UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19019
RADNET, 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.)
1510 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 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2) Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding on May 9,
2007, was 34,497,155 shares (excluding treasury shares).
1
Table of Contents
RADNET, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2007 (unaudited) and
December 31, 2006
Consolidated Statements of Operations (unaudited) for the
Three Months ended March 31, 2007 and 2006
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 2007 and 2006
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1 Legal proceeding
ITEM 1A. Risk Factors
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6 Exhibits
SIGNATURES
INDEX TO EXHIBITS
2
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, December 31,
2007 2006
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,175 $ 3,221
Accounts receivable, net 76,301 69,136
Unbilled receivables and other receivables 42 508
Due from affiliates -- 1,427
Receivable for income taxes 6,536 6,464
Other current assets 8,078 7,518
--------- ---------
Total current assets 92,132 88,274
--------- ---------
PROPERTY AND EQUIPMENT, NET 158,155 158,542
--------- ---------
OTHER ASSETS
Accounts receivable, net 1,305 1,150
Goodwill 61,537 61,607
Other intangible assets 59,182 60,484
Deferred financing costs, net 8,957 9,422
Investment in joint ventures 9,957 10,125
Trade name and other 5,051 4,751
--------- ---------
Total other assets 145,989 147,539
--------- ---------
Total assets $ 396,276 $ 394,355
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Cash disbursements in transit $ 687 $ 5,099
Accounts payable and accrued expenses 50,544 45,500
Notes payable 3,016 2,969
Due to affiliates 517 --
Obligations under capital leases 5,887 4,626
--------- ---------
Total current liabilities 60,651 58,194
--------- ---------
LONG-TERM LIABILITIES
Line of credit -- 22
Notes payable, net of current portion 360,000 360,083
Obligations under capital lease, net of current portion 12,965 11,305
Other non-current liabilities 11,039 10,493
--------- ---------
Total long-term liabilities 384,004 381,903
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 1,050 1,254
STOCKHOLDERS' DEFICIT
Preferred stock - $.0001 par value, 30,000,000 shares -- --
authorized, none issued
Common stock - $.0001 par value, 200,000,000 shares authorized;
35,409,655 and 34,973,780 shares issued; 34,497,155 and 34,061,281
shares outstanding
at March 31, 2007 and December 31, 2006, respectively 4 3
Paid-in-capital 148,678 146,056
Accumulated other comprehensive income (751) (73)
(Accumulated deficit) (196,665) (192,287)
--------- ---------
(48,734) (46,301)
Less: Treasury stock - 912,500 shares at cost (695) (695)
--------- ---------
Total stockholders' deficit (49,429) (46,996)
--------- ---------
Total liabilities and stockholders' deficit $ 396,276 $ 394,355
========= =========
The accompanying notes are an integral part of these financial statements.
3
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2007 2006
--------- ---------
(UNAUDITED)
NET REVENUE $ 105,815 $ 39,650
OPERATING EXPENSES
Operating expenses 81,400 29,830
Depreciation and amortization 10,650 4,004
Provision for bad debts 7,553 1,475
Loss (gain) on sale of equipment -- (14)
Severance costs 538 --
--------- ---------
Total operating expenses 100,141 35,295
INCOME FROM OPERATIONS 5,674 4,355
OTHER EXPENSES (INCOME)
Interest expense 10,916 4,379
Loss on debt extinguishment, net -- 2,097
Other expense -- 822
--------- ---------
Total other expense 10,916 7,298
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
MINORITY INVESTMENTS (5,242) (2,943)
Provision for income taxes (16) --
Minority interest in (income) loss of subs (115) --
Earnings from joint ventures 995 --
--------- ---------
NET LOSS $ (4,378) $ (2,943)
========= =========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.13) $ (0.14)
WEIGHTED AVERAGE SHARES OUTSTANDING 34,387 20,703
Basic and diluted
The accompanying notes are an integral part of these financial statements.
4
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2007 2006
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES (unaudited)
Net loss $ (4,378) $ (2,943)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 10,650 4,004
Provision for bad debts and allowance adjustments 7,553 1,475
Minority interests in consolidated subsidiaries 115 --
Distributions to minority interests (319) --
Equity in earnings of joint ventures (995) --
Distributions from joint ventures 1,164 --
Deferred financing cost interest expense 469 --
Net loss (gain) on disposal of assets -- (14)
Loss on extinguishment of debt -- 2,097
Accrued interest expense 138 1,280
Employee stock compensation 2,220 164
Deferred revenue from sale of building -- (22)
Amortization of tenant improvements and other contracts (2) --
Changes in operating assets and liabilities:
Accounts receivable (14,122) (2,078)
Unbilled receivables 466 82
Other current assets (1,072) (17)
Other assets 952 (551)
Accounts payable and accrued expenses 6,173 1,601
-------- --------
Net cash provided by operating activities 9,012 5,078
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of imaging facilities (540) (238)
Purchase of property and equipment (4,790) (2,006)
Purchase of Radiologix (244) --
Purchase of covenant not to compete contract (250) --
Payments collected on notes receivable 111 --
-------- --------
Net cash provided (used) by investing activities (5,713) (2,244)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit (4,413) (702)
Principal payments on notes and leases payable (1,412) (1,945)
Repayment of debt upon extinguishments -- (141,243)
Proceeds from borrowings upon refinancing -- 146,468
Debt issue costs -- (5,472)
Proceeds from borrowings on notes payable & revolving credit 100 60
Payments on line of credit (22) --
Proceeds from issuance of common stock 402 --
-------- --------
Net cash provided (used) by financing activities (5,345) (2,834)
-------- --------
NET INCREASE (DECREASE) IN CASH (2,046) --
CASH, BEGINNING OF PERIOD 3,221 2
-------- --------
CASH, END OF PERIOD $ 1,175 $ 2
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 9,515 $ 3,936
The accompanying notes are an integral part of these financial statements.
5
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
We entered into capital leases for approximately $4,195,000 and $365,000
for the three months ended March 31, 2007 and 2006, respectively.
6
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
RadNet, Inc. or RadNet (formerly Primedex Health Systems, Inc.), was
incorporated on October 21, 1985. Since its acquisition of Radiologix on
November 15, 2006, the Company operates a group of regional networks comprised
of 132 diagnostic imaging facilities located in seven states with operations
primarily in California, the Mid Atlantic, the Treasure Coast area of Florida,
Kansas and the Finger Lakes (Rochester) and Hudson Valley areas of New York,
providing diagnostic imaging services including magnetic resonance imaging, or
MRI, computed tomography, or CT, positron emission tomography, or PET, nuclear
medicine, mammography, ultrasound, diagnostic radiology, or X-ray, and
fluoroscopy. The Company's operations comprise a single segment for financial
reporting purposes.
