FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended July 31, 1997 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.)
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 No X
Number of shares outstanding of the issuer's common stock as of November 26,
1997 was 38,607,260 (excluding treasury shares).
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the Registrant without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Registrant believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Registrant's latest Annual Report on Form 10-K.
In the opinion of the Registrant, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of the
Registrant as of July 31, 1997, and the results of its operations and changes in
its cash flows for the nine months ended July 31, 1997 and 1996, have been made.
The results of operations for such interim periods are not necessarily
indicative of the results to be expected for the entire year.
1
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
July 31, October 31,
1 9 9 7 1 9 9 6
(Unaudited)
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 624,428 $ 151,870
Accounts Receivable - Net 17,792,402 19,751,419
Unbilled Receivables 656,307 532,138
Due from DHS - Current 366,061 --
Due from Related Party 1,066,570 100,333
Other 1,115,413 826,826
------------ ------------
Total Current Assets 21,621,181 21,362,586
------------ ------------
Property, Plant and Equipment - Net 32,015,367 38,737,846
------------ ------------
Other Assets:
Accounts Receivable - Net 5,973,571 6,104,012
Due from Related Parties 100,000 899,143
Due from DHS - Long-Term 873,971 --
Goodwill - Net 22,831,512 31,821,606
Other 5,637,608 7,005,979
------------ ------------
Total Other Assets 35,416,662 45,830,740
------------ ------------
Total Assets $ 89,053,210 $105,931,172
============ ============
See Notes to Consolidated Financial Statements.
2
</TABLE>
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
July 31, October 31,
1 9 9 7 1 9 9 6
(Unaudited)
Liabilities and Stockholders' Deficit:
Current Liabilities:
<S> <C> <C>
Cash Overdraft $ 1,295,765 $ 250,792
Accounts Payable 5,944,371 5,743,410
Accrued Expenses - Current 7,503,481 7,619,634
Notes and Leases Payable - Current 24,135,078 28,200,547
Accrued Estimated Closing Costs - Current 101,129 157,092
Accrued Restructuring Costs 500,000 895,622
Deferred Revenue-Covenant-not-to Compete - Current 200,000 --
Due to Related Party -- 88,567
Other 892,524 1,033,571
------------ ------------
Total Current Liabilities 40,572,348 43,989,235
------------ ------------
Long-Term Liabilities:
Subordinated Debentures Payable 25,370,000 25,829,000
Notes and Leases Payable 50,548,697 57,199,989
Deferred Revenue - Covenant-not-to Compete 1,716,666 --
Accrued Expenses 958,256 2,435,283
------------ ------------
Total Long-Term Liabilities 78,593,619 85,464,272
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Minority Interest 1,561,145 1,338,979
------------ ------------
Stockholders' Deficit:
Common Stock - $.01 Par Value, 100,000,000 Shares
Authorized; 40,232,260 Shares Issued; 38,607,260
and 38,932,260 Shares Outstanding at July 31, 1997
and October 31, 1996, Respectively 402,322 402,322
Paid-in Capital 99,411,150 99,411,150
Deferred Compensation - Net -- (788,025)
Retained Earnings (Deficit) (130,872,427) (123,405,034)
------------ ------------
Totals (31,058,955) (24,379,587)
Less: Treasury Stock - 1,625,000 and 1,300,000 Shares -
At Cost at July 31, 1997 and October 31, 1996, Respectively(614,947)(481,727)
Total Stockholders' Deficit (31,673,902) (24,861,314)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 89,053,210 $105,931,172
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Nine months ended
July 31, July 31,
-------- --------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
Revenue:
<S> <C> <C> <C> <C>
Revenue $34,214,509 $25,501,478 $ 99,177,804 $ 78,376,553
Less: Allowances 16,752,840 12,845,201 46,636,962 38,426,568
----------- ----------- ------------ ------------
Net Revenue 17,461,669 12,656,277 52,540,842 39,949.985
----------- ----------- ------------ ------------
Operating Expenses:
Operating Expenses 15,092,655 11,156,661 44,814,966 33,069,569
Depreciation and Amortization 2,102,941 1,241,592 6,646,727 3,713,375
Provision for Bad Debts 683,567 310,625 1,901,852 953,764
Impairment Loss of Long-Lived
Assets -- -- 4,953,783 --
----------- ----------- ------------ ------------
