UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended July 31, 1999 Commission File Number 0-19019
PRIMEDEX HEALTH SYSTEMS, INC.
-----------------------------
(Exact name of registrant as specified in charter)
New York 13-3326724
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1516 Cotner Avenue
Los Angeles, California 90025
----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 478-7808
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding of the issuer's common stock as of October 12, 1999
was 38,932,760 [excluding treasury shares].
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC.
PART I - FINANCIAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the Registrant without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Registrant believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Registrant's latest Annual Report on Form 10-K.
In the opinion of the Registrant, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of the
Registrant as of July 31, 1999, and the results of its operations and changes in
its cash flows for the nine months ended July 31, 1999 and 1998, have been made.
The results of operations for such interim periods are not necessarily
indicative of the results to be expected for the entire year.
1
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
July 31, October 31,
1 9 9 9 1 9 9 8
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $ 35,955 $ 59,495
Accounts Receivable - Net 15,584,012 15,429,057
Unbilled Receivables 214,348 10,675
Other Receivables 93,381 47,870
Due from Related Party 170,000 140,000
Other 872,631 1,940,230
------------ ------------
Total Current Assets 16,970,327 17,627,327
------------ ------------
Property and Equipment - Net 33,996,239 26,970,584
------------ ------------
Other Assets:
Accounts Receivable - Net 3,836,993 3,713,956
Due from Related Parties 129,875 133,260
Goodwill - Net 10,774,485 11,313,907
Other 2,197,388 2,897,380
------------ ------------
Total Other Assets 16,938,741 18,058,503
------------ ------------
Total Assets $ 67,905,307 $ 62,656,414
============ ============
See Notes to Consolidated Financial Statements.
2
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
July 31, October 31,
1 9 9 9 1 9 9 8
[Unaudited]
Liabilities and Stockholders' Deficit:
Current Liabilities:
Cash Overdraft $ 2,218,106 $ 1,729,994
Accounts Payable 6,663,005 5,747,988
Accrued Expenses 5,127,089 3,535,840
Accrued Expenses - Professional Fees 1,515,587 1,753,987
Notes and Leases Payable 32,523,036 24,388,427
Accrued Litigation Settlement 1,755,995 ---
Deferred Revenue - Covenant Not-to-Compete 200,000 200,000
Other 85,918 462,343
Due to Related Party 5,000 ---
------------ ------------
Total Current Liabilities 50,093,736 37,818,579
------------ ------------
Long-Term Liabilities:
Subordinated Debentures Payable 20,037,000 20,718,000
Notes Payable - Related Parties 2,553,854 2,553,854
Notes and Leases Payable 56,027,281 54,143,158
Deferred Revenue - Covenant Not-to-Compete 1,316,667 1,466,666
Accrued Expenses - Professional Fees 370,645 399,872
------------ ------------
Total Long-Term Liabilities 80,305,447 79,281,550
------------ ------------
Commitments and Contingencies --- ---
------------ ------------
Minority Interest 582,542 676,114
------------ ------------
Redeemable Stock 160,000 240,000
------------ ------------
Stockholders' Deficit:
Common Stock - $.01 Par Value, 100,000,000 Shares
Authorized; 40,757,760 and 40,757,260 Shares
Issued; 38,932,760 and 39,132,260 Shares
Outstanding at July 31, 1999 and
October 31, 1998, respectively 407,577 407,572
Paid-In Capital 99,336,645 99,251,650
Stock Subscription - Related Party (30,000) (30,000)
Due from Related Party (954,553) (899,143)
Retained Earnings [Deficit] (161,301,140) (153,474,961)
------------- -------------
Totals (62,541,471) (54,744,882)
Less: Treasury Stock - 1,825,000 and 1,625,000
Shares, at cost at July 31, 1999 and
October 31, 1998, respectively (694,947) (614,947)
------------- -------------
Total Stockholders' Deficit (63,236,418) (55,359,829)
------------- -------------
Total Liabilities and Stockholders' Deficit $ 67,905,307 $ 62,656,414
============ ============
See Notes to Consolidated Financial Statements.