The results of operations of Radiologix and its wholly owned
subsidiaries have been included in the consolidated financial statements from
the date of acquisition. The consolidated financial statements also include the
accounts of Radnet Management, Inc., or RadNet Management, and Beverly Radiology
Medical Group III, or BRMG, which is a professional corporation, all
collectively referred to as "us" or "we". The consolidated financial statements
also include Radnet Sub, Inc., Radnet Management I, Inc., Radnet Management II,
Inc., SoCal MR Site Management, Inc., and Diagnostic Imaging Services, Inc., or
DIS, all wholly owned subsidiaries of RadNet Management.
The operations of BRMG are consolidated with us as a result of the
contractual and operational relationship among, BRMG, Dr. Berger, our CEO, and
us. We are considered to have a controlling financial interest in BRMG pursuant
to the guidance in EITF 97-2. Medical services and supervision at most of our
California 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 Dr. Berger. Radnet provides non-medical, technical and
administrative services to BRMG for which they receive a management fee.
Radiologix, our wholly-owned subsidiary, contracts with radiology
practices to provide professional services, including supervision and
interpretation of diagnostic imaging procedures, in its diagnostic imaging
centers. The radiology practices maintain full control over the provision of
professional radiological services. The contracted radiology practices generally
have outstanding physician and practice credentials and reputations; strong
competitive market positions; a broad sub-specialty mix of physicians; a history
of growth and potential for continued growth.
Radiologix enters into long-term agreements with radiology practice
groups (typically 40 years). Under these arrangements, in addition to obtaining
technical fees for the use of our diagnostic imaging equipment and the provision
of technical services, it provides management services and receives a fee based
on the practice group's professional revenue, including revenue derived outside
of its diagnostic imaging centers. Radiologix owns the diagnostic imaging assets
and, therefore, receives 100% of the technical reimbursements associated with
imaging procedures.
Radiologix has no financial controlling interest in the contracted
radiology practices, as defined in Emerging Issues Task Force Issue 97-2 (EITF
97-2); accordingly, it does not consolidate the financial statements of those
practices in its consolidated financial statements.
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 accounting principles generally accepted in
the United States for complete financial statements; however, in the opinion of
our management, 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 March 31, 2007 and 2006 have been
made. The results of operations for any interim period are not necessarily
indicative of the results for a full year. These interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto contained in our Annual Report on Form 10-K
for the year ended October 31, 2006 and our transition report on Form 10-K/T for
the two months ended December 31, 2006.
Certain prior period amounts have been reclassified to conform with the
current period presentation. These changes have no effect on net income.
7
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital of $31.5 million at March 31, 2007 compared to
$30.1 million at December 31, 2006, and had a net loss of $4.4 million and $2.9
million during the three months ended March 31, 2007 and 2006, respectively. We
also had a stockholders' deficit of $49.4 million at March 31, 2007 compared to
a $47.0 million at December 31, 2006.
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations. In addition to
operations, we require significant amounts of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations. Because our cash flows from
operations have been insufficient to fund all of these capital requirements, we
have depended on the availability of financing under credit arrangements with
third parties.
Our business strategy with regard to operations will focus on the
following:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI and CT applications
o Optimizing operating efficiencies; and
o Expanding our networks
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in the next twelve
months.
NOTE 2 - BUSINESS ACQUISITION
On November 15, 2006, we completed our acquisition of Radiologix, Inc
as a stock purchase. Under the terms of the merger agreement, Radiologix
shareholders received an aggregate consideration of 11,310,950 shares (or
22,621,900 shares before the one-for-two reverse stock split effected in late
November 2006) of our common stock and $42,950,000 in cash.
The total purchase price and the allocation of the estimated purchase
price discussed below are preliminary and have not been finalized. The
preliminary estimated total purchase price of the merger is as follows:
(IN THOUSANDS)
--------------
Value of stock given by RadNet to Radiologix* $ 39,400
Cash 42,950
Estimated transaction fees and expenses** 15,208
---------------
Total purchase price $ 97,558
===============
(*) Calculated as 11,310,950 shares multiplied by $3.48 (average closing price
of $1.74 from June 28, 2006 to July 13, 2006, adjusted for the one-for-two
reverse stock split).
(**) Includes $8,274,000 in assumed liabilities of Radiologix, including
$3,210,000 in merger and acquisition fees and $5,064,000 in Radiologix bond
prepayment penalties.
Under the purchase method of accounting, the total estimated purchase
price as shown above is allocated to Radiologix's net tangible and intangible
assets based on their estimated fair values as of the date of acquisition. The
purchase price allocation is preliminary and has not been finalized because the
valuation of the assets and liabilities has not been completed. The following
table summarizes the preliminary purchase price allocation at the date of
acquisition.
8
(IN THOUSANDS)
--------------
Current assets $115,094
Property and equipment, net 86,659
Identifiable intangible assets 61,000
Goodwill 38,074
Investments in joint ventures 9,482
Other assets 999
Current liabilities (24,150)
Accrued restructuring charges (314)
Contracts (8,994)
Assumption of debt (177,358)
Long-term liabilities (1,725)
Minority interests in consolidated subsidiaries (1,209)
------------------
Total purchase price $ 97,558
==================
We have estimated the fair value of tangible assets acquired and
liabilities assumed. Some of these estimates are subject to change, particularly
those estimates relating to the valuation of property and equipment and
identifiable intangible assets. The final allocation of the purchase price will
be based upon the fair value of Radiologix's assets and liabilities as
determined by an external valuation expert.
CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: We valued
cash, marketable securities, investments and other assets at their respective
carrying amounts as we believe that these amounts approximate their current fair
values.
IDENTIFIABLE INTANGIBLE ASSETS: We expect identifiable intangible
assets acquired to include management service agreements and covenants not to
compete. Management service agreements represent the underlying relationships
and agreements with certain professional radiology groups. Covenants not to
compete are contracts entered into with certain former members of management of
Radiologix on the date of acquisition.
Identifiable intangible assets consist of:
ESTIMATED
ESTIMATED AMORTIZATION ANNUAL
(IN THOUSANDS) FAIR VALUE PERIOD AMORTIZATION
Management service agreements $ 57,880 25 years $ 2,315
Covenants not to compete 3,120 1 to 2 years 1,810
We have determined the preliminary fair value of intangible assets
through limited discussions with Radiologix management and a review of certain
transaction-related documents prepared by Radiologix management.
