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 SEPTEMBER 30, 2008
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)
DELAWARE 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, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated Filer [X]
Non-Accelerated Filer [ ] Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) 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 November 6,
2008, was 35,786,474 shares.
Table of Contents
RADNET, INC.
INDEX
PART I - FINANCIAL INFORMATION .........................................................................3
ITEM 1. FINANCIAL STATEMENTS...................................................................3
Consolidated Balance Sheets at September 30, 2008 (unaudited)
and December 31, 2007..................................................................3
Consolidated Statements of Operations (unaudited) for
the Three and Nine Months ended September 30, 2008.....................................4
and 2007
Consolidated Statement of Stockholders' Deficit (unaudited
for the Nine Months ended September 30, 2008...........................................5
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 2008 and 2007......................................6
Notes to Consolidated Financial Statements.............................................8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............................26
ITEM 4. Controls and Procedures................................................................26
PART II - OTHER INFORMATION..............................................................................27
ITEM 1 Legal Proceedings...................................................................27
ITEM 1A. Risk Factors.........................................................................27
ITEM 5 Other Information...................................................................27
ITEM 6 Exhibits............................................................................27
SIGNATURES...............................................................................................27
INDEX TO EXHIBITS........................................................................................27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEPTEMBER 30, DECEMBER 31,
2008 2007
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 18
Accounts receivable, net 107,611 87,285
Refundable income taxes 103 105
Prepaid expenses and other current assets 10,881 10,273
--------- ---------
Total current assets 118,595 97,681
PROPERTY AND EQUIPMENT, NET 201,514 164,097
OTHER ASSETS
Goodwill 105,604 84,395
Other intangible assets 56,878 58,908
Deferred financing costs, net 11,576 9,161
Investment in joint ventures 18,595 15,036
Deposits and other 4,865 4,342
--------- ---------
Total other assets 197,518 171,842
--------- ---------
Total assets $ 517,627 $ 433,620
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 87,316 $ 59,965
Due to affiliates 2,323 1,350
Notes payable 5,427 3,536
Current portion of deferred rent -- 195
Obligations under capital leases 14,393 9,455
--------- ---------
Total current liabilities 109,459 74,501
--------- ---------
LONG-TERM LIABILITIES
Line of credit 13,894 4,222
Deferred rent, net of current portion 7,943 4,394
Deferred taxes 277 277
Notes payable, net of current portion 420,935 382,064
Obligations under capital lease, net of current portion 25,443 22,527
Other non-current liabilities 13,832 15,259
--------- ---------
Total long-term liabilities 482,324 428,743
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 77 206
STOCKHOLDERS' DEFICIT
Common stock - $.0001 par value, 200,000,000 shares authorized;
35,786,474 and 35,239,558 shares issued and outstanding at
September 30, 2008 and December 31, 2007, respectively 4 4
Paid-in-capital 151,901 149,631
Accumulated other comprehensive loss (3,766) (4,579)
Accumulated deficit (222,372) (214,886)
--------- ---------
Total stockholders' deficit (74,233) (69,830)
--------- ---------
Total liabilities and stockholders' deficit $ 517,627 $ 433,620
========= =========
The accompanying notes are an integral part of these financial statements.
3
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------------------ ------------------------------
2007 2008 2008 2007
------------ ------------ ------------ ------------
NET REVENUE $ 131,717 $ 110,209 $ 373,861 $ 323,051
OPERATING EXPENSES
Operating expenses 99,552 83,546 286,404 245,134
Depreciation and amortization 13,083 11,395 39,623 32,352
Provision for bad debts 7,065 6,395 20,640 20,810
Loss on disposal of equipment 1,525 180 1,495 716
Severance costs 137 30 172 815
------------ ------------ ------------ ------------
Total operating expenses 121,362 101,546 348,334 299,827
INCOME FROM OPERATIONS 10,355 8,663 25,527 23,224
OTHER EXPENSES (INCOME)
Interest expense 12,126 11,596 38,230 32,212
Other income (79) (21) (132) (72)
------------ ------------ ------------ ------------
Total other expense 12,047 11,575 38,098 32,140
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
JOINT VENTURES (1,692) (2,912) (12,571) (8,916)
Provision for income taxes (14) (86) (151) (115)
Minority interest in income of subsidiaries (27) (198) (76) (483)
Equity in earnings of joint ventures 1,871 1,103 5,312 3,080
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 138 $ (2,093) $ (7,486) $ (6,434)
============ ============ ============ ============
BASIC NET INCOME (LOSS) PER SHARE $ 0.00 $ (0.06) $ (0.21) $ (0.19)
============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER SHARE $ 0.00 $ (0.06) $ (0.21) $ (0.19)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 35,759,779 34,748,844 35,669,400 34,566,725
============ ============ ============ ============
Diluted 37,014,784 34,748,844 35,669,400 34,566,725
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
Accumulated
Other Total
