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 July 31, 1996 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3326724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 478-7808
------------------------
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 October 21, 1996
was 38,932,260 [excluding 1,300,000 treasury shares].
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
July 31, October 31,
1 9 9 6 1 9 9 5
[Unaudited]
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 322,699 $ 3,928,832
Marketable Securities -- 1,956,707
Accounts Receivable - Net 17,153,283 16,011,324
Accrued Revenue 457,455 304,871
Due from Related Party 3,148,380 87,500
Other 292,094 264,452
---------- -----------
Total Current Assets 21,373,911 22,553,686
---------- -----------
Property, Plant and Equipment - Net 17,017,220 17,270,032
---------- -----------
Other Assets:
Accounts Receivable - Net 5,879,778 5,653,654
Due from Related Parties 1,033,333 2,697,437
Goodwill - Net 17,869,804 15,382,944
Equity in Investee 4,178,000 --
Other 4,510,448 3,201,951
---------- -----------
Total Other Assets 33,471,363 26,935,986
---------- -----------
Total Assets $71,862,494 $66,759,704
=========== ===========
See Notes to Consolidated Financial Statements.
1
<PAGE>
</TABLE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
July 31, October 31,
1 9 9 6 1 9 9 5
[Unaudited]
<S> <C> <C>
Liabilities and Stockholder's Equity [Deficit]:
Current Liabilities:
Accounts Payable $3,681,018 $ 1,918,337
Accrued Expenses - Current 4,458,965 4,182,150
Notes and Leases Payable - Current 6,273,898 17,565,435
Accrued Estimated Closing Costs - Current 150,000 487,447
Accrued Restructuring Costs 600,000 1,250,000
Other 153,463 1,487,755
---------- -----------
Total Current Liabilities 15,317,344 26,891,124
---------- -----------
Long-Term Liabilities:
Subordinated Debentures Payable 25,829,000 25,841,000
Notes and Leases Payable 44,269,458 26,741,081
Accrued Estimated Closing Costs -- 243,723
Accrued Expenses 1,224,961 1,261,899
---------- -----------
Total Long-Term Liabilities 71,323,419 54,087,703
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Minority Interest 1,197,480 1,023,343
---------- -----------
Stockholder's Equity [Deficit]:
Common Stock - $.01 Par Value, 100,000,000 Shares Authorized; 40,232,260 and
40,230,760 Shares Issued; 38,932,260 and 40,230,760 Shares Outstanding at
July 31,
1996 and October 31, 1995, Respectively 402,322 402,307
Paid-in Capital 99,411,150 99,399,165
Retained Earnings [Deficit] (115,307,494)(115,043,938)
Totals (15,494,022) (15,242,466)
Less: Treasury Stock (481,727) --
---------- -----------
Total Stockholder's Equity [Deficit] (15,975,749) (15,242,466)
----------- -----------
Total Liabilities and Stockholder's Equity [Deficit] $71,862,494 $66,759,704
See Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Nine months ended
July 31, July 31
-------- -------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
<S> <C> <C> <C> <C>
------- ------- ------- -------
Revenue:
Revenue $25,501,478 $22,356,477 $78,376,553 $65,226,161
Less: Allowances 12,845,201 10,116,844 38,426,568 28,920,079
---------- ----------- ---------- -----------
Net Revenue 12,656,277 12,239,633 39,949,985 36,306,082
---------- ----------- ---------- -----------
Operating Expenses:
Operating Expenses 11,156,661 9,417,737 33,069,569 30,714,152
Depreciation and Amortization 1,241,592 1,863,588 3,713,375 6,509,716
Provision for Bad Debts 310,625 847,683 953,764 2,474,204
---------- ----------- ---------- -----------
Total Operating Expenses 12,708,878 12,129,008 37,736,708 39,698,072
---------- ----------- ---------- -----------
[Loss] Income from Operations (52,601) 110,625 2,213,277 (3,391,990)
---------- ----------- ---------- -----------
Other [Expenses] and Income:
Interest Expense (1,731,121) (1,870,819) (5,058,229) (4,758,232)
Interest Income 55,978 520,091 245,148 658,417
Other Income 677,757 8,570 1,527,421 1,083,533
Equity in Income of Investee 78,000 -- 178,000 --
---------- ----------- ---------- -----------
Other [Expenses] - Net (919,386) (1,342,158) (3,107,660) (3,016,282)
---------- ----------- ---------- -----------
[Loss] Before Income Taxes,
Minority Interest in [Income]
of Subsidiaries and
Extraordinary Item (971,987) (1,231,533) (894,383) (6,408,272)
Provision for Income Taxes -- -- -- --
Minority Interest in [Income]
of Subsidiaries (116,268) (301,054) (439,137) (315,352)
---------- ----------- ---------- -----------
[Loss] Before Extraordinary Item(1,088,255) (1,532,587) (1,333,520) (6,723,624)
Extraordinary Item - Gain
from Settlement and Debt 888,614 -- 1,069,964 --
---------- ----------- ---------- -----------
Net [Loss] from Continuing
Operations - Forward $ (199,641) $(1,532,587) $ (263,556) $(6,723,624)
See Notes to Consolidated Financial Statements.
