UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-----------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended October 31, 1998 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3326724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 478-7808
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. X
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $3,789,797 on February 1,
1999 based upon the mean between the closing bid and closing ask price for the
common stock in the over-the-counter market on said date.
The number of shares of the registrant's common stock outstanding on February 1,
1999 was 39,132,760 shares (excluding treasury shares).
Documents Incorporated by Reference
NONE
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PART I
Item 1. Business
(a) Background. Primedex Health Systems, Inc. ["PHS" or the "Company"]
is a New York corporation organized in 1985 and principally engaged in the
healthcare services industry. Through its 36 California diagnostic imaging
facilities [seven of which are wholly-owned or in partnerships with unaffiliated
parties with the Company's 90% owned Diagnostic Imaging Services, Inc. ["DIS"]
subsidiary and one is in partnership with an unaffiliated party with the
Company's Radnet subsidiary], the Company arranges for the non-medical aspects
of medical imaging offering MRI, CT, ultrasound, mammography, nuclear medicine
and general diagnostic radiology to the public. DIS also operates a cancer care
therapy center. PHS' executive offices are located at 1516 Cotner Avenue, Los
Angeles, California 90025 where its telephone number is [310] 478-7808.
RadNet Management.
The Company's wholly-owned subsidiary, RadNet Management, Inc.
["RadNet"], owns and operates 28 medical imaging centers and is a joint venture
partner in one other imaging center. Twenty-two of the imaging centers are
located in Southern California [with four centers located in Beverly Hills and
known as the Tower Division] with the remaining seven centers located in
northern California. At the wholly-owned centers, RadNet provides the imaging
center facilities and equipment as well as all non-medical operational,
management, financial and administrative services. At the joint venture center,
RadNet performs non-medical management services. At all 29 centers, the medical
services and medical supervision are provided by various independent physicians
and physician groups [at most of the centers, the medical services are provided
by Beverly Radiology Medical Group ["BRMG"], a partnership between Beverly
Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc., two
professional medical entities 99% owned by the Company's president, Howard G.
Berger, M.D. [see "Item 13"]. As compensation for its management and other
services at the various centers, RadNet receives a management fee. In connection
with the imaging centers in which it is a joint venture partner, RadNet, in
addition to a management fee, also shares in joint venture net income.
Diagnostic Imaging Services
On March 22, 1996, the Company acquired from Diagnostic Imaging
Services, Inc., a Delaware corporation, 2,747,493 shares of DIS common stock
[with a five-year warrant to purchase an additional 1,521,739 shares of DIS
common stock at an exercise price of $1.60 per share] for $3,000,000 and the
establishment of a five-year revolving $1,000,000 line of credit for DIS. The
Company also acquired an additional 730,768 shares of DIS common stock from a
third party for $1,000,000. The aggregate purchase price was Four Million
Dollars and represented approximately 31% of the outstanding DIS common stock.
DIS at that time owned and operated 10 imaging centers providing
diagnostic imaging services located in the Los Angeles and San Diego areas, as
well as 15 ultrasound laboratories located in hospitals, 13 mobile ultrasound
units servicing hospitals and office buildings, and one mobile MRI servicing a
single hospital. DIS also operates a cancer care therapy center in Temecula,
California. DIS acquired and/or opened four additional centers in 1996 and 1997.
In March and April 1997, DIS sold four of its imaging centers and its ultrasound
business to Diagnostic Health Services, Inc. ["DHS"], an unrelated third party,
for approximately $16 Million and $9 Million, respectively, less outstanding
capital lease obligations and other liabilities. Effective January 1, 1998, DHS
acquired the DIS partnership interest in the Scripps Chula Vista MRI Center in
exchange for 127,250 shares of its Common Stock which were sold in May 1998 for
approximately $1,230,000.
As of August 1, 1996, the Company acquired additional shares of DIS's
common stock from the president of DIS and certain parties affiliated with him
thereby bringing the aggregate number of shares of DIS common stock owned by the
Company to 6,706,307 shares representing approximately 59% of the outstanding
shares. The Company acquired the shares by issuance of its five-year
interest-only promissory notes aggregating $3,272,046 together with its
five-year warrants to acquire approximately 4,000,000 shares of the Company's
common stock at $.60 per share. Since August 1996, the Company has acquired an
additional 3,472,137 shares of DIS common stock from certain third parties for
$4,190,820 in cash and notes thereby increasing the Company's ownership to
approximately 90% of
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the outstanding DIS common shares as of February 1, 1999 [excluding treasury
shares]. In October 1998, the Company purchased DIS's outstanding preferred
stock from DVI Healthcare Operations, Inc.
for $5,207,900.
Future Diagnostics
In November 1995, the Company acquired the outstanding capital stock of
Future Diagnostics, Inc. ["FDI"] in exchange for the Company assuming
approximately $855,000 of FDI liabilities and paying an aggregate $2,345,000 to
the sellers. FDI arranges for the provision of imaging services for large payors
[such as large employers and insurance carriers] through a network of
approximately 250 imaging centers primarily in California and also provides
related utilization review and quality assurance services. On September 8, 1997,
the Company sold FDI to an unrelated third party for $13,500,000 [$9,761,853
cash and a two year 10% interest bearing note for $2,000,000 [paid in full in
December 1997] with the balance of the purchase price consisting of the
asumption of liabilities]. The Company retained RadNet Managed Imaging Services,
Inc. ["RMIS"] which still provides utilization review and quality assurance
services.
Tower Imaging
Beginning in January 1999, the Company will relocate three of its Tower
Imaging locations (120 East, 444 San Vicente and 1 West/Women's) from locations
presently on the Cedars Sinai Hospital Campus in Los Angeles to a single
location in Beverly Hills. Fiscal 1998 net revenue from the three sites was
approximately $12,160,000 and while the new site is within the Cedars Sinai
market area, the Company is unable to assess if there will be a negative impact
to revenues as a result of the relocation, although any loss will be reduced by
the annual space lease savings of approximately $1,000,000. In addition, the
Company entered into a new lease agreement for additional space in Beverly Hills
adjacent to its Roxsan center to open a Tower Women's Center and consolidate its
mammography operations in Beverly Hills into one site.
(b) Financial Information About Industry Segments
The Company is principally engaged in only one industry segment, the
healthcare services industry.
(c) Narrative Description of Imaging Business
Medical Services
The following are the principle medical diagnostic procedures performed
on patients at the various imaging centers owned or managed by the Company. The
patient is normally referred to the center for such diagnostic procedures by his
or her treatment physician who may be independent or may be affiliated with an
Independent Physician Association ["IPA"], a Health Maintenance Organization
["HMO"], a Preferred Provider Organization ["PPO"], or a similar organization
who has contracted for such services. See "Marketing" herein. Not all of such
procedures are performed at each center.
Computed Axial Tomography [CT] - CT is 100 times more sensitive than
conventional x-ray. It is used to see inside any of the body's organs, including
the brain, to detect disease and damage. CT focuses an x-ray on a specific plane
of the body, processes the image by computer, and constructs a picture on a
monitor, and later on film. Tissues of various density appear as different
shades of gray, bone [the most dense] as white, and air and fluid is black. The
procedure is painless and takes about one-half hour per study; more than one
study is often ordered on each patient. The patient simply lies on a special,
monitored table which is guided into the scanner. Some CT studies involve the
use of an injected contrast agent to better visualize anatomy and pathology. The
Company primarily uses non-ionic CT contrast agents to minimize contrast
reactions. A CT system costs in the range of $325,000 to $525,000.
Diagnostic Radiology- X-ray services, diagnostic tests employing x-ray
radiation on two planes; includes fluoroscopy and endoscopy.
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Magnetic Resonance Imaging [MRI] - Diagnostic imaging based on magnetism
rather than radiation or conventional x-ray. MRI has become widely accepted as
the standard diagnostic tool for a wide and fast-growing variety of clinical
applications; MRI is painless, requiring only that the patient lie still on a
motorized table that slides into a long cylinder. On some MRI studies, an
injected contrast agent is used, and some require the use of special "coils,"
permitting highly accurate scanning of a particular part of the body. MRIs are
the single most expensive pieces of equipment at RadNet imaging centers costing
between $800,000 and $1,600,000.
Mammography - Provides an x-ray picture of the breast, and is used to
detect tumors and cysts, and to help differentiate between benign and malignant
tumors.
Nuclear Medicine - Involves the use of a small amount of radioactive
material and is used to obtain information about the anatomy and functioning of
various organs. Nuclear medicine is based on the principle that organs absorb or
concentrate scientific minerals or hormones. These substances are not visualized
on conventional x-ray, but if they are made radioactive by the addition of a
radioisotope, they can be seen. If an organ is not functioning properly, too
little or too much of the substance will be taken up or concentrated in some
parts of the organ, but not other parts. The organ will thus appear different on
a screen. The amount of radiation is extremely low, and the isotope usually
disappears from the body within a day or less.
Ultrasound - A painless imaging technique that uses sound waves and
their echoes to visualize and locate internal organs. It is particularly useful
in looking at soft tissues that does not x-ray well. Ultrasound is used in
pregnancy to avoid x-ray exposure as well as in gynecological, urologic,
vascular, cardiac and breast applications.
Imaging Centers
The following table indicates the principal diagnostic procedures
available at each of the imaging centers in which the Company has a management
and/or ownership interest.
Mammo- Ultra- Diagnostic Nuclear
Center MRI CT graphy sound Radiology Medicine
Tower Division:
Roxsan * * * * * *
120 East * * *
Wilshire * * *
1 West/Women's * *
Antelope Valley *
Camarillo** * * *
Corona** * * *
Fresno * * * * *
La Habra * *
Lancaster [Two Sites] * * * * * *
Long Beach [Three Sites] * * *
Northridge * * * * * *
North County**
[San Diego] * *
Orange * * * * * *
Oxnard * * * *
Riverside** * * * * *
Sacramento [DRI]
[Two Sites] * * * * *
San Francisco *
Santa Clarita * * * * *
Santa Monica** * *
Santa Rosa *
Stockton/Valley * * * * * *
Temecula** * * * * *
Thousand Oaks** * * * * * *
Tustin * * *
Vacaville * * *
Ventura [Five Sites] * * * * * *
Westchester * * * * *
*Indicates availability
**Indicates a DIS facility
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In addition, cancer care therapy is performed at Valley Regional Oncology
Center, a DIS center located in Temecula, California.
Management Services and Compensation
Radnet has entered into Management Agreements with respect to its
wholly-owned imaging centers with various physicians and physician groups [the
"Physician Group"]. Pursuant to the typical Management Agreement, the Company
makes available the imaging center facilities and all of the furniture and
medical equipment at such facilities for use by the Physician Group and the
Physician Group is responsible for staffing the center with qualified medical
personnel. In addition, the Company provides management services and
administration of the non-medical functions and services relating to the medical
practice at the center including among other functions, provision of clerical
and administrative personnel, bookkeeping and accounting services, billings and
collections, provision of medical and office supplies, secretarial, reception
and transcription services, maintenance of medical records, advertising,
marketing and promotional activities and the preparation and filing of all
forms, reports and returns required in connection with unemployment insurance,
workers' compensation insurance, disability, social security and similar laws.
As compensation for the services furnished under the Management Agreement, the
Company is paid a Management Fee equal to an agreed percentage of the medical
practice billings, as and when collected, varying between 70% to 85% of such
collections.
At the joint venture imaging center, Radnet has entered into a
Management Agreement to provide management, administrative and billing and
collection services for a management fee approximating eight percent of the
gross monthly receipts received for services performed at the center. In
addition, as a joint venture partner, the Company is entitled to 50% of joint
venture income after deduction of all expenses including amounts paid for
medical services and medical supervision.
At most of RadNet's and DIS's wholly-owned imaging centers, the medical
services including medical supervision are supplied by Beverly Radiology Medical
Group ["BRMG"]. RadNet has a Management and Services Agreement with BRMG for a
ten-year term until June 2002, terminable prior thereto at RadNet's election
upon the occurrence of certain events including a change in BRMG's ownership
such that Dr. Berger is no longer an owner in the aggregate of at least 60% of
the equity ownership of BRMG. As compensation for its services furnished under
the Management and Service Agreement, BRMG has agreed to pay a Management Fee to
RadNet and DIS equal to 81% of its medical practice receipts at the contracted
centers, as and when collected.
Equipment
The two most expensive types of diagnostic medical equipment found at
the imaging centers owned or managed by the Company are the MRI and the CT
systems. As set forth in the chart under "Imaging Centers" above, 22 centers
provide MRI services and 18 centers provide CT services. A majority of the MRI
systems and CT systems at the Company's imaging centers are manufactured by
General Electric or Siemens. The acquisition of these systems as well as the
acquisition of the other relatively expensive diagnostic medical equipment at
the various imaging centers has been effected through various financing
arrangements directly with the manufacturer involving the use of capital leases
with purchase options at minimal prices at the end of the lease term, the
issuance of long term installment notes and the use of operating leases with
purchase options at substantial prices at the end of the lease term. At October
31, 1998, capital lease obligations totaled approximately $20 million through
September 30, 2005 including current installments totaling approximately $3.3
million. Also at October 31, 1998, installment notes payable totaled
approximately $59 million through October 31, 2005 including current
installments of approximately $21 million [including line of credit balances of
approximately $12 million]. Commitments under equipment operating leases at
October 31, 1998 were approximately $395,000 through October 2002 including
current obligations of approximately $205,000. To the extent additional imaging
centers are opened or acquired, these obligations could materially increase. See
the above described chart as to the other equipment available at each imaging
center.
The MRI and CT systems and the other diagnostic medical equipment at the
imaging centers owned or managed by the Company are subject to technological
obsolescence as medical imaging is a field in which there is constant
development of new techniques and technologies.
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Marketing
The patients who undergo diagnostic medical imaging procedures at the
various Company owned or managed imaging centers are generally referred by
individual independent physicians, by Independent Physician Associations
["IPAs"] consisting of groups of physicians, and by Health Maintenance
Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar
organizations which enroll subscribers on a contractual basis to whom they
deliver healthcare services. Such organizations attempt to control the cost of
healthcare services by directing their enrollees to participating physicians and
institutions and often through aggressive utilization review and limitations on
access to physician specialists, attempt to further limit the cost of medical
service delivery. Such organizations typically develop on a regional basis where
an appropriate enrollee population and mix of participating physicians and
institutions are available.
The Company currently employs seven full-time and four part-time
marketing and sales personnel who are compensated on a salary or salary plus
commission basis and who periodically inform the medical community including
individual physicians and the administrators of IPAs, HMOs, PPOs, and similar
organizations throughout Southern California as to the services provided at the
Company's owned or managed imaging centers. Patients are obtained by direct
referral or through contract. Some contracts, referred to as "capitation
contracts," provide for a fixed fee per organization member, which is paid to
the medical service provider. Under a "capitation" contract, the provider agrees
to provide specified services to the organization members for a fixed,
predetermined payment per member for a specified time period [usually one year],
regardless of how many times the member uses the service. No assurances can be
given that any of the current or future "capitation" contracts will be
profitable as there is a possibility that management could underestimate the
number of times the services at its imaging centers will be used by the
contracting organization's members during the contract term.
Competition
All of the imaging centers owned or managed by the Company compete with
a substantial number of imaging centers and hospitals in California. Although no
assurances can be given, management believes the imaging centers will be able to
successfully compete with such other centers because of the up-to-date imaging
equipment maintained at the Company's centers, the quality of the medical
personnel affiliated with its centers and the fact that for widespread potential
customer groups, it has locations throughout many areas.
Insurance
BRMG maintains a medical malpractice insurance policy in the amount of
$6,000,000 per occurrence and $8,000,000 in the aggregate covering each
physician obtained by it pursuant to its medical staffing obligations at the
various imaging centers. The policy provides ongoing coverage from any claims
made by patients seen by the physicians as well as coverage for all of the
Company's non-medical personnel at each center against medical malpractice
claims. RadNet, DIS and PHS are also named insureds under the policy. All other
physicians who perform medical services at the various imaging centers are
required to maintain medical malpractice insurance coverage in the amount of
$1,000,000 per occurrence and $3,000,000 in the aggregate. Although management
believes that such levels of insurance are adequate, there can be no assurance
in this regard. In addition, the Company maintains $33,000,000 of blanket
general liability insurance covering each center and its own principal offices
as well as all of its employees. BRMG, DIS, RMIS and RadNet are also named
insureds under this policy. During 1998, the Company also maintained two medical
equipment repair and maintenance policies covering each center with aggregate
annual limits of approximately $10.6 million.
Employees
At October 31, 1998, the Company [including DIS] had a total of 437
full-time employees of whom 10 served in executive positions, 181 supplied
technical and managerial services at the various imaging centers, and 246
provided administrative, transcription, clerical and similar services.
None of the Company's employees are subject to a collective bargaining
agreement nor had the Company experienced any work stoppages. The Company
believes that its employee relations are good.
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Government Regulation
Substantially all of the Company's current operating revenues are
attributable to its operations in the health care services industry through
RadNet and DIS. The health care services industry in which the Company operates
is subject to a wide range of federal and state governmental regulatory
requirements and prohibitions affecting all aspects of the Company's operations.
Government regulation of the health care services industry in general, and the
occupational health care industry in particular, may adversely affect the
Company's business through, among other things, potential reduction in payment
for health care services.
Government regulation of the Company's health care service operations
fall into the following general areas: licensing, reimbursement, fraud/abuse,
billing/assignment, referral arrangements, corporate practice of medicine, and
environmental.
Licensing - Health care facilities are subject to federal, state and
local regulation, and periodic inspection by licensing agencies to determine
whether the standards of medical care provided therein comply with licensing
standards. California law requires that professional health care services be
provided only by licensed physicians, a licensed facility, or a facility that
qualifies for a statutory exemption from licensure. The Company periodically
verifies that the physician providers at each of its centers maintain valid
licenses to furnish services, although the Company is to some extent dependent
upon the physician providers to which it furnishes management services to
maintain such licensure.
Third Party Reimbursement - Providers of health care services, including
physicians, laboratories, and suppliers, receive payment for medical services
from their patients, from third party payors, or from a combination of both, but
third party reimbursement constitutes the great majority of revenues for most
health care providers. Third party payors include insurance companies,
government agencies, health maintenance organizations, preferred provider
organizations, and third party administrators for self-insured companies.
A significant portion of the Company's revenues is derived from the
operation or management of facilities that furnish diagnostic imaging services
to patients for which payment is made by third party payors such as the
government-sponsored health care programs, Medicare and Medicaid, the workers'
compensation program, and private insurers. The scope and amount of third party
reimbursement has become increasingly unpredictable during the past several
years due to changes in reimbursement formulas, utilization review mechanisms,
and administrative procedures effectuated by third party payors as part of their
cost-containment efforts, such as radiology fee schedules and a resource-based
relative value scale payment system for physician services.
Under most participation arrangements with governmental or third party
payors, including Medicare, Medicaid, Blue Cross/Blue Shield plans, and most
health maintenance organizations, health care providers are required to accept
as payment in full, amounts which may be less than established charges. Nearly
all governmental and third party payors require patients to pay a portion of the
approved payment amount in the form of deductibles and co-payments for services
received. Health care providers are often unable to collect deductibles and
co-payments at the time services are rendered, and in some cases not at all.
Claims submitted to third party payors for reimbursement may be denied,
returned, or reduced for many reasons, including ineligible beneficiary status,
non-covered services, lack of medical necessity, failure to provide sufficient
services to support the claim, secondary payor liability, failure to submit
required information and submission of incorrect billing information.
Coordination of benefits and subrogation rights also require special handling.
Corrections and resubmission of claims add to the cost of operations for health
care facilities.
Third party payors also usually engage in utilization review of claims
to verify that services are medically necessary and eligible for coverage. This
process further complicates and delays collections. Third party payors are, with
increasing frequency, replacing prospective [prior to services being rendered]
utilization review with retrospective [after services are delivered] review.
Such audits, which can relate to claims for service furnished several years
earlier, often result in efforts by the payor to recoup payments previously
approved.
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Fraud and Abuse Issues - Federal and state laws establish a large number
of prohibitions against billing and referral practices in the health care
services industry and impose criminal and civil penalties upon health care
providers found to have violated them.
Billing and Assignment - Under the Medicare and Medicaid programs,
patients usually assign their rights to payment to health care providers in
exchange for certain assurances from the health care providers, e.g., an
agreement not to collect for more than the Medicare approved amount. Health care
providers are generally restricted in their ability to reassign rights to
Medicare or Medicaid payment to third parties; an exception exists for billing
and collection services under specified conditions. Violation of the
requirements for assignment or reassignment can subject the health care provider
to a range of criminal and civil penalties, including fines and exclusion from
the program.
Health care providers and management companies are also subject to
criminal and civil penalties under federal and state law prohibitions against
submitting false claims for payments. Generally, criminal penalties subjecting
participants to fines and imprisonment require that the entity act knowingly or
willfully, or with fraudulent intent. Civil statutes provide penalties for
submitting claims with "reckless disregard" of the truth or falsely submitting
information. The federal civil penalties statute provides for civil penalties
against anyone who presents or causes to be presented a false or improper claim
under Medicare or Medicaid, including billing agents. Liability is imposed on
persons who "know or should know" that a claim is "false," "fraudulent," or for
services "not provided as claimed."
In addition, health care providers and management companies are subject
to various other laws that provide for monetary sanctions for technical billing
violations and for failure to disclose known Medicare or Medicaid overpayments.