Common Stock Paid-in Assumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Loss Deficit
---------- ------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2007 35,239,558 $ 4 $ 149,631 $ (214,886) $ 4,579) $ (69,830)
Issuance of common stock upon
exercise of options/warrants 546,916 -- 383 -- -- 383
Share-based compensation -- -- 1,887 -- -- 1,887
Change in fair value of
cash flow hedge -- -- -- -- 813 813
Net loss -- -- -- (7,486) -- (7,486)
Comprehensive loss (6,673)
---------- ------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2008 35,786,474 $ 4 $ 151,901 $ (222,372) $ (3,766) $ (74,233)
========== ====== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2008 2007
-------- --------
OPERATING ACTIVITIES
Net loss $ (7,486) $ (6,434)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 39,623 32,352
Provision for bad debts 20,640 20,810
Minority interest in income of subsidiaries 76 483
Distributions to minority interests (205) (740)
Equity in earnings of joint ventures (5,312) (3,080)
Distributions from joint ventures 2,334 3,572
Deferred rent 3,071 638
Amortization of deferred financing costs 1,862 1,191
Loss on disposal of equipment 1,495 716
Share-based compensation 1,887 2,883
Changes in operating assets and liabilities,
net of assets acquired and liabilities
assumed in purchase transactions:
Accounts receivable (37,619) (40,776)
Refundable income taxes -- 6,359
Other current assets 259 (1,478)
Other assets (282) 1,815
Accounts payable and accrued expenses 1,793 2,389
-------- --------
Net cash provided by operating activities 22,136 20,700
-------- --------
INVESTING ACTIVITIES
Purchase of imaging facilities (28,649) (15,665)
Purchase of property and equipment (20,950) (19,439)
Purchase of Radiologix, net of cash acquired -- (370)
Purchase of equity interest in joint ventures (728) --
Proceeds from sale of equipment 166 1,300
Purchase of covenant not to compete contract -- (250)
Payments collected on notes receivable -- 111
-------- --------
Net cash used in investing activities (50,161) (34,313)
-------- --------
FINANCING ACTIVITIES
Principal payments on notes and leases payable (13,976) (7,159)
Proceeds from borrowings on credit facility 35,000 28,865
Proceeds from borrowings on notes and revolving credit
facility 10,877 --
Deferred financing costs (4,277) (1,167)
Change in restricted cash (6,909)
Payments on line of credit -- (3,787)
Proceeds from issuance of common stock 383 549
-------- --------
Net cash provided by financing activities 28,007 10,392
-------- --------
NET DECREASE IN CASH (18) (3,221)
CASH, BEGINNING OF PERIOD 18 3,221
-------- --------
CASH, END OF PERIOD $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 36,529 $ 30,953
======== ========
The accompanying notes are an integral part of these financial statements.
6
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
We entered into capital leases for approximately $21.4 million and $16.6
million, excluding capital leases assumed in acquisitions, during the nine
months ended September 30, 2008 and 2007, respectively. We also acquired capital
equipment for approximately $19.1 million during the nine months ended September
30, 2008 that we had not paid for as of September 30, 2008. The offsetting
amount due is recorded in our consolidated balance sheet under accounts payable
and accrued expenses.
Detail of non-cash investing and financing activity related to
acquisitions can be found in Note 2.
7
RADNET, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
RadNet, Inc. or RadNet (formerly Primedex Health Systems, Inc.) ("we"
or the "Company") was incorporated on October 21, 1985 in New York. On September
3, 2008, we reincorporated in the state of Delaware. We operate a group of
regional networks comprised of 165 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 (MRI), computed tomography (CT), positron emission
tomography (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 consolidated financial statements also include the accounts of
RadNet Management, Inc., or RadNet Management, and Beverly Radiology Medical
Group III (BRMG), which is a professional partnership, 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., Radiologix, Inc., RadNet Management Imaging Services, Inc.,
Delaware Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all
wholly owned subsidiaries of RadNet Management.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 18% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
BRMG. BRMG provides all of the professional medical services at the majority of
our facilities located in California under a management agreement with us, and
contracts with various other independent physicians and physician groups to
provide the professional medical services at most of our other California
facilities. We generally obtain professional medical services from BRMG in
California, rather than provide such services directly or through subsidiaries,
in order to comply with California's prohibition against the corporate practice
of medicine. However, as a result of our close relationship with Dr. Berger and
BRMG, we believe that we are able to better ensure that medical service is
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated physician groups. The operations of
BRMG are consolidated with the Company as a result of the contractual and
operational relationship among BRMG, Dr. Berger, and us. We are considered to
have a controlling financial interest in BRMG pursuant to the guidance in
Emerging Issues Task Force Issue 97-2 (EITF 97-2). BRMG is a partnership of
Pronet Imaging Medical Group, Inc. (99%), Breastlink Medical Group, Inc. (100%)
and Beverly Radiology Medical Group, Inc. (99%), each of which are 99% or 100%
owned by Dr. Berger. RadNet provides non-medical, technical and administrative
services to BRMG for which it receives a management fee.