3
</TABLE>
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Nine months ended
July 31, July 31
-------- -------
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net [Loss] from Continuing
Operations - Forwarded $ (199,641) $(1,532,587) $ (263,556) $(6,723,624)
Discontinued Operations:
[Loss] from the Sale of the Accounts
Receivable of the Discontinued
Operation -- (4,013,313) -- (4,013,313)
---------- ----------- ---------- -----------
Net [Loss] $ (199,641) $(5,545,900) $ (263,556) $(10,736,937)
========== =========== ========== ============
Income [Loss] Per Share:
[Loss] Before Extraordinary Item (.03) (.04) (.03) (.17)
Extraordinary Item .02 -- .02 --
---------- ----------- ---------- -----------
[Loss] from Continuing Operations (.01) (.04) (.01) (.17)
Income [Loss] from Discontinued
Operations -- (.10) -- (.10)
---------- ----------- ---------- -----------
Net [Loss] Per Share $ (.01) $ (14) $ (.01) $ (.27)
========== =========== ========== ===========
Weighted Average Shares
Outstanding 38,931,716 40,027,760 39,258,515 40,026,926
========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
4
</TABLE>
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
- ------------------------------------------------------------------------------
Total
Common Stock Retained Stockholder's
Number of Par Value Treasury Paid-in Earnings Equity
Shares Amount Stock Capital [Deficit] [Deficit]
<S> <C> <C> <C> <C> <C> <C>
Balance - November 1, 1995 40,230,760 $ 402,307 $ -- $99,399,165 $(115,043,938$(15,242,466)
Purchase of Treasury Stock (1,300,000) -- (481,727) -- -- (481,727)
Conversion of Subordinated
Debentures to Common Stock 1,500 15 -- 11,985 -- 12,000
Net [Loss] for the Nine Months Ended
July 31, 1996 -- -- -- -- (263,556) (263,556)
----------- ----------- ----------- ---------- ------------ -----------
Balance - July 31, 1996 [Unaudited] 38,932,260 $ 402,322 $ (481,727) $99,411,150 $(115,307,494$(15,975,749)
=========== =========== =========== =========== =========================
See Notes to Consolidated Financial Statements.
5
</TABLE>
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Nine months ended
July 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Cash [Used for] Provided by Continuing Operations $ (705,692) $12,429,008
Cash [Used] for Discontinued Operations (515,208) (8,966,321)
---------- -----------
Net Cash - Operating Activities (1,220,900) 3,462,687
---------- -----------
Investing Activities:
Acquisitions - Net of Cash Acquired (500,000) (1,076,098)
Purchase of Property, Plant and Equipment (279,651) (225,241)
Payments to Care Advantage -- (2,854,168)
Purchase of 2% Increase in Management Fee (1,100,000) --
Proceeds - Sale of Marketable Security 1,998,458 --
Sale of ImmunoTherapeutics 143,750 --
---------- -----------
Net Cash - Investing Activities 262,557 (4,155,507)
--------- -----------
Financing Activities:
Principal Payments on Capital Leases and Notes Payable (5,549,437) (5,435,852)
Proceeds from Short-Term Borrowings on Notes Payable 3,648,374 2,505,754
Joint Venture Distribution (265,000) --
Payment of Equity --(7,000)
Purchase of Treasury Stock (481,727) --
Net Cash - Financing Activities (2,647,790) (2,937,098)
---------- -----------
Net [Decrease] in Cash and Cash Equivalents (3,606,133) (3,629,918)
Cash and Cash Equivalents - Beginning of Periods 3,928,832 5,649,230
---------- -----------
Cash and Cash Equivalents - End of Periods $ 322,699 $ 2,019,312
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $4,213,644 $ 4,390,924
</TABLE>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Radnet subsidiary entered into capital leases of approximately $1,697,125
and $575,000 for the nine months ended July 31, 1996 and 1995, respectively.
During the July 31, 1996 quarter, subordinated debentures totaling $12,000
were converted into 1,500 shares of the Company's common stock. During the July
31, 1995 quarter, subordinated debentures totaling $30,000 were converted into
3,750 shares of the Company's common stock.
During the nine months ended July 31, 1996, the Company acquired all of the
outstanding capital stock of Future Diagnostics, Inc. for $3,220,000 consisting
of notes payable and assumed liabilities resulting in goodwill of approximately
$3,220,000. In addition, the Company acquired a 31% interest in Diagnostic
Imaging Services, Inc. ["DIS"] for $4,000,000 and the establishment of a
$1,000,000 interest-bearing credit facility for DIS.
