently publicly offered for exchange
enabling holders of the outstanding senior notes to exchange
the outstanding notes for publicly registered exchange notes
with nearly identical terms. The exchange offer
was completed on February 14, 2011.
In
addition to the issuance of senior notes, Radnet Management
entered into a new Credit and Guaranty Agreement with a
syndicate of lenders (the "New Credit Agreement"),
whereby Radnet Management obtained $385,000,000 in senior
secured first-lien bank financing, consisting of (i) a
$285,000,000, six-year term loan facility and (ii) a
$100,000,000, five-year revolving credit facility, including
a swing line subfacility and a letter of credit subfacility
(collectively, the “New Credit Facilities”).
Radnet Management’s obligations under the New
Credit Agreement are unconditionally guaranteed by RadNet,
Inc., all of Radnet Management’s current and future
wholly owned domestic subsidiaries as well as certain
affiliates, including Beverly Radiology Medical Group III and
its equity holders (Beverly Radiology Medical Group, Inc.,
BreastLink Medical Group, Inc. and ProNet Imaging Medical
Group, Inc.). These New Credit Facilities created by
the New Credit Agreement are secured by a perfected
first-priority security interest in all of Radnet
Management’s and the guarantors’ tangible and
intangible assets, including, but not limited to, pledges of
equity interests of Radnet Management and all of our current
and future wholly owned domestic subsidiaries.
In
connection with the issuance of the outstanding notes and
entering into the New Credit Agreement, Radnet
Management used the net proceeds from the issuance of the
outstanding notes and the New Credit Facilities created by
the New Credit Agreement to repay in full its existing
first lien term loan for $242.0 million in aggregate
principal amount outstanding, which would have matured on
November 15, 2012, and its second lien term loan for $170.0
million in aggregate principal amount outstanding, which
would have matured on November 15, 2013.
At
June 30, 2011, Radnet Management had $200.0 million aggregate
principal amount of senior notes outstanding, $281.4 million
of senior secured term loan debt outstanding and $25.7
million outstanding under the revolving credit
facility.
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