At a portion of our centers in California and at all of the centers
which are located outside of California, we have entered into long-term
contracts with prominent radiology groups in the area to provide physician
services at those facilities. These third party radiology practices provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our diagnostic imaging centers. The radiology practices
maintain full control over the provision of professional 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. In these facilities we enter 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, we provide management services and receive a
fee based on the practice group's professional revenue, including revenue
derived outside of our diagnostic imaging centers. We own the diagnostic imaging
equipment and, therefore, receive 100% of the technical reimbursements
associated with imaging procedures. The radiology practice groups retain the
professional reimbursements associated with imaging procedures after deducting
management service fees. Our management service fees are included in net revenue
in the consolidated statement of operations and totaled $8.7 million and $7.5
million, for the three months ended September 30, 2008 and 2007, respectively,
and $24.9 and $23.1 for the nine months ended September 30, 2008 and 2007,
respectively. We have no financial controlling interest in the contracted
radiology practices, as defined in EITF 97-2; accordingly, we do not consolidate
the financial statements of those practices in our 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 U.S. generally accepted accounting principles
complete financial statements; however, in the opinion of our management, all
adjustments consisting of normal recurring adjustments necessary for a fair
8
presentation of financial position, results of operations and cash flows for the
interim periods ended September 30, 2008 and 2007 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 December
31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital balance of $9.1 million and $23.2 million at
September 30, 2008 and December 31, 2007, respectively. We had net income of
$138,000 and a net loss of $7.5 million for the three and nine months ended
September 30, 2008, respectively. We had net losses of $2.1 million and $6.4
million for the three and nine months ended September 30, 2007, respectively. We
also had a stockholders' deficit of $74.2 million and $69.8 million at September
30, 2008 and December 31, 2007, respectively.
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 a significant amount 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 focuses on the
following:
|X| Maximizing performance at our existing facilities;
|X| Focusing on profitable contracting;
|X| Expanding MRI, CT and PET applications;
|X| Optimizing operating efficiencies; and
|X| 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. Although no assurance can be given, taking these factors
into account, including our historical experience, 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.
On February 22, 2008, we secured a second incremental $35 million
("Second Incremental Facility") of capacity as part of our existing credit
facilities with GE Commercial Finance Healthcare Financial Services. The Second
Incremental Facility consists of an additional $35 million as part of our second
lien term loan and the first lien term loan or revolving credit facility may be
increased by up to an additional $40 million sometime in the future. As part of
the transaction, partly due to a material drop in LIBOR since the credit
facilities were established in November 2006, we increased the Applicable LIBOR
Margin to 4.25% for the revolving credit facility and the term loan to 9% from
6% for the second lien term loan. The additions to our existing credit
facilities are intended to provide capital for near-term opportunities and
future expansion.
NOTE 2 - FACILITY ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On August 15, 2008, we acquired the women's imaging practice of Parvis
Gamagami, M.D., Inc. in Van Nuys, CA for $600,000. Upon acquisition, we
relocated the practice to a nearby center we recently acquired from InSight
Health in Encino, CA. We rebranded the InSight center as the Encino Breast Care
Center, and focused it on Digital Mammography, Ultrasound, MRI and other
modalities pertaining to women's health. We have allocated the full purchase
price of $600,000 to goodwill.
On July 23, 2008, we acquired the assets and business of NeuroSciences
Imaging Center in Newark, Delaware for $4.5 million in cash. The center, which
performs MRI, CT, Bone Density, X-ray, Fluoroscopy and other specialized
procedures, is located in a highly specialized medical complex called the
Neuroscience and Surgery Institute of Delaware. The acquisition complements our
9
recent purchase of the Papastavros Associates Imaging centers completed in
March, 2008. We have made a preliminary purchase price allocation of the
acquired assets and liabilities, and approximately $2.6 million of goodwill was
recorded with respect to this transaction.
On June 18, 2008, we acquired the assets and business of Ellicott Open
MRI for the assumption of approximately $181,000 of capital lease debt. We have
made a preliminary purchase price allocation of the acquired assets and
liabilities, and no goodwill was recorded with respect to this transaction.
On June 2, 2008, we acquired the assets and business of Simi Valley
Advanced Medical, a Southern California based multi-modality imaging center, for
the assumption of capital lease debt of $1.7 million. We have made a preliminary
purchase price allocation of the acquired assets and liabilities, and
approximately $313,000 of goodwill was recorded with respect to this
transaction.
On April 15, 2008, we acquired the net assets of five Los Angeles area
imaging centers from InSight Health Corp. We completed the purchase of a sixth
center in Van Nuys, CA from Insight Health Corp. on June 2, 2008. The total
purchase price for the six centers was $8.5 million in cash. The centers provide
a combination of imaging modalities, including MRI, CT, X-ray, Ultrasound and
Mammography. We have made a preliminary purchase price allocation of the
acquired assets and liabilities, and approximately $5.6 million of goodwill was
recorded with respect to this transaction.