Estimated useful lives for the intangible assets were based on the
average contract terms, which are greater than the amortization period that will
be used for management contracts. Intangible assets are being amortized using
the straight-line method, considering the pattern in which the economic benefits
of the intangible assets are consumed.
GOODWILL: Approximately $38,074,000 has been allocated to goodwill.
This is a decrease of approximately $434,000 from our estimate at December 31,
2006, and includes a $750,000 increase to net accounts receivable, offset by
$244,000 of additional legal and consulting fees related to the merger as well
as $71,000 of revisions to our estimated valuation of income tax receivables of
Radiologix. Goodwill represents the excess of the purchase price over the fair
value of the underlying net tangible and intangible assets. In accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets" goodwill will not be
amortized but instead will be tested for impairment at least annually. We
perform this test annually on October 1. In the event that management determines
that the value of goodwill has become impaired, we will incur an accounting
charge for the amount of impairment during the fiscal quarter in which the
determination is made, which would normally be the fourth quarter. Because this
goodwill was established through a stock purchase, no amount is deductible for
tax purposes.
OPERATING LEASES: We assumed certain operating leases for both
equipment and facilities. All related historical deferred rent liabilities have
been eliminated. The establishment of any assets or liabilities associated with
the Company's assumption of these operating leases is contingent upon final
analysis from our external valuation experts.
9
NOTE 3 - FACILITY OPENINGS
In March 2007, we acquired the assets and business of Rockville Open
MRI for $540,000 in cash and the assumption of a capital lease of $1.1 million.
The center provides MRI services. The center is 3,500 square feet with a monthly
rental of approximately $8,400 per month. Approximately $365,000 of goodwill was
recorded from this transaction.
NOTE 4 - ADOPTION OF RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS Statement No. 109"
("FIN 48"), and effective January 1, 2007, we adopted FIN 48. FIN 48 applies to
all "tax positions" accounted for under SFAS 109. FIN 48 refers to "tax
positions" as positions taken in a previously filed tax return or positions
expected to be taken in a future tax return which are reflected in measuring
current or deferred income tax assets and liabilities reported in the financial
statements. FIN 48 further clarifies a tax position to include, but not limited
to, the following:
o an allocation or a shift of income between taxing
jurisdictions,
o the characterization of income or a decision to exclude
reporting taxable income in a tax return, or
o a decision to classify a transaction, entity, or other
position in a tax return as tax exempt.
FIN 48 clarifies that a tax benefit may be reflected in the financial
statements only if it is "more likely than not" that a company will be able to
sustain the tax return position, based on its technical merits. If a tax benefit
meets this criterion, it should be measured and recognized based on the largest
amount of benefit that is cumulatively greater than 50% likely to be realized.
This is a change from current practice, whereby companies may recognize a tax
benefit only if it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and quantitative
disclosures, including a discussion of reasonably possible changes that might
occur in unrecognized tax benefits over the next 12 months; a description of
open tax years by major jurisdictions and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on an aggregated basis.
We are subject to tax audits in several tax jurisdictions within the
U.S. and will remain subject to examination until the statute of limitations
expires for each respective tax jurisdiction. Tax audits by their very nature
are often complex and can require several years to complete. Information
relating to our tax examinations by jurisdiction is as follows:
o Federal -- we are subject to U.S. federal tax examinations by
tax authorities for the tax years ended 2003 to 2007
o State -- we are subject to state tax examinations by tax
authorities for the tax years ended 2002 to 2007
The adoption of FIN 48 did not have a material impact on our financial
statements or disclosures. As of January 1, 2007 and March 31, 2007 we did not
recognize any assets or liabilities for unrecognized tax benefits relative to
uncertain tax positions. We do not currently anticipate that any significant
increase or decrease to the gross unrecognized tax benefits will be recorded
during the next 12 months. Any interest or penalties resulting from examinations
will continue to be recognized as a component of the income tax provision
however, since there are no unrecognized tax benefits as a result of tax
positions taken, there are no accrued interest and penalties.
Additionally, the future utilization of the Company's net operating
loss carryforwards to offset future taxable income may be subject to a
substantial annual limitation as a result of ownership changes that may have
occurred previously or that could occur in the future.
NOTE 5 - COMPREHENSIVE INCOME
The following table summarizes total comprehensive income for the
applicable periods (in thousands):
Three Months Ended March 31,
----------------------------
2007 2006
---- ----
Net income $(4,378) $(2,943)
Change in unrealized loss on the fair value of cash flow hedging (678) --
------- -------
Total comprehensive income $(5,056) $(2,943)
------- -------
10
NOTE 6 - EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
of common stock and common stock equivalents outstanding, net of common stock
held in treasury, and includes the effect of the one-for-two reverse stock split
effective November 28, 2006, as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2007 2006
-------- --------
Net loss $ (4,378) $ (2,943)
BASIC EARNINGS (LOSS) PER SHARE
Weighted average number of common shares outstanding during the year 34,387 20,703
-------- --------
Basic earnings (loss) per share:
Basic loss per share $ (0.13) $ (0.14)
-------- --------
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average number of common shares outstanding during the year 34,387 20,703
-------- --------
Add additional shares issuable upon exercise of stock options and warrants -- --
-------- --------
Weighted average number of common shares used in calculating diluted
earnings per share 34,387 20,703
-------- --------
Diluted earnings (loss) per share:
Diluted loss per share $ (0.13) $ (0.14)
-------- --------
For the three months ended March 31, 2007 and 2006, we excluded all
options, warrants and convertible debentures in the calculation of diluted
earnings per share because their effect would be antidilutive. However, these
instruments could potentially dilute earnings per share in future years.
NOTE 7 - INVESTMENT IN JOINT VENTURES
We have eight unconsolidated joint ventures with ownership interests
ranging from 22% to 50%. These joint ventures represent partnerships with
hospitals, health systems or radiology practices and were formed for the purpose
of owning and operating diagnostic imaging centers. Professional services at the
joint venture diagnostic imaging centers are performed by contracted radiology
practices or a radiology practice that participates in the joint venture. Our
investment in these joint ventures are accounted for under the equity method.
Total assets at March 31, 2007 include notes receivable from certain
unconsolidated joint ventures aggregating $725,000. Interest income related to
these notes receivable was approximately $20,000 for the three months ended
March 31, 2007. We also received management service fees of $943,000 for the
three months ended March 31, 2007, in connection with operating the centers
underlying these joint ventures.
