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 January 31, 2002 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 March 18, 2002 was 40,739,860 [excluding treasury shares].
<TABLE> PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - ------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------ <CAPTION> JANUARY 31, OCTOBER 31, 2002 2001 -------------- -------------- ASSETS (UNAUDITED) <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 3,000 $ 40,000 Accounts receivable, net 28,795,000 28,764,000 Unbilled receivables and other receivables 444,000 133,000 Due from related party 70,000 94,000 Deferred income taxes 5,235,000 5,235,000 Other 2,504,000 1,328,000 -------------- -------------- Total current assets 37,051,000 35,594,000 -------------- -------------- PROPERTY AND EQUIPMENT, NET 74,840,000 65,368,000 -------------- -------------- OTHER ASSETS: Accounts receivable, net 2,501,000 2,499,000 Due from related parties 39,000 60,000 Goodwill, net 24,064,000 24,064,000 Other 856,000 844,000 -------------- -------------- Total other assets 27,460,000 27,467,000 -------------- -------------- $ 139,351,000 $ 128,429,000 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Cash disbursements in transit $ 2,613,000 $ 3,804,000 Accounts payable and accrued expenses 21,409,000 19,361,000 Income taxes payable -- 125,000 Notes payable to related party 44,000 119,000 Current portion of notes and leases payable 42,812,000 39,172,000 -------------- -------------- Total current liabilities 66,878,000 62,581,000 -------------- -------------- LONG-TERM LIABILITIES: Subordinated debentures payable 16,303,000 16,303,000 Notes payable to related party 1,330,000 1,330,000 Notes and leases payable, net of current portion 97,579,000 90,569,000 Accrued expenses 824,000 1,986,000 -------------- -------------- Total long-term liabilities 116,036,000 110,188,000 -------------- -------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 892,000 1,142,000 -------------- -------------- REDEEMABLE STOCK -- 160,000 -------------- -------------- STOCKHOLDERS' DEFICIT (44,455,000) (45,642,000) -------------- -------------- $ 139,351,000 $ 128,429,000 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 1 </TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - -------------------------------------------------------------------------------- THREE MONTHS ENDED ------------------ JANUARY 31, ----------- 2002 2001 ------------- ------------- REVENUE Revenue $ 84,120,000 $ 60,778,000 Less: Allowances 51,679,000 36,668,000 ------------- ------------- Net revenue 32,441,000 24,110,000 ------------- ------------- OPERATING EXPENSES Operating expenses 23,571,000 16,871,000 Depreciation and amortization 3,333,000 2,358,000 Provision for bad debts 1,200,000 668,000 ------------- ------------- Total operating expenses 28,104,000 19,897,000 ------------- ------------- Income from operations 4,337,000 4,213,000 ------------- ------------- OTHER INCOME (EXPENSE) Interest expense, net (3,798,000) (3,338,000) Gain on sale of equipment 10,000 1,000 Other income, net 319,000 120,000 ------------- ------------- Total other expense (3,469,000) (3,217,000) ------------- ------------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 868,000 996,000 ------------- ------------- MINORITY INTEREST IN EARNINGS OF SUBSIDIARY 49,000 (78,000) ------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM 917,000 918,000 EXTRAORDINARY ITEM-GAIN FROM EXTINGUISHMENT OF DEBT (NET OF INCOME TAXES OF $-0-) -- 5,000 ------------- ------------- NET INCOME $ 917,000 $ 923,000 ============= ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 2
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - -------------------------------------------------------------------------------- THREE MONTHS ENDED ------------------ JANUARY 31, ----------- 2002 2001 -------------- -------------- BASIC EARNINGS PER SHARE: Income before extraordinary gain .02 .02 Extraordinary gain .00 .00 -------------- -------------- BASIC NET INCOME PER SHARE: $ .02 $ .02 ============== ============== DILUTED EARNINGS PER SHARE: Income before extraordinary gain .02 .02 Extraordinary gain .00 .00 -------------- -------------- DILUTED NET INCOME PER SHARE: $ .02 $ .02 ============== ============== WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 40,732,640 39,284,135 ============== ============== DILUTED 41,435,041 40,164,477 ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 3