Total Operating Expenses 17,879,163 12,708,878 58,317,328 37,736,708
----------- ----------- ------------ ------------
(Loss) from Operations (417,494) (52,601) (5,776,486) 2,213,277
----------- ----------- ------------ ------------
Other (Expenses) Income:
Interest Expense (2,464,305) (1,731,121) (7,486,043) (5,058,229)
Interest Income 66,451 55,978 298,004 245,148
Other Income 2,486 755,757 5,781,973 1,705,421
----------- ----------- ------------ ------------
Total Other (Expenses) (2,395,368) (919,386) (1,406,066) (3,107,660)
----------- ----------- ------------ ------------
(Loss) Before Income Taxes,
Minority Interest in (Income) of
Subsidiaries and Extraordinary
Item (2,812,862) (971,987) (7,182,552) (894,383)
Provision for Income Taxes (34,000) -- (34,000) --
Minority Interest in (Income)
of Subsidiaries (142,569) (116,268) (450,288) (439,137)
----------- ----------- ------------ ------------
(Loss) Before Extraordinary Item(2,989,431) (1,088,255) (7,666,840) (1,333,520)
Extraordinary Item - Gain from
Extinguishment of Debt 199,447 888,614 199,447 1,069,964
----------- ----------- ------------ ------------
Net (Loss) $(2,789,984) $ (199,641)$ (7,467,393) $ (263,556)
=========== =========== ============ ============
(Loss) Per Share:
Loss Before Extraordinary Item$ (.08) $ (.03)$ (.20) $ (.03)
Extraordinary Item .01 .02 .01 .02
----------- ----------- ------------ ------------
Net (Loss) Per Share $ (.07) $ (.01)$ (.19) $ (.01)
=========== =========== ============ ============
Weighted Average Shares
Outstanding 38,652,864 38,931,716 38,837,499 39,258,515
=========== =========== ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------
<TABLE>
Common Stock Retained Total
Number of Par Value Treasury Paid-in Deferred Earnings Stockholders'
Shares Amount Stock Capital Compensation (Deficit) Deficit
Balance - November 1,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 40,232,260 $402,322 $(481,727) $99,411,150 $(788,025) $(123,405,034) $(24,861,314)
Amortization of Deferred
Compensation -- -- -- -- 5,752 -- 5,752
Purchase of Treasury Stock -- -- (133,220) -- -- -- (133,220)
Elimination of Deferred
Compensation based on
Discontinuance of Center -- -- -- -- 782,273 -- 782,273
Net (Loss) for the nine months
ended July 31, 1997 -- -- -- -- -- (7,467,393) (7,467,393)
---------- -------- --------- ----------- --------- ------------- ------------
Balance - July 31, 1997
(Unaudited) 40,232,260 $402,322 $(614,947) $99,411,150 -- $(130,872,427) $(31,673,902)
========== ======== ========= =========== ========= ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
Nine months ended
July 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Cash (Used for) Provided by Continuing Operations $ (2,486,087) $ (705,692)
Cash (Used for) Discontinued Operations (55,963) (515,208)
------------ ------------
Net Cash - Operating Activities (2,542,050) (1,220,900)
------------ ------------
Investing Activities:
Acquisitions - Net of Cash Acquired (1,697,984) (500,000)
Purchase of Property, Plant and Equipment (1,831,723) (279,651)
Purchase of 2% Increase in Management Fee -- (1,100,000)
Proceeds - Sale of Centers or Equipment 16,037,720 --
Proceeds - Sale of Marketable Security -- 1,998,458
Loans to Related Parties (110,000) --
Sale of ImmunoTherapeutics -- 143,750
------------ ------------
Net Cash - Investing Activities 12,398,013 262,557
------------ ------------
Financing Activities:
Cash Overdraft 1,044,973 --
Principal Payments on Capital Leases and Notes Payable (11,208,231) (5,549,437)
Proceeds from Short-Term Borrowings on Notes Payable 1,489,318 3,648,374
Joint Venture Distributions (228,125) (265,000)
Payments to Related Parties (88,567) --
Repurchase of Bond Debentures (259,553) --
Purchase of Treasury Stock (133,220) (481,727)
------------ ------------
Net Cash - Financing Activities (9,383,405) (2,647,790)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 472,558 (3,606,133)
Cash and Cash Equivalents - Beginning of Periods 151,870 3,928,832
------------ ------------
Cash and Cash Equivalents - End of Periods $ 624,428 $ 322,699
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 7,713,586 $ 4,213,644
Income Taxes $ -- $ --
See Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company entered into net capital leases of approximately $3,500,000 and
$1,700,000 during the nine months ended July 31, 1997 and 1996, respectively.