The following table is a summary of key financial data for these joint
ventures as of and for the three months ended March 31 2007 (in thousands):
Current assets $16,578
Noncurrent assets 12,995
Current liabilities 3,365
Noncurrent liabilities 811
Minority interest 9,957
Net revenue 14,709
Net income 3,206
NOTE 8 - STOCK BASED COMPENSATION
We have three long-term incentive stock option plans. The 1992 plan has
not issued options since the inception of the 2000 plan and the 2000 plan has
not issued options since the adoption of the 2006 plan. The 2006 plan reserves
1,000,000 shares of common stock. Options granted under the plan are intended to
qualify as incentive stock options under existing tax regulations. In addition,
we have issued non-qualified stock options from time to time in connection with
acquisitions and for other purposes and have also issued stock under the plans.
Employee stock options generally vest over three to five years and expire five
to ten years from date of grant.
11
As of March 31, 2007, 255,000, or approximately 99%, of all the
outstanding stock options are fully vested. No options were granted during the
three months ended March 31, 2007.
We have issued warrants under various types of arrangements to
employees, in conjunction with debt financing and in exchange for outside
services. All warrants are issued with an exercise price equal to the fair
market value of the underlying common stock on the date of issuance. The
warrants expire from five to seven years from the date of grant. Warrants issued
to employees can vest immediately or up to seven years. Vesting terms are
determined by the board of directors at the date of issuance. We issued 850,000
warrants during the three months ended March 31, 2007. As of March 31, 2007,
4,160,667, or approximately 82%, of all the outstanding warrants are fully
vested.
As of November 1, 2005, we adopted SFAS No. 123(R), "Share-Based
Payment," applying the modified prospective method. This Statement requires all
equity-based payments to employees, including grants of employee options, to be
recognized in the consolidated statement of earnings based on the grant date
fair value of the award. Under the modified prospective method, we are required
to record equity-based compensation expense for all awards granted after the
date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. The fair values of all options were
valued using a Black-Scholes model.
In anticipation of the adoption of SFAS No. 123(R), we did not modify
the terms of any previously granted awards.
Mssrs. Linden, Hames and Stolper who hold the positions of Executive
Vice President and General Counsel, Executive Vice President and Chief Operating
Officer and Executive Vice President and Chief Financial Officer, respectively,
were issued certain warrants in prior periods which fully vest upon the sooner
of their respective multi-year vesting schedules or at such time as the 30 day
average closing stock price of our shares in the public market in which it
trades equals or exceeds $6.00. For the 30 day trading period ended March 7,
2007, the average closing price exceeded $6.00 per share. Accordingly, these
warrants fully vested resulting in the full expensing of the remaining
unamortized fair value of these warrants of $1.7 million.
The compensation expense recognized for all equity-based awards is net
of estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation within operating expenses with the same line item as
the majority of the cash compensation paid to employees.
The following table illustrates the impact of equity-based compensation
on reported amounts (in thousands):
THREE MONTHS ENDED MARCH 31,
2007 2006
---- ----
IMPACT OF EQUITY-BASED IMPACT OF EQUITY-BASED
---------------------- ----------------------
AS REPORTED COMPENSATION AS REPORTED COMPENSATION
----------- ------------ ----------- ------------
Income from operations $ 6,424 $(2,220) $ 4,355 $ (164)
Net loss $(3,628) $(2,220) $(2,943) $ (164)
Net basic and diluted earning per share $ (0.11) $ (0.07) $ (0.14) $ (0.01)
The following summarizes all of our option and warrant transactions for
the three months ended March 31, 2007:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
EXERCISE PRICE CONTRACTUAL LIFE INTRINSIC
OUTSTANDING OPTIONS SHARES PER COMMON SHARE (IN YEARS) VALUE
------------------- ------ ---------------- ---------- -----
Balance, December 31, 2006 350,625 $ 1.01
Granted -- --
Exercised (86,125) 0.85
Canceled or expired (7,000) --
Balance, March 31, 2007 257,500 $ 1.00 3.32 $1,212,075
---------- -------- ------- ----------
Exercisable at March 31, 2007 255,000 $ 1.00 3.29 $1,200,300
========== ======== ======= ==========
12
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
EXERCISE PRICE PER CONTRACTUAL LIFE INTRINSIC
OUTSTANDING WARRANTS SHARES COMMON SHARE (IN YEARS) VALUE
-------------------- ------ ------------ ---------- -----
Balance, December 31, 2006 4,590,667 $ 1.20
Granted 850,000 4.92
Exercised 350,000 0.94
Canceled or expired
Balance, March 31, 2007 5,090,667 $ 2.14 3.64 $19,508,515
----------- -------- ---- -----------
Exercisable at March 31, 2007 4,160,667 $ 1.84 2.87 $16,151,763
=========== ======== ==== ===========
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value (the difference between our closing stock price on March
31, 2007 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holder had all option
holders exercised their options on March 31, 2007. Total intrinsic value of
options and warrants exercised during the three months ended March 31, 2007 was
approximately $1.9 million. As of March 31, 2007, total unrecognized share-based
compensation expense related to non-vested employee awards was approximately
$4.5 million, which is expected to be recognized over a weighted average period
of approximately 3.7 years.
The fair value of each option granted is estimated on the grant date
using the Black-Scholes option pricing model which takes into account as of the
grant date the exercise price and expected life of the option, the current price
of the underlying stock and its expected volatility, expected dividends on the
stock and the risk-free interest rate for the term of the option. The
weighted-average grant date fair value of stock options and warrants was $3.19
for the three months ended March 31, 2007 and $0.41 for the three months ended
March 31, 2006. The following is the weighted average of the data used to
calculate the fair value:
Risk-free Expected Expected Expected
Interest Rate Life Volatility Dividends
------------- ---- ---------- ---------
March 31, 2007 4.66% 3.8 years 94.36% ---
March 31, 2006 4.33% 4.8 years 92.21% ---
We have determined the expected term assumption under the "Simplified
Method" as defined in SAB 107. The expected stock price volatility is based on
the historical volatility of our stock. The risk-free interest rate is based on
the U.S. Treasury yield in effect at the time of grant with an equivalent
remaining term. We have not paid dividends in the past and do not currently plan
to pay any dividends in the near future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
Since our acquisition of Radiologix on November 15, 2006, we operate a
group of regional networks comprised of 132 diagnostic imaging facilities
located in seven states with operations primarily in California, the Mid
Atlantic, the Treasure Coast area of Florida, Kansas and the Finger Lakes
(Rochester) and Hudson Valley areas of New York., providing diagnostic imaging
services including magnetic resonance imaging, or MRI, computed tomography, or
CT, positron emission tomography, or PET, nuclear medicine, mammography,
ultrasound, diagnostic radiology, or X-ray, and fluoroscopy. The Company's
operations comprise a single segment for financial reporting purposes.