3
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Nine months ended
July 31, July 31,
-------- --------
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
Revenue:
<S> <C> <C> <C> <C>
Revenue $ 44,422,477 $34,365,793 $123,621,592 $97,915,332
Less: Allowances 25,539,821 18,392,208 70,008,331 51,982,235
------------ ----------- ------------ -----------
Net Revenue 18,882,656 15,973,585 53,613,261 45,933.097
------------ ----------- ------------ -----------
Operating Expenses:
Operating Expenses 14,890,494 12,877,801 44,530,329 37,894,776
Depreciation and Amortization 1,925,820 2,162,650 5,756,139 6,436,960
Provision for Bad Debts 957,334 557,904 2,608,893 1,571,623
Impairment Loss of Long-Lived
Assets --- --- 478,646 ---
------- ----------- ------------ -----------
Total Operating Expenses 17,773,648 15,598,355 53,374,007 45,903,359
------------ ----------- ------------ -----------
Income from Operations 1,109,008 375,230 239,254 29,738
------------ ----------- ------------ -----------
Other [Expenses] and Revenue:
Interest Expense (2,705,130) (2,389,833) (7,899,104) (6,931,284)
Interest Income 19,522 22,600 67,962 190,268
[Loss] Gain on Sale of Assets 80,969 873,942 (95,540) 1,214,652
Loss from Litigation Settlement --- --- (1,755,995) ---
Other Income [Expense] 143,062 (592,849) 239,428 (630,881)
------------ ------------------------ ------------
Total Other [Expenses] (2,461,577) (2,086,140) (9,443,249) (6,157,245)
-------------------------------------- ------------
[Loss] Before Minority Interest
in Income of Subsidiaries, Extraordinary
Item and Cumulative Effect of Change
in Accounting Principle (1,352,569)(1,710,910) (9,203,995) (6,127,507)
Minority Interest in [Income] Loss
of Subsidiaries 3,949 (69,375) (6,428) (257,253)
------------ ------------------------- ------------
[Loss] Before Extraordinary
Item and Cumulative Effect of
Change in Accounting Principle (1,348,620) (1,780,285) (9,210,423) (6,384,760)
Extraordinary Item-Gain from Early
Extinguishment of Debt [Net of Income
Taxes of $-0- for the six months ended
April 30, 1999 and 1998, respectively] --- 80,795 1,384,244 1,042,680
----- ----------- ------------ -----------
[Loss] Before Cumulative Effect of
Change in Accounting Principle -
Forward $ (1,348,620)$(1,699,490)$ (7,826,179) $(5,342,080)
</TABLE>
See Notes to Consolidated Financial Statements.
4
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Nine months ended
July 31, July 31,
-------- --------
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
[Loss] Before Cumulative
Effect of Change in Accounting
<S> <C> <C> <C> <C>
Principle - Forwarded $(1,348,620) $(1,699,490)$ (7,826,179) $ (5,342,080)
Cumulative Effect of Change in
Accounting Principle --- --- --- (779,294)
----------- ----------- ------------ -------------
Net [Loss] $(1,348,620) $(1,699,490)$ (7,826,179) $ (6,121,374)
============ ========================= =============
Basic EPS:
[Loss] Before Extraordinary Item and
Change in Accounting Principle $ (.03) $ (.04)$ (.22) $ (.16)
Extraordinary Item .00 --- .03 .03
Change in Accounting Principle--
Write-off of Costs of Start-up
Activities --- --- --- (.02)
----------- ----------- ------------ -------------
Net [Loss] $ (.03) $ (.04)$ (.19) $ (.15)
============ ========================= =============
[Loss] Available to Common
Shareholders and Assumed
Conversions $(1,348,620) $(1,699,490)$ (7,826,179) $ (6,121,374)
============ ========================= =============
Diluted EPS:
[Loss] Before Extraordinary
Item and Change in Accounting
Principle $ (.03) $ (.04)$ (.22) $ (.16)
Extraordinary Item .00 --- .03 .03
Change in Accounting Principle--
Write-off of Costs of Start-up
Activities --- --- --- (.02)
----------- ----------- ------------ -------------
Net [Loss] $ (.03) $ (.04)$ (.19) $ (.15)
============ ========================= =============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
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<TABLE>
Common Stock Retained Due from Stock Total
Number Par Value Treasury Paid-in Earnings Related Subscription Stockholders'
of Shares Amount Stock Capital [Deficit] Party Related Party [Deficit]
--------- ------ ----- ------- --------- ----- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - November 1, 1998 40,757,260 $407,572 $(614,947) $99,251,650 $(153,474,961) $ (899,143) $ (30,000) $(55,359,829)
Issuance of Common Stock 500 5 --- 4,995 --- --- --- 5,000
Acquisition of Treasury Stock --- --- (80,000) 80,000 --- --- --- ---
Imputed Interest Income --- --- --- --- --- (55,410) --- (55,410)
Net Loss for the nine months
ended July 31, 1999 --- --- --- --- (7,826,179) --- --- (7,826,179)
--------- -------- --------- ----------- -------------- ----------- --------- -------------
Balance - July 31, 1999
[Unaudited] 40,757,760 $407,577 $(694,947) $99,336,645 $(161,301,140) $ (954,553) $ (30,000) $(63,236,418)
========== ======== ========== =========== ============== ============ ========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Nine months ended
