<PAGE>
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, 2000 Commission File Number 0-19019
------------- -------
PRIMEDEX HEALTH SYSTEMS, INC.
-----------------------------
(Exact name of registrant as specified in charter)
New York 13-3326724
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(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 September 8,
2000 was 39,132,760 [excluding treasury shares].
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders
Primedex Health Systems, Inc.
We have reviewed the consolidated balance sheet of Primedex Health Systems, Inc.
and Affiliates as of July 31, 2000 and the related consolidated statements of
operations and cash flows for the three and nine months then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of the interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Primedex Health Systems, Inc. and
Affiliates as of October 31, 1999, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year then ended not
presented herein; and in our report dated January 28, 2000, we expressed an
unqualified opinion on those consolidated financial statements, with emphasis
regarding substantial doubt about the Company's ability to continue as a going
concern [See Note 10 herein]. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of October 31, 1999, is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
September 8, 2000
1
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
JULY 31, OCTOBER 31,
------------- -------------
2000 1999
---- ----
(UNAUDITED)
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,967 $ 2,638
Accounts receivable, net 18,680,452 16,694,368
Unbilled receivables and other receivables 686,966 441,208
Due from related party 326,395 206,200
Other 942,297 1,628,999
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Total current assets 20,641,077 18,973,413
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PROPERTY AND EQUIPMENT, net 42,088,508 37,666,620
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OTHER ASSETS:
Accounts receivable, net 3,502,990 3,040,416
Due from related parties 94,192 87,795
Goodwill, net 18,228,315 10,594,678
Other 1,432,888 1,883,917
------------- -------------
Total other assets 23,258,385 15,606,806
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$ 85,987,970 $ 72,246,839
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Cash overdraft $ 1,832,576 $ 2,353,667
Accounts payable, accrued expenses and other 13,659,567 15,085,479
Notes payable to related party 2,553,854 -
Current portion of notes and leases payable 46,137,228 39,341,714
Deferred revenue - 200,000
------------- -------------
Total current liabilities 64,183,225 56,980,860
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LONG-TERM LIABILITIES:
Subordinated debentures payable 19,803,000 20,037,000
Notes payable to related party - 2,553,854
Notes and leases payable, net of current
portion 63,774,208 54,882,513
Accrued expenses 327,989 283,024
Deferred revenue - 1,266,666
------------- -------------
Total long-term liabilities 83,905,197 79,023,057
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 507,210 440,063
------------- -------------
REDEEMABLE STOCK 160,000 160,000
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STOCKHOLDERS' DEFICIT (62,767,662) (64,357,141)
------------- -------------
$ 85,987,970 $ 72,246,839
============= =============
The accompanying notes are an integral part of these financial statements
2
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------- --------
2000 1999 2000 1999
------ ---- ------ ----
<S> <C> <C> <C> <C>
REVENUE
Revenue $ 59,187,616 $ 44,422,477 $ 166,846,653 $ 123,621,592
Less: Allowances 35,773,599 25,539,821 101,547,767 70,008,331
-------------- -------------- -------------- --------------
Net revenue 23,414,017 18,882,656 65,298,886 53,613,261
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Operating expenses 15,824,926 14,890,494 45,354,232 44,530,329
Depreciation and amortization 2,200,597 1,925,820 6,235,946 5,756,139
Provision for bad debts 1,154,673 957,334 3,277,682 2,608,893
Impairment loss on long-lived assets - - - 478,646
-------------- -------------- -------------- --------------
Total operating expenses 19,180,196 17,773,648 54,867,860 53,374,007
-------------- -------------- -------------- --------------
Income from operations 4,233,821 1,109,008 10,431,026 239,254
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest expense, net (3,191,581) (2,685,608) (9,212,497) (7,831,142)
Gain (loss) on sale of assets (17,065) 80,969 (12,078) (95,540)
Other 96,181 143,062 472,014 (1,516,567)
-------------- -------------- -------------- --------------
Total other expense (3,112,465) (2,461,577) (8,752,561) (9,443,249)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY
ITEM 1,121,356 (1,352,569) 1,678,465 (9,203,995)
-------------- -------------- -------------- --------------
MINORITY INTEREST IN
EARNINGS OF SUBSIDIARY (61,338) 3,949 (167,147) (6,428)