<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 Stock ------------------------------ Paid-in ------------------------------- Accumulated Shares Amount Capital Shares Amount Deficit -------------- -------------- -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> <C> <C> BALANCE - OCTOBER 31, 2001 42,432,010 $ 425,000 $ 100,108,000 (1,825,000) $ (695,000) $(145,432,000) Issuance of Common Stock 132,850 1,000 79,000 -- -- -- Retirement of Redeemable Stock -- -- 160,000 -- -- -- Payment of Subscription Receivable -- -- -- -- -- -- Net income -- -- -- -- -- 917,000 -------------- -------------- -------------- -------------- -------------- -------------- BALANCE - JANUARY 31, 2002 (UNAUDITED) 42,564,860 $ 426,000 $ 100,347,000 (1,825,000) $ (695,000) $(144,515,000) ============== ============== ============== ============== ============== ============== (CONTINUED BELOW) Total Subscription Stockholders' Receivable Deficit -------------- -------------- BALANCE - OCTOBER 31, 2001 $ (48,000) $ (45,642,000) Issuance of Common Stock -- 80,000 Retirement of Redeemable Stock -- 160,000 Payment of Subscription Receivable 30,000 30,000 Net income -- 917,000 -------------- -------------- BALANCE - JANUARY 31, 2002 (UNAUDITED) $ (18,000) $ (44,455,000) ============== ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 4 </TABLE>
<TABLE> PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - ------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------------------ <CAPTION> THREE MONTHS ENDED ------------------ JANUARY 31, ------- --- 2002 2001 ------------ ------------ <S> <C> <C> NET CASH FROM OPERATING ACTIVITIES $ 5,460,000 $ 1,578,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,269,000) (545,000) Loan fees (5,000) (5,000) Payments from related parties 53,000 -- Loans to related parties -- (75,000) ------------ ------------ Net cash used by investing activities (2,221,000) (625,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Cash disbursements in transit (1,190,000) 488,000 Principal payments on notes and leases payable (4,577,000) (3,155,000) Proceeds from short-term and long-term borrowings 2,766,000 1,682,000 Proceeds from issuance of common stock -- 18,000 Payments to related parties (75,000) -- Joint venture distribution (200,000) -- ------------ ------------ Net cash used by financing activities (3,276,000) (967,000) ------------ ------------ NET DECREASE IN CASH (37,000) (15,000) CASH, beginning of period 40,000 36,000 ------------ ------------ CASH, end of period $ 3,000 $ 21,000 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 3,500,000 $ 3,369,000 ------------ ------------ Income taxes $ -- $ -- ------------ ------------ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 5 </TABLE>
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------- THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 - -------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The Company entered into capital leases or financed equipment through notes payable for $10,461,000 and $410,000 for the three months ended January 31, 2002 and 2001, respectively. Effective January 19, 2001, the Company settled five of its outstanding notes payable related to the historical acquisition of DIS common stock from unrelated third parties. The debt was reduced by warrants issued with the notes payable that were exercised for 920,100 shares of the Company's common stock at $.25 per share, or $230,000. On December 29, 2000, the Company renegotiated two of its existing notes payable with General Electric Company ["GE"] aggregating $3,130,000 into a new promissory note with interest at 8.0% payable along with unpaid interest on December 29, 2005 for $4,664,000. As part of the transaction, the Company issued five-year warrants to purchase 779,000 shares of the Company's common stock at a price of $1.00 per share. The Company allocated $225,000 of the renegotiated notes to the warrants which represented the approximate interest discount GE gave the Company in consideration for the warrants when the rate was compared to other recent financing. Effective December 13, 2000, the Company's major lender, DVI Business Credit Corporation, agreed to convert a $5,542,000 note payable into a new series of non-voting convertible preferred stock on the basis of one share of preferred stock for each one dollar of debt canceled. Subsequent to January 31, 2001, but prior to October 31, 2001, the Company converted the preferred stock back into notes payable with accrued interest of approximately $235,000 accumulated into the new notes payable balances. In November 2001, the Company issued 132,850 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS 6