Health care providers and management companies are also subject to
certain federal and state credit collection agency laws and regulations and
federal and state anti-trust laws which, among other penalties, provide criminal
penalties for conspiring to fix prices. The Federal Fair Debt Collection
Practices Act [the "Federal Fair Debt Act"] sets forth various provisions
designed to eliminate abusive, deceptive, and unfair debt collection practices
by debt collectors. The Federal Fair Debt Act also provides for a civil right of
action against any debt collector who fails to comply with the provisions
thereof. Various states, including California, also have promulgated laws and
regulations that govern credit collection practices. In general, these laws and
regulations prohibit certain fraudulent and oppressive credit collection
practices and also may impose license or registration requirements upon
collection agencies. In addition, state credit collection laws and regulations
generally provide for criminal fines, civil penalties, injunctions and jail
terms for collection agencies and collection agency personnel who fail to comply
with such laws and regulations. Although the Company does not provide past due
or delinquent credit collection services, the management services that it
furnishes to its health care providers may subject it to regulation as a "debt
collector" under the Federal Fair Debt Act and as a "collection agency" under
certain state collection agency laws and regulations.
Referral Arrangements - The Social Security Act [governing Medicare and
Medicaid] and many state laws impose civil and criminal penalties upon persons
who make or receive kickbacks, bribes, or rebates in connection with the
provision of health care services.
The federal anti-kickback rules prohibit individuals and entities from
knowingly and willfully soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for (a) referring someone for a good,
facility, service or item, (b) purchasing, leasing, ordering or arranging for a
good, facility, service or item or (c) recommending that an individual purchase,
lease or order a good, facility, service or item reimbursable under the Medicare
or Medicaid programs. In addition to other penalties, violation of the
prohibitions can lead to exclusion from participation in the Medicare and
Medicaid programs, which would preclude a health care provider or health care
clients of a management company from receiving reimbursement for services
furnished by the excluded entity. The Company believes that arrangements for the
management of medical practices such as it has established have in fact become
common in California, and have not generally been challenged with regard to
these issues. However, the Company cannot substantiate its belief. There can be
no assurance that the Company's present arrangements will not be challenged,
and, if challenged, that it will not be found to violate such prohibitions, thus
subjecting the Company to potential damages, injunction and/or civil and
criminal penalties.
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California Business and Professions Code Section 650 sets forth a
comprehensive prohibition against the payment of compensation by or to a
physician or other health professional in exchange for patient referrals. An
even more broadly worded prohibition on payments for referrals is found in
California Health and Safety Code Section 445, which applies by its terms to all
persons, not only physicians and other health care professionals, and prohibits
referrals for profit to "health-related facilities". The imaging centers
operated or managed by the Company are deemed "health-related facilities" under
the statute. However, the Company does not believe that its present arrangements
violate the prohibition against referrals for profit contained in the statutes.
All of the payment relationships under the management agreements entered
into by the Company are subject to review under the above statutes, as to
whether any portion of the payments is being made in exchange for the referral
of patients. Moreover, payment relationships with other persons and entities
providing goods or services to the Company, BRMG or the Company's other medical
service providers are also subject to review under the above statute as to
whether any of the payments for the goods or services are being made at least in
part in exchange for the referral of patients. Even if the Company were deemed
to be referring patients to the providers, the Company does not believe that any
portion of its management fee is being paid for such referrals, but rather
constitutes reasonable compensation for the services provided by the Company to
the providers pursuant to the management agreements. However, there can be no
assurance that the relationship between the Company and the health care
providers with which it contracts will not be characterized as violating the
statutes.
Future judicial, legislative or administrative action which interprets
state and federal "kickback" prohibitions could have a materially adverse effect
on the Company and its assets. Further, new legislation or regulations are
proposed periodically relating to referral patterns in the health care services
industry and there can be no assurance that the Company will be able to operate
in conformity with such laws and regulations or will be able to do so
profitably.
Both federal and California law prohibit referrals of patients by
physicians to a medical facility [including a diagnostic imaging center] in
which the physician or the physician's immediate family has a financial
interest. The federal law [the so-called "Stark Law"] applies to referrals of
Medicare and Medicaid patients. The California version [the so-called "Speier
Law"] extends the referral prohibition to all patients. The Company believes it
is in substantial compliance with these laws.
Corporate Practice of Medicine - In California, a lay person or any
entity other than a professional corporation is not allowed to practice any of
the healing arts including by employing professional persons or have any
ownership interest or profit participation in or control over any healing arts
professional practice. This doctrine is commonly referred to as the prohibition
on the "corporate practice" of medicine. The Company believes that arrangements
for the management of medical practices have in fact become quite common in
California, and have not generally been challenged with regard to the corporate
practice issue. However, because these types of arrangements are not required to
be reported, the Company cannot substantiate its belief. There can be no
assurance that the Company's present arrangements with BRMG or the physicians
providing medical services and medical supervision at the Company's imaging
centers will not be challenged, and, if challenged, that they will not be found
to violate the corporate practice prohibition, thus subjecting the Company to
potential damages, injunction and/or civil and criminal penalties.
The Company has not received a legal opinion from counsel with regard to
the effect of the corporate practice prohibition on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the lack of court cases relevant to the issue.
Environmental - The facilities operated or managed by the Company
generate hazardous and medical waste subject to federal and state requirements
regarding handling and disposal.
The Company believes that the facilities that it operates and manages
are currently in compliance in all material respects with applicable federal,
state and local statutes and ordinances regulating the handling and disposal of
such materials. The Company does not believe that it will be required to expend
any material amounts in order to remain in compliance with these laws and
regulations or that compliance will materially affect its capital expenditures,
earnings or competitive position.
8
<PAGE>
The Company has not received a legal opinion from counsel with regard to
the effect of the prohibitions discussed above on its business as described
herein, and counsel has advised that such an opinion could not be given, because
of the fluid interpretation of the law relevant to the issue.
Item 2. Properties
All of the imaging centers owned or managed by the Company are located
in leased facilities with the exception of the Northridge imaging center where
the Company owns the building and the land. Certain information with respect to
the imaging centers is as follows:
Annual
Center Rental Company's %
Wholly-Owned Approx. Sq. for Leased Ownership Lease
Ft. of Center Facility Interest Expiration
Tower Division:
[Beverly Hills and Environs]
Roxsan 8,143 $164,000 100% October 2001
120 East 5,349 $188,000 100% June 1999
1 West 4,577 $221,000 100% June 1999
Wilshire [New Tower]1 13,778 $454,674 100% September 2018
Womens Center [New]2 3,830 $ 40,000 100% February 2014
Antelope Valley 2,890 $ 66,000 100% June 2000
Fresno 3,807 $113,000 100% January 2003
La Habra 3,034 $ 38,000 100% December 2002
Lancaster [two sites] 7,827 $163,500 100% July 2002
Long Beach [three sites] 6,000 $122,400 100% December 1999
Northridge 7,500 Owned 100% N/A
Orange 4,201 $132,000 100% February 2001
Oxnard 5,100 $101,000 100% February 2002
Sacramento [DRI]
[two sites] 9,727 $322,000 100% June 2003
San Francisco 3,380 $114,000 100% March 2000
Santa Clarita 4,833 $109,000 100% October 2001
Santa Rosa 4,235 $125,700 100% July 2001
Stockton/Valley 4,588 $ 77,000 100% December 2001
Tustin 5,310 $106,000 100% April 2003
Vacaville 3,984 $ 48,000 100% March 2001
Ventura 9,440 $131,000 100% July 2002
Ventura -Loma Vista
[Four Sites] 3,585 $ 57,000 100% November 2001
DIS Centers
Camarillo 2,035 $ 35,000 90% May 2002
Corona 5,328 $ 93,000 90% October 2000
North County [San Diego] 2,042 $ 49,000 90% October 2000
Riverside 8,312 $149,000 90% July 2001
Santa Monica
[Parkside Womens] 3,103 $109,000 90% January 2001
Temecula 4,247 $121,000 90% November 2005
Temecula Oncology 5,418 $ 94,000 90% Pending
Thousand Oaks 8,300 $305,000 90% January 2001
Joint Venture
Westchester 6,763 $242,000 50% July 2001
Other Facilities
RadNet [Corp. office] 11,500 $232,000 N/A May 2003
Warehouse/Other 34,148 $418,000 N/A Various
(1) The Company has leased space consolidating all three locations to a new
facility in Beverly Hills.
(2) The Company has leased space to consolidate its mammography services into
one new facility in Beverly Hills.
9
<PAGE>
Item 3. Legal Proceedings
(a) At November 1, 1993, the Company was a defendant in a putative class
action pending in the United States District Court for the District of New
Jersey entitled "In re Hibbard Brown & Company Securities Litigation. The
plaintiffs subsequently amended the Consolidated Class Action Complaint and in
July 1994, filed a Second Amended and Consolidated Class Action Complaint [the
"Second Consolidated Complaint"] in the matter. In the Second Consolidated
Complaint, the plaintiff identified certain alleged "control" companies
including among others, the Company, ITI, Digital Products Corporation and Site
and alleged that the defendants violated the federal securities laws and the
Racketeer Influenced Corrupt Organizations Act ["RICO"] by initiating and/or
joining in a conspiracy and course of conduct designed to manipulate and
artificially inflate the market prices of the stocks of the various "control"
companies [allegedly controlled by the Company, the Company's former principal
stockholder and others] in order to permit the defendants to sell "large"
amounts of the "control" companies' securities to the public at manipulated
prices and reap "huge" profits. The Second Consolidated Complaint claimed
damages as well as punitive damages [including a trebling of damages pursuant to
the RICO statute], interest, attorneys' fees and costs, all of which were
unspecified in amount. In September 1994, the Court certified the matter as a
class action. Subsequent thereto, certain of the defendants, including the
Former Principal Stockholder, FNW, WFG and Hibbard filed for protection from
creditors pursuant to the federal bankruptcy laws. See Part II, Item 1 of the
Company's Form 10-Q for the quarter ended January 31, 1996.
Management contended that the Company was not a party to any conspiracy
and did not engage in any illegal course of conduct. The Company entered into a
preliminary settlement with the plaintiff class in this 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, the settlement is
subject to final approval by the class and to final court approval, which has
not yet been obtained.
(b) In connection with the cessation of operations at its Beverly Hills
MRI location, lawsuits were filed against RadNet by the lessor of the property
for past due rent, future rent and damage to the premises plus costs. The
lessor's lawsuit against RadNet was settled in November 1997, with RadNet paying
the lessor $669,000.
(c) An action entitled Gerald E. Dalrymple, M.D. and Gerald E.
Dalrymple, M.D., Inc. v. Primedex Health Systems, Inc., Howard Berger, M.D.,
Diagnostic Imaging Services, Inc., a Delaware corporation, Diagnostic Imaging
Services, a California corporation, and Diagnostic Health Services, Inc. was
filed in the Los Angeles Superior Court, Case No. SC 047526 on June 3, 1997. The
Complaint alleges that Diagnostic Imaging Services, Inc. ["DIS"] failed to
properly pay plaintiffs fees for performing professional services to which they
were entitled as well as damages for violation of the implied covenant of good
faith and fair dealing, fraud, conversion, breach of fiduciary duty,
interference with existing and prospective business advantage, negligent and
intentional infliction of emotional distress and defamation, and seeks damages
for an unspecified amount in excess of $25,000. The Complaint also alleges that
by virtue of the investment by the Company in DIS and the sale of four of the
DIS imaging centers and its ultrasound business to Diagnostic Health Services,
Inc., that DIS has thereby effected either a reorganization, consolidation,
merger or transfer of all or substantially all of its assets to another entity
thereby permitting plaintiffs to convert a warrant for 319,488 shares of DIS's
common stock, issued in connection with the acquisition of Parkside Radiology,
to either $1,000,000 cash or stock with a market value of $1,000,000 in the
Company, at the election of the Company. A partial settlement was reached in
August 1997. Pursuant to the settlement, Dr. Dalrymple assumed ownership of
Parkside Radiology and assumed responsibility for expenses of the facility in
the future. Additionally, DIS sold certain of its equipment and leasehold
improvements to Dr. Dalrymple for approximately $400,000. Plaintiffs' remaining
claims, as well as the DIS cross-claims against Dr. Dalrymple alleging, among
other things, that Dr. Dalrymple pursued a plan to depress Parkside's business,
and therefore its value, thus enabling him to acquire the facility he previously
sold to DIS at a depressed price, are still in dispute. Discovery is not yet
complete and the trial is scheduled for March 1999. The Company and DIS intend
to vigorously defend against plaintiffs' claims and to pursue the DIS
cross-claims in the action.
(d) An action entitled Sterling Diagnostic Imaging, Inc. v. Primedex
Health Systems, Inc., Radnet Management, Inc. and Diagnostic Imaging Services,
Inc., was filed in New Castle County [Delaware] Superior Court, Case No.
98C-10-112[HLA], and a separate action entitled Diagnostic
10
<PAGE>
Imaging Services, Inc. v. Sterling Diagnostic Imaging, Inc., was filed in Contra
Costa County [California] Superior Court bearing Case No. C98-04298. This matter
was initiated on June 5, 1998, when Sterling filed a demand for Arbitration
before the American Arbitration Association in Philadelphia, seeking to enforce
a film purchase agreement between DIS and E.I. du Pont de Nemours and Company
["DuPont"]. In October 1998, both DIS and Sterling commenced civil actions in
state court. Sterling's action, filed in the Delaware Superior Court, sought to
compel arbitration or, in the alternative, sought damages for breach of contract
against DIS, seeking to recover $5,000,000. DIS was also sued for civil
conspiracy, along with defendants Radnet Management, Inc. and the Company, who
were additionally sued on alternative theories of alter ego [of DIS] and
tortious interference with DIS's alleged contract with Sterling. Following the
filing of a motion to dismiss by DIS, Sterling filed an amended complaint
abandoning its attempt to compel arbitration. DIS and the other defendants filed
motions seeking to either dismiss the action entirely or, alternatively, to stay
the action pending the resolution of the California action. The Delaware court
dismissed the action as to the Company and Radnet Management, Inc. and stayed
the action as to DIS pending the hearing in California. The DIS action against
Sterling seeks declaratory relief on claims that Sterling was not a proper
assignee of the DIS contract with DuPont and thus has no standing. Sterling has
filed a motion to dismiss or stay the California action on the ground that
Delaware is the proper forum for the action. Sterling's motion is scheduled for
hearing on February 25, 1999. The Company intends to vigorously defend against
Sterling's claims, in whatever forum they are prosecuted.
The Company's subsidiaries are currently parties to other litigation,
none of which is deemed by management to be material in nature.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters
PHS Common Stock is traded in the over-the-counter market on the OTC
Bulletin Board [symbol, "PMDX"]. The following table indicates the high and low
bid and asked prices for PHS Common Stock for the periods indicated based upon
information supplied by the National Quotation Bureau, Inc. Such quotations
reflect interdealer prices without adjustment for retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Bid Price(1) Asked Price(1)
Quarter Ended High Low High Low
January 31, 1997 .49 .33 .50 .48
April 30, 1997 .54 .34 .56 .36
July 31, 1997 .40 .31 .42 .33
October 31, 1997 .61 .29 .63 .31
January 31, 1998 .26 .26 .32 .28
April 30, 1998 .20 .20 .25 .22
July 31, 1998 .14 .13 .16 .15
October 31, 1998 .09 .09 .10 .10
- --------------
(1) The above information reflects inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
The last reported bid and asked prices for PHS Common Stock on the OTC
Bulletin Board on February 1, 1999, were $.15 and $.16, respectively. As of
February 1, 1999, the number of holders of record of PHS Common Stock was 2,730.
However, a substantial number of PHS' outstanding shares of Common Stock were
owned of record on said date by "Cede & Co.," the nominee for Depository Trust
Company, the clearing agency for most broker-dealers. Management believes that
these shares are beneficially owned by customers of these broker-dealers and
that the number of beneficial owners of PHS Common Stock is substantially
greater than 2,730.
During fiscal 1997, PHS purchased an aggregate of 325,000 shares of its
outstanding common stock for an aggregate $133,220 and purchased $2,906,000 of
its outstanding debentures for a purchase price of $1,984,093 in open market
purchases from unaffiliated third parties. During fiscal 1998, PHS purchased
$2,205,000 outstanding debentures for a purchase price of $1,484,943. Subsequent
to fiscal 1998, PHS purchased an additional $676,000 of its outstanding
debentures for a purchase price of $337,215 from unaffiliated third parties. In
addition, effective December 18, 1998, a $5,000 face value debenture was
converted into 500 shares of the Company's common stock.
Recent Sales of Unregistered Securities
In reliance upon Section 4(2) of the Securities Act of 1933, as amended,
the Company issued five year warrants to purchase an aggregate of 920,100 shares
of its common stock exercisable at $.25 per share to five persons or entities in
connection with the acquisition of shares of DIS common stock by the Company.
12
<PAGE>
Item 6. Selected Consolidated Financial Data
[In thousands, except per share data]
<TABLE>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5[A]1 9 9 4[A]
------- ------- ------- ------- -------
Operating Data:
<S> <C> <C> <C> <C> <C>
Gross Revenues $132,595 $132,569 $ 111,381 $ 88,884 $ 69,942
Operating Expenses $ 75,329 $ 74,687 $ 58,372 $ 98,124 $ 50,289
[Loss] from Investee Transactions$ -- $ -- $ (314) $ -- $ (26)
Income [Loss] from Continuing
Operations [Exclusive of
Non-Recurring Items] -
Net of Taxes ** $(28,543) $ (748)$ (8,361) $(57,616) $(20,476)
Income [Loss] from Discontinued
Operations $ -- $ -- $ -- $ (3,813) $ (3,371)
Net [Loss] Income Before
Extraordinary Items and Change
in Accounting Principle $(29,497) $ (2,343)$ (9,511) $(62,370) $(20,912)
Extraordinary Items - Gain $ 955 $ 1,595 $ 1,150 $ 941 $ --
Change in Accounting Principle $ (779) $ -- $ -- $ -- $ --
[Loss] Income Per Common Share
From Continuing Operations
Before Extraordinary Items $ (.75) $ (.06)$ (.24) $ (1.54) $ (.44)
[Loss] Income Per Common Share
from Discontinued Operations $ -- $ -- $ -- $ (.09) $ (.08)
[Loss] Income Before
Extraordinary Items $ (.75) $ (.06)$ (.24) $ (1.63) $ (.52)
Net [Loss] Income Per Common
Share $ (.75) $ (.02)$ (.21) $ (1.61) $ (.52)
Cash Dividends Per Common Share $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Cash and Cash Equivalents $ 59 $ 130 $ 152 $ 3,929 $ 5,649
Total Assets * $ 62,656 $ 86,340 $ 105,931 $ 66,760 $153,551
Total Long-Term Liabilities $ 79,282 $ 76,843 $ 85,464 $ 54,088 $ 67,666
Total Liabilities $118,016 $111,270 $ 130,792 $ 82,002 $104,522
Working Capital [Deficit] $(20,191) $(12,027)$ (22,627) $ (4,337) $ 528
Stockholders' Equity [Deficit] $(55,360) $(24,930)$ (24,861) $(15,242) $ 49,029
</TABLE>
13
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
[In thousands, except per share]
[A] The operating data for October 31, 1994, gives effect to the spin off of
the Care Advantage, Inc. subsidiary as of October 31, 1994.
* At October 31, 1998, 1997, 1996, 1995 and 1994, includes $11,314,
$20,169, $31,822, $15,383 and $58,725 of net goodwill, respectively.
** Reconciliation of Income from Continuing Operations - Net of Taxes
O c t o b e r 3 1,
--------------------------------------
1 9 9 5 1 9 9 4
------------------ -----------------
Net [Loss] $ (61,429) $(20,912)
Loss from Discontinued Operations 3,813 3,371
--------- --------
[Loss] from Continuing Operations
[Inclusive of Non-Recurring Items] -
Net of Taxes (57,616) (17,541)
Less: Nonoperating Gain from Investee
Stock Transactions [See Note 2] $ -- $ 2,935
Net of Approximate Taxes -- -- -- 2,935
-------- --------- -------- --------
[Loss] from Continuing Operations
[Exclusive of Non-Recurring Items] -
Net of Taxes $ (57,616) $(20,476)
========= ========
14
<PAGE>
ITEM 7.
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, 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 at October 31, 1998, which is accounted for using the
cost method at $-0-.
During fiscal 1992, the Company purchased approximately 90% of the common stock
of ImmunoTherapeutics, Inc. ["ITI"]. As of 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, this investment was sold for
$143,750.
As of January 31, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. I, entered into an asset purchase agreement with Primedex
Corporation ["PC"] for approximately $46,250,000. On July 29, 1993, the Company
announced its plans to restructure its Primedex subsidiary and to wind down its
involvement in the California worker's compensation industry. Accordingly, the
operating results of this subsidiary were reclassified as a discontinued
operation and the appropriate prior period amounts were restated. Effective
August 1, 1995, substantially all of the assets of PC were sold to an unrelated
party for approximately $9,448,000 [See Note 16]. The sale resulted in a loss of
approximately $3,800,000.
As of April 30, 1992, the Company's wholly-owned subsidiary, CCC Franchising
Acquisition Corp. II, entered into a purchase agreement with Radnet Management,
Inc. and certain related companies ["Radnet"] for approximately $66,000,000. The
Statements of Operations and Cash Flows for the years ended October 31, 1998 and
1997 reflect the operations and cash transactions of Radnet.
On December 23, 1993, the Company acquired Advantage Health Systems, Inc.
["AHS"], a newly organized corporation formed to provide medical and surgical
utilization reviews 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 owns AHS.
In November of 1995, the Company formed Radnet Managed Imaging Services, Inc.