July 31,
1 9 9 9 1 9 9 8
------- -------
Cash Provided by [Used for] Operating Activities $ 1,127,720 $ (3,001,550)
------------ -------------
Investing Activities:
Acquisitions - Net of Cash Acquired (100,000) (1,718,120)
Purchase of Property and Equipment (4,785,209) (1,648,267)
Purchase of Other Assets (108,750) ---
Proceeds - Sale of Centers and Equipment 977,000 685,038
Proceeds - Note Receivable --- 2,059,179
Proceeds - Sale of Marketable Security --- 3,082,627
Proceeds - Partnership Dissolution --- 94,515
Loans to Related Parties (55,000) (125,000)
------------- -------------
Net Cash - Investing Activities (4,071,959) 2,429,972
------------- ------------
Financing Activities:
Cash Overdraft 488,112 1,777,036
Principal Payments on Capital Leases and
Notes Payable (10,952,930) (7,760,497)
Proceeds from Borrowings on Notes Payable 13,872,732 8,342,508
Joint Venture Distributions (100,000) ---
Joint Venture Proceeds --- 75,000
Repurchase of Bond Debentures (337,215) (1,484,943)
Payment for Treasury Stock (50,000) ---
Proceeds from Issuance of Common Stock --- 30,750
------------ ------------
Net Cash - Financing Activities 2,920,699 979,854
------------ ------------
Net [Decrease] Increase in Cash and Cash
Equivalents (23,540) 408,276
Cash and Cash Equivalents - Beginning of Periods 59,495 129,517
------------ ------------
Cash and Cash Equivalents - End of Periods $ 35,955 $ 537,793
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 7,841,416 $ 6,993,063
Income Taxes $ --- $ ---
See Notes to Consolidated Financial Statements.
7
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company entered into capital leases or financed equipment through notes
payable for approximately $7,400,000 and $3,655,000 for the nine months ended
July 31, 1999 and 1998, respectively. During the nine months ended July 31, 1999
and 1998, the Company converted approximately $690,000 and $665,000,
respectively, of accounts payable and accrued expenses into promissory notes
payable.
During the nine months ended July 31, 1999, the Company acquired the assets of
Buena Ventura Medical Group ["Loma Vista"] for $72,500 and recorded the
liability as accrued expenses.
During the nine months ended July 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 non current assets, approximately $865,000 in notes and
capital 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"] to Diagnostic Health Services, Inc. ["DHS"] effective
January 1, 1998. As consideration, the Company received 127,250 shares of DHS
common stock which was sold on May 15, 1998 resulting in a gain of approximately
$53,000 on the sale.
During the nine months ended July 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 nine months ended July 31, 1999, $5,000 face value subordinated
bond debentures were converted into 500 shares of the Company's common stock.
During the nine months ended July 31, 1998, the Company issued 300,000 shares of
its common stock and recorded $30,000 as due from related parties.
During the nine months ended July 31, 1999, a prior employee exercised his
stock put for 200,000 shares of the Company's common stock at $.40 per share. As
part of the transaction, $25,000 in prior loans due from this related party were
utilized as payment and the Company also recorded $5,000 due to related party.
During the nine months ended July 31, 1998, the Company received medical
equipment of approximately $730,000 in lieu of cash rebates for Fuji medical
film purchases. During the nine months ended July 31, 1999 and 1998, the Company
recognized purchase discount income related to film purchases [offset against
operating expenses] of approximately $380,000 and $710,000, respectively.
During the nine months ended July 31, 1999 and 1998, the Company issued notes
payable of approximately $429,000 and $325,000, respectively, to acquire shares
of DIS common stock.
See Notes to Consolidated Financial Statements.
8
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
- ------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Significant accounting policies of Primedex Health Systems, Inc. and affiliates
are set forth in the Company's Form 10-K for the year ended October 31, 1998 as
filed with the Securities and Exchange Commission.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and
have been prepared in accordance with generally accepted accounting principles
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles for complete financial
statements; however, in the opinion of the management of the Company, all
adjustments consisting of normal recurring adjustments necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods ended July 31, 1999 and 1998 have been made. The results of
operations for any interim period are not necessarily indicative of the results
for the full year. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Registrant's annual report on Form 10-K for the fiscal year
ended October 31, 1998.