During the nine months ended July 31, 1997, the Company acquired approximately
$1,050,000 in net assets and related notes payable from DIS previously held in
assets held for divestiture with a net book value of $-0-.
During the nine months ended July 31, 1996, subordinated debentures totaling
$12,000 were converted into 1,500 shares of the Company's common stock.
During the nine months ended July 31, 1997, the Company's DIS subsidiary
wrote-off approximately $1,515,000 in net property and equipment, approximately
$2,875,000 in net goodwill and approximately $785,000 in deferred compensation
related to the Parkside closure. The Company recorded an impairment loss related
to Parkside of approximately $4,950,000 in December 1996.
During the nine months ended July 31, 1997, the Company acquired the assets
and related liabilities of Woodward Park Imaging Center in Fresno, California
for approximately $200,000 in notes and assumed liabilities resulting in
goodwill of approximately $90,000. In the acquisition, the Company recorded
approximately $2,075,000 in net property and equipment, approximately $725,000
in other receivables, approximately $2,600,000 in notes and capital leases and
approximately $300,000 in accrued expenses.
During the nine months ended July 31, 1997, the Company acquired the assets of
Las Posas Medical Imaging for $35,000 and relocated DIS's Camarillo facility to
its location.
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.
Effective March 1, 1997, the Company realized a gain of approximately
$5,600,000 related to the sale of four of DIS's hospital-based MRI facilities
and its Ultrasound Division. As a result of the sale, the Company wrote-off
approximately $9,300,000 in net property, plant and equipment, approximately
$6,800,000 in net goodwill, approximately $600,000 in other assets and
approximately $7,525,000 in notes payable and capital leases.
During the nine months ended July 31, 1997, the Company also recognized
purchase discount income related to film purchases (offset against operating
expenses) of approximately $760,000.
See Notes to Consolidated Financial Statements.
7
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 1996 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, 1997 and 1996 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, 1996.
(3) Goodwill
The Company's goodwill as of July 31, 1997 is shown net of accumulated
amortization of approximately $3,125,000. Amortization expense for the nine
months ended July 31, 1997 and 1996 was approximately $1,075,000 and $610,000,
respectively. The 1997 increase in amortization expense was primarily due to the
acquisition of Diagnostic Imaging Services, Inc.
(4) Due to/from Related Party
At October 31, 1996, the Company owed Norman Hames, C.O.O., approximately
$89,000, without interest, for prior loans made by him to the Company's DIS
subsidiary. The amount was fully repaid during the nine months ended July 31,
1997.
During the nine months ended July 31, 1996, the Company loaned $100,000 to a
prior employee of the Company which will be repaid with 4% interest within two
years. During the nine months ended July 31, 1997, the Company loaned $100,000
to an officer of the Company to be repaid with 6.5% interest with one lump-sum
payment at the end of five years. In July 1997, the Company loaned $10,000 to
another officer of the Company to be repaid within the next month.
The Company has a $1,000,000 loan receivable due from its President and C.E.O.
in February 1998 discounted at 8%.
(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 the lawsuit by the payment of
$240,000 in April 1996. Although 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
which has not yet been obtained. Management expects there will be no additional
costs to settle the case beyond the $240,000. The lawsuit continues with respect
to the other defendants. The Company remains convinced that it has not engaged
in any inappropriate conduct in this matter.
8
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), Sheet #2
- ------------------------------------------------------------------------------
(5) Litigation (Continued)
On June 4, 1997, the Company was served with a complaint entitled Gerald E.