The results of operations of Radiologix and its wholly owned
subsidiaries have been included in the consolidated financial statements from
the date of acquisition. The consolidated financial statements also include the
accounts of RadNet, Inc., Radnet Management, Inc., or Radnet Management, and
Beverly Radiology Medical Group III, or BRMG, which is a professional
corporation, all collectively referred to as "us" or "we". The consolidated
financial statements also include Radnet Sub, Inc., Radnet Management I, Inc.,
Radnet Management II, Inc., SoCal MR Site Management, Inc., and Diagnostic
Imaging Services, Inc., or DIS, all wholly owned subsidiaries of Radnet
Management.
13
The operations of BRMG are consolidated with us as a result of the
contractual and operational relationship among, BRMG, Dr. Berger, our CEO, and
us. We are considered to have a controlling financial interest in BRMG pursuant
to the guidance in EITF 97-2. Medical services and supervision at most of our
California 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 Dr. Berger. Radnet provides non-medical, technical and
administrative services to BRMG for which it receives a management fee.
Radiologix, our wholly-owned subsidiary, contracts with radiology
practices to provide professional services, including supervision and
interpretation of diagnostic imaging procedures' performed in its diagnostic
imaging centers. The radiology practices maintain full control over the
provision of professional radiological services. The contracted radiology
practices generally have outstanding physician and practice credentials and
reputations; strong competitive market positions; a broad sub-specialty mix of
physicians; a history of growth and potential for continued growth.
Radiologix enters into long-term agreements with radiology practice
groups (typically 40 years). Under these arrangements, in addition to obtaining
technical fees for the use of our diagnostic imaging equipment and the provision
of technical services, it provides management services and receives a fee based
on the practice group's professional revenue, including revenue derived outside
of its diagnostic imaging centers. Radiologix owns the diagnostic imaging assets
and, therefore, receives 100% of the technical reimbursements associated with
imaging procedures
Radiologix has no financial controlling interest in the contracted
radiology practices, as defined in Emerging Issues Task Force Issue 97-2 (EITF
97-2); accordingly, it does not consolidate the financial statements of those
practices in its consolidated financial statements.
All of our facilities employ state-of-the-art equipment and technology
in modern, patient-friendly settings. Many of our facilities within a particular
region are interconnected and integrated through our advanced information
technology system. Ninety-five of our facilities are multi-modality sites,
offering various combinations of magnetic resonance imaging, or MRI, computed
tomography, or CT, positron emission tomography, or PET, nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray and fluoroscopy.
Thirty-seven of our facilities are single-modality sites, offering either X-ray
or MRI. Consistent with our regional network strategy, we locate our
single-modality facilities near multi-modality sites to help accommodate
overflow in targeted demographic areas.
At our facilities, we provide all of the equipment as well as all
non-medical operational, management, financial and administrative services
necessary to provide diagnostic imaging services. We give our facility managers
authority to run our facilities to meet the demands of local market conditions,
while our corporate structure provides economies of scale, corporate training
programs, standardized policies and procedures and sharing of best practices
across our networks. Each of our facility managers is responsible for meeting
our standards of patient service, managing relationships with local physicians
and payors and maintaining profitability.
We derive substantially all of our revenue, directly or indirectly,
from fees charged for the diagnostic imaging services performed at our
facilities.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based on our consolidated financial statements that were prepared
in accordance with generally accepted accounting principles, or GAAP. Management
makes estimates and assumptions when preparing financial statements. These
estimates and assumptions affect various matters, including:
o Our reported amounts of assets and liabilities in our
consolidated balance sheets at the dates of the financial
statements;
o Our disclosure of contingent assets and liabilities at the
dates of the financial statements; and
o Our reported amounts of net revenue and expenses in our
consolidated statements of operations during the reporting
periods.
These estimates involve judgments with respect to numerous factors that
are difficult to predict and are beyond management's control. As a result,
actual amounts could materially differ from these estimates.
The Securities and Exchange Commission, or SEC, defines critical
accounting estimates as those that are both most important to the portrayal of a
company's financial condition and results of operations and require management's
most difficult, subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
14
As of the period covered in this report, there have been no material
changes to the critical accounting estimates we use, and have explained, in both
our annual report on Form 10-K for the fiscal year ended October 31, 2006 and
our transition report on Form 10-K/T for the two months ended December 31, 2006.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage that certain items in the statement of operations bears to net
revenue.
THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
------------- ------------
(UNAUDITED)
NET REVENUE 100% 100%
OPERATING EXPENSES
Operating expenses 76.9% 75.2%
Depreciation and amortization 10.1% 10.1%
Provision for bad debts 7.1% 3.7%
Loss (gain) on sale of equipment 0.0% 0.0%
Severance costs 0.5% 0.0%
------------- ------------
Total operating expenses 94.6% 89.0%
INCOME FROM OPERATIONS 5.4% 11.0%
OTHER EXPENSES (INCOME) 0.0% 0.0%
Interest expense 10.3% 11.0%
Loss on debt extinguishment, net 0.0% 5.3%
Other income 0.0% 0.0%
Other expense 0.0% 2.1%
------------- ------------
Total other expense 10.3% 18.4%
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
MINORITY INVESTMENTS -5.0% -7.4%
Provision for income taxes 0.0% 0.0%
Minority interest in (income) loss of subs -0.1% 0.0%
Earnings from minority investments 0.9% 0.0%
------------- ------------
NET LOSS -4.1% -7.4%
============= ============
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2006
NET REVENUE
Net revenue from continuing operations for the three months ended March
31, 2007 was $105.8 million compared to $39.7 million for the three
months ended March 31, 2006, an increase of $66.2 million, or 166.9%.
Net revenue from the acquisition of Radiologix, effective November 15,
2006, was $64.8 million for the three months ended March 31, 2007. Net
revenue excluding Radiologix increased $1.4 million for the three
months ended March 31, 2007 when compared to the same period last year.