(3) Goodwill
The Company's goodwill as of July 31, 1999 is shown net of accumulated
amortization of approximately $3,830,000. Goodwill amortization expense for the
nine months ended July 31, 1999 and 1998 was approximately $540,000 and
$1,085,000, respectively. The 1999 decrease in amortization expense is primarily
due to the write-off of goodwill in connection with the sale of Scripps Chula
Vista ["SCV"] to Diagnostic Health Services, Inc. ["DHS"] effective January 1,
1998 and the fiscal 1998 year-end recognition of an impairment loss pursuant to
Statement of Financial Accounting Standards ["SFAS"] No. 121 which included a
write-off of net goodwill of $8,631,944.
The Company amortizes goodwill over the lesser of 20 years or the estimated
useful life of the assets.
(4) Due to/from Related Party
The Company has a $1,000,000 loan receivable due from its President and C.E.O.
in February 2000 at an 8% interest rate resulting in a discounted value of
$954,553 as of July 31, 1999. For the nine months ended July 31, 1999, the
Company recorded interest income on the note of approximately $55,400.
As of October 31, 1998, the Company advanced $115,000 to an officer of the
Company, at no interest, which will be repaid within one year. During the nine
months ended July 31, 1999, the Company advanced an additional $55,000 to the
officer with the same terms.
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 was utilized this
year as payment for 62,500 shares of his common stock repurchased by the Company
per the execution of his stock put, 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 July 31, 1999, approximately $5,000 of interest
remains accrued on these loans.
9
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED], Sheet #2
- ------------------------------------------------------------------------------
(4) Due To/From Related Party [Continued]
At July 31, 1999, the $5,000 due to related party is due to a former officer of
the Company for the acquisition of the Company's common stock that was held by
the former officer.
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 of DIS. The notes bear
interest at 6.58% paid annually. The principal is due June 2001.
(5) Litigation
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, and Diagnostic Imaging Services, Inc., 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
alleged 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 inflection of
emotional distress and defamation, and sought damages for an unspecified amount
in excess of $25,000. The Complaint also alleged 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 had
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, remained in
dispute pending the trial which concluded on August 20, 1999, with a jury
verdict finding that the Company owes damages for breach of the radiology
services agreement with Dr. Dalrymple; breach of its fiduciary duty to Dr.
Dalrymple; conversion of professional fees belonging to Dr. Dalrymple; breach of
the implied covenant of good faith and fair dealing in connection with the
radiology services agreement; breach of the implied covenant of good faith and
fair dealing in connection with plaintiff's claim on the warrant; and negligent
infliction of emotional distress in the aggregate amount of $1,935,995.
Additionally, the jury verdict found that Dr. Dalrymple had breached his
agreement whereby he sold Parkside Radiology to DIS and that DIS should receive
damages of $180,000 (an aggregate recovery against the Company of $1,755,995).
The plaintiffs have advised the Company that they intend to seek fees, costs and
additional damages aggregating as much as an additional $1,500,000. The Company
believes that it has reasonable grounds to expect that the damages against the
Company will be reduced prior to the entry of a final judgment. The Company will
consider an appeal pending the court's action on motions which both the
plaintiff and the Company intend to make in connection with the jury's decision.
10
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED], Sheet #3
- ------------------------------------------------------------------------------
(6) Acquisitions, Sales and Divestitures
In February 1998, effective December 31, 1997, the Company dissolved its
partnership between La Habra Imaging Group II and Friendly Hills Healthcare
Network, Inc. ["Friendly Hills"]. 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 approximately
$95,000 from Friendly Hills as part of the final dissolution. As part of the
dissolution, Friendly Hills acquired the modular building utilized by the
center. The Company entered into a five-year lease with Friendly Hills with an
initial base rent of $3,034 per month.
In March 1998, effective January 1, 1998, the Company's DIS subsidiary sold its
share of Scripps Chula Vista MRI L.P. ["SCV"] to Diagnostic Health Services,
Inc. ["DHS"] for 127,250 shares of DHS stock. As of the transaction date, the
shares were valued at $1,431,563 and recorded as marketable securities held for
sale. On May 15, 1998, the Company sold the 127,250 shares it received from the
sale of SCV for approximately $1,230,000. Due to the sale, the Company wrote-off
approximately $735,000 of net acquisition goodwill.