On April 1, 2008, we acquired the net assets and business of BreastLink
Medical Group, Inc., a prominent Southern California Breast Medical Oncology
business and a leading breast surgery business, for the assumption of
approximately $4.0 million of accrued liabilities and capital lease obligations.
We have made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $2.1 million of goodwill was recorded with
respect to this transaction.
On March 12, 2008, we acquired the net assets and business of
Papastavros Associates Medical Imaging for $9.0 million in cash and the
assumption of capital leases of $337,000. Founded in 1958, Papastavros
Associates Medical Imaging is one of the largest and most established outpatient
imaging practices in Delaware. The 12 Papastavros centers offer a combination of
MRI, CT, PET, nuclear medicine, mammography, bone densitometry, fluoroscopy,
ultrasound and X-ray. We have made a preliminary purchase price allocation of
the acquired assets and liabilities, and approximately $3.4 million of goodwill,
and $1.2 million for covenants not to compete, was recorded with respect to this
transaction. In September 2008, we retired two MRI units from this acquisition
and reclassified them to Other Current Assets on our consolidated balance sheet
as of September 30, 2008, as assets held for sale. The amount reclassified was
approximately $425,000 and is what we expect to receive upon completion of the
sale of these assets during the fourth quarter of 2008.
On February 1, 2008, we acquired the net assets and business of The
Rolling Oaks Imaging Group, located in Westlake and Thousand Oaks, California,
for $6.0 million in cash and the assumption of capital leases of $2.7 million.
The practice consists of two centers, one of which is a dedicated women's
center. The centers are multimodality and include a combination of MRI, CT,
PET/CT, mammography, ultrasound and x-ray. The centers are positioned in the
community as high-end, high-quality imaging facilities that employ
state-of-the-art technology, including 3 Tesla MRI and 64 slice CT units. The
facilities have been fixtures in the Westlake/Thousand Oaks market since 2003.
We have made a preliminary purchase price allocation of the acquired assets and
liabilities, and approximately $6.7 million of goodwill was recorded with
respect to this transaction.
On October 9, 2007, we acquired the assets and business of Liberty
Pacific Imaging located in Encino, California for $2.8 million in cash. The
center operates a successful MRI practice utilizing a 3T MRI unit, the strongest
magnet strength commercially available at this time. The center was founded in
2003. The acquisition allows us to consolidate a portion of our Encino/Tarzana
MRI volume onto the existing Liberty Pacific scanner. This consolidation allows
us to move our existing 3T MRI unit in that market to our Squadron facility in
Rockland County, New York. Approximately $1.1 million of goodwill was recorded
with respect to this transaction. Also, $200,000 was recorded for the fair value
of a covenant not to compete contract.
In September 2007, we acquired the assets and business of three
facilities comprising Valley Imaging Center, Inc. located in Victorville, CA for
$3.3 million in cash plus the assumption of approximately $866,000 of debt. The
acquired centers offer a combination of MRI, CT, X-ray, Mammography, Fluoroscopy
and Ultrasound. The physician who provided the interpretive radiology services
to these three locations joined BRMG. The leased facilities associated with
these centers includes a total monthly rental of approximately $18,000.
Approximately $3.0 million of goodwill was recorded with respect to this
transaction. Also, $150,000 was recorded for the fair value of a covenant not to
compete contract.
10
In September 2007, we acquired the assets and business of Walnut Creek
Open MRI located in Walnut Creek, CA for $225,000. The center provides MRI
services. The leased facility associated with this center includes a monthly
rental of approximately $6,800 per month. Approximately $50,000 of goodwill was
recorded with respect to this transaction.
In July 2007, we acquired the assets and business of Borg Imaging Group
located in Rochester, NY for $11.6 million in cash plus the assumption of
approximately $2.4 million of debt. Borg was the owner and operator of six
imaging centers, five of which are multimodality, offering a combination of MRI,
CT, X-ray, Mammography, Fluoroscopy and Ultrasound. After combining the Borg
centers with RadNet's existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester. The leased facilities associated with
these centers includes a total monthly rental of approximately $71,000 per
month. Approximately $9.0 million of goodwill was recorded with respect to this
transaction. Also, $1.4 million was recorded for the fair value of covenant not
to compete contracts.
In March 2007, we acquired the assets and business of Rockville Open
MRI, located in Rockville, Maryland, 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 with respect to this
transaction.
DIVESTITURES
In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures for approximately $2.3 million reducing our
ownership to 49%. As a result of this transaction, we no longer consolidate this
joint venture. Accordingly, our consolidated balance sheet at December 31, 2007
includes this 49% interest as a component of our total investment in
non-consolidated joint ventures where it is accounted for under the equity
method. The amounts eliminated from our consolidated balance sheet as a result
of the deconsolidation were not material. Since the deconsolidation occurred at
the end of 2007, no significant amounts were eliminated from our statement of
operations.