Dalrymple, M.D. and Gerald E. Dalrymple, M.D., Inc., a California professional
corp. v. Primedex Health Systems, Inc., Diagnostic Imaging Services, Inc. and
Diagnostic Health Services, Inc. filed in the Los Angeles Superior Court. The
complaint alleges that the Company's DIS subsidiary failed to properly pay to
the plaintiff fees for performing professional services to which he was entitled
as well as damages for violation of the implied covenant of good faith and fair
dealing, fraud, conversion, breach of fiduciary duty, interference with existing
and prospective business advantage, negligent and intentional infliction of
emotional distress and defamation and seeks damages for an unspecified amount in
excess of $25,000. The complaint also alleges that by virtue of the investment
by PHS in the Company's DIS subsidiary and the sale of four of the Company's DIS
subsidiary imaging centers and its ultrasound business to Diagnostic Health
Services, Inc., that the Company's DIS subsidiary has thereby effected either a
reorganization, consolidation, merger or transfer of all or substantially all of
its assets to another entity thereby permitting plaintiff to convert a warrant
for 319,488 shares of the Company's DIS subsidiary Common Stock exercisable at
$.01 per share which plaintiff received in connection with the Company's DIS
subsidiary acquisition of its Santa Monica facility to either $1,000,000 cash or
Company stock with a market value of $1,000,000 at the election of the Company.
The Company denies each and every allegation and intends to vigorously defend
against the legal action.
(6) Discontinued Operations - Primedex Subsidiary
As of July 31, 1997, the Company has approximately $100,000 on its books for
estimated closing costs related to its discontinued Primedex subsidiary. This
liability will be paid in full by fiscal year-end 1997.
(7) Acquisitions, Sales and Divestitures
As a result of a continuing deteriorating business climate and other business
reasons at DIS's Santa Monica ("Parkside") facility, on June 25, 1997, the
Company decided to close substantially all of its operations at the facility on
or about August 29, 1997. Due to this decision, the Company recognized a loss in
December 1996 of approximately $4,950,000. In May 1997, the Company sold the
facility's MRI for $65,000 to an unrelated third party. In August 1997, most of
the remaining assets of the facility were sold to another unrelated third party
for approximately $400,000; the buyer also assumed the center's building lease.
The Company still operates a separate entity known as Parkside Women's Center
which provides ultrasound, mammography, stereotactic breast biopsy and bone
densitometry services.
Effective January 1, 1997, the Company's DIS subsidiary opened it Scripps Chula
Vista MRI L.P. ("SCV") servicing patients in San Diego. The Company and Scripps
Health are equal partners with the Company serving as managing partner.
Effective March 1, 1997, the Company sold the assets and related liabilities of
four of DIS's hospital-based MRI facilities and DIS's Ultrasound Division to
Diagnostic Health Services, Inc. ("DHS") for approximately $16,000,000 in cash
including $2,000,000 in ten-year covenants not-to-compete. The covenants
not-to-compete were split equally between PHS and DIS and are classified as
"Deferred Revenue" on the Company's balance sheet. The Company recognized a gain
on the sale of approximately $5,600,000 which included the write-off of
approximately $2,660,000 of net acquisition goodwill. In addition, a discounted
receivable of approximately $1,190,000 was set-up on the Company's books for
post-closing payments of $500,000 each to be made by DHS to DIS on the first,
second and third anniversaries of the closing date. There is also an option to
receive these "post-closing payments" in the form of DHS common stock valued at
the mean average of the reported closing price of such common stock as reported
on the NASDAQ National Market for the five consecutive trading days ending on
the third day immediately prior to the closing date (the "Agreed Value").
9
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), Sheet #3
- ------------------------------------------------------------------------------
(7) Acquisitions, Sales and Divestitures (Continued)
Effective March 1, 1997, the Company acquired the assets and related liabilities
of Woodward Park Imaging Center ("Woodward Park") in Fresno, California for
approximately $200,000 in notes payable and assumed assets and liabilities
resulting in goodwill of approximately $90,000. Woodward Park is a full service
multi-modality imaging center providing MRI, CT, mammography, ultrasound and
general diagnostic radiology services.