During the year ended October 31, 1998, DIS acquired the remaining 25% interest
in Valley Regional Oncology Center for $260,000 in cash, resulting in goodwill
of $260,000, and also acquired the remaining units in TVIC for $196,875 in cash
and notes payable for $157,500, resulting in goodwill of $354,375.
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, ["Loma Vista" collectively] for approximately $4,800 per month.
At three of the Company's Tower locations [120 East, 444 San Vicente and
1W/Womens], the Company was unable to extend the respective leases which expire
at various times beginning in January 1999. Due to this, the Company entered
into a new lease agreement for space in Beverly Hills ["Wilshire"] and began
consolidating the assets and business of these three Tower locations to the new
Wilshire facility in January 1999.
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 ["Redondo" collectively] for $10,200 per month.
Effective March 1, 1999, the Company purchased the assets of Diagnostic
Radiology and Ultrasound ["Tarzana"] for $50,000. Due to contractual changes and
other business reasons, Tarzana was closed in July 1999 and its business was
consolidated with Northridge. In April 1999, the Company acquired existing
medical space in West Hills, California ["West Hills"].
On June 1, 1999, the Company opened Tower Women's Center ["Womens"]
consolidating its mammography operations to one site. In addition, this center
will provide ultrasound and bone densitometry services. The Company entered into
a new 15 year lease agreement for 3,830 square feet adjacent to its Roxsan
facility. The lease calls for monthly payments of $5,000. At the end of July
1999, the Company's DIS subsidiary closed its Parkside Womens facility and
consolidated its operations with the new Tower Women's Center.
11
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED], Sheet #4
- ------------------------------------------------------------------------------
(7) Capital Transactions
During the nine months ended July 31, 1999, the Company purchased an additional
390,100 shares of DIS common stock from various parties for an aggregate
purchase price of $478,646 in cash and notes payable, bringing the Company's
total ownership to approximately 90%.
During the nine months ended July 31, 1999, the Company repurchased 681,000 of
its subordinated bond debentures for cash of $337,215. These bonds were retired
and resulted in a gain on early extinguishment of debt of approximately
$339,000. On December 18, 1998, $5,000 face value subordinated bond debentures
were converted into 500 shares of the Company's common stock.
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. 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.
During the nine months ended July 31, 1999, a former officer of the Company
exercised his right pursuant to a stock put agreement, to have the Company buy
back 200,000 shares of the Company's common stock at $.40 per share. The Company
paid $50,000, utilized $25,000 to partially offset a prior loan made to the
former officer, and recorded a $5,000 liability to him which is non-interest
bearing [See Notes 4 and 9].
(8) Subsequent Events
Due to contractual changes and other business reasons, the Company closed its
newly opened West Hills facility in August 1999 and its business was
consolidated with Northridge.
On September 3, 1999, the Company closed its Corona facility and consolidated
its operations with its Riverside ["HCIC"] center.
In the fourth quarter, the Company entered into a 63-month lease for 3,062 sq.
ft. of space at $5,052 per month in Long Beach, California with plans to open a
new imaging center, Los Coyotes Imaging Center Medical Group ["Long Beach'], on
November 1, 1999. The center will offer MRI, CT, nuclear medicine and radiology
services.
(9) 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 former officer requested that the Company
repurchase 200,000 shares from him per the agreement at $.40 per share, or
$80,000. As of July 31, 1999, $75,000 was paid to the prior employee as follows:
$50,000 in cash and $25,000 in forgiveness of a $25,000 related party receivable
due from the prior employee. The remaining $5,000 was paid in August 1999 [See
Notes 4 and 7].
. . . . . . . .
12
<PAGE>
Item 2:
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Background
Primedex Health Systems, Inc. ["PHS"] was incorporated on October 21, 1985.
On November 1, 1990, the Company acquired a 51% interest in Viromedics, Inc.
["VMI"] for $700,000. On February 18, 1992, Future Medical Products ["FMP"], the
parent corporation of VMI, exercised its right to repurchase one-half of the VMI
stock from PHS at a price of $700,000. The Company owns approximately 19% of
VMI's outstanding capital stock as of July 31, 1999, which is accounted for
using the cost method at $-0-.
On April 30, 1992, the Company entered into a purchase agreement with Radnet
Management, Inc. and certain related companies ["Radnet"] for approximately
$66,000,000. The statement of operations and cash flows for the nine months
ended July 31, 1999 and 1998 include the operations and cash transactions of
Radnet.
Effective November 1, 1995, the Company acquired most of the assets of Future
Diagnostics, Inc. by purchasing 100% of its outstanding stock for approximately
$3.2 million consisting of notes and assumed liabilities. Effective September 3,
1997, 100% of the outstanding capital stock of FDI was sold to Preferred Health
Management, Inc. ["PHM"] for $13,500,000 in cash, notes and assumed liabilities.