-------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 1,060,018 (1,348,620) 1,511,318 (9,210,423)
EXTRAORDINARY ITEM-GAIN
FROM EXTINGUISHMENT OF
DEBT (net of income taxes of $-0-) 74,218 - 129,325 1,384,244
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 1,134,236 $ (1,348,620) $ 1,640,643 $ (7,826,179)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------- --------
2000 1999 2000 1999
------ ---- ------ ----
<S> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS
PER SHARE:
Income (loss) before extraordinary gain .03 (.03) .04 (.24)
Extraordinary gain .00 .00 .00 .04
-------------- -------------- -------------- --------------
BASIC AND DILUTED NET
INCOME (LOSS) PER SHARE $ .03 $ (.03) $ .04 $ (.20)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 38,969,717 38,932,760 38,945,169 38,985,615
============== ============== ============== ==============
DILUTED 40,193,872 38,932,760 39,658,399 38,985,615
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock, $.01 par value
----------------------------
100,000,000 shares authorized Treasury Stock, at cost
----------------------------- Paid-in -----------------------
Shares Amount Capital Shares Amount
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE - OCTOBER 31, 1999 40,757,760 $ 407,577 $ 99,336,645 (1,825,000) $ (694,947)
Discounted note, net - - - - -
Issuance of Common Stock 200,000 2,000 28,000 - -
Net income - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCE - JULY 31, 2000
(Unaudited) 40,957,760 $ 409,577 $ 99,364,645 (1,825,000) $ (694,947)
============== ============== ============== ============== ==============
</TABLE>
continued below
<TABLE>
<CAPTION>
Stock Total
Accumulated Due from Subscription Stockholders'
Deficit Related Party Receivable Deficit
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE - OCTOBER 31, 1999 $(162,546,182) $ (830,234) $ (30,000) $ (64,357,141)
Discounted note, net - (51,164) - (51,164)
Issuance of Common Stock - - (30,000) -
Net income 1,640,643 - - 1,640,643
-------------- -------------- -------------- --------------
BALANCE - JULY 31, 2000
(UNAUDITED) $(160,905,539) $ (881,398) $ (60,000) $ (62,767,662)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
<TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED
-----------------
JULY 31,
--------
2000 1999
---- ----
<S> <C> <C>
NET CASH FROM OPERATING ACTIVITIES $ 5,484,671 $ 1,127,720
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of imaging centers - net of cash acquired - (100,000)
Purchase of property and equipment (3,382,412) (4,785,209)
Proceeds from sale of divisions, centers, and equipment 980,000 977,000
Loan fees (50,000) (108,750)
Loans to related parties (105,000) (55,000)
------------- -------------
Net cash from investing activities (2,557,412) (4,071,959)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft (521,090) 488,112
Principal payments on notes and leases payable (8,584,449) (10,952,930)
Proceeds from short-term and long-term borrowings 6,402,289 13,872,732
Purchase of treasury stock - (50,000)
Purchase of subordinated debentures (121,680) (337,215)
Joint venture distribution (100,000) (100,000)
------------- -------------
Net cash from financing activities (2,924,930) 2,920,699
------------- -------------
NET INCREASE IN CASH 2,329 (23,540)
CASH, beginning of period 2,638 59,495
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CASH, end of period $ 4,967 $ 35,955
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,946,124 $ 7,841,416
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Income taxes $ - $ -
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</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 2000 AND 1999
--------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The
Company entered into capital leases or financed equipment through notes payable
for approximately $3,150,000 and $7,400,000 for the nine months ended July 31,
2000 and 1999, respectively.
During the nine months ended July 31, 2000, the Company acquired three
hospital-based MRI centers, previously sold to Diagnostic Health Services, Inc.
["DHS"] in 1997, for approximately $14.2 million in notes payable. As part of
the transaction, the Company recorded net accounts receivable of approximately
$917,000, net property and equipment of approximately $3,380,000 and goodwill of
approximately $8,240,000. In addition, the Company wrote-off deferred revenue
related to covenants not-to-compete with DHS of approximately $1,350,000 and
other liabilities of approximately $305,000.
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 an accrued expense.
During the nine months ended July 31, 1999, the Company recorded goodwill
and notes payable of approximately $429,000 to acquire DIS common stock.
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, 2000, an officer of the Company
exercised his stock options to acquire 200,000 of the Company's common stock at
$.15 per share, or $30,000. The entire amount was borrowed from the Company,
bears interest at 7% and is due on or before May 3, 2002.