During the nine months ended July 31, 1997, the Company acquired Las Posas
Medical Imaging for $35,000 and relocated DIS's Camarillo facility to its
location. Camarillo's previous building space is being used for warehouse
storage.
(8) Capital Transactions
During the nine months ended July 31, 1997, the Company purchased an additional
1,155,663 shares of DIS common stock for approximately $1,465,000. Subsequent to
the quarter's end, as of November 26, 1997, the Company has purchased an
additional 138,000 shares of DIS common stock for approximately $175,000
increasing its total ownership to 7,999,970 shares, or approximately 70%.
During the nine months ended July 31, 1997, the Company repurchased 459,000 of
its subordinated bond debentures for cash of approximately $260,000. These bonds
were retired and resulted in a gain on early extinguishment of debt of
approximately $199,000. Subsequent to the quarter's end, as of November 26,
1997, the Company repurchased an additional 2,888,000 of its subordinated bond
debentures for approximately $2,042,000. When the bonds are retired, the Company
will recognize an additional gain from early extinguishment of debt of
approximately $846,000 while reducing quarterly interest payments to
approximately $562,000.
During the nine months ended July 31, 1997, the Company repurchased an
additional 325,000 shares of its PHS common stock for approximately $133,000.
(9) Subsequent Events
Effective September 3, 1997, the Company sold 100% of the outstanding capital
stock of its FDI wholly-owned subsidiary to Preferred Health Management, Inc.
("PHM") for $13,500,000 paid as follows: approximately $9,760,000 in cash;
$2,000,000 in a promissory note bearing interest at 10% with $1,000,000 due on
the first anniversary of the Closing Date with the remaining principal due on
the second anniversary of the Closing Date; the assumption of PHS's original
November 1995 acquisition notes payable with a remaining principal balance of
approximately $900,000; and the assumption of other liabilities of approximately
$840,000. The Company estimates it will recognize a gain on the sale of
approximately $10 to $11 million.
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") 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, 1997, which is accounted for
using the cost method at $0.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of ImmunoTherapeutic, Inc. ("ITI"). 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.
On April 30, 1992, the Company entered into a purchase agreement with 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, 1997 and 1996 include the operations and cash transactions of
Radnet.
Effective November 1, 1995, the Company acquired most 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. Founded in 1989, FDI
is a leading radiology management services organization providing network
development and management along with diagnostic imaging cost containment and
utilization review services. The statement of operations and cash flows for the
nine months ended July 31, 1997 and 1996 reflect the operations and cash
transactions of FDI. Effective September 3, 1997, the Company sold 100% of the
outstanding capital stock of its wholly-owned subsidiary FDI for $13,500,000
consisting of cash, notes and assumed liabilities (See Note 9).
On March 25, 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ("DIS") for $4,000,000 and acquired a
five-year warrant to purchase an additional 1,521,739 shares of DIS stock at
$1.60 per share. The $4 million was borrowed by the Company from a primary
lending source. During the four-month period ended July 31, 1996, the investment
yielded a loss to the Company of $313,649. Effective August 1, 1996, the Company
issued a five-year promissory note for $3,272,046 and five-year warrants to
purchase approximately 4,000,000 shares of PHS common stock at $.60 per share,
to acquire an additional 3,228,046 shares of DIS common stock. The purchase made
PHS the majority shareholder in DIS with approximately 59% ownership. During the
nine months ended July 31, 1997, 1,155,663 of additional shares of DIS common
stock were acquired for approximately $1,465,000. In connection with the
acquisitions, goodwill of approximately $8,660,000 was recorded of which
approximately $4,200,000 was written-off with the closure of Parkside and the
sale to DHS (see Note 7). The statements of operations and cash flows for the
nine months ended July 31, 1997 reflect the operations and cash transactions
with DIS. The statements of operations and cash flows for the nine months ended
July 31, 1996 reflect only the original investment with DIS.
Effective March 1, 1997, the Company acquired the assets and related liabilities
of Woodward Park Imaging Center ("Woodward Park") in Fresno, California for
approximately $200,000 in notes payable and assumed assets and liabilities
resulting in goodwill of approximately $90,000. Woodward Park is a full service
multi-modality imaging center providing MRI, CT, mammography, ultrasound and
general diagnostic radiology services.