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 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 January 31, 2002 and 2001 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 related notes thereto contained in the Company's Annual Report on Form 10-K for the year ended October 31, 2001. The consolidated financial statements include the accounts of Primedex Health Systems, Inc., and its subsidiaries outlined as follows: o Radnet Management, Inc. ["Radnet"] Subsidiaries o Radnet Sub, Inc. ["Tower"], o Radnet Heartcheck Management, Inc., o Radnet Managed Imaging Services, Inc. ["RMIS"], o SoCal MR Site Management, Inc., o Radnet Management I, Inc., o Radnet Management II, Inc. ["Modesto"], o Westchester Imaging Group (a 50% joint venture), o Burbank Advanced Imaging Center, LLC (75%) o Diagnostic Imaging Services, Inc. ["DIS"] Both Radnet and DIS are combined with Beverly Radiology Medical Group III ["BRMG"] 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. NOTE 2 - NATURE OF BUSINESS Primedex Health Systems, Inc., incorporated on October 21, 1985, provides diagnostic imaging services through its 48 facilities. The Company arranges for the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology to the public. 7
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, effective for purchases after June 30, 2001 and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill [and intangible assets deemed to have indefinite lives] will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company implemented No. 142 in first quarter ended January 31, 2002. In connection with the adoption of No. 142, the Company performed a transitional goodwill impairment assessment and determined there would be no effect on the earnings and financial position of the Company at this time. Application of the nonamortization provisions of the Statement resulted in an increase in income of approximately $375,000 ($0.01 per share) for the quarter ended January 31, 2002. NOTE 4 - ACQUISITIONS, SALES AND DIVESTITURES Future imaging center openings: Effective November 26, 2001, the Company entered into a new building lease in Rancho Bernardo, California, near San Diego, for 9,557 square feet of space to develop a multi-modality imaging center providing MRI, CT, PET, mammography, ultrasound and x-ray services. The center, Rancho Bernardo Advanced Imaging Center, LLC, will be 75%-owned by the Company and 25%-owned by two physicians who will invest $250,000. The lease term is ten years from the anticipated opening date and completion of tenant improvements which is expected to be on or around June 1, 2002. The beginning monthly rental at that time will be approximately $12,000. Center openings: Effective January 1, 2002, the Company entered into a capitation arrangement with Primecare Medical Group for approximately 62,000 lives primarily benefiting the Company's Temecula Valley Imaging Center ["TVIC"]. The Company opened two additional facilities in Sun City and Lake Elsinore, California which will provide x-ray services to support the new contract. NOTE 5 - GOODWILL AND INTANGIBLE ASSETS Goodwill is recorded at cost of $30,330,000, less accumulated amortization of $6,266,000 as of January 31, 2002 and October 31, 2001. Other intangible assets consist of offering costs and loan fees which are expected to be fully amortized by June 2003 and December 2003, respectively. The Company implemented Statement of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets, effective November 1, 2001. Under the new rules, goodwill [and intangible assets deemed to have indefinite lives] will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Application of the nonamortization provisions of the Statement resulted in an increase in income of approximately $375,000 ($0.01 per share) for the quarter ended January 31, 2002. Amortization expense of approximately $300,000 was recognized for the three months ended January 31, 2001. 8
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6 - CAPITAL TRANSACTIONS In November 2001, the Company issued 132,800 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. Effective November 1, 2001, the Company issued 75,000 additional warrant shares at $.95 per share expiring on November 1, 2006. Effective November 1, 2001, the Company paid $40,000 to a former officer eliminating his options to require the Company to repurchase 400,000 shares under his separation agreement [stock put was classified as Redeemable Stock on the Company's financial statements]. The $40,000 was charged to other expenses. During November 2001, the Company received $30,000 as payment in full of a stock subscription receivable. Effective December 13, 2000, the Company's major lender, DVI Business Credit Corporation, agreed to convert a $5,542,000 note payable into a new series of non-voting convertible preferred stock on the basis of one share of preferred stock for each one dollar of debt canceled. Subsequent to January 31, 2001, but prior to October 31, 2001, the Company converted the preferred stock back into notes payable with accrued interest of approximately $235,000 accumulated into the new notes payable balances. On December 29, 2000, the Company renegotiated two of its existing notes with General Electric Company aggregating $3,130,000 into a new promissory note with interest at 8.0% payable along with unpaid