["RMIS"] which acquired most of the assets of Future Diagnostics, Inc. ["FDI"]
by purchasing 100% of its outstanding stock for approximately $3.2 million
consisting of cash, notes and assumed assets and liabilities. Effective
September 3, 1997, 100% of the outstanding capital stock of FDI was sold to
Preferred Health Management, Inc. ["PHM"] for approximately $13,500,000 in cash,
notes and assumed liabilities. The sale resulted in a gain of approximately
$10,400,000. The statement of operations and cash flows for the year ended
October 31, 1997 reflect the operations and cash transactions of FDI. . The
Company continues to operate RMIS which provides utilization review services.
The statements of operations and cash flows for the years ended October 31, 1998
and 1997 reflect the operations and cash transactions with RMIS.
15
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Background [Continued]
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. In addition, the Company established a five-year $1 million
revolving loan with DIS. 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.
In subsequent purchases through February 1, 1999, the Company acquired or
purchased an additional 3,472,137 shares of DIS common stock for $4,190,820
increasing its total ownership to approximately 90% [excluding treasury shares].
In connection with the DIS common stock purchases through October 31, 1998, the
Company recorded goodwill of $10,896,417 of which $1,555,154 was written off in
conjunction with the disposal of Parkside, $3,522,595 was written off in
conjunction with the sale of the ultrasound division and five of DIS's
hospital-based MRI facilities to Diagnostic Health Services, Inc. ["DHS"] and
$8,631,944 was written off pursuant to Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The Statements of Operations and
Cash Flows for the years ended October 31, 1998 and 1997 reflect the operations
and cash transactions of DIS.
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
Forward Looking Information
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward looking statements are
based on assumptions that the Company will have adequate financial resources to
fund the development and operation of its business, and that there will be no
material adverse change in the Company's operations or business. The foregoing
assumptions are based on judgment with respect to, among other things,
information available to the Company, future economic, competitive and market
conditions, future business decisions, and future governmental medical
reimbursement decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the forward
looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward looking statements will be realized. There are a number of other
risks presented by the Company's business and operations which could cause the
Company's financial performance to vary markedly from prior results or results
contemplated by the forward looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause the Company to alter its capital investment and other expenditures, which
may also adversely affect the Company's results of operations. In light of
significant uncertainties inherent in forward-looking information included in
this Annual Report on Form 10-K, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
Company's objectives or plans will be achieved.
16
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1998 vs. October 31,
1997
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc..
Results of Operations
The discussion of the results of continuing operations includes PHS, Radnet,
RMIS and DIS for the year ended October 31, 1998. The discussion of the results
of continuing operations includes PHS, Radnet, RMIS, DIS and FDI for the year
ended October 31, 1997.
For the years ended October 31, 1998 and 1997, the Company had operating losses
from continuing operations of $16,508,162 and $7,668,385, respectively, which
included impairment losses of $12,677,324 and $4,553,783, respectively.
The Company generated gross revenue of $132,594,891 and $132,569,387 and net
revenue of $58,820,543 and $67,018,507 for the years ended October 31, 1998 and
1997, respectively. The Company's net revenue decreased approximately 12% for
the year ended October 31, 1998. During the years ended October 31, 1998 and
1997, Radnet generated gross revenue of $111,648,718 and $100,169,718,
respectively, FDI generated gross revenue of $0 and $7,103,525, respectively,
PHS generated gross billing revenue of $215,975 and $225,701, respectively, and
DIS generated gross revenue of $20,730,198 and $25,070,443, respectively [net of
elimination entries]. During the years ended October 31, 1998 and 1997, Radnet
generated net revenue of $47,555,149 and $44,952,132, respectively, FDI and RMIS
generated net revenue of $37,427 and $7,010,470, respectively, PHS generated net
billing revenue of $215,975 and $225,701, respectively, and DIS generated net
revenue of $11,011,992 and $14,830,204, respectively [net of elimination
entries]. The decrease in net revenue is primarily attributable to the sale of
FDI which during fiscal 1997 generated net revenue of $7,010,470 which was
billed at net and required minor contractual adjustments. Even though Radnet's
gross revenue increased approximately $11.5 million during fiscal 1998,
contractual adjustments on those charges were approximately $6.5 million.
In addition, during the year ended October 31, 1998, the Company began the
process of consolidating many of its internal and external billing systems into
three systems company-wide based upon geographic considerations. With this
process, the balances on the Company's previous systems were sent to collection
agencies and the values were written-down considerably to account for their age
and higher one-time collection fees. In addition, historical workers
compensation [pre-1994] and personal injury files were written-off or adjusted
for current trends in collection yields, increased age and uncollectibility, and
bad debts were recorded on a few of the Company's contracted payors who did not
pay or defaulted on note or payment arrangements. During the year ended October
31, 1998, approximately $4 million in additional contractual adjustments or
provisions for bad debt were recorded for these accounts receivable adjustments.
For the years ended October 31, 1998 and 1997, operating expenses totaled
$75,328,705 and $74,686,892, respectively. For the year ended October 31, 1998,
Radnet's operating expenses were $51,294,476, RMIS's operating expenses were
$334,293, DIS's operating expenses were $21,313,209 and PHS's overhead expenses
were $2,386,727 [net of elimination entries]. For the year ended October 31,
1997, Radnet's operating expenses were $44,880,065, FDI's and RMIS's operating
expenses were $6,090,612, DIS's operating expenses were $20,753,338 and PHS's
overhead expenses were $2,962,877 [net of elimination entries].
17
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1998 vs. October 31,
1997
Results of Operations [Continued]
During the years ended October 31, 1998 and 1997, the Company recognized
impairment losses, included in operating expenses, of $12,677,324 and
$4,553,783, respectively. For the years ended October 31, 1998 and 1997, the
Company incurred expenses for salaries and professional reading fees of
$25,919,490 and $26,328,082, respectively, building and equipment rental
expenses of $5,412,407 and $6,226,423, respectively, general and administrative
expenses of $19,978,762 and $21,915,419, respectively, provisions for bad debt
of $2,698,139 and $1,962,837, respectively, and depreciation and amortization
expense of $8,642,583 and $8,783,419, respectively. In addition, during the year
ended October 31, 1997, the Company incurred restructuring costs of $662,026 and
FDI vendor site costs of approximately $4,254,903. Even with the Company
incurring an increase in 1998 impairment losses of approximately $8.1 million,
overall operating expenses only increased approximately $650,000 due primarily
to the sale of FDI, the sales of DIS's Ultrasound Division and five of its
hospital-based MRI facilities during fiscal 1997 [Tarzana, SMIC, SGV and Chino]
and 1998 [SCV] and the closures of Parkside and West L.A..
For the year ended October 31, 1998 and 1997, interest income was approximately
$140,000 and $295,000, respectively. During fiscal 1997, the Company recorded
interest income of approximately $131,000 related to the sale of DIS's four
hospital-based MRI facilities to DHS. For the years ended October 31, 1998 and
1997, interest expense was approximately $9,279,000 and $9,845,000,
respectively.
For the years ended October 31, 1998 and 1997, the gain on sale of subsidiaries
and Divisions was approximately $965,000 and $16,000,000 respectively. Fiscal
1998's gain primarily consisted of additional proceeds of approximately $595,000
for the Company's agreement to a IRS Section 338 (h)(10) Election as part of the
FDI sale transaction, a final FDI sale reconciliation adjustment of
approximately $70,000, a gain from the partnership dissolution of LaHabra of
approximately $48,000, and a gain from the sale of SCV of approximately
$252,000. Fiscal 1997's gain primarily consisted of the sale of DIS's ultrasound
division and four of its hospital-based MRI facilities to DHS in March 1997 and
the sale of FDI to PHM in September 1997. The Company recognized gains from the
sales of DIS's sites and FDI of approximately $5,600,000 and $10,400,000,
respectively.
For the year ended October 31, 1998, other income was approximately $394,000.
For the year ended October 31, 1997, other expense was approximately $640,000.
Fiscal 1998's increase in other income was primarily due to the conversion of
DHS common stock received as payment on the $1,500,000 in post closing payments
from the sales of four of DIS's hospital-based MRI facilities, and the sale of
SCV into cash generating a net gain of approximately $297,000. In addition,
during the year ended October 31, 1997, the Company wrote-off a large portion of
its deposits and disposed of fixed assets.
For the years ended October 31, 1998 and 1997, the Company had gains on early
extinguishment of debt of $954,533 and $1,595,106, respectively. For the year
ended October 31, 1998, the Company wrote-off capitalized fees and organization
costs of approximately $780,000 upon the early adoption of Statement of Position
["SOP"] No. 98-5, "Reporting on the Costs of Start-up Activities."
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
For the years ended October 31, 1998 and 1997, the Company had net losses of
$29,321,832 and $748,095, respectively. For the year ended October 31, 1998,
Radnet realized net losses of $8,839,831, RMIS generated net losses of $182,136,
DIS realized net losses of $16,699,060 [including write-offs of net acquisition
goodwill of $11,331,299] and PHS realized net losses of $3,600,805 [net of
elimination entries]. For the year ended October 31, 1997, Radnet realized net
losses of $4,138,831, FDI and RMIS generated net income of $11,283,923, DIS
realized net losses of $2,747,775 [including write-offs of net acquisition
goodwill of $4,193,662], and PHS realized net losses of $5,145,412 [net of
elimination entries].
18
<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 years ended October 31, 1998 and 1997 by $70,022 and
$22,353, respectively.
Cash generated from investing activities for the years ended October 31, 1998
and 1997 was $1,282,607 and $20,741,396, respectively.
During the year ended October 31, 1998, the Company received proceeds of
$595,645 for a IRS Section 338 (h)(10) Election related to the sale of FDI,
$69,393 of additional proceeds from PHM for final reconciling adjustments,
$420,000 from the sale of medical equipment, $2,059,179 from PHM in full payment
of the FDI sale note receivable, $1,232,691 from the sale of SCV in the form of
common stock [which was subsequently sold], and $1,849,936 from the conversion
of a note receivable due from the sale of DIS's MRI facilities into common stock
[which was subsequently sold]. During the year ended October 31, 1998, the
Company acquired an additional 1,788,374 shares of DIS common stock for
$1,739,120 in cash [and approximately $325,000 in notes payable], received
$94,515 from the dissolution of the La Habra partnership, purchased property and
equipment for $3,089,632, made loans of $235,000 to related parties and received
$25,000 in payments from related parties.
During the year ended October 31, 1997, the Company received proceeds of
$9,761,853 from the sale of FDI to PHM, $266,500 from the sale of certain
medical equipment and other assets, and $15,972,720 from the sale of DIS's
Ultrasound Division and four of its hospital based MRI facilities to DHS. The
DHS sale proceeds were as follows: $6,519,475 from the sale of the Ultrasound
Division, $7,453,245 from the sale of the MRI facilities and $2,000,000 in
covenant not-to-compete income split equally between PHS and DIS. During the
year ended October 31, 1997, the Company acquired an additional 1,293,663 shares
of DIS common stock for $1,639,623, purchased the outstanding limited
partnership units in Valley Regional Oncology Center ["VROC"] for $260,000,
purchased additional limited partnership units in Temecula Valley Imaging Center
["TVIC"] for $196,875 and purchased the assets of Las Posas Medical Imaging for
$35,000. In addition, during the year ended October 31, 1997, the Company
purchased property and equipment for $3,098,179 and made loans of $30,000 to
related parties.
Cash generated from financing activities for the year ended October 31, 1998 was
$134,066. Cash utilized for financing activities for the year ended October 31,
1997 was $17,894,237. For the year ended October 31, 1998 and 1997, the Company
made principal payments on notes payable and capital lease obligations of
$8,077,336 and $17,741,045, respectively. The fiscal 1997 increase was primarily
due to the Company reducing its lines of credit by $6,938,183 with proceeds from
the sales of certain assets, facilities and divisions. In addition, during
fiscal 1998, the Company restructured its capital lease obligations and notes
payable with its two primary lendors extending terms, reducing monthly payments
and skipping at least one principal payment during the year. For the years ended
October 31, 1998 and 1997 the Company received proceeds from borrowings on lines
of credit and notes payable of $8,180,082 and $2,373,554, respectively. During
fiscal 1998, the Company increased its lines of credit borrowing $4,231,579 from
fiscal 1997 and received working capital proceeds from other outside lendors of
$3,948,503. For the years ended October 31, 1998 and 1997, the Company purchased
$2,205,000 face value subordinated bond debentures for $1,484,943 and purchased
$2,906,000 debentures for $1,984,093, respectively. For the years ended October
31, 1998 and 1997, the Company increased its cash overdraft by $1,410,513 and
$68,689, respectively. For the year ended October 31, 1998, the Company received
proceeds of $30,750 from the issuance of common stock and received joint venture
proceeds of $75,000. For the year ended October 31, 1997, the Company purchased
325,000 shares of its stock for $133,220 and distributed $478,122 to its joint
venture partners.
At October 31, 1998 and 1997, the Company had working capital deficits of
$20,191,252 and $12,027,033, respectively. The 1998 increase in working capital
deficit of $8,164,219 was primarily due to the increase in lines of credit
borrowings of $4,231,579. In addition, current assets decreased approximately
$3.3 million due to the write-down of accounts receivable and the conversion of
PHM's and DHS's note receivables. Included in 1998 current liabilities of the
Company is $11,911,416 of revolving lines of credit liabilities.
19
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1998 vs. October 31,
1997
Liquidity and Capital Resources [Continued]
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $30,175,000, $19,875,000, $14,075,000, $12,830,000 and
$11,150,000. Interest expense [assuming lines of credit are paid in full] for
the Company for the next five years, included in the above payments, will be
approximately $5,800,000, $4,550,000, $3,125,000, $2,125,000 and $1,150,000,
respectively. Interest on subordinated bond debentures is excluded. In addition,
the Company has noncancellable operating leases for use of its facilities and
certain medical equipment which will average approximately $3,000,000 in annual
payments over the next five years.
At three of the Company's Tower locations [120 East, 444 San Vicente and 1
West/Womens], the Company was unable to extend the respective leases which
expire at various times beginning in January 1999. Due to this, the Company has
entered into a new lease agreement for space in Beverly Hills ["Wilshire"] and
will consolidate the assets and business of these three Tower locations to the
new space during fiscal 1999. The Company cannot predict whether the move will
negatively impact the volume of business previously obtained from these three
centers, but the new site will reduce respective average building rental
disbursements by approximately $1,000,000 per year [including note payment
disbursements assumed upon the acquisition of Tower in October 1994]. Fiscal
1998 net revenue for these three sites was approximately $12,160,000.
The Company estimates interest payments on its bond debentures to be
approximately $2,005,000 for fiscal 1999. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year. Subsequent to year-end,
as of February 1, 1999, the Company purchased $676,000 face value bond
debentures for $337,215. The Company has or will retire all of these bonds. In
addition, effective December 18, 1998, a $5,000 face value debenture was
converted into 500 shares of the Company's common stock.
The Company's working capital needs are currently provided under two lines of
credit. A third line of credit for DIS was paid in full and terminated, at the
Company's request, in September 1997. Under one agreement with Coast Business
Credit, originally 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%. At October 31, 1998, approximately $8,770,000 was
outstanding under this line. This line of credit was renewed on January 14,
1999, extending the due date to December 31, 2000. Under the new agreement, the
Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$20,000,000 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 2.5%, or (b) 8%. The lender holds a first lien on
substantially all of Radnet's assets, the president and C.E.O. of PHS has
personally guaranteed $6,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the president and C.E.O.
of PHS. A second line of credit with DVI Business Credit was renewed on October
31, 1998. Under this agreement, now due October 31, 2000, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. The credit
line is collateralized by approximately 80% of the Tower division's accounts
receivable. Borrowings under this line are repayable together with interest at
an annual rate equal to the bank's prime rate plus 1.0%. At October 31, 1998,
approximately $3,140,000 was outstanding under this line. As of October 31,
1998, the bank's prime rate was 8.0%. Under the various formulas, total funds
available for borrowing under the two lines of credit was approximately $3.09
million at October 31, 1998.
20
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1998 vs. October 31,
1997
Liquidity and Capital Resources [Continued]
The Company entered into an additional line of credit agreement with DVI
Business Credit on October 31, 1998. Under this line, due October 31, 2000, the
Company may borrow up to $3,500,000 to either (a) pay off in full the promissory
note dated 10/1/94 issued to Tower Radiology, et. al. ["Tower Goodwill"], or (b)
purchase, on the open market, the subordinated debentures of the Company at a
price not to exceed 60% of the face value of such debentures. Borrowings under
this line are repayable monthly, at the rate of 1.4% of the line balance,
including principal and interest, at an annual rate equal to the bank's prime
rate plus 1.0%. This line is also collateralized by the Tower division's
accounts receivable. At October 31, 1998, $0 was outstanding under this line and
the full amount was available. Subsequent to year-end, as of February 1, 1999,
the Company borrowed the entire line of $3,500,000 [See Note 22].
In connection with ceasing operations at certain of the Company's imaging
centers, selling certain divisions and the restructure of Corporate operations,
the Company set up an additional restructuring reserve of $662,026 during the
year ended October 31, 1997. Total accrued restructuring costs of $1,062,026 as
of October 31, 1997 included $500,000 remaining on the Company's books from
October 31, 1996 for estimated legal and settlement costs associated with one
final building lessor. This final lessor settled with the Company and was paid
in full $669,000 in November 1997. During fiscal 1998, corporate operations
reserves of $288,026 were utilized leaving approximately $105,000 on the
Company's books at October 31, 1998, which amount is included with accrued
expenses.
New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. Management is in the process of evaluating the disclosure
requirements. SFAS No. 131 is not expected to have a material impact on the
Company.
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it its designated, for example, gain or losses related to
changes in the fair value of a derivative not designated as a hedging instrument
is recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive income
[outside earnings] until the consummation of the underlying transaction.
21
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1998 vs. October 31,
1997
New Authoritative Pronouncements [Continued]
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
Year 2000
The Company relies significantly on computer systems and applications in its
daily operations. Some of these systems are not presently year 2000 compliant,
which means that because they have historically used only two digits to identify
the year in a date, they will fail to distinguish dates in the "2000's" from
dates in the "1900's." The Company's business, financial condition and results
of operations could be materially and adversely affected by the failure of the
Company's systems and applications [and those provided by or operated by third
parties interfacing with the Company's systems and applications] to properly
operate or manage these dates.
The Company has embarked on a program to repair or replace these noncompliant
systems and to obtain similar assurances from third parties providing the
Company with computer software or interfacing with the Company's systems and
applications. The Company estimates it will incur expenditures in this regard
not in excess of $100,000. The Company presently anticipates being fully
operational at the year 2000. Additionally, it has received verbal assurances
from those who supply computer systems for its operations that such systems will
also be operational at the year 2000. Such parties included those who provide
computer software for its sophisticated and complex medical equipment. However,
there can be no assurance that such parties will complete their year 2000
conversions in a timely fashion or will not suffer a year 2000 business
disruption that may adversely affect the Company's financial condition and
results of operations.
Inflation
To date, inflation has not had a material effect on the Company's operations.
22
<PAGE>
ITEM 7.
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1997 vs. October 31,
1996
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc.
Results of Operations
The discussion of the results of continuing operations includes PHS, Radnet, FDI
and DIS for the years ended October 31, 1997 and 1996.
For the years ended October 31, 1997 and 1996, the Company had operating losses
from continuing operations of $7,668,385 and $1,833,120, respectively.
The Company generated net revenue of $67,018,507 and $56,538,507 for the years
ended October 31, 1997 and 1996, respectively. The increase in net revenue in
1997 is primarily attributable to the acquisition of DIS. During the year ended
October 31, 1997, Radnet generated net revenue of $44,952,132, FDI generated net
revenue of $7,010,470, PHS generated net billing revenue of $225,701 and DIS
generated net revenue of $14,830,204 [net of elimination entries]. During the
year ended October 31, 1996, Radnet generated net revenue of $43,439,338, FDI
generated net revenue of $7,482,487 and DIS generated net revenue of
approximately $5,616,682 [for the partial period from August to October 1996]
[net of elimination entries].
For the years ended October 31, 1997 and 1996, operating expenses totaled
$74,686,892 and $58,371,627, respectively. For the year ended October 31, 1997,
Radnet's operating expenses were $44,880,065, FDI's operating expenses were
$6,090,612, DIS's operating expenses were $20,753,338 and PHS's overhead
expenses were $2,962,877 [net of elimination entries]. For the year ended
October 31, 1996, Radnet's operating expenses were $43,754,174, FDI's operating
expenses were $6,332,934, DIS's operating expenses were $5,687,219 [for the
partial period from August to October 1996] and PHS's overhead expenses were
$2,597,300 [net of elimination entries]. The increase in fiscal 1997 operating
expenses is primarily attributable to DIS given its fiscal 1996 operating
expenses included only three months of consolidated financial information. In
addition, DIS recognized an impairment loss on the closure of Parkside during
the twelve months ended October 31, 1997.
For the years ended October 31, 1997 and 1996, the Company incurred expenses for
salaries and professional reading fees of $26,328,082 and $22,563,519,
respectively, FDI vendor site costs of $4,254,903 and $4,433,907, respectively,
building and equipment rental expenses of $6,226,423 and $5,535,652,
respectively, general and administrative expenses of $21,915,419 and
$17,266,956, respectively, provisions for bad debt of $1,962,837 and $2,531,337,
respectively, and depreciation and amortization expense of $8,783,419 and
$6,040,256, respectively. In addition, during fiscal 1997, the Company incurred
restructuring costs of $662,026 and recorded an impairment loss on the closure
of Parkside of $4,553,783.