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, 1999, the Company recognized purchase
discount income related to film purchases [offset against operating expenses] of
approximately $380,000.
The accompanying notes are an integral part of these financial statements
7
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENATATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. They have been reviewed by the Company's independent auditors in
accordance with the professional standards and procedures as set forth in
Statement of Auditing Standards No. 71 (SAS 71). SAS 71 procedures for
conducting a review of interim financial information generally are limited to
inquiries and analytical procedures concerning significant accounting matters
relating to the financial information to be reported. They do not include all
information and footnotes necessary for a fair presentation of financial
position and results of operations and cash flows in conformity with generally
accepted accounting principles. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes contained in the Company's Annual Report on Form 10-K for the year ended
October 31, 1999. In the opinion of Management, all adjustments considered
necessary for a fair presentation have been included in the interim period.
Operating results for the three and nine months ended July 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 2000.
NOTE 2 - NATURE OF BUSINESS
Primedex Health Systems, Inc., incorporated on October 21, 1985, provides
diagnostic imaging services in the state of California.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Primedex Health Systems, Inc.; Radnet Management, Inc.;
Diagnostic Imaging Services, Inc. ["DIS"] and Radnet Managed Imaging Services,
Inc. ["RMIS"] (collectively referred to as "the Company"). Radnet Management,
Inc. is combined with Beverly Radiology Medical Group ["BRMG"] and consolidated
with Radnet Sub, Inc., Tower Imaging Heartcheck, Woodward Park Imaging Center,
SoCal MR Site Management, Inc. and Westchester Imaging Group (a joint venture).
Operating activities of subsidiary entities are included in the accompanying
financial statements from the date of acquisition. All intercompany transactions
and balances have been eliminated in consolidation and combinations.
Medical services and supervision at most of the Company's imaging centers
are provided through BRMG and through other independent physicians and physician
groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly
Radiology Medical Group, both of which are 99% owned by a shareholder and
president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical
and administrative services to BRMG for which they receive a management fee.
Other 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, 1999 as filed with the Securities and Exchange Commission.
NOTE 4 - BUSINESS COMBINATIONS - ACQUISITIONS, SALES AND DIVESTITURES
In November 1999, the Company opened Los Coyotes Imaging in Long Beach,
California, a start-up facility providing MRI, CT, nuclear medicine and
diagnostic x-ray services.
8
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - BUSINESS COMBINATIONS - ACQUISITIONS, SALES AND DIVESTITURES
(CONTINUED)
In April 2000, the Company entered into a management service arrangement
with Heartcheck America and opened Tower Imaging Heartcheck in a suite adjacent
to its Roxsan facility. The center performs coronary artery screenings for
calcification on an Electron Beam Cat Scan ["EBCT"] for early detection of heart
disease.
In June 2000, the Company formed SoCal MR Site Management, Inc. and
acquired the businesses and some of the assets of three hospital-based MRI
facilities; Tarzana MRI ["Tarzana"], Chino Valley MRI ["Chino"] and San Gabriel
Valley MRI ["SGV"], formerly sold to Diagnostic Health Services, Inc. ["DHS"] in
1997, for $14.2 million in notes payable.
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%.
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 operation's four facilities located in Ventura (2 sites), Oxnard
and Camarillo ("Loma Vista" collectively) for approximately $4,800 per month.
During the nine months ended July 31, 2000, the Camarillo facility was closed
and consolidated with the Company's other site in the same city.
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 Imaging" collectively) for $10,200 per month.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of goodwill recorded at cost of $22,845,935, less
accumulated amortization of $4,617,620 as of July 31, 2000. Amortization expense
of approximately $608,000 and $540,000 was recognized for the nine months ended
July 31, 2000 and 1999, respectively. Goodwill is amortized over 20 years.
During the nine months ended July 31, 2000, the Company recorded goodwill
of approximately $8,240,000 related to the acquisition of Tarzana, Chino and
SGV. During the nine months ended July 31, 1999, the Company recorded goodwill
in connection with the acquisition of additional shares of DIS stock of
approximately $478,000 which was written off as impairment losses.
NOTE 6 - SUBORDINATED DEBENTURES
In June of 1993, the Company's registration 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 $3,000,000 associated with the original
offering are being amortized over ten years to result in a constant yield. The
unamortized portion is classified as other assets. The debentures are
convertible into shares of common stock at any time before the maturity into
$1,000 principal amounts at a conversion price of $10 per share through June
1999 and $12 per share thereafter. As debentures are being converted or retired,
a pro-rata share of the offering costs are written-off.