This increase is net of the effects of reimbursement reductions
experienced as a result of the DRA which became effective in January
2007
OPERATING EXPENSES
Operating expenses from continuing operations for the three months
ended March 31, 2007 increased approximately $51.6 million, or 172.9%,
from $29.8 million for the three months ended March 31, 2006 to $81.4
million for the three months ended March 31, 2007. The following table
sets forth our operating expenses for the three months ended March 31,
2007 and 2006 (in thousands):
15
THREE MONTHS ENDED MARCH 31,
-----------------------------
2007 2006
------------- ------------
Salaries and professional reading fees (excluding stock based compensation and severance) $ 44,156 $ 18,602
Stock based compensation 2,220 164
Severance 538 --
Building and equipment rental 9,700 2,093
General administrative expenses (excluding NASDAQ one-time listing fee) 24,666 8,971
NASDAQ one-time listing fee 120 ---
------------- ------------
Total operating expenses 81,400 29,803
Depreciation and amortization 10,650 4,004
Provision for bad debt 7,553 1,475
Loss (gain) on sale of equipment, net -- --
Severance costs 538 --
o SALARIES AND PROFESSIONAL READING FEES (EXCLUDING STOCK COMPENSATION
AND SEVERANCE)
Salaries and professional reading fees increased $25.6 million, or
137.4%, to $44.2 million for the three months ended March 31, 2007
compared to $18.6 million for the three months ended March 31, 2006.
During the three months ended March 31, 2007, salaries and professional
reading fees were $23.7 million for Radiologix. Salaries excluding
Radiologix increased $1.9 million for the three months ended March 31,
2007 when compared to the same period last year.
STOCK BASED COMPENSATION
Stock compensation increased $2.0 million to $2.2 million for the three
months ended March 31, 2007 compared to $164,000 for the three months
ended March 31, 2006. This increase is primarily due to $1.7 million of
additional stock based compensation expense recorded during the three
months ended March 31, 2007 as a result of the acceleration of vesting
of warrants.
Messrs. Linden, Hames and Stolper who hold the positions of Executive
Vice President and General Counsel, Executive Vice President and Chief
Operating Officer and Executive Vice President and Chief Financial
Officer, respectively, were issued certain warrants in prior periods
which fully vest upon the sooner of their respective multi-year vesting
schedules or at such time as the 30 day average closing stock price of
our shares in the public market in which it trades equals or exceeds
$6.00. For the 30 day trading period ended March 7, 2007, the average
closing price exceeded $6.00 per share. Accordingly, these warrants
fully vested resulting in the full expensing of the remaining
unamortized fair value of these warrants of $1.7 million.
SEVERANCE
During the three months ended March 31, 2007, we recorded severance
costs of $538,000 associated with the integration of Radiologix.
o BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $7.6 million, or
363.5%, to $9.7 million for the three months ended March 31, 2007
compared to $2.1 million for the three months ended March 31, 2006.
During the three months ended March 31, 2007, building and equipment
rental expense was $7.3 million for Radiologix. Building and equipment
rental expenses excluding Radiologix increased $336,000 for the three
months ended March 31, 2007 when compared to the same period last year.
The increase was due to normal consumer price index escalations built
into the operating leases, and the increase in equipment rental was
primarily due to the increased costs of renting mobile MRI equipment
while repairs were being done at our Orange California facility.
o GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUDING NASDAQ ONE-TIME LISTING
FEE)
General and administrative expenses include billing fees, medical
supplies, office supplies, repairs and maintenance, insurance, business
tax and license, outside services, utilities, marketing, travel and
other expenses. Many of these expenses are variable in nature including
16
medical supplies and billing fees, which increase with volume and
repairs and maintenance under our GE service agreement at 3.62% of net
revenue for the three-month period. Overall, general and administrative
expenses increased $15.7 million, or 175.0%, for the three months ended
March 31, 2007 compared to the previous period. During the three months
ended March 31, 2007, general and administrative expenses were $13.8
million for Radiologix. General and administrative expenses excluding
Radiologix increased $1.9 million for the three months ended March 31,
2006 when compared to the same period last year. The increase was
primarily due to increased expenditures for accounting fees, costs
related to repairs at our Orange California facility, and employee and
marketing expenditures at year-end.
NASDAQ ONE-TIME LISTING FEE
During the three months ended March 31, 2007, we recorded $120,000 for
fees associated with listing our common stock with NASDAQ.
o DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $6.6 million, or 166.0%, to
$10.6 million for the three months ended March 31, 2007 when compared
to the same period last year. During the three months ended March 31,
2007, depreciation and amortization expense was $6.1 million for
Radiologix which includes $1.0 million of amortization of intangible
assets associated with the fair value of management service agreements
and covenants not to compete. Depreciation and amortization expense
excluding Radiologix increased $486,000 for the three months ended
March 31, 2007 when compared to the same period last year primarily due
to property and equipment additions.
o PROVISION FOR BAD DEBT
Provision for bad debt increased $6.1 million, or 412.0%, to $7.6
million, or 7.1% of net revenue, for the three months ended March 31,
2007 compared to $1.5 million, or 3.8% of net revenue, for the three
months ended March 31, 2006. During the three months ended March 31,
2007, the provision for bad debt expense was $5.5 million, or 8.5% of
net revenue, for Radiologix. Historically, Radiologix has experienced
higher bad debt expense as compared to our business pre-acquisition due
to the higher concentration of business associated with hospital payers
in the markets that Radiologix serves and the poor collection
percentages that are inherent with hospital business. Provision for bad
debt expense excluding Radiologix increased $568,000 for the three
months ended March 31, 2007 when compared to the same period last year.
The increase was primarily due to increased write-offs due to billing
issues related to untimely filing, and incomplete or incorrect
demographic information collected at the sites.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2007 increased
approximately $6.5 million, or 149.3%, from the same period in 2006. The
increase was primarily due to the increased indebtedness of $360.0 million upon
the acquisition of Radiologix as well as the amortization of our deferred
finance costs associated with this new financing which was $469,000 for the
three months ended March 31, 2007. Also related to our increase in interest
expense is a $138,000 fair value adjustment of certain interest rate swaps
during the three months ended March 31, 2007.
LOSS ON DEBT EXTINGUISHMENTS, NET
For the three months ended March 31, 2006, we recognized a loss on
extinguishment of debt of 2.9 million.
INCOME TAX EXPENSE
For the three months ended March 31, 2007, we recognized $16,000 in
income tax expense related to certain state tax obligations of Radiologix.
MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARIES
For the three months ended March 31, 2007, we recognized $115,000 in
minority interest expense related to consolidated joint ventures of Radiologix.
17
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the three months ended March 31, 2007, we recognized equity in
earnings from unconsolidated joint ventures of $995,000 including $971,000 from
investments of Radiologix and $24,000 from an investment in a PET center in Palm
Desert, California.