See Notes to Consolidated Financial Statements.
6
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Information as of and for the nine months ended July 31, 1996 is Unaudited]
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Significant accounting policies of Primedex Health Systems, Inc. and affiliates
are set forth in the Company's Form 10-K for the year ended October 31, 1995 as
filed with the Securities and Exchange Commission.
[2] Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and
have been prepared in accordance with generally accepted accounting principles
and 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 July 31, 1996 and 1995 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 notes thereto
contained in the Registrant's annual report on Form 10-K for the fiscal year
ended October 31, 1995.
[3] Goodwill
The Company's goodwill as of July 31, 1996 is shown net of accumulated
amortization of $1,694,666 for the Radnet and Future Diagnostics subsidiaries.
In October 1995, the Company recognized an impairment loss on long-lived assets
and the majority of the Company's goodwill was written off. For this reason,
amortization expense for the nine months ended July 31, 1996 was approximately
$733,668 compared to $3,288,565 for the nine months ended July 31, 1995.
Amortization expense for the nine months ended July 31, 1996 consists of
$612,898 for the Radnet subsidiary and $120,770 for the Future Diagnostics
subsidiary acquired in November 1995.
[4] Transactions with Related Parties
In April 1996, the Company re-negotiated the existing management and service
agreement with Beverly Radiology Medical Group, Inc. ["BRMG"]. BRMG is owned by
an officer/stockholder of the Company and provides medical services and
supervision at several of the Company's wholly-owned imaging centers. The
Company's management fee will increase from 79% to 81% of Practice Billing
Receipts in consideration for which the Company paid $1,100,000 to BRMG, which
amount is being amortized over the appropriate six year remaining term of the
agreement. The $1,100,000 amount was arrived at by negotiation between the
parties based upon the discounted value of the estimated additional benefit to
the Company over the remaining term of the agreement taking into account recent
past and future estimated Practice Billing Receipts at the imaging centers
managed by BRMG. At the same time, the officer/stockholder purchased the
interest of his partner in BRMG for $1,100,000. The partner who is an employee
of the Company repaid a $1,400,000 note due to the Company and renegotiated his
employment contract for a reduction in his time commitment and duties to the
Company with a commensurate reduction in his compensation and an extension of
his employment contract. The remaining partner in BRMG still owes the Company
$1,431,830 as of July 31, 1996.
During the nine months ended July 31, 1996, the Company loaned $50,000 to an
employee. In addition, $35,000 was repaid to the Company against an $87,500 loan
made to an officer in fiscal 1995 reducing the balance due to $52,500 at July
31, 1996.
7
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the nine months ended July 31, 1996 is Unaudited]
- ------------------------------------------------------------------------------
[4] Transactions with Related Parties [Continued]
The Company loaned $1,271,050 to Diagnostic Imaging Services, Inc. ["DIS"] in
the second and third quarters of fiscal 1996. In early August 1996, subsequent
to the quarter's end, DIS repaid approximately $1,215,000 of the loans with
interest. The residual loan balances with DIS are short-term and will accrue
interest at 10%. In addition, as part of the Diagnostic Imaging Services, Inc.
investment [see Acquisitions], the Company set up a five-year, 10% revolving
loan for DIS with a maximum borrowing base of $1,000,000. As of July 31, 1996,
DIS borrowed the full $1,000,000 under this line and PHS has classified the
receivable as long-term. Accrued interest on both of the above DIS transactions
approximates $42,000 as of July 31, 1996.
The Company accrued management fee income related to the DIS transaction of
approximately $335,000 for the five periods from the investment date. March and
April management fees were $100,000 each; May to July fees were $45,000 per
month. These amounts were agreed upon by management of both DIS and PHS.
[5] Litigation
The Company is a defendant in a class action pending in the United States
District Court for the District of New Jersey entitled "In re Hibbard Brown &
Company Securities Litigation" [No. 93 CV 1150]. The Company entered into a
preliminary settlement with the plaintiff class in this lawsuit by the payment
of $240,000. The lawsuit continues with respect to the other defendants. The
Company remains convinced that it had not engaged in any inappropriate conduct
in this matter. The settlement between the Company and the plaintiff class was
granted preliminary Court approval in April 1996. The settlement is subject to
final approval by the class and to final Court approval.