9
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - SUBORDINATED DEBENTURES (continued)
Amortization expense of the offering costs for the nine months ended July
31, 2000 and 1999 was approximately $173,000 and $175,000, respectively.
Interest expense for the nine months ended July 31, 2000 and 1999 was
approximately $1,500,000 for each period.
During the nine months ended July 31, 2000 and 1999, the Company
repurchased debentures with face amounts of $234,000 and $676,000 for $121,680
and $337,215 resulting in gains on early extinguishments of $112,320 and
$338,785, respectively. In connection with these transactions, $7,868 and
$34,375 of net offering costs were written-off during the nine months ended July
31, 2000 and 1999, respectively.
NOTE 7 - CAPITAL TRANSACTIONS
During the nine months ended July 31, 2000, an officer of the Company
exercised his stock options to acquire 200,000 of the Company's common stock at
$.15 per share, or $30,000. The entire amount was borrowed from the Company,
bears interest at 7% and is due on or before May 3, 2002.
During the nine months ended July 31, 1999, debentures totaling $5,000 were
converted into 500 shares of common stock.
During the year ended October 31, 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. In January 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 lent the former officer $30,000, with interest at 6.5%, which is
classified as stock subscription receivable on the Company's financial
statements.
During the nine months ended July 31, 1999, the Company repurchased 200,000
shares from the former officer at $.40 per share under a stock repurchase
agreement. 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 was paid during the year ended October 31, 1999.
NOTE 8 - RELATED PARTY TRANSACTIONS
The amount due from related party relates to a $6,000,000 note receivable
issued in connection with the acquisition of Radnet. The outstanding balance of
$1,000,000, classified as stockholders' equity, is discounted at 8% and due
February 2001. The note is secured by the stock of the Company, which was issued
in connection with the Radnet acquisition.
The notes payable to related parties of $2,553,854 are due to an officer
and and employee of the Company. The notes bear interest at 6.58% annually and
the outstanding principal is due June 2001. During the nine months ended July
31, 2000 and 1999, interest expense was approximately $126,000 for each period.
During the nine months ended July 31, 2000, the Company loaned $30,000 to
an officer of the Company to purchase 200,000 of the Company's common stock at
$.15 per share per his stock options. The note bears interest at 7% and is due
on or before May 3, 2002.
At October 31, 1999, the Company had total advances made to one officer of
the Company of $195,000 due within one year. During the nine months ended July
31, 2000, the Company advanced an additional $105,000 to this officer with the
same terms. The advances bear interest at 6.5%
10
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
At October 31, 1999, the Company had total loans to a former officer of the
Company of $105,000 due within four years with interest at 6.5% of which $30,000
was used to purchase Company stock and classified as stock subscription
receivable.
NOTE 9 - SUBSEQUENT EVENTS
At the Company's North County facility ["San Diego"], the current building
lease expires October 31, 2000 and the Company was unable to obtain an option to
extend its term. Due to this, the Company acquired space in nearby Oceanside,
California and entered into a building lease for approximately $3,702 per month
until November 2005. The site will be operational in September 2000.
On August 30, 2000, the Company's newly formed subsidiary Radnet Management
I, Inc. acquired the assets of two open MRI centers in San Francisco and
Emeryville, California for $3.3 million in notes payable. In conjunction with
the transaction, the Company closed its other site in San Francisco at 450
Sutter Street and consolidated its business at the new center.
On August 7, 2000, the Company amended the loan and security agreement with
Coast Business Credit increasing the maximum line to $22,000,000 [limited to the
aggregate cash receipts for the preceding 120 days] and extending the loan's due
date to December 31, 2003. In addition, the President and C.E.O.'s personal
guarantee was increased to $10,000,000.
NOTE 10 - 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 a
deficiency in equity of $62,768,000 and a working capital deficiency of
$43,542,000, which raise substantial doubt about its ability to continue as a
going concern. Over the past several years, management has been addressing the
issues that have lead to these deficiencies. Results of management's plans and
efforts have been positive, as indicated by the recent improvement in operating
income; however, continued effort is planned in the future to allow the Company
to continue to operate and ultimately return the Company to sustained
profitability. Such actions and plans include:
Increase revenue by selectively opening imaging centers in areas currently
not served by the Company. In November 1999, the Company opened a new center in
Long Beach, California which has experienced favorable performance in its
initial months of operations. In June 2000, the Company acquired three MRI
centers previously sold to DHS in 1997 and expects very favorable results from
all three facilities. In August 2000, the Company acquired two open MRI centers
in Northern California and closed one nearby facility consolidating its business
at the new site.