The Company continues to operate Radnet Managed Imaging Services, Inc. ["RMIS"]
which provides utilization review services. The statements of operations and
cash flows for the nine months ended July 31, 1999 and 1998 reflect the overhead
costs and cash transactions of RMIS. Effective January 1, 1999, RMIS's
operations were consolidated with Radnet Management, Inc..
On March 25, 1996, the Company purchased 3,478,261 shares, or approximately 31%,
of Diagnostic Imaging Services, Inc. ["DIS"] for $4,000,000 and acquired a
five-year warrant to purchase an additional 1,521,739 shares of DIS stock at
$1.60 per share. The $4 million was borrowed by the Company from a primary
lending source. During the four-month period ended July 31, 1996, the investment
yielded a loss to the Company of $313,649. Effective August 1, 1996, the Company
issued a five-year promissory note for $3,272,046 and five-year warrants to
purchase 4,129,630 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
primary shareholder in DIS with approximately 59% ownership.
In subsequent purchases through October 12, 1999, the Company acquired an
additional 3,472,137 shares of DIS stock from various related and unrelated
parties for approximately $4,180,000 in cash and notes payable increasing its
ownership in DIS to approximately 90% [excluding treasury shares]. The
statements of operations and cash flows for the nine months ended July 31, 1999
and 1998 reflect the operations and cash transactions with DIS.
13
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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 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 and future business 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
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 Quarterly Report on Form 10-Q, 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.
The following discussion relates to the continuing activities of Primedex Health
Systems, Inc.
Results of Operations
The discussion of the results of continuing operations includes Radnet, PHS,
RMIS and DIS for the nine months ended July 31, 1999 and 1998.
During the nine months ended July 31, 1999 and 1998, the Company had income from
operations of approximately $240,000 and $30,000, respectively.
During the nine months ended July 31, 1999 and 1998, the Company realized net
revenues of approximately $53,600,000 and $46,000,000, respectively [net of
elimination entries]. During the nine months ended July 31, 1999 and 1998,
Radnet realized net revenues of approximately $44,600,000 and $37,950,000,
respectively. During the nine months ended July 31, 1999, the Company opened or
acquired five new centers [Loma Vista, Redondo, Tarzana, West Hills and Womens]
which generated approximately $2,400,000 in net revenue. In addition, during the
nine months ended July 31, 1999, the Company experienced significant increases
in net revenue at certain sites including approximately $1,500,000 of additional
net revenue at Tower and approximately $2,800,000 of additional net revenue at
the sites of VROC, La Habra, Stockton, Orange, Oxnard and Northridge primarily
due to new contracts and the addition of MRI services at Stockton and Oxnard.
During the nine months ended July 31, 1999 and 1998, DIS realized net revenues
of approximately $9,000,000 and $7,835,000, respectively. During the nine months
ended July 31, 1998, PHS generated net billing revenue from Diagnostic Health
Services, Inc. ["DHS"] of approximately $215,000. Effective August 1, 1998, DHS
terminated its billing service contract with PHS and moved the operation in
house.
14
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
During the nine months ended July 31, 1999 and 1998, the Company incurred
operating expenses of approximately $53,375,000 and $45,900,000, respectively
[net of elimination entries]. For the nine months ended July 31, 1999 and 1998,
Radnet's operating expenses were approximately $42,325,000 and $34,915,000,
respectively, DIS's operating expenses were approximately $9,420,000 and
$8,850,000, respectively, RMIS's operating expenses were approximately $40,000
and $260,000, respectively, and PHS's operating expenses were approximately
$1,590,000 and $1,875,000, respectively. In addition to variable cost increases
with the increase in net revenue, during the nine months ended July 31, 1999,
Radnet incurred additional start-up costs associated with setting up five new
facilities and one-time transitional costs due to the consolidation of three of
its Tower facilities to Wilshire.
During the nine months ended July 31, 1999 and 1998, the Company's operating
expenses consisted of approximately $23,105,000 and $19,435,000, respectively,
for salaries and reading fees, approximately $4,510,000 and $4,000,000,
respectively, for building and equipment rentals, approximately $16,915,000 and
$14,460,000, respectively, in general and administrative expenditures,
approximately $5,755,000 and $6,435,000, respectively, in depreciation and
amortization, approximately $2,610,000 and $1,570,000, respectively, for
provisions for bad debt, and approximately $480,000 and $-0- attributable to the
recognition of an impairment loss, pursuant to FASB 121, for the writedown of
goodwill related to the acquisition of DIS common stock.