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, PHS, FDI
and DIS for the nine months ended July 31, 1997. The discussion of the results
of continuing operations includes Radnet, PHS and FDI for the nine months ended
July 31, 1996.
During the nine months ended July 31, 1997, the Company had an operating loss
from operations of approximately $5,775,000. During the nine months ended July
31, 1996, the Company had operating income from operations of approximately
$2,200,000. The decrease was primarily attributable to an impairment loss
related to the closure of Parkside (see Note 7) of approximately $4,950,000
recognized in December 1996.
The Company realized net revenues of approximately $52,500,000 and $39,950,000
during the nine months ended July 31, 1997 and 1996, respectively. Including
provisions for bad debts, the Company realized net revenues of approximately
$50,650,000 and $39,000,000 during the nine months ended July 31, 1997 and 1996,
respectively. Radnet realized net revenues, less provisions for bad debt, of
approximately $31,900,000 and $33,200,000 during the nine months ended July 31,
1997 and 1996, respectively. The decrease in net revenues is primarily
attributable to reductions in reimbursement from various payors including Blue
Shield, contract and fee for service customers. FDI realized net revenues of
approximately $6,200,000 and $5,800,000 during the nine months ended July 31,
1997 and 1996, respectively. DIS realized net revenues of approximately
$12,425,000 during the nine months ended July 31, 1997 (approximately $3,200,000
of DIS net revenues related to sites sold to DHS) (See Note 7). PHS realized net
revenues related to billing services of approximately $125,000 during the nine
months ended July 31, 1997.
During the nine months ended July 31, 1997 and 1996, the Company incurred
operating expenses of approximately $58,300,000 and $37,750,000, respectively.
Exclusive of provisions for bad debt and one-time impairment losses, the Company
incurred operating expenses of approximately $51,500,000 and $36,800,000 during
the nine months ended July 31, 1997 and 1996, respectively.
During the nine months ended July 31, 1997, the Company's operating expenses
consisted of approximately $19,775,000 for salaries and reading fees,
approximately $3,725,000 for vendor site costs, approximately $4,550,000 for
building and equipment rentals, approximately $16,750,000 in general and
administrative expenditures, approximately $6,650,000 in depreciation and
amortization, approximately $1,900,000 for provisions for bad debt and
approximately $4,950,000 in impairment losses.
During the nine months ended July 31, 1996, the Company's operating expenses
consisted of approximately $14,950,000 in salaries and reading fees,
approximately $3,475,000 in vendor site costs, approximately $3,150,000 in
building and equipment rentals, approximately $11,500,000 in general and
administrative expenditures, approximately $3,725,000 in depreciation and
amortization and approximately $950,000 in provisions for bad debt.
During the nine months ended July 31, 1997, Radnet incurred operating expenses
of approximately $33,400,000, FDI incurred operating expenses of approximately
$5,100,000, PHS incurred operating expenses of $1,950,000 and DIS incurred
operating expenses of approximately $17,850,000 (including $4,950,000 impairment
loss). Fiscal 1997 operating expense increases were primarily due to the
acquisition of DIS. During the nine months ended July 31, 1996, Radnet incurred
operating expenses of approximately $31,150,000, FDI incurred operating expenses
of approximately $4,900,000 and PHS incurred operating expenses of approximately
$1,700,000.
12
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations (Continued)
During the nine months ended July 31, 1997, Radnet's provisions for bad debt
increased approximately $950,000, depreciation and amortization increased
approximately $500,000, and general and administrative expenses increased
approximately $800,000 primarily for legal and outside service expenditures.
During the nine months ended July 31, 1997, FDI's vendor costs increased with
revenues, and PHS's amortization expense increased with the acquisition of DIS.
During the nine months ended July 31, 1997 and 1996, interest income was
approximately $300,000 and $250,000, respectively. The majority of 1997 interest
income was related to related party note receivables and the sale to DHS (see
Note 7). During the nine months ended July 31, 1997 and 1996, interest expense
was approximately $7,500,000 and $5,050,000, respectively. Interest expense
increases in 1997 were primarily due to the acquisition of DIS which incurred
approximately $1,975,000 in interest charges.