For the year ended October 31, 1997 and 1996, interest income was approximately
$295,000 and $258,000, respectively. For the years ended October 31, 1997 and
1996, interest expense was approximately $9,845,000 and $7,893,000,
respectively. For the consolidated three month period ended October 31, 1996,
DIS's interest expense was approximately $855,000; for the twelve months ended
October 31, 1997, DIS's interest expense was approximately $2,505,000. The
remaining increase in interest expense is primarily attributable to PHS
promissory notes payable issued with the August 1996 acquisition of DIS common
stock.
23
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1997 vs. October 31,
1996
Results of Operations [Continued]
For the year ended October 31, 1997 and 1996, the gain on sale of subsidiaries
and Divisions was $16,082,302 and $143,750, respectively. Fiscal 1997's gain
primarily consisted of the sale of DIS's ultrasound division and four of its
hospital-based MRI facilities to DHS in March 1997 and the sale of FDI to PHM in
September 1997. The Company recognized gains from the sales of DIS's sites and
FDI of approximately $5,600,000 and $10,400,000, respectively. Fiscal 1996's
gain was the result of the sale of ITI stock.
For the year ended October 31, 1997, other income [expense] was an expense of
approximately $640,000. For the year ended October 31, 1996, other income
[expense] was income of approximately $935,000. Fiscal 1997's other expense
primarily consisted of the sale, disposal and abandonment of fixed assets of
approximately $825,000. Fiscal 1996's other income primarily consisted of
$335,000 of pre-consolidation DIS management fee income and a $500,000 legal
settlement gain.
For the years ended October 31, 1997 and 1996, the Company had gains on early
extinguishment of debt of $1,595,106 and $1,149,817, respectively.
For the years ended October 31, 1997 and 1996, the Company had net losses of
$748,095 and $8,361,096, respectively. For the year ended October 31, 1997,
Radnet realized net losses of $4,138,831, FDI generated net income of
$11,283,923, DIS realized net losses of $2,747,775 [including write-offs of net
acquisition goodwill of $4,193,662], and PHS realized net losses of $5,145,412
[net of elimination entries]. For the year ended October 31, 1996, Radnet
realized net losses of $2,596,218, FDI generated net income of $241,545, DIS
realized net losses of $1,494,829 [including the investment loss for the interim
period of $313,649], and PHS realized net losses of $4,511,594 [net of
elimination entries].
Liquidity and Capital Resources
Cash decreased for the years ended October 31, 1997 and 1996 by $22,353 and
$3,776,962, respectively.
Cash generated from investing activities for the year ended October 31, 1997 was
$20,741,396. Cash utilized for investing activities for the year ended October
31, 1996 was $77,638. During the year ended October 31, 1997, the Company
received proceeds of $9,761,853 from the sale of FDI to PHM, $266,500 from the
sale of certain medical equipment and other assets, and $15,972,720 from the
sale of DIS's Ultrasound Division and four of its hospital based MRI facilities
to DHS. The DHS sale proceeds were as follows: $6,519,475 from the sale of the
Ultrasound Division, $7,453,245 from the sale of the MRI facilities and
$2,000,000 in covenant not-to-compete income split equally between PHS and DIS.
During the year ended October 31, 1997, the Company acquired an additional
1,293,663 shares of DIS common stock for $1,639,623, purchased the outstanding
limited partnership units in Valley Regional Oncology Center ["VROC"] for
$260,000, purchased additional limited partnership units in Temecula Valley
Imaging Center ["TVIC"] for $196,875, and purchased the assets of Las Posas
Medical Imaging for $35,000. During the year ended October 31, 1996, the Company
paid $1,100,000 in modification of its management fee [See Note 7], received
proceeds from the sale of its marketable securities of $1,998,458, received
proceeds from the sale of ITI stock of $143,750, acquired imaging centers for
$732,160, advanced approximately $1,640,000 to DIS prior to the Company's
consolidation in August 1996 and was repaid $1,937,500 on notes due from related
parties. During the years ended October 31, 1997 and 1996, the Company purchased
property and equipment of $3,098,179 and $682,472, respectively.
24
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1997 vs. October 31,
1996
Liquidity and Capital Resources [Continued]
Cash utilized for financing activities for the years ended October 31, 1997 and
1996 was $17,894,237 and $2,726,305, respectively. For the year ended October
31, 1997 and 1996, the Company made principal payments on notes payable and
capital lease obligations of $17,741,045 and $7,515,599, respectively. The
fiscal 1997 increase was primarily due to the Company reducing its lines of
credit by $6,938,183 with proceeds from the sales of certain assets, facilities
and divisions. The remaining increase is primarily attributable to DIS and its
first full year of consolidated operating activity. In addition, fiscal 1996
principal payments were lower than average primarily due to the deferral of
payments while renegotiating balances and terms, and the arrangements of new
notes and leases with interest-only payments or deferred principal payments
during the first year. For the years ended October 31, 1997 and 1996, the
Company received proceeds from borrowings on notes payable of $2,373,554 and
$5,460,229, respectively. In fiscal 1996, a large portion of the borrowings were
from revolving lines or credit paid down or eliminated in fiscal 1997. For the
year ended October 31, 1997, the Company repurchased $2,906,000 face value
subordinated bond debentures for $1,984,093, repurchased 325,000 shares of
Company stock for $133,220 and distributed $478,122 to its joint venture
partners. For the year ended October 31, 1996, $481,727 was utilized to
repurchase 1,300,000 shares of Company stock and $440,000 was paid to joint
venture partners.
At October 31, 1996, the Company had a working capital deficit of $22,626,649;
at October 31, 1997, the Company had a working capital deficit of $12,027,033, a
decrease of $10,599,616. A primary reason for the improvement was due to the
proceeds from the sale of FDI and DIS's Ultrasound Division and its MRI sites
during the fiscal year. Included in current liabilities of the Company is
$7,679,837 of revolving line of credit liabilities.
The Company's future payments for debt and equipment under capital leases for
the next five years, assuming lines of credit are paid and not renewed, will be
approximately $25,945,000, $15,825,000, $15,585,000, $14,400,000 and
$12,200,000. Interest expense [assuming lines of credit are paid in full] for
the Company for the next five years, included in the above payments, will be
approximately $5,605,000, $4,285,000, $3,135,000, $1,895,000 and $915,000,
respectively. Interest on subordinated bond debentures is excluded. In addition,
the Company has noncancellable operating leases for use of its facilities and
certain medical equipment which will average approximately $3,300,000 in annual
payments over the next five years.
At three of the Company's Tower locations [120 East, 444 San Vicente and 1
West/Womens], the Company was unable to extend the respective leases which
expire at various times beginning in January 1999. Due to this, the Company has
entered into a new lease agreement for space in Beverly Hills ["Wilshire"] and
will consolidate the assets and business of these three Tower locations to the
new space during fiscal 1999. The Company cannot predict whether the move will
negatively impact the volume of business previously obtained from these three
centers, but the new site will reduce respective average building rental
disbursements by approximately $1,015,000 per year [including note payment
disbursements assumed upon the acquisition of Tower in October 1994]. Fiscal
1997 net revenue for these three sites was approximately $13,225,000.
The Company estimates interest payments on its bond debentures to be
approximately $2,100,000 for fiscal 1998. The quarterly payments are paid on
January 1, April 1, July 1 and October 1 of each year. Subsequent to year-end,
as of February 27, 1998, the Company repurchased $1,736,000 face value bond
debentures for $1,207,050. The Company has or will retire all of these bonds.
25
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1997 vs. October 31,
1996
Liquidity and Capital Resources [Continued]
The Company's working capital needs are currently provided under two lines of
credit. A third line of credit for DIS was paid in full and terminated, at the
Company's request, in September 1997. Under one agreement with Coast Business
Credit, 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 assets. At
October 31, 1997, approximately $6,452,000 was outstanding under this line. A
second line of credit with DVI Business Credit was obtained in December of 1994
subsequent to the acquisition of the Tower Imaging Group. Under this agreement,
originally due December 1997 and extended on a month-to-month basis, the Company
may borrow the lesser of 75% of the eligible accounts receivable, $4,000,000 or
the prior 120-days' cash collections. The credit line is collateralized by
approximately 80% of the Tower division's accounts receivable. Borrowings under
this line are repayable together with interest at an annual rate equal to the
bank's prime rate plus 3.5%. At October 31, 1997, approximately $1,228,000 was
outstanding under this line. As of October 31, 1997, the bank's prime rate was
8.50%. Under the various formulas, total funds available for borrowing under the
two lines of credit was approximately $5.8 million at October 31, 1997.
In connection with ceasing operations at certain of the Company's imaging
centers, selling certain divisions and the restructure of Corporate operations,
the Company set up an additional restructuring reserve of $662,026 during the
year ended October 31, 1997. During fiscal 1997, $495,622 of the Company's
reserves were utilized or paid. Total accrued restructuring costs of $1,062,026
as of October 31, 1997 include $500,000 remaining on the Company's books from
October 31, 1996 for estimated legal and settlement costs associated with one
final building lessor. This final lessor settled with the Company and was paid
in full $669,000 in November 1997.
New Authoritative Pronouncements
The FASB has issued SFAS No. 128, "Earnings per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
26
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Discussion of Operations for the Years Ended October 31, 1997 vs. October 31,
1996
New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. Management is in the process of evaluating the disclosure
requirements. SFAS No. 131 is not expected to have a material impact on the
Company.
Inflation
To date, inflation has not had a material effect on the Company's operations.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements are attached hereto and begin at page F-1.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
27
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report................................. F-1......
Consolidated Balance Sheets.................................. F-2...... F-3
Consolidated Statements of Operations........................ F-4...... F-5
Consolidated Statements of Stockholders' Equity [Deficit].... F-6......
Consolidated Statements of Cash Flows........................ F-7...... F-10
Notes to Consolidated Financial Statements................... F-11..... F-32
Independent Auditor's Report on Supplemental Schedule........ S-1......
Schedule II - Valuation and Qualifying Accounts.............. S-2...... S-4
. . . . . . . . . . . . . . .
28
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Primedex Health Systems, Inc. and its affiliates as of October 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity [deficit], and cash flows for each of the three fiscal years in the
period ended October 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Primedex Health Systems, Inc. and its affiliates as of October 31,
1998 and 1997, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended October 31, 1998,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 21 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has negative working capital which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 21. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in the accompanying Note 1[M] to consolidated financial
statements, effective November 1, 1997, the Company adopted a new accounting
standard promulgated by the Financial Accounting Standards Board, changing its
method of accounting for start-up costs.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
January 15, 1999
F-1
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
October 31,
1 9 9 8 1 9 9 7
Assets:
Current Assets:
Cash and Cash Equivalents $ 59,495 $ 129,517
Accounts Receivable - Net 15,429,057 16,933,340
Unbilled Receivables 10,675 693,847
Other Receivables 47,870 2,390,755
Due from Related Party 140,000 55,568
Other 1,940,230 765,467
----------- -----------
Total Current Assets 17,627,327 20,968,494
----------- -----------
Property and Equipment - Net 26,970,584 33,401,161
----------- -----------
Other Assets:
Accounts Receivable - Net 3,713,956 5,810,814
Due from Related Parties 133,260 897,133
Other Receivables -- 899,896
Goodwill - Net 11,313,907 20,168,729
Other 2,897,380 4,193,696
----------- -----------
Total Other Assets 18,058,503 31,970,268
----------- -----------
Total Assets $62,656,414 $86,339,923
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
October 31,
1 9 9 8 1 9 9 7
Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Overdraft $ 1,729,994 $ 319,481
Accounts Payable 5,747,988 4,010,861
Accrued Expenses 3,535,840 5,270,787
Accrued Expense - Professional Fees 1,753,987 1,596,916
Notes and Leases Payable 24,388,427 20,341,372
Accrued Restructuring Costs -- 1,062,026
Deferred Revenue - Covenant not-to-compete 200,000 200,000
Other 462,343 194,084
----------- -----------
Total Current Liabilities 37,818,579 32,995,527
----------- -----------
Long-Term Liabilities:
Subordinated Debentures Payable 20,718,000 22,923,000
Notes Payable - Related Parties 2,553,854 2,553,854
Notes and Leases Payable 54,143,158 48,891,402
Deferred Revenue - Covenant not-to-compete 1,466,666 1,666,666
Accrued Expenses -- 225,292
Accrued Expenses - Professional Fees 399,872 582,998
----------- -----------
Total Long-Term Liabilities 79,281,550 76,843,212
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Minority Interest 676,114 1,430,788
----------- -----------
Redeemable Stock 240,000 --
----------- -----------
Stockholders' Equity [Deficit]:
Common Stock - $.01 Par Value, 100,000,000 Shares
Authorized; 40,757,260 and 40,432,260 Shares
Issued; 39,132,260 and 38,807,260 Shares
Outstanding at October 31, 1998 and 1997,
Respectively 407,572 404,322
Paid-in Capital 99,251,650 99,434,150
Stock Subscription - Related Party (30,000) --
Due from Related Party (899,143) --
Retained Earnings [Deficit] (153,474,961) (124,153,129)
------------ ------------
Totals (54,744,882) (24,314,657)
Less: Treasury Stock - 1,625,000 Shares at Cost (614,947) (614,947)
----------- -----------
Total Stockholders' Equity [Deficit] (55,359,829) (24,929,604)
----------- -----------
Total Liabilities and Stockholders' Equity
[Deficit] $62,656,414 $86,339,923
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenue:
<S> <C> <C> <C>
Revenue $132,594,891 $132,569,387 $111,380,904
Less: Allowances 73,774,348 65,550,880 54,842,397
------------ ------------ -----------
Net Revenue 58,820,543 67,018,507 56,538,507
------------ ------------ -----------
Operating Expenses:
Operating Expenses 51,310,658 58,724,827 49,800,034
Depreciation and Amortization 8,642,584 8,783,419 6,040,256
Provision for Bad Debts 2,698,139 1,962,837 2,531,337
Restructuring Costs -- 662,026 --
Impairment Loss of Long-Lived Assets [6] 12,677,324 4,553,783 --
------------ ------------ -----------
Total Operating Expenses 75,328,705 74,686,892 58,371,627
------------ ------------ -----------
Loss from Operations (16,508,162) (7,668,385) (1,833,120)
------------ ------------ -----------
Other [Expenses] and Revenue:
Interest Expense (9,278,547) (9,844,505) (7,892,653)
Financing Costs [2] (5,207,900) -- --
Interest Income 139,636 295,168 258,390
Gain on Sale of Subsidiaries and Divisions 965,616 16,082,302 143,750
Other [Expense] Income 393,898 (637,850) 934,505
------------ ------------ -----------
Total Other [Expenses] Revenue (12,987,297) 5,895,115 (6,556,008)
------------ ------------ -----------
[Loss] Before Minority Interest in Income
of Subsidiaries, Equity in Loss of Investees,
Extraordinary Item and Cumulative Effect of
Change in Accounting Principle (29,495,459) (1,773,270) (8,389,128)
Minority Interest in Income of Subsidiaries (1,612) (569,931) (808,136)
Equity in Loss of Investees -- -- (313,649)
------------ ------------ -----------
[Loss] Before Extraordinary Item and
Cumulative Effect of Change in
Accounting Principle (29,497,071) (2,343,201) (9,510,913)
Extraordinary Item - Gains from Extinguishment
of Debt [Net of Income Taxes of $-0- for the
Years ended October 1998, 1997 and 1996] 954,533 1,595,106 1,149,817
------------ ------------ -----------
[Loss] Before Cumulative Effect of Change in
Accounting Principle - Forward $(28,542,538) $ (748,095) $(8,361,096)
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
[Loss] Before Cumulative Effect of Change in
<S> <C> <C> <C>
Accounting Principle - Forwarded $(28,542,538) $ (748,095) $(8,361,096)
Cumulative Effect of Change in Accounting
Principle [Net of Income Taxes of $-0-] (779,294) -- --
------------ ----------- -----------
Net [Loss] $(29,321,832) $ (748,095) $(8,361,096)
============ =========== ===========
Basic EPS:
[Loss] Before Extraordinary Item and Change
in Accounting Principle $ (.75) $ (.06) $ (.24)
Extraordinary Item .02 .04 .03
Change in Accounting Principle - Write-off
of Costs of Start-up Activities (.02) -- --
------------ ----------- -----------
Basic Net [Loss] Per Share $ (.75) $ (.02) $ (.21)
============ =========== ===========
Weighted Average Shares Outstanding 39,069,178 38,853,904 39,176,281
============ =========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
<TABLE>
Total
Common Stock Retained Due from Stock Stockholders'
Number of Par Value Treasury Paid-in Deferred Earnings Related Subscription Equity
Shares Amount Stock Capital Compensation [Deficit] Party Related Party [Deficit]
Balance - October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 40,230,760 $402,307 $ -- $99,399,165 $ -- $(115,043,938)$ -- $ -- $(15,242,466)
Conversion of Subordinated
Debentures to Stock 1,500 15 -- 11,985 -- -- -- -- 12,000
Deferred Compensation -- -- -- -- (796,653) -- -- -- (796,653)
Amortization of Deferred
Compensation -- -- -- -- 8,628 -- -- -- 8,628
Purchase of Treasury
Stock -- -- (481,727) -- -- -- -- -- (481,727)
Net [Loss] for the Year
Ended October 31, 1996 -- -- -- -- -- (8,361,096) -- (8,361,096)
---------- -------- ---------- ---------- -------- ------------- --------- --------- ------------
Balance - October 31,
1996 40,232,260 402,322 (481,727) 99,411,150 (788,025) (123,405,034) -- -- (24,861,314)
Issuance of Common
Stock 200,000 2,000 -- 23,000 -- -- -- -- 25,000
Amortization of Deferred
Compensation -- -- -- -- 5,752 -- -- -- 5,752
Write-off Deferred
Compensation -- -- -- -- 782,273 -- -- -- 782,273
Purchase of Treasury
Stock -- -- (133,220) -- -- -- -- -- (133,220)
Net [Loss] for the Year
Ended October 31, 1997 -- -- -- -- -- (748,095) -- -- (748,095)
---------- -------- ---------- ---------- -------- ------------- --------- --------- ------------
Balance - October 31,
1997 40,432,260 404,322 (614,947) 99,434,150 -- (124,153,129) -- -- (24,929,604)
Issuance of Common
Stock 325,000 3,250 -- 57,500 -- -- -- -- 60,750
Common Stock Subscribed -- -- -- -- -- -- -- (30,000) (30,000)
Issuance of Stock Put -- -- -- (240,000) -- -- -- -- (240,000)
Reclass Due from
Related Party -- -- -- -- -- -- (899,143) -- (899,143)
Net [Loss] for the Year
Ended October 31, 1998 -- -- -- -- -- (29,321,832) -- -- (29,321,832)
---------- -------- ---------- ----------- -------- ------------ --------- --------- ------------
Balance - October 31,
1998 40,757,260 $407,572 $ (614,947)$99,251,650 $ -- $(153,474,961)$(899,143) $ (30,000)$(55,359,829)
========== ======== ========== ========== ======== ============= ========= ========= ============
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Operating Activities:
<S> <C> <C> <C>
Net [Loss] $(29,321,832) $ (748,095) $(8,361,096)
------------ ----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash
Provided [Used] by Continuing Operations:
Equity in Loss of Investees -- -- 313,649
Depreciation and Amortization 8,642,584 8,783,419 6,040,256
Amortization of Management Fee Modification 161,070 143,296 102,449
Write-off Offering Costs-Bond Retirement 138,811 187,524 --
Amortization of Purchase Discount (946,542) (889,083) --
Minority Interest in Income of Subsidiaries 1,612 569,931 808,136
Provision for Bad Debts and Allowance
Adjustments 1,346,272 1,505,344 2,531,337
Loss [Gain] on Sale of Assets 222,123 824,533 (365,728)
Provision for Restructuring -- 662,026 --
Imputed Interest Income (131,918) (96,247) (95,981)
Gain on Sale of Subsidiaries and Divisions (965,616) (16,082,302) (143,750)
Deferred Revenue - Covenant Not-to-Compete (200,000) (133,334) --
Write-off Deposits and Other Assets 37,849 258,748 --
Gain on Sale of Marketable Securities (297,376) -- --
Write Down of Long-Lived Assets 12,677,324 4,553,783 --
Financing Costs 5,207,900 -- --
Change in Accounting Principle 779,294 -- --
Extraordinary Gain from Extinguishment
of Debt (954,533) (1,595,106) (1,149,817)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Other Current Assets (61,979) (39,767) (171,621)
Accounts Receivable 1,696,031 479,918 407,455
Unbilled Receivables 683,172 (402,682) (227,267)
Due from Employee -- -- 100,333
Other Assets (586,290) (178,964) 669,591
Increase [Decrease] in:
Due to/from Related Parties -- (88,567) (178,392)
Accounts Payable and Accrued Expenses 896,840 (179,971) 756,204
Accrued Restructuring Costs (1,062,026) (395,622) --
Other Current Liabilities 550,535 148,798 (1,434,699)
------------ ----------- ------------
Total Adjustments 27,835,137 (1,964,325) 7,962,155
------------ ------------ -----------
Cash [Used] by Continuing Operations (1,486,695) (2,712,420) (398,941)
Cash [Used] Provided by Discontinued
Operations -- (157,092) (574,078)
------------ ------------ -----------
Net Cash - Operating Activities - Forward $ (1,486,695) $(2,869,512) $ (973,019)
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
O c t o b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Cash - Operating Activities - Forwarded$ (1,486,695) $(2,869,512) $ (973,019)
------------ ----------- -----------
Investing Activities:
Acquisitions of Imaging Centers - Net of Cash
Acquired (1,739,120) (2,131,498) (732,160)
Purchase of Property and Equipment (3,089,632) (3,098,179) (682,472)
Proceeds from Sale of Unconsolidated
Subsidiary -- -- 143,750
Proceeds - Sale of Divisions, Centers and
Equipment 3,144,217 26,001,073 --
Payment for Modification of Management Fee -- -- (1,100,000)
Proceeds from Sale of Marketable Securities 3,082,627 -- 1,998,458
Proceeds from Dissolution of Partnership 94,515 --
Loans to Related Parties (235,000) (30,000) --
Receipts from Related Parties 25,000 -- --
Loans to Unconsolidated Subsidiary -- -- (1,642,714)
Receipts on Notes from Related Parties -- -- 1,937,500
------------ ----------- -----------
Net Cash - Investing Activities 1,282,607 20,741,396 (77,638)
------------ ----------- -----------
Financing Activities:
Cash Overdraft 1,410,513 68,689 250,792
Principal Payments on Notes and Leases
Payable (8,077,336) (17,741,045) (7,515,599)
Proceeds from Short-Term Borrowings
on Notes Payable 8,180,082 2,373,554 5,460,229
Purchase of Treasury Stock -- (133,220) (481,727)
Purchase of Subordinated Bond Debentures (1,484,943) (1,984,093) --
Proceeds from the Issuance of Common Stock 30,750 -- --
Joint Venture Proceeds 75,000 -- --
Joint Venture Distribution -- (478,122) (440,000)
------------ ----------- -----------
Net Cash Financing Activities 134,066 (17,894,237) (2,726,305)
------------ ----------- -----------
Net [Decrease] in Cash and Cash Equivalents (70,022) (22,353) (3,776,962)
Cash and Cash Equivalents - Beginning of Years 129,517 151,870 3,928,832
----------- ----------- -----------
Cash and Cash Equivalents - End of Years $ 59,495 $ 129,517 $ 151,870
============ =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 9,290,539 $10,070,345 $ 7,133,723
Income Taxes $ -- $ -- $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company entered into capital leases or financed equipment through notes
payable for approximately $4,780,000, $5,965,000 and $3,500,000 for the years
ended October 31, 1998, 1997 and 1996, respectively.