interest on December 29, 2005 for $4,664,000. As part of the renegotiation, the Company issued five-year warrants to purchase 779,000 shares of the Company's common stock at a price of $1.00 per share. The Company allocated approximately $225,000 of the renegotiated notes to the warrants which represented the approximate interest discount GE gave the Company in consideration for the warrants when the rate was compared to other recent financing. Effective January 19, 2001, the Company settled five of its outstanding notes payable relating to the historical acquisition of DIS common stock from unrelated third parties. Warrants issued with the notes were exercised for 920,100 shares of the Company's common stock at $.25 per share, or $230,000. The remaining balance due of $568,000 was payable in four monthly installments with the final payment made on April 19, 2001. As part of the settlement, the Company issued a total of 150,000 warrants at $1.00 per share. NOTE 7 - RELATED PARTY TRANSACTIONS The amount due from related parties at October 31, 2001 consisted of notes to a current officer of the Company of approximately $18,000 [classified as Stock Subscription Receivable], short-term loans made to a current officer of the Company of approximately $94,000 to be repaid within one year, notes to a prior officer of the Company for $70,000 bearing interest at 6.5% [including $30,000 classified as Stock Subscription Receivable], and accrued interest of approximately $20,000. During the three months ended January 31, 2002, the Company received $30,000 from the prior officer as payment of his Stock Subscription Receivable, received $24,000 from another officer in repayment of short-term loans and forgave a portion of interest and debt from a prior officer of the Company of approximately $21,000. 9
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - RELATED PARTY TRANSACTIONS - CONTINUED The amount due to related parties at October 31, 2001 consisted of $1,330,000 of long-term notes payable due to an officer and employee of the Company for the purchase of DIS common stock in 1996 and $119,000 in short-term loans made by an officer to the Company. During the three months ended January 31, 2002, the Company repaid $75,000 to the officer for short-term loans. The long-term notes bear interest at 6.58% paid annually. During the three months ended January 31, 2002 and 2001, interest expense was approximately $22,000 and $42,000, respectively. NOTE 8 - LIQUIDITY 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. At January 31, 2002, the Company has a deficiency in equity of $44,455,000 compared to $45,642,000 as of October 31, 2001, and a working capital deficiency of $29,827,000 as of January 31, 2002 compared to a deficiency of $26,987,000 as of October 31, 2001. Over the past several years, management has been addressing the issues that have lead to these deficiencies, and the results of management's plans and efforts have been positive as indicated by improvement in operating income and profitability over the last two years. However, continued effort is planned in the future to allow the Company to continue to operate profitably. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In late November 2001, the Company opened a new center in Burbank and in January 2002, the Company opened a new center in Tarzana, California. o Increase revenue by negotiating new and existing managed care contracts for additional services and more favorable terms. The Company entered into a new capitation contract effective January 1, 2002 with Primecare Medical Group for approximately 62,000 lives primarily benefiting the Company's Temecula Valley Imaging Center ["TVIC"]. The Company opened two additional facilities in Sun City and Lake Elsinore, California which will provide x-ray services to support the new contract. January's net revenue at TVIC increased approximately 150% over the average prior two months after the implementation of the new contract. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursements fall short of the Company's costs. The Company has renegotiated several of its existing capitation contracts increasing net reimbursement for the current fiscal year. o 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 including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. 10
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 - LIQUIDITY (CONTINUED) o 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 past success in renegotiation of many of its existing notes payable and capital lease obligations by extending payment terms, reducing interest rates, reducing or eliminating monthly payments and creating long-term balloon payments. Subsequent to the quarter-end, the Company is currently renegotiating several notes payable with DVI to obtain working capital and extend payment terms. In addition, the Company financed historically accrued maintenance charges with General Electric for approximately $1,108,000 with payment terms of 35 months at 9.5%. o Continue its attempt to settle historical notes payable, subordinated bond debentures and other debt at a discount. 11