The Company had previously announced that the Los Angeles District Attorney's
office was conducting an investigation related to the Company and its
subsidiaries and had conducted a search of the premises of the Company and its
Primedex and Radnet subsidiaries pursuant to a sealed affidavit which management
was unable to examine but which the Company was advised, alleged violations of
California penal laws concerning securities and tax fraud, grand theft and
criminal conspiracy. On March 19, 1996, the Company issued a press release
announcing that although the Los Angeles District Attorney's Office was
investigating the activities of certain individuals who had been part of the
management of the Company's Primedex Corporation subsidiary through fiscal 1993,
the District Attorney's Office had confirmed that it was not investigating any
members of the current management or the present business activities of Primedex
Health Systems, Inc. or those of its operating subsidiaries including Radnet
[The Primedex Corporation subsidiary, acquired by the Company in February 1992,
subsequently ceased all business operations]. The Workers' Compensation Fraud
Division of the Los Angeles District Attorney's Office approved the text of the
Company's press release.
On May 31, 1996, the District Attorney's Office announced that a Los Angeles
Grand Jury had issued a two count indictment against three individuals formerly
associated with the Primedex Corporation subsidiary. The three individuals under
indictment are David G. Gardner, former president of the Primedex Corporation
subsidiary and a former director of the Company, Vincent A. Punturere, a former
vice president and medical director of the Primedex Corporation subsidiary and
Stanley Goldblum, a former consultant to the subsidiary. None of the three
individuals have any present employment or consulting positions with the
Company. Count One of the indictment accuses the three individuals between
October 8, 1987 and November 30, 1995 of conspiring to commit insurance fraud,
securities fraud and of conspiring to cheat and defraud others of property.
Count Two of the indictment accuses the three individuals of actions between
December 8, 1987 and January 21, 1993 allegedly constituting the crime of
securities fraud. Management believes that the indictment marks the culmination
of the above described investigation of the District Attorney's Office.
8
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the nine months ended July 31, 1996 is Unaudited]
- ------------------------------------------------------------------------------
[6] Discontinued Operations - Primedex Subsidiary
In the nine months ended July 31, 1996, the Company settled its outstanding
obligation with its Primedex Corporation subsidiary's primary building lessor
for $140,000. Approximately $150,000 remains on the Company's books as a
liability for estimated closing costs as of July 31, 1996.
[7] ImmunoTherapeutics Stock ["ITI"]
In November of 1995, the Company's investment in ITI representing 1,150,001
shares with a book value of $-0- was sold for $143,750. The investment was
originally purchased in 1991 and the majority of the shares were sold in fiscal
1994.
[8] Acquisitions
Effective November 1, 1995, the Company acquired most of the assets of Future
Diagnostics, Inc. ["FDI"] by purchasing 100% of its outstanding stock for
approximately $3.2 million consisting of notes and assumed liabilities. Founded
in 1989, FDI is a leading Radiology management services organization providing
network development and management along with diagnostic imaging cost
containment, utilization review and physician and credentialing services.
For the nine months ended July 31, 1996, FDI generated approximately $5,812,567
million in net revenue and generated approximately $236,329 in net income.
On March 25, 1996, the Company purchased 2,747,493 shares of common stock of
Diagnostic Imaging Services, Inc. ["DIS"] together with a five year warrant to
acquire an additional 1,521,739 shares ["the Warrant Shares"] at $1.60 per share
for $3,000,000 and extended a five year revolving $1,000,000 loan to DIS. The
purchase, together with a separate purchase of 730,768 of DIS shares for
$1,000,000 from DVI Financial Services, Inc. ["DVI"], made the Company the
largest single shareholder of DIS, owning approximately 31%, or 3,478,261 of the
outstanding shares [excluding Warrant Shares]. The Company borrowed an aggregate
$4,500,000 from DVI of which $4,000,000 was applied directly to such stock and
warrant purchases and $500,000 was applied [together with an additional $500,000
from the Company's working capital] to the funding of the $1,000,000 revolving
loan.
DIS currently owns and operates 12 imaging centers providing high quality
diagnostic imaging services located in the Los Angeles and San Diego area as
well as 14 ultrasound laboratories located in hospitals, 8 mobile ultrasound
units servicing hospitals and office buildings and one mobile MRI servicing a
single hospital at various sites throughout southern California. DIS also
operates a cancer care therapy center in Temecula, California. As of July 31,
1996, the investment is recorded on the Company's books at $4,000,000 with an
additional $178,000 of estimated earnings during the investment period.
Effective August 6, 1996, subsequent to the quarter's end, PHS acquired an
additional 3,223,046 shares of DIS common stock [2,448,862 from Norman Hames,
President of DIS, and 774,184 from other related parties] together with various
warrants to acquire an additional 525,917 shares of DIS common stock ["the
Warrant Shares"] at various prices increasing PHS's total ownership in DIS to
approximately 60%, or 6,701,307 shares [excluding Warrant Shares]. In
consideration for the additional stock, Primedex issued a five-year, interest
only promissory note for $4,252,445 with five-year warrants to acquire up to
5,528,179 shares of PHS common stock at $.60 per share.