During fiscal 1996, subordinated debentures totaling $12,000 were converted
into 1,500 shares of the Company's common stock.
During the year ended October 31, 1998, the Company wrote-off approximately
$1,565,000 in net property and equipment, approximately $285,000 in net accounts
receivable, approximately $735,000 in net goodwill, approximately $19,000 in
other assets, approximately $865,000 in notes and lease obligations,
approximately $160,000 in other current liabilities and approximately $398,000
in minority interest related to the sale of Scripps Chula Vista ["SCV"].
During the year ended October 31, 1998, the Company dissolved its partnership
between La Habra Imaging Group II and Friendly Hills Healthcare Network, Inc.
["Friendly Hills"] effective December 31, 1997. Upon the dissolution, the
Company wrote-off approximately $270,000 of Friendly Hills accounts receivable,
approximately $365,000 in net property, approximately $155,000 of accrued
expenses and approximately $435,000 in minority interest.
During the year ended October 31, 1998, the Company wrote-off approximately
$4,008,000 in net property and equipment, approximately $13,840,000 in net
goodwill, approximately $37,000 in other intangible assets and recorded an
impairment loss of approximately $17,885,000.
During the year ended October 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, approximately $230,000 in other assets and
approximately $785,000 in deferred compensation related to the Parkside closure.
The Company recorded a net impairment loss of approximately $4,550,000 during
the twelve months ended October 31, 1997 [See Note 2] after receiving $400,000
in exchange for the assets subsequent to closing the center.
During the year ended October 31, 1997, the Company acquired the assets and
related liabilities of Woodward Park Imaging Center ["WWP"] in Fresno,
California; with 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 payable and capital leases and approximately
$300,000 in accrued expenses [See Note 2].
During the year ended October 31, 1997, the Company wrote-off approximately
$9,300,000 in net property 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 related to the sale of DIS's Ultrasound
Division and four of its hospital-based MRI facilities.
During fiscal 1996, the Company acquired medical equipment of approximately
$21,000,000 as part of the FDI and DIS acquisitions along with the issuance of
notes payable and assumption of liabilities thereon [See Note 2].
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities
[Continued]:
During the year ended October 31, 1998, the Company issued 300,000
shares of common stock and recorded $30,000 as due from related parties. During
the year ended October 31, 1997, the Company issued 200,000 shares of common
stock and recorded $25,000 as due from employee which was subsequently repaid.
During the year ended October 31, 1998, the Company received medical
equipment of approximately $730,000 in lieu of cash rebates for medical film
purchases.
During the year ended October 31, 1998, the Company issued a stock put and
recorded $240,000 as redeemable stock and a decrease to paid-in capital.
During the year ended October 31, 1998, the Company recorded goodwill and
notes payable of approximately $327,100 for the acquisition of DIS common stock.
During the year ended October 31, 1997, the Company recorded goodwill and notes
payable of $157,500 for the acquisition of remaining partnership interests in
two of the operating centers.
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
[A] Organization, Business and Basis of Presentation - Primedex Health Systems,
Inc. ["PHS"] was incorporated on October 21, 1985 and is principally engaged in
the diagnostic imaging business in the state of California.
The accompanying combined and consolidated financial statements include the
accounts of PHS, Radnet Management, Inc. ["Radnet"], Diagnostic Imaging
Services, Inc. ["DIS"], Primedex Corporation ["PC"] and Radnet Managed Imaging
Services, Inc. ["RMIS"] [Collectively "the Company"]. Radnet is combined and
consolidated with Beverly Radiology Medical Group III ["BRMG"], Radnet Sub, Inc.
["Tower"], Woodward Park Imaging Center ["WWP"] and one joint venture,
Westchester Imaging Group ["WIG"].
The Company purchased the remaining interests in the Imaging Center of La Habra
["La Habra"] during fiscal 1998. Wilshire Imaging Group ["Downtown L.A."] was
closed in late 1994 and consolidated with Radnet during fiscal 1998. DIS is
combined and consolidated with one joint venture, Scripps Chula Vista Imaging
Center, L.P. ["SCV"]. SCV was sold during fiscal 1998. RMIS is combined and
consolidated with Future Diagnostics, Inc. ["FDI"] which was sold in September
1997 to an unrelated party. Acquired entities are included in operations from
the date of acquisition onward. All intercompany transactions and balances have
been eliminated.
Medical services and supervision at most of the Company's wholly-owned imaging
centers are provided through BRMG and through other various independent
physicians and physician groups. BRMG is combined and consolidated with Pronet
Imaging Medical Group, Inc. ["PN"] and Beverly Radiology Medical Group ["BRMG1"]
which are 99% owned by a shareholder of PHS. Radnet and DIS provide non-medical,
technical and administrative services including operation of medical equipment,
facility maintenance, marketing, advertising, billing and collection, and other
financial and administrative services. As compensation for their management and
other services at the various centers, Radnet receives a management fee. In
connection with the imaging centers in which it is a joint venture partner,
Radnet and DIS also share in joint venture income.
For many of the patients serviced at the Company's centers, the cost of the
service is borne by third party payors. The difference between the Company's
list price for such services and the amount the Company receives from such third
party payors results in contractual adjustments.
The Company owns 19% of the outstanding capital stock of Viromedics, Inc.
["VMI"] at October 31, 1998. This investment is accounted for using the cost
method, which at October 31, 1998 and 1997 was $-0-.
[B] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
carrying amount of cash and cash equivalents approximates their fair value.
[C] Property and Equipment and Depreciation and Amortization - Property and
equipment are stated at cost, less accumulated depreciation and amortization,
and includes equipment held under capital lease agreements. Depreciation, which
includes amortization of leased equipment, is computed by the straight-line
method and is based on the estimated useful lives of the various assets ranging
from three to forty years. Leasehold improvements are amortized over the shorter
of the life of the lease or their estimated useful life, using the straight-line
method.
F-11
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[D] Accounts Receivable and Allowances - Accounts receivable are stated at gross
amounts billed less allowances. A significant portion of the Company's accounts
receivable involve third party payors, primarily insurance companies. The
collection cycle on accounts receivable from continuing operations extends up to
thirty-six months with most personal injury cases having the longer collection
cycle. The current portion of accounts receivable are the amounts which are
reasonably expected to be collected within a year, based upon historical
collection data.
Accounts receivable as of October 31, 1998 are shown net of allowances for
doubtful accounts of $24,790,058 of which $19,980,513 has been deducted from
current receivables and $4,809,545 has been deducted from noncurrent
receivables. Accounts receivable as of October 31, 1997 are shown net of
allowances for doubtful accounts of $26,390,309 of which $19,637,802 has been
deducted from current receivables and $6,752,507 has been deducted from
noncurrent receivables.
[E] Intangibles - Goodwill is recognized in business combinations accounted for
under the purchase method of accounting and represents the excess of the
purchase price over the fair value of identifiable net assets acquired. Goodwill
is amortized on a straight-line basis over twenty years, which is the period
during which the Company expects to receive benefits. Organization costs,
offering costs, loan fees, covenants-not-to compete and management fee reduction
buyout are recorded at cost and amortized on a straight-line basis over their
estimated useful lives which range from one to twenty years. During fiscal 1998,
the Company adopted Statement of Position ["SOP"] No. 98-5, "Reporting on the
Costs of Start-up Activities", and wrote-off approximately $780,000 in
organization costs and capitalized fees.
[F] Long-Term Accrued Expenses - Long-term accrued expenses consist primarily of
outside professional services related to the accounts receivable classified as
long-term.
[G] Revenue Recognition and Accrued Revenues - Revenue is recognized at the time
services are provided. Accrued revenues consist primarily of services performed
prior to period end, which were not billed. Billing is usually completed within
the following month.
[H] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these estimates.
[I] Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk are cash and cash
equivalents and accounts receivable arising from its normal business activities.
The Company routinely assesses the financial strength of its customers and third
party payors and, based upon factors surrounding their credit risk, establishes
an allowance for uncollectible accounts, and as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is limited. The
Company places its cash and cash equivalents with high credit quality financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. The Company had $21,447 and
$515,424 as of October 31, 1998 and 1997, respectively, with financial
institutions subject to a credit risk beyond the insured amount. The Company has
not experienced any losses in such accounts. The Company does not require
collateral or other security to support financial instruments subject to credit
risk.
F-12
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[J] Impairment - Certain long-term assets of the Company are reviewed at least
annually as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations
[undiscounted and without interest charges]. If impairment is deemed to exist,
the assets will be written down to fair value or projected discounted cash flows
from related operations. Management also reevaluates the periods of amortization
to determine whether subsequent events and circumstances warrant revised
estimates of useful lives. As of October 31, 1998, management expects these
remaining assets to be fully recoverable.
[K] Stock Options - On November 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards ["SFAS"] No. 123,
"Accounting for Stock-Based Compensation," for stock options and similar equity
instruments [collectively, "Options"] issued to employees, however, the Company
will continue to apply the intrinsic value based method of accounting for
options issued to employees prescribed by Accounting Principles Board ["APB"]
Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair
value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
[L] Reclassifications - Certain amounts in the prior year consolidated financial
statements have been reclassified to conform to the current year presentation.
[M] Change in Accounting Principle - During the year ended October 31, 1998, the
Company elected early adoption of Statement of Position ["SOP"] No. 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 which is effective for
years beginning after December 15, 1998 with earlier application encouraged,
requires that organization costs be expensed as they are incurred. As a result
of the decision, the Company reduced historical net organizational costs and
capitalized fees by approximately $780,000. The effect of this change was to
decrease net income for the year ended October 31, 1998 by $.02 per share.
[N] Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended October 31, 1998, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all companies with complex
capital structures. Diluted earnings per share reflects the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.
F-13
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[N] Earnings Per Share [Continued] - The computation of diluted earnings per
share does not assume conversion, exercise, or contingent issuance of securities
that would have an antidilutive effect on earnings per share (i.e., increasing
earnings per share or reducing loss per share). The dilutive effect of
outstanding options and warrants and their equivalents are reflected in dilutive
earnings per share by the application of the treasury stock method which
recognizes the use of proceeds that could be obtained upon exercise of options
and warrants in computing diluted earnings per share. It assumes that any
proceeds would be used to purchase common stock at the average market price
during the period. Options and warrants will have a dilutive effect only when
the average market price of the common stock during the period exceeds the
exercise price of the options or warrants. Potential common shares of 6,941,850
have been excluded as their effect would be anti-dilutive.
[2] Business Combinations - Acquisitions, Sales and Divestitures
The Company acquired certain assets and liabilities of Primedex Corporation
["PC"] in January 1992 for $46,250,000 consisting of cash and stock. PC was a
southern California based medical management company that provided services to
four medical corporations, which in turn provided medical/legal evaluation
services and medical services to worker's compensation claimants. The
acquisition was accounted for under the purchase method and resulted in goodwill
of approximately $7,300,000, which was written off in July 1993 in connection
with the discontinuance of PC's operations [See Note 20]. In August 1995,
substantially all of the discontinued operation's remaining assets were sold to
an unrelated party for approximately $9,448,000. The sale resulted in a loss of
approximately $3,800,000.
In April of 1992, the Company acquired certain assets and liabilities of Radnet
for approximately $66,000,000 consisting of stock, cash and a note payable. The
Company also loaned $6,000,000 to the sellers [See Note 7]. The acquisition was
accounted for under the purchase method resulting in goodwill of approximately
$51,500,000. The majority of this goodwill was written off in fiscal 1995 when
the Company adopted Statement of Financial Accounting Standards ["SFAS"] No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" [See Note 6].
Effective November 1, 1995, the Company formed Radnet Managed Imaging Services,
Inc. ["RMIS"] which acquired all of the outstanding capital stock of Future
Diagnostics, Inc. ["FDI"] for $2,345,000 consisting of cash, notes, and assumed
liabilities of approximately $855,000 resulting in goodwill of approximately
$3,200,000. The acquisition was accounted for as a purchase. FDI arranges for
the provision of imaging services for large payors [such as large employers and
insurance carriers] through an approximately 250 imaging center network
primarily in California. Effective September 3, 1997, the Company sold all of
the outstanding capital stock of FDI to an unrelated party for approximately
$13,500,000 in cash, notes receivable and buyer-assumed liabilities. The sale
resulted in a gain of approximately $10,400,000. In addition, in June 1998, the
Company received additional proceeds of $595,000 from PHM related to the sale of
FDI by agreeing to an IRS Section 338 (h)(10) Election for "Corporations Making
Qualified Stock Purchases." The Company continues to operate RMIS which provides
utilization review services for its imaging centers.
F-14
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[2] Business Combinations - Acquisitions, Sales and Divestitures [Continued]
In March of 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ["DIS"] for $4,000,000 with a five-year
warrant to acquire an additional 1,521,739 shares of DIS stock at $1.60 per
share. In addition, the Company established a five-year $1 million revolving
loan with DIS. The Company utilized $500,000 in cash and borrowed approximately
$4.5 million from DVI Financial Services, Inc. ["DVI"] to finance the
transaction. At that time, DIS owned and operated ten imaging centers providing
high quality diagnostic imaging services located in the Los Angeles and San
Diego areas, as well as 15 ultrasound laboratories located in hospitals, 13
mobile ultrasound units servicing hospitals and office buildings, and one mobile
MRI servicing a single hospital. DIS also operates a cancer care therapy center
in Temecula, California. During the four-month period ended July 31, 1996, the
investment yielded a loss to the Company of $313,649. In August 1996, the
Company issued a five-year interest-only promissory note for $3,272,046 plus
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 fiscal 1997, the Company acquired an additional 1,293,663
shares of DIS common stock from various unrelated parties for approximately
$1,640,000 increasing its total ownership to approximately 70%. During fiscal
1998, the Company acquired an additional 1,788,374 shares of common stock from
various unrelated parties for approximately $2,063,000 increasing its total
ownership to approximately 86%. The acquisitions were accounted for as purchases
resulting in goodwill of approximately $2,063,000 and $1,640,000 during the
years ended October 31, 1998 and 1997, respectively.
In October 1998, the Company purchased from DVI Healthcare Operations, Inc.
["DVI"] all 4,482,000 shares of DIS outstanding preferred stock which carried a
liquidation preference of $4,482,000, plus accrued and unpaid dividends of
$725,900 by issuing a $5,207,900 note payable to DVI due October 31, 2000. In
the transaction, the Company recorded financing costs of $5,207,900 which were
charged to operations during the year ended October 31, 1998.
The following pro forma unaudited information presents the results of the
combined operations of Primedex Health Systems, Inc. and affiliates, FDI and
DIS, treating FDI and DIS as if they were subsidiaries for the entire year ended
October 31, 1996 with pro forma adjustments as if the acquisitions had been
consummated as of November 1, 1995. This pro forma information does not purport
to be indicative of what would have occurred had the acquisitions been made as
of November 1, 1995 or results which may occur in the future.
[Unaudited]
Year ended
October 31,
1 9 9 6
Net Revenues $ 74,301,315
Net [Loss] $(12,361,971)
Net Basic [Loss] Per Share $ (.32)
Effective March 1, 1997, the Company sold the assets and related liabilities of
four of DIS's hospital-based MRI facilities and its ultrasound division to
Diagnostic Health Services, Inc. ["DHS"] for $15,972,720 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 financial statements. 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 utilizing a 11.75% interest rate was recorded 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. During the
year ended October 31, 1998, the Company exercised its option to receive these
payments in the form of 200,000 shares of DHS common stock which were
subsequently sold on May 8, 1998 for $1,849,936 yielding a gain of approximately
$496,000.
F-15
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[2] Business Combinations - Acquisitions, Sales and Divestitures [Continued]
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 an
impairment loss of approximately $4,550,000 which included the write-off of
approximately $1,530,000 of net acquisition goodwill. In May 1997, the Company
sold the facility's MRI for $65,000 to an unrelated party; in August 1997, the
Company's remaining assets were sold for approximately $400,000 to another party
who also assumed the centers building lease. The Company still operates a
separate entity, Parkside Radiology Women's Center ["Parkside Womens"], which
provides ultrasound, mammography, stereotactic breast biopsy and bone
densitometry services.
Effective January 1, 1997, the Company's DIS subsidiary opened its Scripps Chula
Vista MRI, L.P. ["SCV"] servicing patients in San Diego. The Company and Scripps
Health were equal partners with the Company serving as managing partner. In
March 1998, effective January 1, 1998, the Company sold its share of SCV for
127,250 shares of DHS stock. As of the transaction date, the shares were valued
at $1,431,563 and on May 15, 1998, the Company sold the shares for approximately
$1,230,000 and recorded a loss on the sale of marketable securities of
approximately $202,000. The net gain on the sale of SCV was approximately
$252,000 which included the write-off of approximately $735,000 of net
acquisition goodwill.
In February 1998, the Company dissolved its partnership between La Habra Imaging
Group II and Friendly Hills Healthcare Network, Inc. ["Friendly Hills"]
effective December 31, 1997. Upon the dissolution, the Company wrote-off
approximately $270,000 of Friendly Hills accounts receivable, approximately
$365,000 in net property, approximately $155,000 of accrued expenses and
approximately $435,000 in minority interest. The Company received cash of
approximately $95,000 from Friendly Hills upon the dissolution and recognized a
gain of approximately $48,000. As part of the dissolution, Friendly Hills
acquired the modular building utilized by the center. The Company entered into a
five-year building lease with Friendly Hills for the space.
The Company has acquired various percentage interests in imaging centers and
other business ventures in transactions accounted for as purchases generally
involving a mixture of cash, notes, common stock and warrants as follows:
Effective August 1, 1996, DIS acquired Healthcare Imaging Center ["HCI"] for
$200,000 and assumed liabilities resulting in goodwill of $10,000.
Effective October 1, 1996, DIS acquired substantially all of the assets of
Corona Imaging Center by assuming liabilities of $434,500. No goodwill was
recorded in this transaction.
Effective March 1, 1997, the Company acquired the assets and related liabilities
of Woodward Park Imaging Center ["WWP"] in Fresno for approximately $200,000 in
notes payable and assumed liabilities resulting in goodwill of approximately
$90,000 which was subsequently written of in fiscal 1998 when originally
recorded estimated liabilities turned out to be overstated. WWP is a full
service, multi-modality imaging center providing MRI, CT, mammography,
ultrasound and general diagnostic radiology services.
During the year ended October 31, 1997, the Company acquired the assets of Las
Posas Medical Imaging for $35,000 in cash and relocated DIS's Camarillo facility
to its location. No goodwill was recorded in this transaction.
During the year ended October 31, 1998, DIS acquired the remaining 25% interest
in Valley Regional Oncology Center for $260,000 cash, resulting in goodwill of
$260,000, and also acquired the remaining units in TVIC for $196,875 in cash and
a note payable for $157,500, resulting in goodwill of $354,375.
In April 1997, the Company opened Oxnard Imaging, a start-up operation in
Ventura County.
F-16
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[3] Marketable Securities
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at cost which approximates fair value.
The Company had no marketable securities at October 31, 1998 and 1997.
During the years ended October 31, 1998, 1997 and 1996, the Company converted
available for sale securities held during the year into cash of approximately
$3,080,000, $-0- and $1,998,000, respectively. Gains on sale of securities were
approximately $297,000 for the year ended October 31, 1998 and $-0- for the
years ended October 31, 1997 and 1996. The Company uses specific identification
as the basis on which cost was determined in calculating realized gains and
losses.