Increase revenue by negotiating new and existing managed care contracts for
additional services and more favorable terms. In the nine months ended July 31,
2000, the Company entered into 2 new capitation contracts that will
significantly increase business in at least four Southern California facilities.
Increase revenue through new fee for service arrangements where
opportunities exist. In the nine months ended July 31, 2000, the Company was
successful in negotiating new fee for service arrangements that will increase
patient volume in four Southern California facilities.
11
<PAGE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - GOING CONCERN (CONTINUED)
Consolidate underperforming facilities to reduce operating cost
duplication.
Continue to evaluate all facilities' operations and trim excess operating
costs as well as general and administrative costs where it is feasible to do so.
Continue to selectively acquire new medical equipment and replace old and
obsolete equipment in order to increase service volume and throughput at many
facilities. In 1999, this was done in many of the facilities, resulting in
increased revenue.
Selectively seek opportunities to hire physicians who have the requisite
skills and knowledge to deliver new and additional services where deficiencies
have been identified in underperforming facilities.
Continue to work with lessors and lenders to extend terms of leases and
financing to accommodate cash flow requirements for ongoing agreements and upon
the expiration of leases and notes. The Company has demonstrated success doing
so in the past, and in December 1999, successfully refinanced a portion of
existing notes and obtained additional working capital.
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"] [formerly CCC Franchising Corp.] was
incorporated on October 21, 1985.
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. The sale resulted in a loss of approximately
$3,800,000.
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, 2000 and 1999 include the operations and cash transactions of
Radnet.
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 $13,500,000 in cash, notes and
assumed liabilities. The sale resulted in a gain of approximately $10,400,000.
The Company continues to operate RMIS which provides utilization review
services. The Statements of Operations and Cash Flows for the nine months ended
July 31, 1999 reflect the overhead costs and cash transactions of RMIS.
Effective January 1, 1999, RMIS's operations and services 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 4,130,000 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 September 8, 2000, the Company acquired an
additional 3,472,137 shares of DIS stock from various related and unrelated
parties for $4,181,841 in cash and notes payable increasing its total ownership
to approximately 90%. The Statements of Operations and Cash Flows for the nine
months ended July 31, 2000 and 1999 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 [The
Company is currently working with DVI to extend the due date to October 31,
2003]. In the transaction, the Company recorded financing costs of $5,207,900
which were charged to operations during the year ended October 31, 1998.
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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, 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 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.
DISCUSSION OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2000 VS. JULY 31,
1999
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 nine months ended July 31, 2000 and 1999.
During the nine months ended July 31, 2000 and 1999, the Company generated
income from operations of approximately $10,430,000 and $240,000, respectively.
During the nine months ended July 31, 2000 and 1999, the Company realized net
revenues of approximately $65,300,000 and $53,610,000, respectively.
During the nine months ended July 31, 2000 and 1999, Radnet realized net
revenues of approximately $55,175,000 and $44,620,000, respectively, and DIS
realized net revenues of approximately $10,125,000 and $8,990,000, respectively.
The primary reasons for the improvement in net revenue was due to the addition
of new equipment increasing throughput and procedural exam volume, the addition
of new capitation contracts including St. Josephs and St. Judes benefiting the
Orange County region, the renegotiation of exisiting capitation and fee for
service contracts improving reimbursement, the addition of new sites in Long
Beach, Tarzana, San Gabriel Valley and Chino, California, and increased demand
for imaging services throughout the healthcare industry due to an improved
economy.
During the nine months ended July 31, 2000 and 1999, the Company incurred
operating expenses of approximately $54,870,000 and $53,375,000, respectively.
14
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
For the nine months ended July 31, 2000 and 1999, Radnet's operating expenses
were approximately $45,865,000 and $42,325,000, respectively, DIS's operating
expenses were approximately $7,225,000 and $9,420,000, respectively, RMIS's
operating expenses were approximately $-0- and $40,000, respectively, and PHS's
operating expenses were approximately $1,780,000 and $1,590,000, respectively.