LIQUIDITY AND CAPITAL RESOURCES
On November 15, 2006, we entered into a $405 million senior secured
credit facility with GE Commercial Finance Healthcare Financial Services (the
"November 2006 Credit Facility"). This facility was used to finance our
acquisition of Radiologix, refinance existing indebtedness, pay transaction
costs and expenses relating to our acquisition of Radiologix, and to provide
financing for working capital needs post-acquisition. The facility consists of a
revolving credit facility of up to $45 million, a $225 million term loan and a
$135 million second lien term loan. The revolving credit facility has a term of
five years, the term loan has a term of six years and the second lien term loan
has a term of six and one-half years. Interest is payable on all loans initially
at an Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the "base rate on corporate loans posted by
at least 75% of the nation's largest 30 banks" or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each of the revolving credit
facility and the term loan is 2% and on the second lien term loan is 6%. We may
request that the interest rate instead be based on LIBOR plus the Applicable
LIBOR Margin, which is 3.5% for the revolving credit facility and the term loan
and 7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
As part of the financing, we swapped 50% of the aggregate principal
amount of the facilities to a floating rate within 90 days of the close of the
agreement. On April 11, 2006, effective April 28, 2006, we entered into an
interest rate swap on $73.0 million fixing the LIBOR rate of interest at 5.47%
for a period of three years. This swap was made in conjunction with the $161.0
million credit facility closed on March 9, 2006. In addition, on November 15,
2006, we entered into an interest rate swap on $107.0 million fixing the LIBOR
rate of interest at 5.02% for a period of three years, and on November 28, 2006,
we entered into an interest rate swap on $90.0 million fixing the LIBOR rate of
interest at 5.03% for a period of three years. Previously, the interest rate on
the above $270.0 million portion of the credit facility was based upon a spread
over LIBOR which floats with market conditions.
The Company documents its risk management strategy and hedge
effectiveness at the inception of the hedge, and, unless the instrument
qualifies for the short-cut method of hedge accounting, over the term of each
hedging relationship. The Company's use of derivative financial instruments is
limited to interest rate swaps, the purpose of which is to hedge the cash flows
of variable-rate indebtedness. The Company does not hold or issue derivative
financial instruments for speculative purposes. In accordance with Statement of
Financial Accounting Standards No. 133, derivatives that have been designated
and qualify as cash flow hedging instruments are reported at fair value. The
gain or loss on the effective portion of the hedge (i.e., change in fair value)
is initially reported as a component of other comprehensive income in the
Company's Consolidated Statement of Stockholders' Equity. The remaining gain or
loss, if any, is recognized currently in earnings. Of the derivatives that were
not designated as cash flow hedging instruments, we recorded an increase to
interest expense of approximately $138,000 for the three months ended March 31,
2007. The corresponding liability of $848,000 is included in the other
non-current liabilities in the consolidated balance sheet at March 31, 2007.
This liability was $710,000 at December 31, 2006.
We operate in a capital intensive, high fixed-cost industry that
requires significant amounts of capital to fund operations. In addition to
operations, we require significant amounts of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations. Because our cash flows from
operations have been insufficient to fund all of these capital requirements, we
have depended on the availability of financing under credit arrangements with
third parties.
Our business strategy with regard to operations will focus on the
following:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI and CT applications
o Optimizing operating efficiencies; and
o Expanding our networks
18
Our ability to generate sufficient cash flow from operations to make
payments on our debt and other contractual obligations will depend on our future
financial performance. A range of economic, competitive, regulatory, legislative
and business factors, many of which are outside of our control, will affect our
financial performance. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, we believe that through implementing our strategic plans
and continuing to restructure our financial obligations, we will obtain
sufficient cash to satisfy our obligations as they become due in the next twelve
months.
SOURCES AND USES OF CASH
Cash decreased during the three months ended March 31, 2007 to $1.2
million from $3.2 million at December 31, 2006.
Cash provided by operating activities for the three months ended March
31, 2007 was $9.0 million compared to $5.1 million for the same period in 2006.
Cash used by investing activities for the three months ended March 31,
2007 was $5.7 million compared to cash used of $2.2 million for the same period
in 2006. For the three months ended March 31, 2007 and 2006, we purchased
property and equipment for approximately $4.8 million and $2.0 million,
respectively. During the three months ended March 31, 2007, we recorded the
purchase of a covenant not to compete contract for $250,000 which we recorded to
other intangible assets on our consolidated balance sheet. Also, during the
three months ended March 31, 2007, we paid cash of $540,000 for the purchase of
an additional imaging facility.
Cash used for financing activities for the three months ended March 31,
2007 was $5.3 million compared to $2.8 million for the same period in 2006. The
primary use of cash during the three months ended March 31, 2007 was related to
the increase in our disbursements in transit of $4.4 million, payments on notes
and capital leases payable of $1.4 million, offset by $402,000 of cash generated
from the issuance of our common stock through the exercise of options and
warrants.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES, which permits entities to choose
to measure many financial instruments and certain warranty and insurance
contracts at fair value on a contract-by-contract basis. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007 (January 1, 2008 for calendar-year-end companies). Management
has not determined the effect the adoption of this statement will have on its
consolidated financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements reflect, among other things, management's
current expectations and anticipated results of operations, all of which are
subject to known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements, or industry results, to
differ materially from those expressed or implied by such forward-looking
statements. Therefore, any statements contained herein that are not statements
of historical fact may be forward-looking statements and should be evaluated as
such. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "intends," "will," "expects," "should" and similar words and
expressions are intended to identify forward-looking statements. Except as
required under the federal securities laws or by the rules and regulations of
the SEC, we assume no obligation to update any such forward-looking information
to reflect actual results or changes in the factors affecting such
forward-looking information. The factors included in "Risks Relating to Our
Business," among others, could cause our actual results to differ materially
from those expressed in, or implied by, the forward-looking statements.
Specific factors that might cause actual results to differ from our
expectations, include, but are not limited to:
o economic, competitive, demographic, business and other
conditions in our markets;
o a decline in patient referrals;
o changes in the rates or methods of third-party reimbursement
for diagnostic imaging services;
o the enforceability or termination of our contracts with
radiology practices;
o the availability of additional capital to fund capital
expenditure requirements;
o burdensome lawsuits against our contracted radiology practices
and us;
o reduced operating margins due to our managed care contracts
and capitated fee arrangements;
o any failure on our part to comply with state and federal
anti-kickback and anti-self-referral laws or any other
applicable healthcare regulations;
19
o our substantial indebtedness, debt service requirements and
liquidity constraints;
o the interruption of our operations in certain regions due to
earthquake or other extraordinary events;
o the recruitment and retention of technologists by us or by
radiologists of our contracted radiology groups;
o successful integration of Radiologix operations;
o and other factors discussed in the "Risk Factors" section or
elsewhere in this report.