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GENERAL Primedex Health Systems, Inc. provides diagnostic imaging services through its 48 facilities throughout California. The Company arranges for the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology to the public. The consolidated financial statements include the accounts of Primedex Health Systems, Inc., and its subsidiaries outlined as follows: o Radnet Management, Inc. ["Radnet"] Subsidiaries o Radnet Sub, Inc. ["Tower"], o Radnet Heartcheck Management, Inc., o Radnet Managed Imaging Services, Inc. ["RMIS"], o SoCal MR Site Management, Inc., o Radnet Management I, Inc., o Radnet Management II, Inc., o Westchester Imaging Group (a 50% joint venture), o Burbank Advanced Imaging Center, LLC (75%) o Diagnostic Imaging Services, Inc. Both Radnet and DIS are combined with Beverly Radiology Medical Group III ["BRMG"] 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. 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 12
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. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2002 AND 2001 The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income bear to net revenue and the percentage dollar increase (decrease) of such items from period to period. <TABLE> <CAPTION> PERCENTAGE DOLLAR PERCENT OF NET REVENUE INCREASE THREE MONTHS ENDED JANUARY 31, (DECREASE) --------------------------------------- --------------------- 2002 2001 `01 TO `02 ------------------- ------------------- --------------------- <S> <C> <C> <C> Revenue 259.3% 252.1 % 38.4% Less: Allowances (159.3) (152.1) 40.9 ------------------- ------------------- --------------------- Net revenue 100.0 100.0 34.6 Operating expense Operating expenses (72.6) (70.0) 39.7 Depreciation and amortization (10.3) (9.8) 41.3 Provision for bad debts (3.7) (2.7) 79.6 ------------------- ------------------- --------------------- Total operating expense (86.6) (82.5) 41.2 ------------------- ------------------- --------------------- Income from operations 13.4 17.5 2.9 Interest expense, net (11.7) (13.9) 13.8 Other, net 1.0 0.5 171.9 ------------------- ------------------- --------------------- Income before minority interest 2.7 4.1 (12.9) and extraordinary item Minority interest 0.1 (0.3) 162.8 ------------------- ------------------- --------------------- Income before extraordinary item 2.8 3.8 0.1 Extraordinary item -- 0.0 (100.0) ------------------- ------------------- --------------------- Net income 2.8 3.8 (0.6) =================== =================== ===================== </TABLE> The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the three months ended January 31, 2002 compared to the three months ended January 31, 2001. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. 2002 2001 ---- ---- NET REVENUE $32,441,000 $ 24,110,000 - ----------- Net revenue increased approximately $8,331,000, or 34.6%, for the three months ended January 31, 2002, compared to the same period last year. Of the net revenue increase, 51.2% was due to the addition of eight new sites subsequent to January 31, 2001, offset by a 5.8% decrease due to the sale of the VROC facility in the second quarter of fiscal 2001. The remaining 54.6% increase was due to new contracts, renegotiation of existing contracts to more favorable rates, an improved economy with increasing population, and increased throughput at many 13
sites due to the upgrade of medical equipment. In particular were improvements at the Company's Tower and Riverside facilities where net revenue increased by approximately $759,000 and $743,000, respectively, during the three months ended January 31, 2002 versus the same period the prior year. OPERATING EXPENSES 2002 2001 - ------------------ ---- ---- OPERATING EXPENSES $ 23,571,000 $ 16,871,000 DEPRECIATION AND AMORTIZATION 3,333,000 2,358,000 PROVISION FOR BAD DEBTS 1,200,000 668,000 ------------- ------------- TOTAL OPERATING EXPENSES $ 28,104,000 $ 19,897,000 Operating expenses for the three months ended January 31, 2002 increased approximately $8,207,000, or 41.2%, compared to the same period last year. Of this increase, 60.5% is due to the addition of eight new sites subsequent to January 31, 2001, offset by a 3.4% decrease due to the sale of the Valley Regional Oncology Center ["VROC"] facility in the second quarter of fiscal 2001. The remaining 42.9% increase in operating expenses is primarily due to an increase in net revenue and the variable nature of many of the expense line items. Included in operating expenses for the