With the increase in net revenue, the Company's variable expenses did not
increase proportionately due to efficiencies created with the consolidation of a
portion of Tower's operation at its new Wilshire site, the addition of new
equipment which reduced repair and maintenance costs, the reduction of legal
expenditures related to litigation matters (coupled with reimbursement of legal
expenditures from the Company's insurance policies), and the reduction of film
costs with increased purchase discounts and the introduction of filmless systems
at a number of the Company's busiest facilities. In addition, during the nine
months ended July 31, 1999, DIS's operating expenses included approximately
$479,000 for the write-off of additional shares of DIS stock acquired in
December 1998.
During the nine months ended July 31, 2000 and 1999, the Company's operating
expenses consisted of approximately $25,920,000 and $23,105,000, respectively,
for salaries and reading fees, approximately $4,640,000 and $4,510,000,
respectively, for building and equipment rentals, approximately $14,795,000 and
$16,915,000, respectively, in general and administrative expenditures,
approximately $6,235,000 and $5,755,000, respectively, in depreciation and
amortization, approximately $3,280,000 and $2,610,000, respectively, for
provisions for bad debt, and approximately $-0- and $480,000 attributable to the
recognition of an impairment loss, pursuant to FASB 121, for the write-down of
acquisition stock related to DIS.
During the nine months ended July 31, 2000 and 1999, net interest expense was
approximately $9,210,000 and $7,830,000, respectively.
During the nine months ended July 31, 2000, the Company recognized other income
of approximately $475,000. During the nine months ended July 31, 1999, the
Company recognized other expense [net of other income] of approximately
$1,515,000 which included $1,755,995 of settlement costs related to litigation
matters. During the nine months ended July 31, 2000 and 1999, the Company
realized net losses from the sale or disposal of equipment of approximately
$12,000 and $95,000, respectively.
During the nine months ended July 31, 2000, the Company realized extraordinary
gains of approximately $130,000 for the repurchase of subordinated bond
debentures and the settlement of limited partner notes at a discount. During the
nine months ended July 31, 1999, the Company realized extraordinary gains of
approximately $1,385,000 which included gains of approximately $339,000 for the
repurchase and retirement of subordinated bond debentures and approximately
$1,037,000 for the discounted pre-payment of Tower Goodwill. The Company
utilized its additional line of credit agreement with DVI Business Credit to
settle the majority of its obligation from the Tower acquisition ["Tower
Goodwill"] 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%.
During the nine months ended July 31, 2000, the Company recognized net income of
approximately $1,640,000. During the nine months ended July 31, 1999, the
Company had net losses of approximately $7,825,000.
15
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash increased for the nine months ended July 31, 2000 by approximately $2,000.
Cash decreased for the nine months ended July 31, 1999 by approximately $24,000.
Cash utilized for investing activities for the nine months ended July 31, 2000
and 1999 was approximately $2,560,000 and $4,070,000, respectively. For the nine
months ended July 31, 2000 and 1999, the Company paid loan fees of approximately
$50,000 and $110,000, respectively, purchased property and equipment for
approximately $3,385,000 and $4,785,000, respectively, received proceeds from
the sale or trade-in of equipment for $980,000 in each period, and loaned
$105,000 and $55,000, respectively, to related parties. In addition, during the
nine months ended July 31, 1999, the Company acquired assets and additional DIS
stock for approximately $100,000.
Cash utilized for financing activities for the nine months ended July 31, 2000
was approximately $2,925,000. Cash generated from financing activities for the
nine months ended July 31, 1999 was approximately $2,920,000. During the nine
months ended July 31, 2000 and 1999, the Company made principal payments on
capital leases and notes payable of approximately $8,585,000 and $10,955,000,
respectively, received proceeds from borrowing under existing lines of credit
and refinancing arrangements of approximately $6,400,000 and $13,875,000,
respectively, distributed $100,000 in each period to its joint venture partner,
and repurchased subordinated debentures for approximately $120,000 and $340,000,
respectively. In addition, during the nine months ended July 31, 2000, the
Company decreased its cash overdraft by approximately $520,000, and during the
nine months ended July 31, 1999, the Company purchased common stock per an
exercised stock put for $50,000 and increased its cash overdraft by
approximately $490,000. During the nine months ended July 31, 1999, the Company
entered into an additional line of credit with DVI Business Credit and borrowed
approximately $3,360,000 to repurchase bond debentures and pay off the majority
of the Tower Radiology promissory note.