[4] Fair Value of Financial Instruments
Estimated fair value of the Company's financial instruments are as follows:
1 9 9 8 1 9 9 7
------- -------
Carrying Fair Carrying Fair
Amount Value Amount Value
Due from Related Party -
Long-Term $ 1,062,403 $ 1,062,403 $ 897,133 $ 897,133
Debt Maturing within One Year (21,083,111)(21,083,111) (14,372,462)(14,372,462)
Long-Term Debt (37,703,502)(31,679,349) (29,263,982)(23,622,571)
Notes Payable Related
Parties - Long-Term (2,553,854) (2,164,305) (2,553,854) (2,061,531)
Subordinated Debentures (20,718,000)(13,445,982) (22,923,000)(18,521,708)
In assessing the fair value of these financial instruments, the Company has used
a variety of methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, cash overdraft, due from/to related parties and
current and short-term debt, it was assumed that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturities. The fair value of the amounts due from related party -
long-term, notes payable related parties - long-term and long-term debt is based
on current rates at which the Company could borrow funds with similar remaining
maturities. The fair value of the subordinated debentures is the estimated value
of debentures available to repurchase at current market rates over the bond term
including an estimated interest payment stream.
[5] Property and Equipment and Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of
October 31, 1998 and 1997 are as follows:
1 9 9 8 1 9 9 7
------- -------
Land $ 1,763,773 $1,763,773
Building 1,876,144 2,371,822
Medical Equipment 10,367,312 15,055,818
Office Equipment and Furniture and Fixtures 4,071,029 3,025,180
Leasehold Improvements 5,721,582 5,461,420
Property Held Under Capital Leases 24,775,274 27,954,039
----------- ----------
Totals 48,575,114 55,632,052
Less: Accumulated Depreciation and Amortization (21,604,530) (22,230,891)
Property and Equipment - Net $26,970,584 $33,401,161
---------------------------- =========== ===========
F-17
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[5] Property and Equipment and Depreciation and Amortization [Continued]
Depreciation expense for fiscal 1998, 1997 and 1996 was approximately
$6,725,000, $6,650,000 and $4,300,000, respectively.
For property held under capital leases, amortization expense for the years ended
October 31, 1998, 1997 and 1996 was approximately $3.0 million, $3.3 million and
$2.8 million, and the accumulated amortization was approximately $11.0 million
and $9.7 million, for the years ended October 31, 1998 and 1997, respectively.
Certain assets were written down during fiscal 1998 and 1997 [See Note 6].
[6] Intangible Assets
A breakdown of intangible assets is as follows:
Accumulated
Cost Amortization Net
October 31, 1998:
Goodwill $ 14,604,195 $ 3,290,288 $11,313,907
===========
Covenants Not-to-Compete $ -- $ -- $ --
===========
October 31, 1997:
Goodwill $ 23,329,444 $ 3,160,715 $20,168,729
===========
Covenants Not-to-Compete $ 550,000 $ 412,500 $ 137,500
===========
Covenants not-to-compete are included in the caption "Other Assets" on the
balance sheet.
Amortization expense of approximately $1,915,000, $2,130,000 and $1,700,000 was
recognized for the years ended October 31, 1998, 1997 and 1996, respectively.
During the years ended October 31, 1998 and 1997, the Company recorded goodwill
of approximately $2,063,000 and $1,640,000, respectively, for the acquisition of
DIS common stock from various parties.
During the year ended October 31, 1998, net goodwill of $735,036 was written off
in connection with the sale of SCV to DHS effective January 1, 1998, and WWP net
goodwill of $88,147 was written off upon the adjustment of estimated liabilities
recorded at the time of acquisition.
During the year ended October 31, 1997, the Company's DIS subsidiary recorded
$614,375 in goodwill relating to its acquisition of additional units of Valley
Regional Oncology Center ["VROC"] and Temecula Valley Imaging Center ["TVIC"],
and the Company recorded goodwill of $92,382 upon its acquisition of Woodward
Park Imaging Center ["WWP"]. Effective September 3, 1997, the Company sold its
FDI subsidiary and wrote-off net goodwill of $2,925,312.
During the year ended October 31, 1998, pursuant to SFAS No. 121, the Company
recorded an impairment loss of $12,677,324 consisting of net goodwill of
$8,631,944, net property and equipment of $4,007,880 and other net long-lived
assets of $37,500 [See Note 5]. During the year ended October 31, 1997, net
goodwill of $9,688,034 was written-off in connection with the closure and
eventual sale of Parkside, the sale to DHS and the closing of Murrieta [See Note
2]. Pursuant to SFAS No. 121 during fiscal 1997, the Company recorded an
impairment loss of $4,553,783 from writing down goodwill, property and equipment
and other long-lived assets. Facts and circumstances leading to the 1998 and
1997 impairment losses consist principally of a current period operating and
cash flow loss combined with a history of operating and cash flow losses and
changes in the manner in which certain assets will be used. Fair value was
determined for individual centers primarily by comparison to quoted market
prices, where determinable, and alternative future discounted cash flows. The
impairment loss recorded is the difference between these estimated fair values
and the carrying values of all centers, including goodwill allocated to
individual centers, based on pro-rata estimated fair values at the dates of the
acquisition.
F-18
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[7] Related Party Transactions
The amount due from related parties originally consisted of a $6,000,000 loan to
the sellers of Radnet [See Note 2] discounted at a 7% interest rate. In October
1993, the installment note due February 1994 was extended until August 1994. In
August of 1994, the Company and the two former owners agreed to offset
approximately $3,000,000 of the loan against $2,500,000 due to them by PHS and
the waiver of rights to payments aggregating $500,000. The remaining $3,000,000
of receivables' due dates were further extended to February 1, 1997 in
consideration for the two individuals agreeing to utilize their personal assets
as collateral for future loans. A discount of approximately $500,000 was
recorded in fiscal 1994 on the transaction which was reflected as a reduction to
interest income. In April 1996, one of the two individuals, who is currently an
employee of the Company, repaid his portion of the notes valued at $1,400,000
and renegotiated his employment contract for a reduction in his compensation and
an extension of his employment term. In August 1996, the remaining note holder
repaid $500,000 of his $1,500,000 note due in February 1997. In consideration
for the advance payment, the Company offered to extend the remaining $1,000,000
due to February 1998. The note has been further extended to February 2000, which
has been discounted at an 8% interest rate resulting in a discounted value of
$899,143 as of October 31, 1998 and has been reclassified to stockholders
equity. The note is secured by stock of PHS, which was issued in connection with
the Radnet acquisition.
In April 1996, the Company renegotiated the existing management and service
agreement with BRMG which provides medical services and supervision at several
of the Company's imaging centers. BRMG is a partnership between Pronet Imaging
Medical Group, Inc. ["PN"] and Beverly Radiology Medical Group ["BRMG1"] which
are 99% owned by an officer/stockholder of the Company. The Company's management
fee was increased 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 approximate 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.
During fiscal 1996, the Company loaned $100,000 to an employee of the Company
which was to be repaid within two years. At October 31, 1997, as part of the
restructuring provision [see Note 9], the $100,000 was expensed as consulting
fees. DIS had a related party loan payable of approximately $90,000 due, without
interest, to an officer/stockholder which was paid in full during fiscal 1997.
During the years ended October 31, 1998 and 1997, the Company advanced $85,000
and $30,000, respectively, to an officer of the Company, at no interest, which
will be repaid within the next year. During the year ended October 31, 1997, the
Company loaned a former officer of the Company $25,000, with interest at 6%, for
the purchase of 200,000 shares of the Company's common stock at $.125 per share
which was repaid in February 1998. During the year ended October 31, 1998, the
Company loaned an additional $180,000 to the same former officer. Of his loans,
$25,000 is due within one year, at no interest, while the remaining $155,000 is
due in five years, with interest at 6.5% [of which $30,000 was used to purchase
company stock and is classified as "Stock Subscription - Related Party" on the
Company's financial statements]. As of October 31, 1998, approximately $10,000
of interest has been accrued on these loans.
The notes payable related parties of $2,553,854 are due to an employee, officer
of the Company in the amount of $2,448,862 and an employee of the Company of
$104,992. The notes were incurred during the August 1996 acquisition of DIS
common stock, as these individuals were stockholders in DIS. The notes bear
interest at 6.58% paid annually. The principal is due June 2001. During the
years ended October 31, 1998, 1997 and 1996, interest expense was approximately
$168,000, $168,000 and $56,000, respectively
F-19
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[8] Income Taxes
Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset as of October 31, 1998 and 1997 are as
follows:
October 31,
1 9 9 8 1 9 9 7
Deferred Tax Assets:
Net Operating Loss Carryforward $39,000,000 $27,500,000
Tax Basis of Intangible Assets in Excess of Book
Basis 12,400,000 13,600,000
Totals 51,400,000 41,100,000
Deferred Tax Liability:
Book Basis of Fixed Asset in Excess of Tax Basis 9,500,000 10,500,000
----------- ----------
Deferred Tax Asset 41,900,000 30,600,000
Valuation Allowance for Deferred Tax Asset (41,900,000) (30,600,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
---------------------- =========== ==========
The valuation allowance of $41,900,000 and $30,600,000 at October 31, 1998 and
1997, respectively, represent increases of $11,300,000 and $1,000,000,
respectively, over the preceding years.
The Company has net operating loss carryforwards of approximately $96,900,000
which expire as follows:
Years ended
2002 $ 200,000
2003 600,000
2004 1,000,000
2005 800,000
2006 4,100,000
2007 4,100,000
2008 23,100,000
2009 16,200,000
2010 13,400,000
2011 16,800,000
2012 1,700,000
2018 14,900,000
-------------
Total $ 96,900,000
----- =============
As of October 31, 1998, $26,500,000 of the Company's federal not operating
loss carryforwards are subject to limitations relating to their utilization
under Section 382 of the Internal Revenue Code.
A reconciliation between the statutory federal income tax rate and the effective
rate of income tax expense for each of the three years during the period ended
October 31, 1998 follows:
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Statutory Federal Income Tax Rate (34%) (34%) (34%)
Earnings [Loss] of Unconsolidated Subsidiaries,
Joint Ventures and Affiliate 8% 22% (11%)
Other -- -- (2%)
Change in Valuation Allowance 26% 12% 47%
------ ------ ------
Effective Income Tax Rate -- -- --
------------------------- ====== ====== ======
F-20
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[9] Provision for Closed and Restructured Imaging Centers
At October 31, 1997, approximately $900,000 remained on the Company's books for
legal and settlement costs related to leases for two closed centers. One
center's outstanding obligation with its building lessor was settled in fiscal
1996 for $950,000 of which approximately $400,000 remained to be paid as of
October 31, 1996. During fiscal 1997, the $400,000 was paid in full settlement
of that building lessors outstanding liability.
During the year ended October 31, 1997, the Company recorded an additional
restructuring provision of $662,026, which included the write-off of $100,000 of
loans made by the Company to an employee [See Note 7], increasing the total
reserve to $1,062,026. Included in the reserve was approximately $669,000 for an
old building site's legal and settlement costs and approximately $393,026 for
contract and buyout costs for four previous employees. As of October 31, 1998,
the entire building legal costs and approximately $288,026 of contract and
buyout costs were paid leaving $105,000 of the original provision on the
Company's books, which amount is included with accrued expenses.
[10] Stock Options and Warrants
[A] Stock Options - An incentive stock option plan, which was adopted by the
Company and approved by the shareholders, in November of 1992, reserves
2,000,000 shares of the Company's common stock. Options granted under the plan
are intended to qualify as incentive stock options under existing tax
regulations.
In addition, the Company has issued non-qualified stock options from time to
time in connection with acquisitions and for other purposes.
The following table summarizes the activity in common shares subject to
incentive stock options and non-qualified options for the three years ended
October 31, 1998:
Weighted Average
Number of SharesExercise Price
[Thousands]
October 31, 1995 - Balance 2,736 $ 6.06
Granted 859 $ .34
Exercised -- $ --
Canceled or Expired 600 $ 1.31
------------- ---------
October 31, 1996 - Balance 2,995 $ 4.49
Granted 200 $ .43
Exercised 200 $ .125
Canceled or Expired -- $ --
------------- ---------
October 31, 1997 - Balance 2,995 $ 4.51
Granted 295 $ .25
Exercised 325 $ .187
Canceled or Expired 635 $ 2.78
------------- ---------
Options Outstanding and Exercisable at
October 31, 1998 2,330 $ 5.04
============= =========
F-21
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[10] Stock Options and Warrants [Continued]
[A] Stock Options [Continued] - The following table summarizes information about
stock options outstanding at October 31, 1998:
Options Outstanding
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
[Thousands]
$ .01 - $ 3.00 1,080 2.70 $ .24
$3.01 - $ 6.00 -- -- $ --
$6.01 - $ 9.00 1,063 .19 $ 8.94
$9.01 - $ 12.00 187 .17 $ 10.67
-------
2,330 1.35 $ 5.04
=======
The exercise prices of the options outstanding at October 31, 1998 range between
$.15 and $12.00 with a weighted average contractual life of 1.35.
There was no compensation cost recognized in income for fiscal years 1998, 1997
or 1996.
Had compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net loss and loss per share would have been reduced as
follows:
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Net Loss:
As Reported $(29,321,832) $(748,095)$(8,361,096)
Pro Forma $(29,355,049) $(793,390)$(8,494,101)
Loss Per Share:
As Reported $ (.75) $ (.02)$ (.21)
Pro Forma $ (.75) $ (.02)$ (.22)
The fair value of each option granted is estimated on the grant date using an
option pricing model which took into account as of the grant date, the exercise
price and the expected life of the option, the current price of the underlying
stock and its expected volatility, expected dividends on the stock and the
risk-free interest rate for the expected term of the option. The following is
the average of the data used for the following items:
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
1998 5.51% 5 Years 60.37% N/A
1997 6.19% 5 Years 61.47% N/A
1996 6.35% 5 Years 132.66% N/A
F-22
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[10] Stock Options and Warrants [Continued]
[B] Warrants - The following table summarizes the activity in common shares
subject to warrants:
Shares Warrant Price
[Thousands]
October 31, 1995 - Balance 4,884 $3.50 - $7.43
Granted 4,130 $ .60
Exercised -- $ --
Canceled or Expired -- $ --
--------- -------------
October 31, 1996 - Balance 9,014 $.60 - $ 7.43
Granted -- $ --
Exercised -- $ --
Canceled or Expired -- $ --
--------- -------------
October 31, 1997 - Balance 9,014 $.60 - $ 7.43
Granted 530 $ .25
Exercised -- $ --
Canceled or Expired 4,932 $.60 - $7.43
--------- -------------
Warrants Outstanding and Exercisable to
October 31, 1998 4,612 $.25 - $ .60
----------------- ========= =============
Warrants outstanding at October 31, 1998 expire at various times through May
2003.
[11] Long-Term Debt and Capital Leases
Long-term debt at October 31, 1998 and 1997 consisted of the following:
1 9 9 8 1 9 9 7
------- -------
Revolving lines of credits: one due December 31, 1998
at the bank's prime rate plus 3% [minimum 10%] and one
due October 2000 at the bank's prime rate plus 1%.
Each of the lines are collateralized by the Company's
assets as defined. $11,911,416 $ 7,679,837
Note payable bearing interest at the bank's prime
rate plus 1% due October 2000 from the purchase of
DIS preferred stock collateralized by Towers
accounts receivable 5,225,000 --
Notes payable fixed at 6.58% to 11.0%, due through 2005,
collateralized by medical equipment. 34,544,543 27,676,321
Note payable bearing interest at 9.25% due in 2005
collateralized by real estate. 1,697,948 1,862,918
----------- -----------
Totals - Forward $53,378,907 $37,219,076
F-23
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[11] Long-Term Debt and Capital Leases [Continued]
1 9 9 8 1 9 9 7
------- -------
Totals - Forwarded $53,378,907 $37,219,076
Obligation from the Tower Acquisition, due date
dependent upon cash receipts. Principal payments
are payable monthly at the rate of 8% of the Tower
cash receipts plus 5% interest. 5,407,706 6,417,368
Obligations under capital leases, collateralized
by medical equipment and office equipment
originally costing approximately $29,150,000 and
$31,800,000, respectively, payable in various monthly
installments including interest at various rates from
8.5% to 13.5% through 2005. 19,744,972 25,596,330
----------- -----------
Totals 78,531,585 69,232,774
Less: Current Portion 24,388,427 20,341,372
----------- -----------
Totals $54,143,158 $48,891,402
------ =========== ===========
The Company's working capital needs are currently provided under two lines of
credit. Under one line, 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 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%. At
October 31, 1998, approximately $8,770,000 was outstanding under this line due
December 31, 1998. This line of credit was renewed on January 14, 1999,
extending the due date to December 31, 2001. Under the new agreement, the
Company may borrow the lesser of 75% to 80% of eligible accounts receivable,
$20,000,000 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 2.5%, or (b) 8%. The lender holds a first lien on
substantially all of Radnet's assets, the President and C.E.O. of PHS has
personally guaranteed $6,000,000 of the loans and the credit line is
collateralized by a $5,000,000 life insurance policy on the president and C.E.O.
of PHS. A second line of credit with DVI Business Credit was renewed on October
31, 1998. Under this agreement, now due October 31, 2000, the Company may borrow
the lesser of 110% of the eligible accounts receivable or $5,000,000. The credit
line is collateralized by approximately 80% of the Tower division's accounts
receivable. Borrowings under this line are repayable together with interest at
an annual rate equal to the bank's prime rate plus 1.0%. At October 31, 1998,
approximately $3,140,000 was outstanding under this line. Under the various
formulas, total funds available for borrowing under the two lines of credit was
approximately $3,090,000 million at October 31, 1998.
The Company entered into an additional line of credit agreement with DVI
Business Credit on October 31, 1998. Under this line, due October 31, 2000, the
Company may borrow up to $3,500,000 to either (a) pay off in full the promissory
note dated 10/1/94 issued to Tower Radiology, et. al., or (b) purchase, on the
open market, the subordinated debentures of the Company at a price not to exceed
60% of the face value of such debentures. Borrowings under this line are
repayable monthly, at the rate of 1.4% of the line balance, including principal
and interest, at an annual rate equal to the bank's prime rate plus 1.0%. This
line is also collateralized by the Tower division's accounts receivable. At
October 31, 1998, $0 was outstanding under this line and the full amount was
available. Subsequent to year-end, as of February 1, 1999, the Company borrowed
the full amount available under the line of $3,500,000.
The prime rate at October 31, 1998 and 1997 was 8.00% and 8.50%, respectively.
For the year ended October 31, 1998 and 1997, the weighted average interest rate
on short-term borrowings was 11.36% and 12.03%, respectively.
F-24
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[11] Long-Term Debt and Capital Leases [Continued]
The following schedule shows the future maturities of long-term debt exclusive
of capital leases as of October 31, 1998:
Years ended
October 31,
1999 $21,083,111
2000 11,726,826
2001 7,400,812
2002 7,328,809
2003 6,726,837
Thereafter 4,520,218
-----------
Total $58,786,613
The Company leases property under capital leases. The following schedule shows
the minimum lease payments under capital leases as of October 31, 1998:
Years ended
October 31,
1999 $ 5,063,006
2000 5,025,604
2001 4,613,378
2002 4,112,157
2003 3,682,380
Thereafter 2,779,013
-----------
Total 25,275,538
Less: Amount Representing Interest 5,530,566
Total 19,744,972
Less: Current Portion 3,305,316
Total $16,439,656
The Company has been in default under various of its capital lease agreements,
and has from time to time either made agreements to resolve the defaults or
brought the past due debt current by payment. At October 31, 1998, the Company
was not in default under any of the capital lease arrangements. At October 31,
1998, the Company is in default on approximately $1,755,000 under various note
agreements, pertaining to the acquisition of centers, for non-payment of
principal and interest. These notes have been classified as current.
F-25
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[12] Commitments and Contingencies
[A] Leases - The Company and its subsidiaries have noncancellable operating
leases for use of their facilities and certain medical equipment. The leases
require payment of various expenses as additional rent and expire at various
times from 1999 through 2018. Certain leases contain renewal options from two to
ten years and escalation based primarily on the consumer price index. Minimum
annual rentals under the leases are as follows:
Total Equipment Facilities
October 31,
1998 $ 4,846,240 $ 204,961 $ 4,641,279
1999 4,106,081 78,884 4,027,197
2000 3,064,048 71,596 2,992,452
2001 1,956,405 37,408 1,918,997
2002 1,230,051 -- 1,230,051
Thereafter 11,126,262 -- 11,126,262
------------ ----------- -----------
Totals $ 26,329,087 $ 392,849 $25,936,238
------ ============ =========== ===========
Total rent expense, including equipment rentals, for the years ended October 31,
1998, 1997 and 1996 amounted to approximately $5,410,000, $6,225,000 and
$5,400,000, respectively.
At three of the Company's Tower locations, the Company was unable to extend its
leases which expire at various times beginning in January 1999. The Company has
acquired new space in Beverly Hills with a twenty-year lease and two five-year
options to extend.
[B] Salary and Consulting Contractor Agreements - The Company has a variety of
arrangements for payment of professional and employment services. The agreements
provide for the payment of professional fees to physicians under various
arrangements including a percentage of revenue collected from 15% to 20%, fixed
amounts per periods, and combinations thereof.
The Company also has employment agreements with officers and key employees at
annual compensation rates ranging from $50,000 to $150,000 and for periods
extending up to five years. Total commitments under the agreements are
approximately $1,000,000 as of October 31, 1998.