9
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the nine months ended July 31, 1996 is Unaudited]
- ------------------------------------------------------------------------------
[9] Refinancing
[A] Note Payable - A note payable with remaining aggregate payments of
approximately $946,000 was settled for $765,000 in February of 1996 resulting in
a gain on early extinguishment of debt of approximately $181,000. In addition, a
capital lease reclassified as other liabilities at year-end 1995 was settled in
full for $-0- and the return of the equipment to the lessor. The Company's book
value on the equipment was $-0- and the transaction resulted in a extraordinary
gain of approximately $890,000 in the third quarter of fiscal 1996.
[B] Coast Fed Business Credit - The Company re-negotiated its terms and interest
rate on its line of credit with Coast Fed reducing its interest rate to prime
plus 3% from prime plus 4%. In addition, the Company re-negotiated its borrowing
base with Coast Fed and transferred its FDI subsidiary's receivable collateral
from DVI Business Credit to Coast Fed in the third quarter of fiscal 1996. Under
the new agreement, the Company may borrow the lesser of 75% to 80% of eligible
accounts receivable, $10,000,000 or the prior 120-days' cash collections.
[C] DVI Business Credit - The Company re-negotiated the interest rate on its
line of credit with DVI reducing its rate to prime plus 3-1/2% from prime plus
4-1/2%. Previously assigned receivables of FDI were transferred to CoastFed and
the second line of credit was eliminated. The Company had borrowed $-0- against
these receivables before the transfer. In March of 1996, the line of credit
agreement with DVI was amended so that the Company could borrow up to an
additional $1,500,000 over and above its eligible borrowings under its existing
line of credit which is collateralized by approximately 80% of the RadnetSub
receivables. Approximately $1,000,000 is secured by an additional 5% of the
eligible accounts receivable and the balance is unsecured.
. . . . . . . . . . . . . . .
10
<PAGE>
Item 2:
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Background
Primedex Health Systems, Inc. ["PHS"] [formerly "CCC Franchising Corp."] was
incorporated on October 21, 1985. On November 1, 1990, the Company acquired a
51% interest in Viromedics, Inc. ["VMI"] for $700,000. On February 18, 1992,
Future Medical Products ["FMP"], the parent corporation of VMI, exercised its
right to repurchase one-half of the VMI stock from PHS at a price of $700,000.
The Company owns approximately 19% of VMI's outstanding capital stock as of July
31, 1996, which is accounted for using the cost method at $-0-.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of Immuno Therapeutics, Inc. ["ITI"]. At October 31, 1995, the Company owned
approximately 19% of ITI and accounted for this investment using the cost method
which was $-0-. In November of 1995, the investment was sold for $143,750
resulting in a gain on the Company's books recorded in the first quarter of
fiscal 1996.
As of January 31, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Corp. I, entered into an asset purchase agreement to acquire the business of
Primedex Corporation ["Primedex"] for approximately $46,250,000. On July 29,
1993, the Company announced its plans to restructure its Primedex subsidiary and
to wind down its involvement in the California workers' compensation industry.
Accordingly, the operating results of this subsidiary were classified as a
discontinued operation and the appropriate prior period amounts have been
restated. Effective August 1, 1995, substantially all of the assets of Primedex
were sold to an unrelated party for approximately $9,448,000. The sale resulted
in a loss of approximately $3,800,000 for the year ended October 31, 1995.
As of April 30, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Corp. II, entered into a purchase agreement to acquire the business of Radnet
Management, Inc. and certain related companies ["Radnet"] for approximately
$66,000,000. The statement of operations and cash flows for the nine months
ended July 31, 1996 and 1995 include the operations and cash transactions of
Radnet.
On December 31, 1993, the Company acquired Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to provide medical and surgical
utilization review for major providers of health insurance, for $6,000,000 in
cash. On August 26, 1994, the Company announced a plan to spin-off its
subsidiary, Care Advantage, Inc. ["CareAd"], which owned AHS. The spin off was
effected in October 1994. The operations of this subsidiary have been classified
as a discontinued line of business.
Effective November 1, 1995, the Company acquired the bulk of the assets of
Future Diagnostics, Inc. by purchasing 100% of its outstanding stock for
approximately $3.2 million consisting of notes and assumed liabilities. Through
the FDI subsidiary, the Company arranges for the provision of imaging services
throughout California via a network of more than 180 contracted imaging centers
which, in turn provide quality diagnostic imaging services to insurance
companies, health plans and other payors. Additionally, FDI provides a broad
array of healthcare management services to its contracted centers and to others
including utilization review, physician credentialing and financial information
systems services.
On March 25, 1996, the Company acquired approximately 31% of Diagnostic Imaging
Services, Inc. for $4,000,000 and the establishment of a $1,000,000 revolving
loan for DIS. DIS currently owns and operates 12 imaging centers in the Los
Angeles and San Diego area as well as 14 ultrasound laboratories located in
hospitals, 8 mobile ultrasound units servicing hospitals and office buildings
and one mobile MRI servicing a single hospital throughout southern California.