During the nine months ended July 31, 1997 and 1996, the Company recognized
other income of approximately $5,800,000 and $1,700,000, respectively. During
1996, DIS's operations were not consolidated with PHS and resulting management
fee income was not eliminated. In addition, the Company had various gains on
settlements during 1996 increasing other income including, but not limited to,
the TME settlement for $500,000 (see Form 10-K for the year ended October 31,
1996). During the nine months ended July 31, 1997, the Company realized a gain
from the sale to DHS (see Note 7) of approximately $5,600,000. During the nine
months ended July 31, 1997 and 1996, the Company realized an extraordinary gain
from early extinguishment of debt of approximately $200,000 and $1,070,000,
respectively.
During the nine months ended July 31, 1997 and 1996, the Company had net losses
of approximately $7,465,000 and $265,000, respectively
Liquidity and Capital Resources
Cash increased for the nine months ended July 31, 1997 by approximately
$475,000. Cash decreased for the nine months ended July 31, 1996 by
approximately $3,600,000.
Cash generated from investing activities for the nine months ended July 31, 1997
and 1996 was approximately $12,400,000 and $260,000, respectively. In 1997, the
Company sold four of DIS's hospital-based MRI sites and its Ultrasound Division
for approximately $16,000,000 in cash, acquired DIS stock for approximately
$1,465,000, acquired Las Posas Medical Imaging for $35,000, purchased additional
units in DIS's TVIC partnership for approximately $200,000 and purchased
approximately $1,830,000 of property and equipment.
Cash utilized for financing activities for the nine months ended July 31, 1997
and 1996 was approximately $9,400,000 and $2,650,000, respectively. With the
proceeds from the sale to DHS (See Note 7), the Company reduced its outstanding
lines of credit obligations by approximately $3,000,000 in addition to other
notes payable and capital lease principal reductions of approximately
$8,200,000. During the nine, months ended July 31, 1997, the Company borrowed
approximately $465,000 from Coast Business Credit, increased its cash overdraft
approximately $1,050,000 and received additional working capital loans from DVI
(collateralized by existing equipment) of approximately $1,025,000. In addition,
during the nine months ended July 31, 1997, the Company repurchased bond
debentures for approximately $260,000, purchased treasury stock for
approximately $135,000, distributed joint venture income of approximately
$225,000, and repaid related parties approximately $90,000 (See Note 4).
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)
At July 31, 1997, the Company had a net working capital deficit of $18,951,167
as compared to a working capital deficit of $22,626,649 at October 31, 1996, an
increase of $3,675,482. The improvement from year-end is primarily attributable
to the reduction in notes and leases payable, including lines of credit, from
the sale to DHS. The decrease in working capital from April 30, 1997 is
primarily due to increased borrowings on lines of credit initially paid down
with the DHS sale proceeds.
The Company's working capital needs are currently provided under three 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 holds a first lien on substantially all of
Radnet's (Beverly Radiology's) and FDI's assets to secure repayment under this
line of credit. The President and C.E.O. of PHS has personally guaranteed
$3,000,000 of the loans. In addition, the credit line is collateralized by a
$5,000,000 life insurance policy on the President and C.E.O. of PHS. At July 31,
1997, approximately $7,930,000 was outstanding under this line.
Under a second line of credit due December 1997, the Company may borrow the
lesser of 75% of the eligible accounts receivable, $4,000,000 or the prior
120-days' cash collections. Borrowings under this line are repayable together
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. As of July 31, 1997, approximately $2,225,000 was
outstanding under this line.
Under the third line of credit, the Company may borrow the lesser of $4,000,000
or approximately 53% of DIS's eligible accounts receivable. At July 31, 1997,
approximately $1,940,000 was outstanding under this line. This line, originally
due June 1997, was extended on a month-to-month basis and was closed at the
Company's request, and paid in full, in September 1997.