three months ended January 31, 2002 and 2001 is approximately $14,228,000 and $9,901,000, respectively, for salaries and reading fees, approximately $2,055,000 and $1,732,000, respectively, for building and equipment rentals, and approximately $7,288,000 and $5,238,000, respectively, in general and administrative expenditures. Depreciation and amortization for the three months ended January 31, 2002 increased approximately $975,000, or 41.3%, compared to the same period last year. The increase is due to the addition of eight new sites subsequent to January 31, 2001 and the upgrade of addition of equipment throughout fiscal 2001. As of January 31, 2001, net property and equipment was approximately $43.3 million compared to approximately $74.8 million as of January 31, 2002. Provision for bad debt for the three months ended January 31, 2002 increased approximately $532,000, or 79.6%, compared to the same period last year. Coupled with the increase in net revenue, the Company's overall bad debt percentage increased from approximately 1.8% of the contractual adjustments during fiscal 2001 to approximately 2.3% of the contractual adjustments during fiscal 2002. 2002 2001 ---- ---- INTEREST EXPENSE, NET $ 3,798,000 $ 3,338,000 - --------------------- Net interest expense for the three months ended January 31, 2002 increased approximately $460,000, or 13.8%, compared to the same period last year. The increase is primarily a result of acquisitions coupled with new equipment financing offset by decreases in line of credit interest charges with the reductions in the prime interest rate during the respective periods. 2002 2001 ---- ---- MINORITY INTEREST IN EARNINGS OF SUBSIDIARY $ 49,000 $(78,000) - ------------------------------------------- Minority interest expense for the three months ended January 31, 2002 decreased approximately $127,000, or 162.8%, compared to the same period last year. The decrease is primarily a result of the losses incurred in the start-up of Burbank Advanced Imaging Center offset by the income earned by Westchester Imaging Group. 14
2002 2001 ---- ---- EXTRAORDINARY ITEM $ -- $ 5,000 - ------------------ Extraordinary gains represent the settlement of limited partner notes at a discount. LIQUIDITY AND CAPITAL RESOURCES Cash decreased for the three months ended January 31, 2002 and 2001 by $37,000 and $15,000, respectively. Cash used by investing activities for the three months ended January 31, 2002 was $2,221,000 compared to $625,000 for the same period in 2001. For the three months ended January 31, 2002 and 2001, the Company purchased property and equipment for approximately $2,269,000 and $545,000, respectively, and paid loan fees of $5,000 in each period. In addition, during the three months ended January 31, 2002, the Company received payments from related parties of $53,000, and during the three months ended January 31, 2001 made loans to related parties of $75,000. Cash used for financing activities for the three months ended January 31, 2002 was $3,276,000 compared to $967,000 for the same period in 2001. For the three months ended January 31, 2002 and 2001, the Company made principal payments on capital leases and notes payable of approximately $4,577,000 and $3,155,000, respectively, and received proceeds from borrowing under existing lines of credit and refinancing arrangements of approximately $2,766,000 and $1,682,000, respectively. In addition, during the three months ended January 31, 2002, the Company made payments to related parties of $75,000, decreased its cash disbursements in transit by $1,190,000 and distributed $200,000 to one of its joint venture partners. During the three months ended January 31, 2001, the Company received proceeds from the issuance of common stock of approximately $18,000 and increased its cash disbursements in transit by $488,000. At January 31, 2002, the Company had a working capital deficit of $29,827,000 as compared to a working capital deficit of $26,987,000 at October 31, 2001, representing an increased deficit of $2,840,000. Included in current liabilities of the Company at January 31, 2002 and October 31, 2001 are approximately $22.0 million and $20.7 million, respectively, of revolving lines of credit liabilities. Over the past several years, management has been addressing the issues that have lead to these deficiencies, and the results of management's plans and efforts have been positive as indicated by improvement in operating income and profitability over the last two years. However, continued effort is planned in the future to allow the Company to continue to operate profitably. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. In late November 2001, the Company opened a new center in Burbank and in January 2002, the Company opened a new center in Tarzana, California. o Increase revenue by negotiating new and existing managed care contracts for additional services and more favorable terms. The Company entered into a new capitation contract effective January 1, 2002 with Primecare Medical Group for approximately 62,000 lives primarily benefiting the Company's Temecula Valley Imaging Center ["TVIC"]. The Company opened two additional facilities in Sun City and Lake Elsinore, California which will provide x-ray services to support the new contract. January's net revenue at TVIC increased approximately 150% over the average prior two months after the implementation of the new contract. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursements fall short of the Company's costs. The Company has renegotiated several of its existing capitation contracts increasing net reimbursement for the current fiscal year. 15
o 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 including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. o 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 past success in renegotiation of many of its existing notes payable and capital lease obligations by extending payment terms, reducing interest rates, reducing or eliminating monthly payments and creating long-term balloon payments. Subsequent to the quarter-end, the Company is currently renegotiating several notes payable with DVI to obtain working capital and extend payment terms. In addition, the Company financed historically accrued maintenance charges with General Electric for approximately $1,108,000 with payment terms of 35 months at 9.5%. o Continue its attempt to settle historical notes payable, subordinated bond debentures and other debt at a discount. The Company's future obligations for debt and equipment under capital lease for the next five years, excluding lines of credit, will be approximately $53,860,000, $31,015,000, $27,870,000, $31,740,000 and $17,770,000, respectively. Interest expense, excluding interest expense on operating lines of credit and subordinated bond debentures, for the next five years, included in the above payments, will be approximately $11,050,000, $8,810,000, $6,540,000, $4,405,000 and $1,845,000, respectively. The Company estimates interest on its bond debentures to be approximately $1,630,000 in fiscal 2002. In addition, the Company has noncancelable operating leases for the use of its facilities and certain medical equipment, which will average approximately $5,600,000 in annual payments over the next five years. Effective March 1, 2000, the Company entered into an agreement with GE Medical Systems for the maintenance of the majority of its medical equipment for a fee based upon a percentage of net revenues with minimum aggregate net revenue requirements. In August 2001, the agreement was amended and expires on November 1, 2005. The service fee ranges from 2.82% to 3.74% of net revenue [less provisions for bad debt] and the aggregate minimum net revenue ranges from $85,000,000 to $125,000,000 during the term of the agreement. For the three months ended January 31, 2002, the monthly service fees were 3.64% of net revenues. The Company's working capital needs are currently provided under two lines of credit. Under one agreement with Coast Business Credit, due December 31, 2003, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, $22,000,000 or the prior 120-days' cash collections. 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 $10,000,000 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 January 31, 2002, $19,158,000 was outstanding under this line. Under a second line of credit with DVI Business Credit, the Company may borrow the lesser of 110% of the eligible accounts receivable or $5,000,000. The line, originally due October 31, 2000, is currently on a month-to-month basis pending renegotiation. 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 January 31, 2002, $2,861,000 was outstanding under this line. 16
PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS There are no matters to be reported under this heading. ITEM 2. CHANGES IN SECURITIES There are no matters to be reported under this heading. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There are no matters to be reported under this heading. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There are no matters to be reported under this heading. ITEM 5. OTHER INFORMATION In March 2002, the Company and Howard G. Berger, M.D. determined to rescind the issuance of the Company's five-year warrant for 2,500,000 shares issued to Dr. Berger as nominee to be apportioned by him amongst management. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 11 - Computation of Earnings Per Share 17
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) March 22, 2002 By: Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D., President, Treasurer and Principal Financial Officer 18