In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.
In June 2007 we divested a non-core center in Duluth, Minnesota to a
local multi-center operator for $1.3 million.
NOTE 3 - INCOME (LOSS) PER SHARE
Income (loss) per share is based upon the weighted average number of
shares of common stock and common stock equivalents outstanding, as follows (in
thousands except share and per share data):
11
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Net Income (loss) $ 138 $ (2,093) $ (7,486) $ (6,434)
BASIC INCOME (LOSS) PER SHARE
Weighted average number of common shares
outstanding during the period 35,759,779 34,748,844 35,669,400 34,566,725
------------ ------------ ------------ ------------
Basic income (loss) per share $ 0.00 $ (0.06) $ (0.21) $ (0.19)
------------ ------------ ------------ ------------
DILUTED INCOME (LOSS) PER SHARE
Weighted average number of common
shares outstanding during the period 35,759,779 34,748,844 35,669,400 34,566,725
------------ ------------ ------------ ------------
Add additional shares issuable upon
exercise of stock options and warrants 1,255,005 -- -- --
------------ ------------ ------------ ------------
Weighted average number of common shares
used in calculating diluted earnings per share 37,014,784 34,748,844 35,669,400 34,566,725
------------ ------------ ------------ ------------
Diluted income (loss) per share $ 0.00 $ (0.06) $ (0.21) $ (0.19)
------------ ------------ ------------ ------------
For the nine months ended September 30, 2008 and the three and nine
months ended September 30, 2007, we excluded all options and warrants in the
calculation of diluted loss per share because their effect is antidilutive.
NOTE 4 - INVESTMENT IN JOINT VENTURES
We have nine 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 is accounted for under the equity method.
Investment in joint ventures increased $3.6 million to $18.6 million at
September 30, 2008 compared to $15.0 million at December 31, 2007. This increase
is primarily related to our purchase of an additional $728,000 of share holdings
in joint ventures that were existing as of December 31, 2007 as well as our
equity earnings of $5.3 million for the nine months ended September 30, 2008,
offset by $2.4 of distributions received during the period.
We received management service fees from the centers underlying these
joint ventures of approximately $1.7 million and $1.4 million for the three
months ended September 30, 2008 and 2007, respectively, and $5.6 million and
$3.6 million for the nine months ended September 30, 2008 and 2007,
respectively.
The following table is a summary of key financial data for these joint
ventures as of and for the nine months ended September 30, 2008 and 2007 (in
thousands):
12
SEPTEMBER 30,
----------------------
Balance Sheet Data: 2008 2007
-------- --------
Current assets $ 23,029 $ 15,531
Noncurrent assets 24,015 11,345
Current liabilities (4,560) (2,018)
Noncurrent liabilities (8,699) (558)
-------- --------
Total net assets $ 33,785 $ 24,300
======== ========
Book value of Radnet joint venture interests $ 15,212 $ 9,633
Cost in excess of book value of acquired joint venture interests 3,383 --
-------- --------
Total value of Radnet joint venture interests $ 18,595 $ 9,633
======== ========
Total book value of other joint venture partner interests $ 18,573 $ 14,667
======== ========
Net revenue $ 60,196 $ 44,080
Net income $ 13,386 $ 9,669
NOTE 5 - SHARE BASED COMPENSATION
We have three long-term incentive plans. We have not issued options
under the 1992 plan since the inception of the 2000 plan and we have not issued
options under the 2000 plan since the adoption of the 2006 plan. We have
reserved for issuance under the 2006 plan 2,500,000 shares of common stock.
Options granted under the 2006 plan to employees are intended to qualify as
incentive stock options under existing tax regulations. In addition, we issue
non-qualified stock options and warrants under the 2006 plan from time to time
to non-employees, in connection with acquisitions and for other purposes and we
may also issue stock under the plans. Stock options and warrants generally vest
over three to five years and expire five to ten years from date of grant.
As of September 30, 2008, 642,500, or approximately 39.2%, of all the
outstanding stock options and warrants under our option plans are fully vested.
During the nine months ended September 30, 2008, we granted options and warrants
to acquire 545,000 shares of common stock.
We have issued warrants outside the plan under various types of
arrangements to employees, in conjunction with debt financing and in exchange
for outside services. All warrants issued to employees, directors and
consultants after our February 2007 listing on the NASDAQ Global Market have
been characterized as awards under the 2006 plan. All warrants outside the plan
are issued with an exercise price equal to the fair market value of the
underlying common stock on the date of grant. The warrants expire from five to
seven years from the date of grant. Vesting terms are determined by the board of
directors or the compensation committee of the board of directors at the date of
grant.
As of September 30, 2008, 2,741,237, or approximately 80.4%, of all the
outstanding warrants outside the 2006 plan are fully vested. During the nine
months ended September 30, 2008, we did not grant any warrants outside the 2006
plan.
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 in operating expenses with the same line item as the
majority of the cash compensation paid to employees.