The Company renegotiated and bought out the remaining years of an employment
contract with one officer of the Company during fiscal 1997. Terms of the
settlement include severance pay, the issuance of additional options, and the
establishment of a legal consulting arrangement which expires March 2003. The
total remaining commitment under this agreement is approximately $215,000.
[C] Purchase Commitment - On July 23, 1996, the Company entered into a four year
purchase agreement with FUJI Medical Systems, USA, Inc. whereby the Company must
purchase $10 million of FUJI Medical Imaging Film at the rate of approximately
$2.5 million annually over the term of the agreement. Purchases under the
agreement are at a discount which is received in advance annually and is
amortized over the respective film purchase period. In addition, the Company has
agreed to purchase a minimum of $1.5 million of Fuji Equipment at the best
available price over the term of the agreement.
F-26
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
- --------------------------------------------------------------------------------
[13] Litigation
[A] 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.
[B] An action entitled Gerald E. Dalrymple, M.D. and Gerald E. Dalrymple, M.D.,
Inc. v. Primedex Health Systems, Inc., Howard Berger, M.D., Diagnostic Imaging
Services, Inc., a Delaware corporation, Diagnostic Imaging Services, a
California corporation, and Diagnostic Health Services, Inc. was filed in the
Los Angeles Superior Court, Case No. SC 047526 on June 3, 1997. The Complaint
alleges that Diagnostic Imaging Services, Inc. ["DIS"] failed to properly pay
plaintiffs fees for performing professional services to which they were entitled
as well as damages for violation of the implied covenant of good faith and fair
dealing, fraud, conversion, breach of fiduciary duty, interference with existing
and prospective business advantage, negligent and intentional infliction of
emotional distress and defamation, and seeks damages for an unspecified amount
in excess of $25,000. The Complaint also alleges that by virtue of the
investment by the Company in DIS and the sale of four of the DIS imaging centers
and its ultrasound business to Diagnostic Health Services, Inc., that DIS has
thereby effected either a reorganization, consolidation, merger or transfer of
all or substantially all of its assets to another entity thereby permitting
plaintiffs to convert a warrant for 319,488 shares of DIS's common stock, issued
in connection with the acquisition of Parkside Radiology, to either $1,000,000
cash or stock with a market value of $1,000,000 in the Company, at the election
of the Company. A partial settlement was reached in August 1997. Pursuant to the
settlement, Dr. Dalrymple assumed ownership of Parkside Radiology and assumed
responsibility for expenses of the facility in the future. Additionally, DIS
sold certain of its equipment and leasehold improvements to Dr. Dalrymple for
approximately $400,000. Plaintiffs' remaining claims, as well as the DIS
cross-claims against Dr. Dalrymple alleging, among other things, that Dr.
Dalrymple pursued a plan to depress Parkside's business, and therefore its
value, thus enabling him to acquire the facility he previously sold to DIS at a
depressed price, are still in dispute. Discovery is not yet complete and the
trial is scheduled for March 1999. The Company and DIS intend to vigorously
defend against plaintiffs' claims and to pursue the DIS cross-claims in the
action.
[C] An action entitled Sterling Diagnostic Imaging, Inc. v. Primedex Health
Systems, Inc., Radnet Management, Inc. and Diagnostic Imaging Services, Inc.,
was filed in New Castle County [Delaware] Superior Court, Case No.
98C-10-112[HLA], and a separate action entitled Diagnostic Imaging Services,
Inc. v. Sterling Diagnostic Imaging, Inc., was filed in Contra Costa County
[California] Superior Court bearing Case No. C98-04298. This matter was
initiated on June 5, 1998, when Sterling filed a demand for Arbitration before
the American Arbitration Association in Philadelphia, seeking to enforce a film
purchase agreement between DIS and E.I. du Pont de Nemours and Company
["DuPont"]. In October 1998, both DIS and Sterling commenced civil actions in
state court. Sterling's action, filed in the Delaware Superior Court, sought to
compel arbitration or, in the alternative, sought damages for breach of contract
against DIS, seeking to recover $5,000,000. DIS was also sued for civil
conspiracy, along with defendants Radnet Management, Inc. and the Company, who
were additionally sued on alternative theories of alter ego [of DIS] and
tortious interference with DIS's alleged contract with Sterling. Following the
filing of a motion to dismiss by DIS, Sterling filed an amended complaint
abandoning its attempt to compel arbitration. DIS and the other defendants filed
motions seeking to either dismiss the action entirely or, alternatively, to stay
the action pending the resolution of the California action. The Delaware court
dismissed the action as to the Company and Radnet Management, Inc. and stayed
the action as to DIS pending the hearing in California. The DIS action against
Sterling seeks declaratory relief on claims that Sterling was not a proper
assignee of the DIS contract with DuPont and thus has no standing. Sterling has
filed a motion to dismiss or stay the California action on the ground that
Delaware is the proper forum for the action. Sterling's motion is scheduled for
hearing on February 25, 1999. The Company intends to vigorously defend against
Sterling's claims, in whatever forum they are prosecuted.
The Company is currently a party to other litigation, none of which is deemed
material in nature.
F-27
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
- --------------------------------------------------------------------------------
[14] Deferred Compensation
In connection with DIS's acquisition of Advanced Diagnostic Imaging, L.P.
["ADI-LP"], DIS issued a stock purchase warrant to the general partner and
radiologist of ADI-LP contingent upon the merger of DIS and IPS. The warrant was
issued as consideration for certain liabilities due form ADI-LP to the general
partner and radiologist which were assumed by DIS and in consideration for
entering into a 25- year radiology and management services agreement. The
Company had accounted for the amount attributable to the radiology and
management services agreement as deferred compensation and was amortizing that
amount as a charge to income over the term of the agreement. As a result of the
Company's decision to close substantially all of its operations at the facility
on or about August 29, 1997 [See Note 2], net deferred compensation of $782,273
was written-off.
[15] Capital Transactions
[A] During fiscal 1996, debentures totaling $12,000 were converted into 1,500
shares of common stock [See Note 25].
[B] During fiscal 1996, the Company purchased 1,300,000 shares of its common
stock for an aggregate purchase price of $481,727.
[C] During fiscal 1997, the Company purchased 325,000 shares of its common stock
for an aggregate purchase price of $133,220.
[D] On June 17, 1997, an officer of the Company exercised his options for
200,000 shares of the Company's common stock at $.125 per share. In connection
with the transaction, the Company loaned the officer $25,000, with interest at
6%, which was paid in full in February 1998.
[E] During fiscal 1998, a former officer of the Company, who had existing
options for 200,000 shares of the Company's common stock, was granted options
for an additional 100,000 shares at $.30 per share as part of his contract
buyout and renegotiation [See Note 10]. On January 12, 1998, he exercised all of
his remaining options for 300,000 shares of the Company's common stock at a
weighted average price of $.183 per share. In connection with the transaction,
the Company loaned the officer $30,000, with interest at 6.5%, which is
classified as "Stock Subscription Receivable - Related Party" on the Company's
financial statements.
[F] In December 1997, a previous employee of the Company exercised his options
for 25,000 shares of the Company's common stock at $.23 per share, or $5,750.
[16] Discontinued Operations
On July 29, 1993, the Company commenced its plans to restructure PC and to wind
down its involvement in the California worker's compensation industry.
Effective July 31, 1995, the Company sold substantially all of the assets of PC
to an unrelated party for approximately $9,448,000 cash resulting in a loss of
$3,813,314. The assets of PC which were sold consisted primarily of net accounts
receivable of $22,087,072 and net property and equipment of $605,138. Accrued
estimated closing costs of $9,100,000 were written-off in connection with the
sale.
Closing costs of $-0-, $157,092 and $574,078 were paid in the years ending
October 31, 1998, 1997 and 1996, respectively.
[17] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
F-28
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #19
- --------------------------------------------------------------------------------
[17] New Authoritative Pronouncements [Continued]
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. Management is in the process of evaluating the disclosure
requirements. SFAS No. 131 is not expected to have a material impact on the
Company.
In February 1998, the FASB issued SFAS No. 132, "Employees Disclosure about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997. The modified disclosure requirements are not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and how it its designated, for example, gain or losses related to
changes in the fair value of a derivative not designated as a hedging instrument
is recognized in earnings in the period of the change, while certain types of
hedges may be initially reported as a component of other comprehensive income
[outside earnings] until the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[18] Subordinated Debenture Offering
In June of 1993, the Company's registration statement for a total of
$25,875,000, of 10% Series A Convertible subordinated debentures due 2003 was
declared effective by the Securities and Exchange Commission. The net proceeds
to the Company were approximately $23,000,000. Costs of approximately $3,000,000
associated with the original offering are being amortized over ten years and are
classified as other assets. As debentures are converted or retired a pro-rata
share of the offering costs are written-off. The debentures are convertible into
shares of common stock at any time before maturity into $1,000 principal amounts
at a conversion price of $10 per share until June 28, 1999 and $12 per share
thereafter.
The offering costs' amortization expense for the years ended October 31, 1998,
1997 and 1996 was $244,650, $298,545 and $298,545, respectively. Interest
expense for the years ended October 31, 1998, 1997 and 1996 was approximately
$2,125,000, $2,525,000 and $2,600,000, respectively. During fiscal 1996,
debentures totaling $12,000 were converted into 1,500 shares of common stock.
There were no debentures converted into common stock during fiscal 1998 and
1997.
During the years ended October 31, 1998 and 1997, $2,205,000 and $2,906,000 face
value debentures, respectively, were purchased by the Company for $1,484,943 and
$1,984,093, respectively, resulting in a gain on early extinguishment of
$720,058 and $921,907, respectively. With the purchase and subsequent bond
retirements, $138,811 and $187,524 of net offering costs were written-off during
the years ended October 31, 1998 and 1997, respectively.
F-29
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #20
- --------------------------------------------------------------------------------
[19] Employee Benefit Plans
The Company adopted a profit-sharing/savings plan pursuant to Section 401(k) of
the Internal Revenue Code, that covers substantially all employees. Eligible
employees may contribute on a tax deferred basis a percentage of compensation,
up to the maximum allowable amount under the tax law. Employee contributions
vest immediately. The plan does not require a matching contribution by the
Company.
There was no expense for fiscal 1998, 1997 or 1996.
[20] Extraordinary Item
During fiscal 1998, the Company settled various notes payable and other
liabilities and purchased subordinated bond debentures at a discount resulting
in a gain on early extinguishment of debt of $954,533. During fiscal 1997, the
Company settled various notes payable and purchased subordinated bond debentures
at a discount resulting in a gain on early extinguishment of debt of $1,595,106.
During fiscal 1996, the Company settled or renegotiated various notes payable
resulting in a gain of $1,149,817.
There was no income tax effect on these transactions.
[21] Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
The Company has suffered recurring losses from operations and has negative
working capital which raises substantial doubt about its ability to continue as
a going concern. A large portion of the Company's fiscal 1998 losses were due to
impairment losses recognized in the write-down of equipment and intangible
assets incurred with the original acquisition and subsequent purchases of DIS
common and preferred stock. Management has taken additional steps to revise its
operating and financial condition, which it believes are sufficient to provide
the Company with the ability to continue in existence.
In December 1998, the Company acquired a new capitated contract with
Buenaventura Medical Clinic, Inc. in Ventura County. As part of the transaction,
the Company purchased the equipment of the existing operation for $72,500 and
subleased the operations' four facilities located in Ventura [2 sites], Oxnard
and Camarillo, [now known collectively as "Loma Vista"] for approximately $4,800
per month. The facilities will provide mammography, ultrasound and general
diagnostic radiology services. The new contract is expected to generate net
revenue of approximately $140,000 per month during fiscal 1999 and give the
Company a solid presence in Ventura County with eight facilities covering the
region. In January 1999, the Company acquired a new capitated contract with
Herriman Jones and subleased the operations' three facilities in Long Beach, La
Palma and Seal Beach [now known collectively as "Redondo Imaging"] for $10,200
per month. The facilities will provide mammography, ultrasound and general
diagnostic radiology services. The new contract is expected to generate net
revenue of approximately $120,000 per month during fiscal 1999. In February
1999, the Company acquired a new capitated contract with SCIPA involving the
Company's Northridge facility. As part of the transaction, the Company will open
a new office in West Hills providing mammography, ultrasound and general
diagnostic radiology services for Northridge's SCIPA and other patients.
During fiscal 1998 and early 1999, the Company continued to streamline and
economize its operations and make changes to enhance revenues. During fiscal
1998, the Company added MRI's at its Stockton and Oxnard sites and upgraded and
replaced MRI's at its University, Santa Rosa and Ventura sites to improve
operating efficiency and increase market share. As of February 1, 1999, the
Company also upgraded and replaced its MRI at Tustin. Equipment at other sites
has been or will be upgraded if market conditions dictate the necessity of
enhanced equipment.
F-30
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #20
- --------------------------------------------------------------------------------
[21] Going Concern [Continued]
The Company renewed its existing line of credit with Coast Business Credit on
January 14, 1999, extending the due date to December 31, 2000. Under the new
agreement, the Company increased its potential borrowing to the lesser of 75% to
80% of eligible accounts receivable, $20,000,000 or the prior 120-days' cash
collections. The Company also reduced its interest rate on the line to the
bank's prime rate plus 2.5%. A second line of credit with DVI Business Credit
was renewed on October 31, 1998 extending the due date to October 31, 2000.
Under the new agreement, the Company increased its potential borrowing to the
lesser of 110% of the eligible accounts receivable or $5,000,000. The Company
also reduced its interest rate on the line to the bank's prime rate plus 1.0%.
The Company entered into an additional line of credit agreement with DVI
Business Credit on October 31, 1998. Under this line, due October 31, 2000, the
Company may borrow up to $3,500,000 to either (a) pay off in full the promissory
note dated 10/1/94 issued to Tower Radiology, et. al. ["Tower Goodwill"], or (b)
purchase, on the open market, the subordinated debentures of the Company at a
price not to exceed 60% of the face value of such debentures. Borrowings under
this line are repayable monthly, at the rate of 1.4% of the line balance,
including principal and interest, at an annual rate equal to the bank's prime
rate plus 1.0%. Subsequent to year-end, the Company utilized the entire line of
$3,500,000 and should recognize a gain on early extinguishment of debt of
approximately $263,000 for the repurchase of bonds and approximately $1,015,000
for the settlement of a portion of the Tower Goodwill note at a discount [See
Note 22].
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
[22] Subsequent Events
[A] As of February 1, 1999, the Company purchased an additional 390,100 shares
of DIS common stock from various parties for an aggregate purchase price of
$487,625 in cash and notes payable, bringing the Company's total ownership to
approximately 90%.
[B] As of February 1, 1999, the Company purchased an additional $676,000 face
value subordinated bond debentures for $337,215. The bonds have or will be
retired.
[C] In December 1998, $5,000 face value subordinated bond debentures were
redeemed for 500 shares of the Company's common stock.
[D] In December 1998, the Company acquired a new capitated contract with
Buenaventura Medical Clinic, Inc. in Ventura County. As part of the transaction,
the Company purchased the equipment of the existing operation for $72,500 and
subleased the operations' four facilities located in Ventura [2 sites], Oxnard
and Camarillo, [now known collectively as "Loma Vista"] for approximately $4,800
per month. The facilities will provide mammography, ultrasound and general
diagnostic radiology services. The new contract is expected to generate net
revenue of approximately $140,000 per month during fiscal 1999 and give the
Company a solid presence in Ventura County with eight facilities covering the
region.
[E] In January 1999, the Company acquired a new capitated contract with Harriman
Jones and subleased the operations' three facilities in Long Beach, La Palma and
Seal Beach [now known collectively as "Redondo Imaging"] for $10,200 per month.
The facilities will provide mammography, ultrasound and general diagnostic
radiology services. The new contract is expected to generate net revenue of
approximately $120,000 per month during fiscal 1999.
F-31
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #21
- --------------------------------------------------------------------------------
[22] Subsequent Events [Continued]
[F] In February 1999, the Company acquired a new capitated contract with SCIPA
involving the Company's Northridge facility. As part of the transaction, the
Company will open a new office in West Hills providing mammography, ultrasound
and general diagnostic radiology services for Northridge's SCIPA and other
patients.
[G] The Company renewed its existing line of credit with Coast Business Credit
on January 14, 1999, extending the due date to December 31, 2001. Under the new
agreement, the Company increased its potential borrowing to the lesser of 75% to
80% of eligible accounts receivable, $20,000,000 or the prior 120-days' cash
collections. The Company also reduced its interest rate on the line to the
bank's prime rate plus 2.5%.
[H] The Company utilized its additional line of credit agreement with DVI
Business Credit [See Note 11] to settle the majority of its obligation from the
Tower acquisition ["Tower Goodwill'] in February 1999. As of December 31, 1998,
the Company owed approximately $5,315,000 to Tower and settled this obligation
for $3,500,000 cash and an $800,000 note payable to be paid over 48 months
beginning February 1, 1999 with interest at 8%. The Company will recognize a
gain on the early extinguishment of debt of approximately $1,015,000 in the
transaction.
[I] The Company entered into a new lease agreement in the Beverly Hills region
for 3,830 square feet of space adjacent to Tower Roxsan where it plans to
consolidate its Tower mammography operations into one consolidated Women's
Center which should open in May or June of 1999.
[23] Redeemable Stock
In January 1998, the Company entered into a five year agreement with a former
officer of the Company whereby the Company agreed to purchase from the former
officer up to 600,000 shares of the Company's common stock owned by him at a
price of $.40 per share, in minimum increments of 100,000 shares, upon his
election anytime subsequent to December 31, 1998 and prior to February 28, 2003.
Effective January 12, 1999, the Company repurchased 200,000 shares from the
former employee for $.40 per share.
[24] Fourth Quarter Information
During the fourth quarter of 1998, the Company recorded an impairment, loss
pursuant to SFAS No. 121, in the amount of $12,677,324 [See Note 6].
Additionally, the Company recorded financing costs of $5,207,900 for the
redemption of DIS's outstanding redeemable preferred stock and unpaid dividends.
The aggregate effect of these items was to increase net loss for the fourth
quarter by $17,885,224 [$.46 per basic share].
. . . . . . . . . .
F-32
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULE
To the Stockholders and Board of Directors of
Primedex Health Systems, Inc.
New York, New York
Our report on the consolidated financial statements of Primedex
Health Systems, Inc. and its affiliates is included on page F-1 of this Form
10-K. In connection with our audits of such financial statements, we have also
audited the related accompanying financial statement Schedule II -Valuation and
Qualifying Accounts.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
January 15, 1999
S-1
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
Additions
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts [A]Reserves [B] of Period
For the period ended October 31, 1998:
Allowances [Deducted from Accounts
<S> <C> <C> <C> <C> <C>
Receivable Short-Term] $19,637,802 $61,635,980 $ -- $61,293,269 $19,980,513
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $ 6,752,507 $14,836,507 $ -- $16,779,469 $4,809,545
=========== =========== ========== =========== ==========
Amortization of Goodwill
[See Note 6] $ 3,160,715 $ 1,463,268 $ -- $ 1,333,695 $3,290,288
=========== =========== ========== =========== ==========
Amortization of Other Intangibles
[See Note 6] $ 412,500 $ 110,000 $ -- $ 522,500 $ --
=========== =========== ========== =========== ==========
</TABLE>
[A] Addition due to acquisitions.
[B] Deductions include sales and divestitures.
S-2
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
Additions
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts [A] Reserves[B] of Period
For the period ended October 31, 1997:
Allowances [Deducted from Accounts
<S> <C> <C> <C> <C> <C>
Receivable Short-Term] $18,386,423 $54,010,973 $ 825,000 $53,584,594 $19,637,802
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $ 6,871,881 $13,502,744 $ -- $13,622,118 $6,752,507
=========== =========== ========== =========== ==========
Amortization of Goodwill
[See Note 6] $ 3,077,716 $ 1,405,911 $ -- $ 1,322,912 $3,160,715
=========== =========== ========== =========== ==========
Amortization of Other Intangibles
[See Note 6] $ 1,172,317 $ 196,726 $ -- $ 956,543 $ 412,500
=========== =========== ========== =========== ==========
[A] Addition due to acquisitions.
[B] Deductions include sales and divestitures.
</TABLE>
S-3
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
Additions
Balance at Charged Charged to Deductions Balance at
Beginning Against Other from Close
of Period Income Accounts [A]Reserves [B] of Period
For the period ended October 31, 1996:
Allowances [Deducted from Accounts
<S> <C> <C> <C> <C> <C>
Receivable Short-Term] $15,633,140 $40,161,614 $1,971,693 $39,380,024 $18,386,423
=========== =========== ========== =========== ===========
Allowances [Deducted from Accounts
Receivable Long-Term] $ 4,353,102 $17,212,120 $ 845,011 $15,538,352 $ 6,871,881
=========== =========== ========== =========== ===========
Amortization of Goodwill
[See Note 6] $ 960,998 $ 1,170,025 $ 946,693 $ -- $ 3,077,716
=========== =========== ========== =========== ===========
Amortization of Other Intangibles
[See Note 6] $ -- $ 93,378 $1,078,939 $ -- $ 1,172,317
=========== =========== ========== =========== ===========
[A] Addition due to acquisitions.
</TABLE>
S-4
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to each
of the directors and those executive officers of the Company performing a
policy-making function for PHS as of February 28, 1998:
Director
or Officer
Name Age Since Position with Company
Howard G. Berger, M.D.* 53 1992 President, Treasurer, Chief Executive
and Financial Officer, and Director
Norman R. Hames 41 1996 Vice President, Chief Operating
Officer, Secretary and Director
Jaana Shellock* 36 1996 Director
Michael J. Krane, M.D. 54 1992 Vice President, Director of Medical
Operations
- --------
*Member of the Stock Option Committee
The following is a brief account of the business experience of each PHS
director and executive officer during the past five years.