DIS also operates a cancer care therapy center in Temecula, California.
11
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc..
Results of Operations
The discussion of the results of continuing operations includes Radnet and
Future Diagnostics, Inc. ["FDI"] for the nine months ended July 31, 1996. The
discussion of the results of continuing operations includes Radnet for the nine
months ended July 31, 1995.
For the nine months ended July 31, 1996, the Company realized income from
operations of $2,213,277. For the nine months ended July 31, 1995, the Company
had an operating [loss] of $(3,391,990). One reason for the operating income
increase was the reduction in depreciation and amortization expense [with the
implementation of FASB 121 in fiscal 1995] from $6,509,716 to $3,713,375 in the
nine month periods ended July 31, 1995 and 1996, respectively. Radnet realized
operating income of $3,576,812 for the nine months ended July 31, 1996 compared
to an operating [loss] of $(1,463,019) for the nine months ended July 31, 1995.
Future Diagnostics, Inc. realized operating income of $289,250 for the nine
months ended July 31, 1996.
For the nine months ended July 31, 1996 and 1995, Radnet realized net revenues
of $34,137,419 and $36,306,082, respectively. With the provision for bad debts
of $953,764 and $2,474,204, Radnet net revenues were $33,183,654 and $33,831,878
for the nine months ended July 31, 1996 and 1995, respectively. FDI realized net
revenues of $5,812,567 for the nine months ended July 31, 1996.
For the nine months ended July 31, 1996, operating expenses totaled $37,736,708
of which $31,132,267 was incurred by the Radnet operation, $4,903,582 was
incurred by FDI, and $1,700,859 was incurred by PHS, the parent company.
Operating expenses of Radnet for the nine months ended July 31, 1996 consisted
primarily of wages and compensation of $13,225,639, depreciation and
amortization of $3,339,702, building and equipment rent of $3,054,421 and other
operating expenses of $11,512,505. Operating expenses of FDI for the nine months
ended July 31, 1996 consisted primarily of radiology site costs of approximately
$3,477,839, salaries and wages of $850,418, depreciation and amortization of
$149,764, building and equipment rent of $94,251 and other operating expenses of
$331,309. PHS's operating expenses for the nine months ended July 31, 1996
included $870,062 in salaries and compensation, amortization of $223,909 and
$606,888 in other operating expenses.
For the nine months ended July 31, 1996 and 1995, interest income was $245,148
and $658,417, respectively. The interest income decrease is primarily
attributable to the payment by one BRMG partner of his note receivable in April
of 1996 and the liquidation of various interest-bearing investments during the
period. For the nine months ended July 31, 1996 and 1995, interest expense was
$5,058,229 and $4,758,232, respectively. Interest of approximately $310,000 was
reclassified from interest expense in continuing operations and allocated to
accrued estimated closing costs of the Company's Primedex Corporation subsidiary
for the nine months ended July 31, 1995. Interest expense of Radnet was
primarily attributable to equipment financing and lines of credit charges.
Interest expense of PHS was primarily attributable to its outstanding
debentures.
For the nine months ended July 31, 1996 and 1995, the Company had net losses
from continuing operations of $( 263,556) and $(6,723,624), respectively. During
the nine months ended July 31, 1995, the Company had net losses from
discontinued operations of $(4,013,313).
12
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash decreased for the nine months ended July 31, 1996 and 1995 by $3,606,133
and $3,629,918, respectively. Cash generated in investing activities for the
nine months ended July 31, 1996 was $262,557. Cash utilized for investing
activities for the nine months ended July 31, 1995 was $4,155,507. In March
1996, the Company converted its marketable securities into cash. During the nine
months ended July 31, 1996, the Company acquired Future Diagnostics, Inc. and a
31% interest in Diagnostic Imaging Services, Inc. During the nine months ended
July 31, 1995, the Company acquired the remaining interests in Lancaster
Radiology Medical Group, Antelope Valley MRI and Santa Clarita Imaging Center.
In addition, the Company acquired Women's Diagnostics Medical Group and merged
its operation with the Tower division in fiscal 1995. Also, in the nine months
ended July 31, 1995, the Company advanced $2,854,168 to Care Advantage. Cash
utilized for financing activities for the nine months ended July 31, 1996 and
1995 was $2,647,790 and $2,937,098, respectively. For the nine months ended July
31, 1996, $5,549,437 was made in debt and lease payments, $3,648,374 was
advanced from short-term borrowings, $481,727 was used to purchase treasury
stock and $265,000 was distributed to joint venture partners. For the nine
months ended July 31, 1995, $5,435,852 was made in debt and lease payments and
$2,505,754 was advanced from short-term borrowings.