The following tables illustrate the impact of equity-based compensation
on reported amounts (in thousands except per share data):
13
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2008 2007
-------------------------- ---------------------------
IMPACT OF EQUITY-BASED IMPACT NOF EQUITY-BASED
COMPENSATION COMPENSATION
AS REPORTED COMPENSATION AS REPORTED COMPENSATION
----------- ------------ ----------- -------------
Income from operations $ 1,355 $ (831) $ 8,663 $ (281)
Income (loss) before income tax $ 152 $ (831) $(2,007) $ (281)
Net income (loss) $ 138 $ (831) $(2,093) $ (281)
Net basic income (loss) per share $ 0.00 $ 0.02) $ 0.06) $ (0.01)
Net diluted income (loss) per share $ 0.00 $ 0.02) $ 0.06) $ (0.01)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2008 2007
-------------------------- ---------------------------
IMPACT OF EQUITY-BASED IMPACT NOF EQUITY-BASED
COMPENSATION COMPENSATION
AS REPORTED COMPENSATION AS REPORTED COMPENSATION
----------- ------------ ----------- -------------
Income from operations $ 25,527 $ (1,887) $ 23,224 $ (2,883)
Loss before income tax $ (7,335) $ (1,887) $ (6,319) $ (2,883)
Net loss $ (7,486) $ (1,887) $ (6,434) $ (2,883)
Net basic loss per share $ (0.21) $ (0.05) $ (0.19) $ (0.08)
Net diluted loss per share $ (0.21) $ (0.05) $ (0.19) $ (0.08)
The following summarizes all of our option and warrant activity for the
nine months ended September 30, 2008:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
OUTSTANDING OPTIONS AND WARRANTS EXERCISE PRICE CONTRACTUAL LIFE INTRINSIC
UNDER THE 2006 PLAN SHARES PER COMMON SHARE (IN YEARS) VALUE
------------------- ------ ---------------- ---------- -----
Balance, December 31, 2007 1,165,250 $ 5.74
Granted 545,000 7.76
Exercised (50,250) 1.44
Canceled or expired (19,000) 7.69
--------
Balance, September 30, 2008 1,641,000 $ 6.52 4.92 $ 467,240
========
Exercisable at September 30, 2008 642,500 $ 5.69 1.58 $ 467,240
========
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING AGGREGATE
NON-PLAN EXERCISE PRICE CONTRACTUAL LIFE INTRINSIC
OUTSTANDING WARRANTS SHARES PER COMMON SHARE (IN YEARS) VALUE
-------------------- ------ ---------------- ---------- -----
Balance, December 31, 2007 3,996,667 $ 1.85
Granted -- --
Exercised (496,666) 1.06
Canceled or expired (90,430) 1.42
--------
Balance, September 30, 2008 3,409,571 $ 1.96 3.13 $ 7,546,359
========
Exercisable at September 30, 2008 2,741,237 $ 1.37 2.51 $ 7,343,675
========
14
The aggregate intrinsic value in the table above represents the
difference between our closing stock price on September 30, 2008 and the
exercise price, multiplied by the number of in-the-money options and warrants on
September 30, 2008. Total intrinsic value of options and warrants exercised
during the nine months ended September 30, 2008 was approximately $3.9 million.
As of September 30, 2008, total unrecognized share-based compensation expense
related to non-vested employee awards was approximately $5.8 million, which is
expected to be recognized over a weighted-average period of approximately 3.5
years.
The fair value of each option/warrant 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/warrant, 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/warrant.
The following is the weighted average data used to calculate the fair
value:
RISK-FREE EXPECTED EXPECTED EXPECTED
INTEREST RATE LIFE VOLATILITY DIVIDENDS
------------- ---- ---------- ---------
September 30, 2008 2.75% 3.7 years 74.68% --
September 30, 2007 4.64% 4.1 years 94.65% --
We have determined the expected term assumption under the "Simplified
Method" as defined in SAB 107, as amended by SAB 110. 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.
The weighted-average grant date fair value of stock options and
warrants granted during the nine months ended September 30, 2008 and 2007 was
$4.20 and $3.80, respectively.
NOTE 6 - FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States,
and expands disclosures about fair value measurements. We have adopted the
provisions of SFAS 157 as of January 1, 2008 for financial instruments. Although
the adoption of SFAS 157 did not materially impact our financial position,
results of operations, or cash flow, we are now required to provide additional
disclosures as part of our financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers are: Level 1,
defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
The Company maintains interest rate swaps which are required to be
recorded at fair value on a recurring basis. At September, 30, 2008 the fair
value of these swaps of $4.3 million was determined using Level 2 inputs and is
included in other non-current liabilities.