The Company's future payments for debt and equipment under capital lease for the
next five years, assuming lines of credit are paid in the first year and not
renewed, will be approximately $29,650,000, $17,375,000, $15,200,000,
$14,500,000 and $10,150,000, respectively. The July 31, 1997 lines of credit
balances were approximately $12,100,000. Interest expense (excluding line of
credit and bond debenture interest) for the next five years, included in the
above payments, will be approximately $5,525,000, $4,000,000, $2,900,000,
$1,650,000 and $725,000, respectively. In addition, the Company has
non-cancelable operating leases for use of its facilities and certain medical
equipment which will average approximately $3,000,000 in annual payments over
the next five years.
As of July 31, 1997, approximately $500,000 remains on the Company's books for
estimated legal and settlement costs related to a building lease for one closed
center.
14
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
Item 5: Other Information
On March 21, 1997, effective March 1, 1997, the Registrant's subsidiary,
Diagnostic Imaging Services, Inc., entered into an agreement with Diagnostic
Health Services, Inc. ("DHS") whereby the subsidiary sold the assets and related
liabilities of its ultrasound business (13 mobile ultrasound units together with
15 ultrasound laboratories) for Eight Million Five Hundred Thousand Dollars,
comprised of approximately Seven Million Dollars cash with the balance
consisting of the assumption of liabilities. Net annual revenues from those
operations have been approximately Four Million Dollars.
On April 17, 1997, effective March 1, 1997, the Registrant's subsidiary,
Diagnostic Imaging Services, Inc., concluded the sale of its wholly-owned
subsidiary, which owned and operated four magnetic resonance imaging centers
located on or adjacent to hospital sites in the Los Angeles area, for Sixteen
Million Dollars (including the assumption of approximately Six Million Dollars
of debt to DHS). The four centers formerly provided approximately 6.5 Million
Dollars of net annual revenue to the subsidiary.
On April 18, 1997, the Registrant borrowed $5,500,000 from Diagnostic Imaging
Services, Inc. (of which approximately 70% of the outstanding common stock is
owned by the Registrant). The principal is due and payable on or before March
31, 1998 with monthly interest at 10%.
On September 8, 1997, effective September 3, 1997, the Registrant sold its
Future Diagnostics, Inc. ("FDI") subsidiary to Preferred Health Management,
Inc., an unrelated party, for $13,500,000 payable $9,761,853 cash, a two-year
$2,000,000 promissory note bearing interest at 10% per annum with a $1,000,000
principal payment due in one year, and the balance of the purchase price
consisting of the assumption of certain outstanding liabilities connected with
the subsidiary's assets. The promissory note is secured by the subsidiary's
accounts receivable. FDI arranges for the provision of diagnostic imaging
services through a network of contracted imaging centers, which in turn provide
imaging services to insurance companies, health plans and other health care
payers. Registrant retained the portion of FDI's business related to radiology
management services ("Radnet Managed Imaging Services, Inc." or "RMIS"), and in
particular physician utilization review, which is in keeping with Registrant's
intent to concentrate on the development and expansion of its core business of
radiology practice management, information management systems and utilization
review/management. For further information, see Registrant's Form 8-K for the
event of September 8, 1997.
Item 6: Exhibits and Reports on Form 8-K
(b) On September 18, 1997, the Registrant filed its report on Form 8-K
containing information under Item 2 of such report pertaining to the FDI
transaction reported in Item 5 herein above.
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 28, 1997 By:/s/ Howard G. Berger
--------------------
Howard G. Berger, M.D., President, Principal
Executive Officer, Financial Officer and Director
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Jul-31-1997
<CASH> 624,428
<SECURITIES> 0
<RECEIVABLES> 17,792,402
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,621,181
<PP&E> 32,015,367
<DEPRECIATION> 0
<TOTAL-ASSETS> 89,053,210
<CURRENT-LIABILITIES> 40,572,348
<BONDS> 0
0
0
<COMMON> 402,322
<OTHER-SE> 31,461,277
<TOTAL-LIABILITY-AND-EQUITY> 89,053,210
<SALES> 34,214,509
<TOTAL-REVENUES> 34,214,509
<CGS> 16,752,840
<TOTAL-COSTS> 17,879
<OTHER-EXPENSES> 68,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,464,305
<INCOME-PRETAX> (2,812,862)
<INCOME-TAX> 34,000
<INCOME-CONTINUING> (2,989,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 199,447
<CHANGES> 0
<NET-INCOME> (2,789,984)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