At July 31, 1996, the Company had net working capital of $6,056,567 as compared
to a working capital deficit of $(4,337,438) at October 31, 1995, an increase of
$10,394,005. One reason for the improvement in working capital since October 31,
1995 was the reclassification of the Company's renegotiated lines of credit as
long-term with one line now due in December 1997 and the other in December 1998.
As of July 31, 1996 and October 31, 1995, approximately $9,625,000 and
$6,000,000, respectively, was due under each of the Company's external credit
lines. In addition, the Company settled its dispute with an outside lender and
restructured its debt of approximately $5,200,000 previously classified entirely
as current liabilities as of October 31, 1995. With the re-negotiation, the
Company made a payment in August for accrued interest and commenced monthly
payments as of September 1, 1996. The restructure improved July 1996 working
capital by approximately $4,900,000 from year-end.
The Company's payments for debt and equipment under capital lease for the next
five years will be approximately $6,275,000, $10,820,000, $13,970,000,
$9,110,000 and $4,915,000. The July 31, 1996 outstanding lines of credit
balances totaled approximately $9,625,000. Interest expense, exclusive of lines
of credit charges, for the next five years, in addition the above payments will
be approximately $3,830,000, $2,665,000, $1,965,000, $1,200,000 and $720,000,
respectively. In addition, Radnet and FDI have non-cancelable operating leases
for use of their facilities and certain medical equipment which will average
approximately $2,975,000 in annual payments over the next five years. In
addition to approximately $1,025,000 of new capital equipment leases added
during the nine months ended July 31, 1996, the Company estimates additional
expenditures of at least $1,000,000 over the next year to develop a centralized
scheduling, transcription, billing and collection system. The major supplier of
equipment to the Company has and will continue to provide financing for
substantially all of the project.
The Company acquired Future Diagnostics, Inc. in November 1995 for approximately
$3,200,000 in notes [approximately $2.2 million] and assumed assets and
liabilities [approximately $1 million]. Approximately $1,015,000 of note
principal was paid during the nine months ended July 31, 1996.
The Company estimates interest payments on its bond debentures to be
approximately $2,582,900 for the next four quarters. The January, April, July
and October payments in 1996 were all made on time.
13
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources [Continued]
Radnet's working capital needs are currently provided under two lines of credit.
Under one agreement, due December 31, 1998, the Company may borrow the lesser of
75% to 80% of eligible accounts receivable, $10,000,000 or the prior 120-days'
cash collections. Borrowings under this line are repayable together, with
interest at an annual rate equal to the greater of (a) the bank's prime rate
plus 3%, or (b) 10%. The lender hold a first lien on substantially all of
Radnet's [Beverly Radiology's] assets and Future Diagnostic's ["FDI"] accounts
receivable to secure repayment under this line of credit. At July 31, 1996,
approximately $6,335,000 was outstanding under this line.
A second line of credit was obtained in December 1994, subsequent to the
acquisition of Tower Imaging Corporation. Under this agreement, due December
1997, the Company may borrow the lessor of 75% of the eligible accounts
receivable, $4,000,000, or the prior 120-days' cash collections. Borrowing under
this line are repayable with interest at an annual rate of the bank's prime rate
plus 3-1/2%. The credit line is collateralized by approximately 80% of the Tower
division's (Radnet Sub, Inc.) accounts receivable. At July 31, 1996,
approximately $3,290,000 was outstanding under this line. In March of 1996, the
line of credit was further amended so that the Company could borrow an
additional $1,500,000 over and above its eligible borrowings under the line
discussed above. Approximately $1,000,000 of this line is secured by an
additional 5% of the eligible accounts receivable, while the remaining $500,000
of this line is unsecured.
In connection with ceasing operations at certain of the Radnet imaging centers,
lawsuits have been filed against the Radnet subsidiary by lessors of the
properties for past due rent, future rent and damages to the properties plus
other costs. The aggregate monthly rentals through the terms of each of the
related leases approximates $2,500,000. The Radnet subsidiary has and will
assert defenses to each of these lawsuits; however, no assurances can be given
that any of these suits will settle or as to the amount of damages, if any,
Radnet will incur. Radnet accrued approximately $1,250,000 for past due rent and
legal costs of which $650,000 of the reserve was utilized in the nine months
ended July 31, 1996 for legal services and some settlement costs. Management is
reviewing whether the reserve will need to be increased by fiscal year-end.
On March 25, 1996, the Company purchased 2,747,493 shares of common stock of
Diagnostic Imaging Services, Inc. ["DIS"] together with a five year warrant to
acquire an additional 1,521,739 shares [the "Warrant Shares"] at $1.60 per share
for $3,000,000 and extended a five year revolving $1,000,000 loan to DIS. The
purchase, together with a separate purchase of 730,768 DIS shares for $1,000,000
from DVI Financial Services, Inc. ["DVI"] makes Primedex the largest single
shareholder of DIS, owning approximately 31% of the outstanding shares
[excluding the Warrant Shares]. The Company borrowed an aggregate $4,500,000
from DVI of which $4,000,000 was applied directly to such stock and warrant
purchases and $500,000 was applied [together with an additional $500,000 from
the Company's working capital] to the funding of the $1,000,000 revolving loan.