NOTE 7 - SUBSEQUENT EVENTS
At the close of business on Oct 31, 2008 we acquired the assets of
Middletown Imaging located in Middletown, Delaware for $1,450,000 of which
$1,239,602 consisted of the assumption of existing equipment debt with the
balance paid in cash. The facility offers MRI, CT and ultrasound.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 and
Section 21E of the Securities Exchange Act of 1934. 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," in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, as amended or supplemented by the
information if any, in Part II - Item 1A below, among others, could cause our
actual results to differ materially from those expressed in, or implied by, the
forward-looking statements.
The Company intends that all forward-looking statements made will be
subject to the safe harbor protection of the federal securities laws pursuant to
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Forward-looking statements are based upon, among other things, the Company's
assumptions with respect to:
o future revenues;
o expected performance and cash flows;
o changes in regulations affecting the Company;
o changes in third-party reimbursement rates;
o the outcome of litigation;
o the availability of radiologists at BRMG and our
other contracted radiology practices;
o competition;
o acquisitions and divestitures of businesses;
o joint ventures and other business arrangements;
o access to capital and the terms relating thereto;
o technological changes in our industry; o successful
execution of internal plans;
o compliance with our debt covenants; and
o anticipated costs of capital investments.
You should consider the limitations on, and risks associated with,
forward-looking statements and not unduly rely on the accuracy of predictions
contained in such forward-looking statements. As noted above, these
forward-looking statements speak only as of the date when they are made. The
Company does not undertake any obligation to update forward-looking statements
to reflect events, circumstances, changes in expectations, or the occurrence of
unanticipated events after the date of those statements. Moreover, in the
future, the Company, through senior management, may make forward-looking
statements that involve the risk factors and other matters described in this
Form 10-Q as well as other risk factors subsequently identified, including,
among others, those identified in the Company's filings with the SEC on Form
10-K, Form 10-Q and Form 8-K.
16
OVERVIEW
The following discussion should be read along with the unaudited
consolidated condensed financial statements included in this Form 10-Q, as well
as the Company's 2007 Annual Report on Form 10-K filed with the Securities and
Exchange Commission, which provides a more thorough discussion of the Company's
services, industry outlook, and business trends.
We operate a group of regional networks comprised of 165 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 (MRI), computed
tomography (CT), positron emission tomography (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
November 15, 2006, the date of the Company's acquisition of Radiologix. The
consolidated financial statements also include the accounts of RadNet
Management, Inc., or RadNet Management, and Beverly Radiology Medical Group III
(BRMG), which is a professional partnership, 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., Radiologix, Inc., RadNet Management Imaging Services, Inc.,
Delaware Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all
wholly owned subsidiaries of RadNet Management.
Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 18% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
BRMG. BRMG provides all of the professional medical services at the majority of
our facilities located in California under a management agreement with us, and
contracts with various other independent physicians and physician groups to
provide the professional medical services at most of our other California
facilities. We generally obtain professional medical services from BRMG in
California, rather than provide such services directly or through subsidiaries,
in order to comply with California's prohibition against the corporate practice
of medicine. However, as a result of our close relationship with Dr. Berger and
BRMG, we believe that we are able to better ensure that medical service is
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated physician groups. The operations of
BRMG are consolidated with the Company as a result of the contractual and
operational relationship among BRMG, Dr. Berger, and us. We are considered to
have a controlling financial interest in BRMG pursuant to the guidance in
Emerging Issues Task Force Issue 97-2 (EITF 97-2). BRMG is a partnership of
Pronet Imaging Medical Group, Inc. (99%), Breastlink Medical Group, Inc. (100%)
and Beverly Radiology Medical Group, Inc. (99%), each of which are 99% or 100%
owned by Dr. Berger. RadNet provides non-medical, technical and administrative
services to BRMG for which it receives a management fee.
At a portion of our centers in California and at all of the centers
which are located outside of California, we have entered into long-term
contracts with prominent radiology groups in the area to provide physician
services at those facilities. These third party radiology practices provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our diagnostic imaging centers. The radiology practices
maintain full control over the provision of professional 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.
In these facilities we enter 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, we provide management services and receive a
fee based on the practice group's professional revenue, including revenue
derived outside of our diagnostic imaging centers. We own the diagnostic imaging
assets and, therefore, receive 100% of the technical reimbursements associated
with imaging procedures. We have no financial controlling interest in the
contracted radiology practices, as defined in EITF 97-2; accordingly, we do not
consolidate the financial statements of those practices in our consolidated
financial statements.
17
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 U.S. 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 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.
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 our
annual report on Form 10-K for the fiscal year ended December 31, 2007.
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.