Howard G. Berger, M.D. was elected a director of PHS in July 1992 and
in September 1996 was appointed President and Chief Executive Officer of PHS.
Dr. Berger is the owner of BRMG which supplies the medical services at a number
of the Company's imaging centers. Dr. Berger has been principally engaged since
1987 in the same capacities for the predecessor entities. See Item 13. Dr.
Berger also serves as a director of Diagnostic Imaging Services, Inc.
Norman R. Hames was appointed as an officer and director in 1996. Mr.
Hames, a founder of Diagnostic Imaging Services, Inc. has since 1986, served as
the president and a director of that entity.
Jaana Shellock was appointed a director in 1996. Ms. Shellock has,
since 1989, served as the president and a director of Future Diagnostics, Inc.
Michael J. Krane, M.D. is the vice president and director of medical
operations at RadNet. Dr. Krane has been principally engaged since 1987 in the
same capacities for the predecessor entities.
None of the Company's directors serve as directors of any other
corporation with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934 or subject to the requirements of Section 15(d)
of that Act. Furthermore, none of the events described in Item 401(f) of
Regulation S-K involving a director or an executive officer of the Company
occurred during the past five years.
The officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships among any of the officers
and directors. During the fiscal year ended October 31, 1998, while the Board of
Directors held numerous meetings, they took board action by unanimous written
consent, which was done on five occasions. All directors were present and
participated in all such actions.
The Board of Directors intends to establish an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, and a compensation committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company.
29
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of Forms 3 and 4 and any amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange
Act of 1934, or representations that no Forms 5 were required, the Company
believes that with respect to fiscal 1998, all Section 16(a) filing requirements
applicable to its officers, directors and beneficial owners of more than 10% of
its equity securities were complied with.
Item 11. Executive Compensation
The following table sets forth information concerning the compensation
earned during the three years ended on October 31, 1998 by any individual
serving as the Company's Chief Executive Officer at any time during fiscal 1998
and by any other executive officer of the Company who earned at least $100,000
during fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation(1) Long-Term Compensation
Year Other Securities Restricted
Name and Ended Annual Underlying Stock LTIP All Other
Principal Position 10/31 Salary($) Bonus($) Comp.($) Options(#) Awards($) Pay-outs($) Comp($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard G. Berger, M.D. 1998 $100,000 -- -- -- -- -- --
Chief Executive Officer 1997 $ 78,000 -- -- -- -- -- --
[beginning 9/1/96] 1996 $ 75,000 -- -- -- -- -- --
Norman Hames 1998 $139,000 -- -- -- -- -- --
Vice-President,
Secretary and Chief 1997 $150,000 -- -- -- -- -- --
Operating Officer 1996 $150,000 -- -- -- -- -- --
of PHS and President
of DIS
Michael J. Krane, M.D. 1998 $ 96,000 -- -- -- -- -- --
Vice President 1997 $103,846 -- -- -- -- -- --
1996 $103,846 -- -- -- -- -- --
</TABLE>
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the named executive officers was less than the reporting thresholds
established by the Securities and Exchange Commission.
Employment Contracts
Drs. Berger and Krane each executed a five-year employment agreement as
of June 12, 1992 with RadNet to serve as President and chief executive officer
and as Vice President and Director of Medical Operations, respectively, at
annual salaries of $100,000. Each employment agreement provided that it could be
terminated by the employee after two years on 30 days prior notice and contains
certain restrictive covenants designed to prevent the employee from competing
with RadNet's business prior to the later of termination of employment or June
11, 1997. In addition, each was granted options to purchase an aggregate 762,500
shares of PHS Common Stock at an exercise price of $8.00 per share at any time
during the five-year period commencing June 12, 1992. On October 13, 1993, the
board of directors authorized the reduction in the number of these options and a
reduction in the exercise price. Dr. Berger and Dr. Krane each subsequently
agreed to the assignment of 200,000 of these options to a third party thereby
reducing the ownership of each to options to purchase an aggregate 281,250
shares of PHS Common Stock at an exercise price of $3.50 per share. In July
1995, in connection with an extension of his employment contract with RadNet
through July 14, 1999, Dr. Krane's options were canceled. In April 1996, Dr.
Krane's contract was revised to provide for annual compensation of $250,000 with
its term ending June 11, 1999. Dr. Berger's options expired in June 1998. Dr.
Berger, who currently has no employment contract with the Company and Dr. Krane
are also paid additional amounts for their services by BRMG.
RadNet and Steven R. Hirschtick had executed an employment agreement
effective November 1, 1993 through October 31, 1997, employing Mr. Hirschtick as
RadNet's Senior Vice President and General Counsel at an annual salary of
$320,000. On July 21, 1995, the PHS board of directors authorized a new
employment agreement for Mr. Hirschtick, granted him five-year options
exercisable to purchase an aggregate 400,000 shares of common stock at $.125 per
share and also agreed, assuming his execution of a new employment contract on
acceptable terms, to sell him 100,000 shares
30
<PAGE>
of PHS common stock at par [$.01 per share]. On July 21, 1995, the Closing Bid
and Closing Asked Prices for PHS common stock in the over-the-counter market
according to the National Quotation Bureau were $.09375 and $.15625
respectively. On September 14, 1995, PHS and Mr. Hirschtick executed a new
employment agreement, superseding the November 1, 1993 agreement with RadNet and
employing Mr. Hirschtick as General Counsel and Senior Vice President of PHS.
The term of the new agreement commenced on November 1, 1995 and expired on
October 31, 2000. The new agreement provided for an annual salary of $275,000.
In connection with the new agreement and the grant of the new options, Mr.
Hirschtick purchased the 100,000 shares of PHS common stock at par. On said
date, the Closing Bid and Closing Asked Prices for PHS common stock in the
over-the-counter market according to the National Quotation Bureau were $.09 and
$.11 respectively. As of February 27, 1998, effective October 31, 1997, the
parties agreed to terminate the new agreement in consideration of Mr. Hirschtick
receiving a payment of $100,000, receiving additional options to purchase
100,000 shares of the Company's stock at $.30 per share and entry into a five
year consulting agreement providing for compensation of $50,000 per year.
Additionally, the Company loaned Mr. Hirschtick $155,000 all due and payable in
five years together with interest at the rate of 6.5% per annum. Mr. Hirschtick
was also loaned $25,000, with no interest, due and payable within one year.
Norman Hames has an employment agreement with Diagnostic Imaging
Services, Inc. ending in 2001 whereby he serves as president of that company and
receives annual compensation of $150,000.
Stock Options
During the fiscal year ended October 31, 1998, no options were granted
to a person who served as chief executive officer of PHS during such year or to
a PHS executive officer, or chief executive officer of a PHS subsidiary, who
earned at least $100,000 in compensation during such year.
At October 31, 1998, the Company had an Incentive Stock Option Plan in
force. Under the Plan, an aggregate 2,000,000 shares of Common Stock were
reserved for issuance upon exercise of outstanding incentive stock options held
by 8 Company employees at exercise prices ranging from $.15 to $.53 per share.
There are not outstanding options held at October 31, 1998 by the
individuals named in the Summary Compensation Table.
Director Compensation
Directors do not receive a fee for their services as a director.
Compensation Committee Interlocks and Insider Participation
During fiscal 1998 all executive compensation has been determined by
the three member board of directors of PHS, Howard G. Berger, M.D., Norman Hames
and Jaana Shellock. In addition, no individual who served as an executive
officer of the Company during fiscal 1998, served during fiscal 1998 on the
board of directors or compensation committee of another entity where an
executive officer of the other entity also served on the board of directors of
the Company, except that Howard G. Berger, M.D., chairman and president of
RadNet and Norman Hames, vice president and a director of the Company serves as
a director and as president and a director of Diagnostic Imaging Services, Inc.,
respectively. See "Summary Compensation Table" herein in this Item 11 and Item
13 herein as to transactions involving the Company and Dr. Berger.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of PHS Common Stock as of February 1, 1999, by (i) each
holder known by the Company to beneficially own more than five percent of the
outstanding Common Stock, (ii) each of the Company's directors and executive
officers [including officers listed in the Summary Compensation Table] as a
group. The percentages set forth in the table have been calculated on the basis
of treating as outstanding, for purposes of computing the percentage ownership
of a particular holder, all shares of PHS Common Stock outstanding at such date
and all shares of Common Stock purchasable upon exercise of options and warrants
owned by such holder which are exercisable at or within 60 days after such date.
31
<PAGE>
Name of Shares of Common Stock
Beneficial Owner Beneficially Owned(1) Percent of Class
Howard G. Berger, M.D.* 12,809,428(2) 26.6%
Jaana Shellock* 500,000(3) 1.0%
Norman Hames* 2,913,550(4) 6.1%
Michael J. Krane, M.D. 2,216,228 4.6%
All directors and executive
officers of the Company as a
group [four persons] 18,439,206(5) 38.3%
- -----------
*The address of all of the Company's officers and directors is c/o the
Company, 1516 Cotner Avenue, Los Angeles, California 90025.
(1) Subject to applicable community property statutes and except as
otherwise noted, each holder named in the table has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned.
(2)Includes 343,200 shares issuable upon conversion of PHS outstanding
convertible debentures convertible at $10 per share. On June 5, 1995, Howard G.
Berger, M.D. president and a director of PHS consummated the purchase of
10,000,000 shares of PHS' common stock from Robert E. Brennan, PHS' then
principal shareholder. In connection with the purchase, John J. Petillo, the
former chairman as well as the former chief executive officer of PHS, waived his
rights to vote the shares pursuant to an irrevocable proxy previously granted by
Mr. Brennan. The purchase price for the shares was $.14 per share or $1,400,000
in the aggregate consisting of (a) a $300,000 cash payment paid by Dr. Berger
using personal funds, (b) Dr. Berger's five-year 8% promissory note in the
principal amount of $700,000 and (c) the assignment by Dr. Berger of rights to
receive 2,466,228 shares of CareAd Common Stock upon the Distribution of same.
Mr. Brennan also has the right to receive additional payments based upon future
market prices for PHS' common stock equal to 25% of the difference between the
market price for the shares sold and the initial $.14 purchase price per share,
payable at various times over a nine-year period. As Dr. Berger was granted the
right to make "additional payments" in cash or in shares of PHS' common stock
[or combination thereof], Mr. Brennan was granted certain rights to register any
stock so transferred to him as additional payments under the Securities Act of
1933, at PHS' expense, so as to permit the public offer and sale of such shares.
(3)Represents options exercisable at $.15 per share.
(4)Represents options exercisable at $.60 per share.
(5)See the above footnotes. Includes 12,216,228 shares owned of record
and 3,756,750 shares issuable upon exercise of presently exercisable options and
convertible debentures.
As a result of his stock ownership and his positions as president and a
director of the Company, Howard G. Berger, M.D. may be deemed to be the
controlling person of the Company.
Item 13. Certain Relationships and Related Transactions
Howard G. Berger, M.D. [see "Items 10 and 12"] is the 99% stockholder
of Beverly Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc.
who together have formed the partnership known as Beverly Radiology Medical
Group which has executed a Management and Service Agreement with RadNet and DIS
pursuant to which it supplies the medical services at most of the Company's
imaging centers [see "Item 1] through 2002. In April 1996, the Company
renegotiated the Agreement with BRMG whereby the management fees paid to the
Company by BRMG were increased from 79% of collections to 81% in consideration
of the Company's payment to BRMG of $1,100,000. The amount paid was determined
based upon the discounted value of the estimated additional benefit to the
Company over the remaining term of the agreement of the increased percentage to
be received by the Company. In fiscal 1997, Dr. Berger was paid $294,000 and Dr.
Krane was paid $150,000 by BRMG.
32
<PAGE>
See Footnote 2 in Item 12 herein above as to Dr. Berger's purchase of
10,000,000 shares of PHS common stock from Robert E. Brennan in June 1995 and in
connection therewith, the grant to Mr. Brennan of rights to register certain of
these shares under the Securities Act of 1933, at PHS' expense, to the extent
Dr. Berger transfers any such shares back to Mr. Brennan. See Item 11 herein as
to Dr.
Berger and Dr. Krane's employment agreements with RadNet.
At October 31, 1995 Howard G. Berger and Michael J. Krane were each
indebted to PHS in the amount of $1,500,000 based on loans extended to Drs.
Berger and Krane at the time of the Company's acquisition of RadNet in June
1992. In April 1996, Dr. Krane discharged his obligation by paying the Company
$1,400,000 and agreeing to renegotiate his employment contract with the Company
to provide for reduced compensation and a reduced time commitment. Dr. Berger,
in August 1996, paid $500,000 against his obligation. In consideration of the
early payment the Company offered to extend the remaining one million dollars
due to February 1998. The note was further extended in January 1998 to February
1999. In January 1999, the note was extended to February 2000 and was discounted
at an 8% interest rate resulting in a discounted value of $899,143 as of October
31, 1998.
On August 1, 1996, the Company acquired from Norman Hames, [not then an
officer or director of the Company] all of his common stock and warrants to
purchase shares of common stock of Diagnostic Imaging Services, Inc., a Delaware
corporation [3,042,704 shares] which then represented 21.6% of the outstanding
shares of that entity in exchange for five year warrants to purchase 2,913,550
shares of the Company's common stock at $.60 per share as well as the Company's
five year promissory note, payable interest only annually at 6.58% for
$2,448,862.
33
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements - The following financial statements are filed
herewith:
Page No.
Independent Auditors Report................................. F-1
Consolidated Balance Sheets................................. F-2...F-3
Consolidated Statements of Operations....................... F-4...F-5
Consolidated Statements of Stockholders' Equity [Deficit]... F-6
Consolidated Statements of Cash Flows....................... F-7...F-10
Notes to Consolidated Financial Statements.................. F-11..F-32
Schedules - The Following financial statement schedules are filed herewith:
Independent Auditor's Report on Supplemental Schedule....... S-1
Schedule II - Valuation and Qualifying Accounts............. S-2...S-4
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
(b) Exhibits - The following exhibits are filed herewith or incorporated by
reference herein:
Exhibit Incorporated by
No. Description of Exhibit Reference to
3.1.1 Certificate of Incorporation as amended (A)
3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A)
3.2 By-laws
4.1 Form of Common Stock Certificate (AA)
4.2 Form of Indenture between Registrant and American Stock
Transfer and Trust Company as Incorporated by Indenture
Trustee with respect to the 10% Series A Convertible
Subordinated Debentures due 2003 (B)
4.3 Form of 10% Series A Convertible Subordinated Debenture Due 2003
[Included in Exhibit 4.2] (B)
10.1 Agreement and Plan of Reorganization, dated as of April 30, 1992
by and among PHS, CCC Franchising Acquisition Corp. II
["New RadNet"], RadNet Management, Inc., Beverly Hills MRI,
Dr. Berger and Dr. Krane (C)
10.2 Partnership Purchase Agreement, dated as of April 30, 1992 by and
among PHS, New RadNet and Dr. Berger and Dr. Krane (C)
34
<PAGE>
10.3 Promissory Note dated June 12, 1992 ["Purchaser Note"] issued by
New RadNet in the principal amount of $10,000,000 payable to
Dr. Berger ["Purchaser Note"]. [An identical note payable to
Dr. Krane was issued to him.] (C)
10.4 PHS Guarantee, dated as of June 12, 1992, of payment of the
Purchaser Notes (C)
10.5 Stock Pledge Agreement, dated as of June 12, 1992 pursuant
to which PHS as pledgor pledged the outstanding capital
stock of New RadNet to Drs. Berger and Krane to secure its
guarantee (C)
10.6 Secured Promissory Note, dated June 12, 1992 ["Sellers' Note"]
issued by Drs. Berger and Krane, jointly in the principal
amount of $6,000,000 payable to New RadNet (C)
10.7 Stock Pledge Agreement dated as of June 12, 1992 pursuant
to which Drs. Berger and Krane as pledgors pledged the
5,000,000 shares of PHS Common Stock issued to them in the
acquisition, to PHS to secure repayment of the Sellers' Note (C)
10.8 Employment Agreement dated as of June 12, 1992 between New
RadNet and Howard G. Berger. [Dr. Krane executed a substantially
identical employment agreement with New RadNet on said date.] (C)
10.11 Asset Purchase Agreement dated as of October 1, 1994 between the
Tower Group and RadNet Sub (D)
10.12 Management Agreement dated as of October 1, 1994 between the Tower
Group and RadNet Sub (D)
10.15 Stock Purchase Agreement dated as of November 9, 1993 for the
acquisition of Advantage Health Systems, Inc. ["AHS"] between PHS,
John T. Lincoln and Paul G. Shoffeitt (D)
10.16 Employment Services Agreement dated November 9, 1993
between AHS and Paul G. Shoffeitt [John T. Lincoln
executed a similar employment services agreement with
AHS on the same date] (D)
10.17 Deposit Agreement for stock dividend of CareAd common
stock dated October 31, 1994 and Midlantic bank, N.A.,
PHS and CareAd (D)
10.18 Separation Agreement dated January 31, 1995 between
PHS and CareAd (D)
10.19 Separation Agreement dated April 20, 1995 between PHS
and CareAd (E)
10.20 Stock Purchase Agreement made as of June 2, 1995 among
PHS, CareAd, Howard G. Berger and Robert E. Brennan (E)
10.21 Medical Receivable Purchase and Sale Agreement made as of
July 31, 1995 between Bristol A/R and Primedex Corporation
[relating to the sale of the Primedex Corporation portfolio
of workers' compensation receivables] (F)
10.22 Employment Agreement dated as of September 14, 1995 between
PHS and Steven R. Hirschtick (G)
35
<PAGE>
10.24 Incentive Stock Option Agreement dated as of July 21, 1995
between PHS and Steven R. Hirschtick (G)
10.25 Stock Purchase Agreement dated as of November 14, 1995 among
PHS, RadNet Managed Imaging Services, Inc. ["RMIS"], Future
Diagnostics, Inc. ["FDI"] and the shareholders of FDI relating to the
purchase by RMIS of all of the outstanding stock of FDI (G)
10.26 Securities Purchase Agreement dated March 22, 1996, between the
Company and Diagnostic Imaging Services, Inc. (G)
10.27 Stockholders Agreement by and among the Company, Diagnostic
Imaging Services, Inc. and Norman Hames (G)
10.28 Securities Purchase Agreement dated June 18, 1996 between the
Company and Norman Hames (G)
10.29 Stock Purchase Agreement dated September 3, 1997 between the
Company and Preferred Health Management, Inc. whereby the
Company sold its Future Diagnostics, Inc. subsidiary (H)
10.30 Consulting Agreement and Stock Put with Steven R. Hirschtick (I)
- ------------------
(A) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-1 [File No. 33-51870].
(AA) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File 33-73150].
(B) Incorporated by reference to exhibit filed with PHS' Registration
Statement on Form S-3 [File No. 33-59888].
(C) Incorporated by reference to exhibit filed in an amendment to Form 8-K
report for June 12, 1992.
(D) Incorporated by reference to exhibit filed with PHS' annual report on
Form 10-K for the year ended October 31, 1994.
(E) Incorporated by reference to exhibit filed with PHS' Form 8-K report for
June 5, 1995. (F) Incorporated by reference to exhibit filed with PHS' Form
8-K report for August 4, 1995. (G) Incorporated by reference to exhibit filed
with Form 10K for the year ended October 31, 1996. (H) Incorporated by
reference to exhibit filed with Form 8-K report for September 8, 1997. (I)
Incorporated by reference to exhibit filed with Form 10K for the year ended
October 31, 1997.
22 Subsidiaries PHS % Ownership State of Incorporation
-- ------------ --------------- ----------------------
RadNet Management, Inc. 100% California
RadNet Managed Imaging
Services, Inc. 100% California
RadNet Sub, Inc. (a) California
Diagnostic Imaging Services, Inc. 90% Delaware
- ---------------
(a)Wholly-owned subsidiary of RadNet Management, Inc.
PHS also owns approximately 19% of the outstanding common stock of
Viromedics, Inc. a Delaware corporation and approximately 4% of the outstanding
common stock of CareAdvantage, Inc., a Delaware corporation.
(c) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended October 31, 1998.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRIMEDEX HEALTH SYSTEMS, INC.
Date: February 15, 1999 /s/ Howard G. Berger, M.D.
--------------------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
By /s/ Howard G. Berger, M.D.
- ------------------------------------------------
Howard G. Berger, M.D.
Date: February 15, 1999
By /s/ Jaana Shellock
- -------------------------------------
Jaana Shellock
Date: February 15, 1999
By /s/ Norman Hames
- -------------------------------------
Norman Hames
Date: February 15, 1999
37
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Oct-31-1998
<PERIOD-END> Oct-31-1998
<CASH> 59,495
<SECURITIES> 0
<RECEIVABLES> 15,429,057
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,627,327
<PP&E> 26,970,584
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,656,414
<CURRENT-LIABILITIES> 37,818,579
<BONDS> 20,718,000
0
0
<COMMON> 407,572
<OTHER-SE> (55,767,401)
<TOTAL-LIABILITY-AND-EQUITY> 62,656,414
<SALES> 0
<TOTAL-REVENUES> 58,820,543
<CGS> 0
<TOTAL-COSTS> 75,328,705
<OTHER-EXPENSES> (1,499,150)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,278,547
<INCOME-PRETAX> (29,497,071)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,497,071)
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<EXTRAORDINARY> 954,533
<CHANGES> (779,294)
<NET-INCOME> (29,321,832)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
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