As of July 31, 1996, the investment is recorded on the Company's books at
$4,000,000 with an additional $178,000 of estimated earnings during the
investment period.
Effective August 6, 1996, subsequent to the quarter's end, PHS acquired an
additional 3,223,046 shares of DIS common stock [2,448,862 from Norman Hames,
President of DIS and 774,184 from other related parties] together with various
warrants to acquire an additional 525,917 shares ["the Warrant Shares"] at
various prices increasing PHS's total ownership in DIS to approximately 60%, or
6,701,307 shares [excluding Warrant Shares]. In consideration for the additional
stock, Primedex issued a five-year, interest only promissory note for $4,252,445
with five-year warrants to acquire up to 5,528,179 shares of PHS common stock at
$.60 per share.
14
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
Item 1. Legal Proceeding
Second Consolidated Class Action
The Company is a defendant in a class action pending in the United States
District Court for the District of New Jersey entitled "In re Hibbard Brown &
Company Securities Litigation" [No. 93 CV 1150]. The Company entered into a
preliminary settlement with the plaintiff class in this lawsuit by the payment
of $240,000. The lawsuit continues with respect to the other defendants. The
Company remains convinced that it had not engaged in any inappropriate conduct
in this matter. The settlement between the Company and the plaintiff class was
granted preliminary Court approval in April 1996. The settlement is subject to
final approval by the class and to final Court approval.
Los Angeles District Attorney Investigation
The Company had previously announced that the Los Angeles District Attorney's
office was conducting an investigation related to the Company and its
subsidiaries and had conducted a search of the premises of the Company and its
Primedex and Radnet subsidiaries pursuant to a sealed affidavit which management
was unable to examine but which the Company was advised, alleged violations of
California penal laws concerning securities and tax fraud, grand theft and
criminal conspiracy. On March 19, 1996, the Company issued a press release
announcing that although the Los Angeles District Attorney's Office was
investigating the activities of certain individuals who had been part of the
management of the Company's Primedex Corporation subsidiary through fiscal 1993,
the District Attorney's Office had confirmed that it was not investigating any
members of the current management or the present business activities of Primedex
Health Systems, Inc. or those of its operating subsidiaries including Radnet
[The Primedex Corporation subsidiary, acquired by the Company in February 1992,
subsequently ceased all business operations]. The Workers' Compensation Fraud
Division of the Los Angeles District Attorney's Office approved the text of the
Company's press release.
On May 31, 1996, the District Attorney's Office announced that a Los Angeles
Grand Jury had issued a two count indictment against three individuals formerly
associated with the Primedex Corporation subsidiary. The three individuals under
indictment are David G. Gardner, former president of the Primedex Corporation
subsidiary and a former director of the Company, Vincent A. Punturere, a former
vice president and medical director of the Primedex Corporation subsidiary and
Stanley Goldblum, a former consultant to the subsidiary. None of the three
individuals have any present employment or consulting positions with the
Company. Count One of the indictment accuses the three individuals between
October 8, 1987 and November 30, 1995 of conspiring to commit insurance fraud,
securities fraud and of conspiring to cheat and defraud others of property.
Count Two of the indictment accuses the three individuals of actions between
December 8, 1987 and January 21, 1993 allegedly constituting the crime of
securities fraud. Management believes that the indictment marks the culmination
of the above described investigation of the District Attorney's Office.
15
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements 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. and Affiliates
[Registrant]
NOVEMBER 01, 1996
By: /s/ Howard G. Berger
Howard G. Berger, President, Principal Executive
Officer, Chief Financial Officer and Director
By: /s/ Norman Hames
Norman Hames, Principal Vice President Officer,
Chief Operating Officer and Director
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> jul-31-1996
<CASH> 322,699
<SECURITIES> 0
<RECEIVABLES> 17,153,283
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,373,911
<PP&E> 17,017,220
<DEPRECIATION> 0
<TOTAL-ASSETS> 71,862,494
<CURRENT-LIABILITIES> 15,317,344
<BONDS> 0
0
0
<COMMON> 402,322
<OTHER-SE> (16,378,071)
<TOTAL-LIABILITY-AND-EQUITY> 71,862,494
<SALES> 12,656,277
<TOTAL-REVENUES> 12,656,277
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (811,735)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,731,121
<INCOME-PRETAX> (971,987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (199,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 888,614
<CHANGES> 0
<NET-INCOME> (199,641)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