During the nine months ended July 31, 1999 and 1998, interest income was
approximately $68,000 and $190,000, respectively. Interest income for 1999
consisted primarily of imputed interest income on related party note
receivables. Interest income for 1998 consisted primarily of imputed interest
income on notes receivable due from PHM, DHS and related parties.
During the nine months ended July 31, 1999 and 1998, interest expense was
approximately $7,900,000 and $6,930,000, respectively. The interest expense
increase was primarily due to additional borrowings under existing lines of
credit, notes payable and capital lease obligations. At July 31, 1999 and 1998,
the Company had total outstanding obligations for notes payable, capital leases
and subordinated debentures payable of approximately $111 million and $96
million, respectively.
During the nine months ended July 31, 1999, the Company recognized losses from
the sale and abandonment of assets of approximately $95,000. During the nine
months ended July 31, 1998, the Company recognized gains from the sales of
subsidiaries or divisions of approximately $1,215,000. The gains consisted of
approximately $595,000 for the Company's agreement to an IRS Section 338 (h)(10)
Election as part of the FDI sale transaction, a final FDI sale reconciling
adjustment gain of approximately $70,000, a gain on the conversion of DHS's note
receivable into common stock [and subsequent sale] of approximately $495,000,
and a gain from the sale of SCV of approximately $55,000.
During the nine months ended July 31, 1999, the Company recognized a loss from a
legal case for $1,755,995 [see Note 5]. During the nine months ended July 31,
1999, the Company generated other income of approximately $240,000. During the
nine months ended July 31, 1998, the Company incurred other expenses of
approximately $630,000. Other expenses consisted primarily of debt restructuring
costs [net of other income] associated with the refinancing of the majority of
the Company's outstanding notes and capital lease obligations reducing future
interest rates and extending payment terms to six years.
15
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
During the nine months ended July 31, 1999 and 1998, the Company realized
extraordinary gains from the early extinguishment of debt of approximately
$1,385,000 and $1,040,000, respectively. The gains were primarily from the
repurchase and retirement of subordinated bond debentures, the settlement of
limited partner notes payable at a discount and the settlement of notes payable
at a discount.
During the nine months ended April 30, 1998, the Company adopted the Statement
of Position ["SOP"] No. 98-5 regarding the "Reporting on the Costs of Start-up
Activities" and the expenditure of these costs as they are incurred. As a result
of this decision, the Company wrote-off approximately $780,000 of historical net
organizational costs and capitalized fees in January 1998.
During the nine months ended July 31, 1999 and 1998, the Company had net losses
of approximately $7,825,000 and $6,120,000, respectively
Liquidity and Capital Resources
Cash decreased for the nine months ended July 31, 1999 by approximately $25,000.
Cash increased for the nine months ended July 31, 1998 by approximately
$410,000.
Cash used for investing activities for the nine months ended July 31, 1999, was
approximately $4,070,000. Cash provided by investing activities for the nine
months ended July 31, 1998 was approximately $2,425,000. During the nine months
ended July 31, 1999 and 1998, the Company acquired DIS stock for approximately
$50,000 and $1,720,000, respectively, and acquired the assets and liabilities of
Tarzana for $50,000 and $-0-, respectively. During the nine months ended July
31, 1999 and 1998, the Company purchased property and equipment of approximately
$4,785,000 and $1,650,000, respectively, received proceeds from the sale of
equipment of approximately $980,000 and $20,000, respectively, and made loans to
related parties of $55,000 and $125,000, respectively. During the nine months
ended July 31, 1999, the Company paid loan fees of approximately $110,000.
During the nine months ended July 31, 1998, the Company collected approximately
$2,060,000 from the acceleration of PHM's post-closing sale note receivable,
received additional proceeds from the sale of FDI of approximately $665,000,
received proceeds from the sale of stock received in the SCV sale transaction
for approximately $1,230,000, received proceeds from the dissolution of a
partnership of approximately $95,000 and received approximately $1,850,000 from
the sale of stock received in the conversion of DHS's post-closing note
receivable into common stock.