At July 31, 2000, the Company had a working capital deficit of $43,542,148 as
compared to a working capital deficit of $38,007,447 at October 31, 1999, an
increased deficit of $5,534,701. Included in current liabilities of the Company
at July 31, 2000 and October 31, 1999 are approximately $25.7 million and $21.6
million, respectively, of revolving lines of credit liabilities.
The Company's future payments for debt and equipment under capital lease for the
next five years will be approximately $53,300,000, $20,370,000, $19,815,000,
$17,185,000 and $10,070,000, respectively. Interest expense, excluding interest
expense on operating lines of credit and acquisition notes payable, for the
Company for the next five years, included in the above payments, will be
approximately $7,170,000, $5,715,000, $4,195,000, $2,670,000 and $1,455,000,
respectively. Interest on subordinated bond debentures is excluded. The Company
estimates interest on its bond debentures to be approximately $2,000,000 for the
next twelve month period. In addition, the Company has noncancellable 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.
Effective March 1, 2000, the Company entered into a maintenance agreement with
GE Medical Systems until October 2003 for the majority of its medical equipment
for a fee based upon a percentage of net revenues with minimum aggregate net
revenue requirements. The service fee ranges from 2.82% to 3.67% of net revenue
and the aggregate minimum net revenue ranges from $85,000,000 to $95,000,000
during the term of the agreement. As of July 31, 2000, the monthly service fees
were approximately $200,000 per month.
16
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
The Company's working capital needs are currently provided under three lines of
credit.
Under one agreement with Coast Business Credit, due December 31, 2001, the
Company may borrow the lesser of 75% to 80% of eligible accounts receivable, the
prior 120-days' cash collections or $20,000,000. In any scenario, the Company
may 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. 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, 2000, approximately $16,780,000 was outstanding under this
line. On August 7, 2000, the Company amended the loan and security agreement
with Coast Business Credit increasing the maximum line to $22,000,000 [limited
to the aggregate cash receipts for the preceding 120 days] and extending the
loan's due date to December 31, 2003. In addition, the President and C.E.O.'s
personal guarantee was increased to $10,000,000.
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 equal to the bank's prime rate plus
1.0%. At July 31, 2000, approximately $5,280,000 was outstanding under this
line, which was over the borrowing base by approximately $755,000 and over the
line availability by approximately $280,000. DVI Business Credit continues to
advance funds to the Company and is not presently charging over advance fees.
The Company entered into an additional line of credit with DVI Business Credit,
due October 31, 2000, where 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. Effective January 1,
2000, the line of credit agreement was amended and monthly payments were
suspended and interest was accrued on the outstanding principal balance until
payments resumed on July 1, 2000. At July 31, 2000, approximately $3,615,000 was
outstanding under this line.
The Company is in the process of extending the two lines of credit with DVI
Business Credit to October 31, 2003. The Company will continue to work with
lessors and lenders to extend terms of leases and financing to accommodate cash
flow requirements for ongoing agreements and upon the expiration of leases and
notes.
17
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Annual Meeting of Stockholders held June 23, 2000.
(b) The directors elected at the meeting and whose terms extend beyond
the meeting are:
Howard G. Berger, M.D.
John V. Crues, III, M.D.
Norman R. Hames
(c) Matters voted upon and the votes cast at the meeting were as
follows:
(i) Directors:
Nominee For Against
------- --- -------
Howard G. Berger, M.D. 33,466,195 0
John V. Crues, III, M.D. 33,466,195 0
Norman R. Hames 33,466,195 0
(ii) Adoption of the 2000 Long-Term Incentive Plan:
For Against Abstain
--- ------- -------
21,666,178 207,210 76,920
(d) Inapplicable
ITEM 5: OTHER INFORMATION.
As of September 1, 2000, the Company purchased the assets of two
existing and operating open MRI centers located in San Francisco and
Emeryville, California from an unrelated third party. The purchase
price for the two centers was $3,300,000 including equipment debt
assumption. The Company intends to relocate and consolidate its
existing San Francisco site at the location of the just purchased site
and increase its Northern California presence with the acquisition of
the Emeryville site.
18
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PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES
SIGNATURE
--------------------------------------------------------------------------------
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.
-----------------------------
(Registrant)
September 8, 2000 By: Howard G. Berger, M.D.
----------------------
Howard G. Berger, M.D., President,
Treasurer and Principal Financial Officer
19