All future written and verbal forward-looking statements attributable
to us or any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We sell our services exclusively in the United States and receive
payment for our services exclusively in United States dollars. As a result, our
financial results are unlikely to be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
A large portion of our interest expense is not sensitive to changes in
the general level of interest in the United States because the majority of our
indebtedness has interest rates that were fixed when we entered into the note
payable or capital lease obligation. On November 15, 2006, we entered into a
$405 million senior secured credit facility with GE Commercial Finance
Healthcare Financial Services. This facility was used to finance our acquisition
of Radiologix, refinance existing indebtedness, pay transaction costs and
expenses relating to our acquisition of Radiologix, and to provide financing for
working capital needs post-acquisition. The facility consists of a revolving
credit facility of up to $45 million, a $225 million term loan and a $135
million second lien term loan. The revolving credit facility has a term of five
years, the term loan has a term of six years and the second lien term loan has a
term of six and one-half years. Interest is payable on all loans initially at an
Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the "base rate on corporate loans posted by
at least 75% of the nation's largest 30 banks" or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each the revolving credit facility
and the term loan is 2% and on the second lien term loan is 6%. We may request
that the interest rate instead be based on LIBOR plus the Applicable LIBOR
Margin, which is 3.5% for the revolving credit facility and the term loan and
7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.
As part of the financing, we swapped at least 50% of the aggregate
principal amount of the facilities to a floating rate within 90 days of the
close of the agreement. On April 11, 2006, effective April 28, 2006, we entered
into an interest rate swap on $73.0 million fixing the LIBOR rate of interest at
5.47% for a period of three years. This swap was made in conjunction with the
$161.0 million credit facility closed on March 9, 2006. In addition, on November
15, 2006, we entered into an interest rate swap on $107.0 million fixing the
LIBOR rate of interest at 5.02% for a period of three years, and on November 28,
2006, we entered into an interest rate swap on $90.0 million fixing the LIBOR
rate of interest at 5.03% for a period of three years. Previously, the interest
rate on the above $270.0 million portion of the credit facility was based upon a
spread over LIBOR which floated with market conditions.
In addition, our credit facility, classified as a long-term liability
on our financial statements, is interest expense sensitive to changes in the
general level of interest because it is based upon the current prime rate plus a
factor.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we performed an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures are not effective
in alerting them prior to the end of a reporting period to all material
information required to be included in our periodic filings with the SEC because
we identified the following material weakness in the design of internal control
over financial reporting: We concluded that we had (i) insufficient processes to
identify and resolve non-routine accounting matters, such as the identification
of off-balance sheet transactions and (ii) insufficient personnel resources and
technical accounting expertise within the accounting function to resolve the
recording of non-typical cost-based investments in accordance with generally
accepted accounting principles. The incorrect accounting for the foregoing was
sufficient to lead management to conclude that a material weakness in the design
of internal control over the accounting for non-routine transactions existed at
March 31, 2007.
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We determined to change the design of our internal controls over
non-routine accounting matters by the identification of an outside resource at a
recognized professional services company that we can consult with on non-routine
transactions and the employment of qualified accounting personnel to deal with
this issue together with the utilization of other senior corporate accounting
staff, who are responsible for reviewing all non-routine matters and preparing
formal reports on their conclusions, and conducting quarterly reviews and
discussions of all non-routine accounting matters with our independent public
accountants. We engaged MorganFranklin, a consulting firm with the requisite
accounting expertise, to assist us, from time to time, in the evaluation and
application of the appropriate accounting treatment, to provide support in the
form of technical analysis related to accounting and financial reporting matters
that may arise, and to provide management advice with respect to their
preliminary conclusions regarding issues we wish to bring to their attention. To
the extent our Chief Financial Officer identifies any non-routine accounting
matters which require resolution, he will contact MorganFranklin and work
closely with them, our audit committee and our auditors to resolve any issues.
We are continuing to evaluate additional controls and procedures that we can
implement and may add additional accounting personnel during fiscal 2007 to
enhance our accounting processes and technical accounting resources. We do not
anticipate that the cost of this remediation effort will be material to our
financial statements. We believe that the engagement of MorganFranklin and use
of their services should adequately address the identified weakness. With the
acquisition of Radiologix we have added additional technical accounting staff
from their organization which we believe will further reduce any material
weakness.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
At March 31, 2006, the status of all current legal matters previously
disclosed in Part 1, Item 3, of our Form 10-K/T for the two months ended
December 31, 2006 is unchanged.
ITEM 1A RISK FACTORS
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item 1A Risk
Factors" in our Form 10-K for the year ended October 31, 2006 and our Form
10-K/T for the two months ended December 31, 2006, which could materially affect
our business, financial condition, and results of operations. The risks
described in our Forms 10-K and 10-K/T are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2007, we sold the following
securities pursuant to an exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended:
In January 2007, we issued to one of BRMG's radiologists in order to
obtain his services, a five-year warrant exercisable at a price of $4.79 per
share, which was the public market closing price for our common stock on the
transaction date, to purchase 500,000 shares of our common stock. In January
2007, we issued to one of our key employees a six-year warrant exercisable at a
price of $4.74 per share, which was the public market closing price for our
common stock on the transaction date, to purchase 250,000 shares of our common
stock.
In February 2007, we issued to each of our four independent directors,
as annual compensation in connection with their agreements to serve as
directors, five year warrants to purchase 25,000 shares exercisable at a price
of $5.99 per share , which was the public market price for our common stock on
the transaction date.
ITEM 6 EXHIBITS
The list of exhibits filed as part of this report is incorporated by
reference to the Index to Exhibits at the end of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RADNET, INC.
(Registrant)
Date: May 21, 2007 By: /s/ HOWARD G. BERGER, M.D.
----------------------------
Howard G. Berger, M.D.,
President, Chief Executive Officer and Director
Date: May 21, 2007 By: /s/ Mark D. Stolper
---------------------------
Mark D. Stolper, Chief Financial Officer
(Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Certification of Howard G. Berger, M.D. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of Mark D. Stolper pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002 of Howard G. Berger,
M.D. *
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002 of Mark D. Stolper *
-------------------
* Filed herewith.
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