Cash provided from financing activities for the nine months ended July 31, 1999
and 1998 was approximately $2,920,000 and $980,000, respectively. During the
nine months ended July 31, 1999 and 1998, the Company increased its cash
overdraft by approximately $490,000 and $1,780,000, respectively, made principal
payments on capital leases and notes payable of approximately $10,950,000 and
$7,760,000, respectively, received proceeds from borrowing under existing lines
of credit and refinancing arrangements of approximately $13,870,000 and
$8,340,000, respectively, and repurchased subordinated bond debentures for
approximately $340,000 and $1,485,000, respectively. During the nine months
ended July 31, 1999, the Company distributed $100,000 to its joint venture
partner in Westchester and paid $50,000 to a former officer of the Company for
treasury stock [see Notes 4, 7 and 9]. During the nine months ended July 31,
1998, the Company received $75,000 from its SCV joint venture partner and
received proceeds of approximately $30,000 for the issuance of common stock.
16
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources [Continued]
At July 31, 1999, the Company had a working capital deficit of $33,123,409 as
compared to a working capital deficit of $20,191,252 at October 31, 1998, an
increased deficit of $12,932,157. The deficit increase is primarily attributable
to increased borrowings from the Company's existing lines of credit, additional
notes payable and capital lease obligations, the recognition of a legal loss and
increases in accounts payable and accrued expenses. At July 31, 1999, the
Company had approximately $20,600,000 of outstanding lines of credit borrowings
classified as current liabilities on the Company's financial statements.
The Company's working capital needs are currently provided under two lines of
credit. Under one line, due December 31, 2001, 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 [Beverly Radiology'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. At July 31, 1999, approximately $14,350,000 was outstanding under this
line. On September 30, 1999, the Company amended this line of credit where the
Company may now borrow up to the aggregate collection of receivables in the
prior 120-days as long as the collections in any one month do not decrease by
more than 25% from the prior month.
Under a second line of credit with DVI Business Credit, 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 of the bank's prime rate plus 1.0%. At
July 31, 1999, approximately $2,890,000 was outstanding under this line.
The Company entered into an additional line of credit agreement with DVI
Business Credit, due October 31, 2000, where the Company may borrow up to
$3,500,000 to either (a) pay off 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 July 31, 1999, approximately
$3,360,000 was outstanding under this line which was utilized to repurchase bond
debentures and pay off the majority of the Tower Radiology promissory note.
The Company's future payments for debt and equipment under capital lease for the
next five years, assuming lines of credit are paid in the first year and not
renewed, will be approximately $38,735,000, $21,860,000, $18,150,000,
$14,085,000 and $11,200,000, respectively. Interest expense [excluding lines of
credit and bond debenture interest] for the next five years, included in the
above payments, will be approximately $6,215,000, $4,950,000, $3,365,000,
$2,015,000 and $945,000, respectively. In addition, the Company has
non-cancelable operating leases for the use of its facilities and certain
medical equipment which will average approximately $3,900,000 in annual payments
over the next five years.
17
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
Item 2: Changes in Securities and Use of Proceeds
The following securities were issued:
[a] May 21, 1999 an option to purchase 500,000 shares of the Company's
common stock was issued.
[b] The option was issued to John V. Crues, III, M.D., medical director of
the Company.
[c] The consideration was the continuing employment of the issuee by the
Company and termination of existing options to purchase 268,197 shares of the
Company's common stock, exercisable at a higher price than those issued hereby.
[d] The option is exempt from registration as a private offering pursuant
to Section 4(1) of the Securities Act of 1933, as amended.
[e] The option is exercisable at a price of $.15 per share at any time
during the five years ending May 20, 2004 or upon termination of the issuee's
employment with the Company, whichever shall first occur.
[f] Inapplicable.
18
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Primedex Health Systems, Inc. and Affiliates
(Registrant)
October 12, 1999 By:/s/ Howard G. Berger
------------------------------------------
Howard G. Berger, M.D., President, Principal
Executive Officer and Financial Officer and Director
19
<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> 9-mos
<FISCAL-YEAR-END> Oct-31-1999
<PERIOD-END> Jul-31-1999
<CASH> 35,955
<SECURITIES> 0
<RECEIVABLES> 15,584,012
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,970,327
<PP&E> 33,996,239
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,905,307
<CURRENT-LIABILITIES> 50,093,736
<BONDS> 0
0
0
<COMMON> 407,577
<OTHER-SE> (63,643,995)
<TOTAL-LIABILITY-AND-EQUITY> 67,905,307
<SALES> 0
<TOTAL-REVENUES> 53,613,261
<CGS> 0
<TOTAL-COSTS> 53,374,007
<OTHER-EXPENSES> 1,544,145
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,899,104
<INCOME-PRETAX> (9,210,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,210,423)
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<EXTRAORDINARY> 1,384,244
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<NET-INCOME> (7,826,179)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
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