18
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2007 2008 2008 2007
------- ------- ------- -------
NET REVENUE 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 75.8% 76.6% 75.6% 75.9%
Depreciation and amortization 10.3% 10.6% 9.9% 10.0%
Provision for bad debts 5.8% 5.5% 5.4% 6.4%
Loss on disposal of equipment 0.2% 0.4% 1.2% 0.2%
Severance costs 0.0% 0.0% 0.1% 0.3%
------- ------- ------- -------
Total operating expenses 92.1% 93.2% 92.1% 92.8%
INCOME FROM OPERATIONS 7.9% 6.8% 7.9% 7.2%
OTHER EXPENSES (INCOME)
Interest expense 10.5% 10.2% 9.2% 10.0%
Other income 0.0% 0.0% -0.1% 0.0%
------- ------- ------- -------
Total other expense 10.5% 10.2% 9.1% 9.9%
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
JOINT VENTURES -2.6% -3.4% -1.3% -2.8%
Provision for income taxes -0.1% 0.0% 0.0% 0.0%
Minority interest in income of subsidiaries -0.2% 0.0% 0.0% -0.1%
Equity in earnings of joint ventures 1.0% 1.4% 1.4% 1.0%
------- ------- ------- -------
NET INCOME (LOSS) -1.9% -2.0% 0.1% -2.0%
------- ------- ------- -------
THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2007
NET REVENUE
Net revenue for the three months ended September 30, 2008 was $131.7
million compared to $110.2 million for the three months ended September 30,
2007, an increase of $21.5 million, or 19.5%.
Net revenue, including only those centers which were in operation
throughout the third quarters of both 2008 and 2007 increased $6.0 million, or
5.6%. This 5.6% increase is mainly due to an increase in procedure volumes. This
comparison excludes revenue contributions from centers that were acquired or
divested subsequent to June 30, 2007. For the three months ended September 30,
2008, net revenue from centers that were acquired subsequent to June 30, 2007
and excluded from the above comparison (see Note 2) was $18.3 million.
Contributing to the net revenue of the third quarter ended September 30, 2007
and excluded from the above comparison was $2.8 million from centers that were
divested and were not operational in the third quarter ended September 30, 2008.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2008
increased approximately $19.8 million, or 19.5%, from $101.6 million for the
three months ended September 30, 2007 to $121.4 million for the three months
ended September 30, 2008. The following table sets forth our operating expenses
for the three months ended June 30, 2008 and 2007 (in thousands):
19
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2008 2007
-------- --------
Salaries and professional reading fees,
excluding stock compensation $ 54,217 $ 45,053
Share-based compensation 831 281
Building and equipment rental 10,968 10,927
General administrative expenses 33,536 27,285
-------- --------
Operating expenses 99,552 83,546
Depreciation and amortization 13,083 11,395
Provision for bad debts 7,065 6,395
Loss on disposal of equipment 1,525 180
Severance costs 137 30
-------- --------
Total operating expenses $121,362 $101,546
======== ========
SALARIES AND PROFESSIONAL READING FEES, EXCLUDING STOCK COMPENSATION AND
SEVERANCE
Salaries and professional reading fees increased $9.2 million, or
20.3%, to $54.2 million for the three months ended September 30, 2008 compared
to $45.0 million for the three months ended September 30, 2007.
Salaries and professional reading fees, including only those centers
which were in operation throughout the third quarters of both 2008 and 2007,
increased $2.8 million, or 6.3%. This 6.3% increase is primarily due to
increased salaries and staffing to support the revenue growth of these existing
imaging centers. This comparison excludes contributions from centers that were
acquired or divested subsequent to June 30, 2007. For the three months ended
September 30, 2008, salaries and professional reading fees from centers that
were acquired subsequent to June 30, 2007 and excluded from the above comparison
(see Note 2) was $6.8 million. Contributing to the salaries and professional
reading fees of the third quarter ended September 30, 2007 and excluded from the
above comparison was $460,000 from centers that were divested and were not
operational in the third quarter ended September 30, 2008.
SHARE-BASED COMPENSATION
Share-based compensation increased $550,000, or 195.7%, to $831,000 for
the three months ended September 30, 2008 compared to $281,000 for the three
months ended September 30, 2007. The increase is primarily due to additional
options granted during the second half of 2007 and the first half of 2008.
BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $41,000, or 0.4%, to
$11.0 million for the three months ended September 30, 2008 compared to $10.9
million for the three months ended September 30, 2007.
Building and equipment rental expenses, including only those centers
which were in operation throughout the third quarters of both 2008 and 2007,
decreased $918,000, or 8.6%. This 8.6% decrease is primarily due to the
conversion of certain equipment leases contracts from operating to capital
leases. This comparison excludes contributions from centers that were acquired
or divested subsequent to June 30, 2007. For the three months ended September
30, 2008, building and equipment rental expenses from centers that were acquired
subsequent to June 30, 2007 and excluded from the above comparison (see Note 2)
was $1.3 million. Contributing to the building and equipment rental expenses of
the third quarter ended September 30, 2007 and excluded from the above
comparison was $303,000 from centers that were divested and were not operational
in the third quarter ended September 30, 2008.
20
GENERAL AND ADMINISTRATIVE EXPENSES
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 medical supplies and billing
fees, which increase with volume and repairs and maintenance under our GE
service agreement as a percentage of net revenue. Overall, general and
administrative expenses increased $6.3 million, or 22.9%, for the three months
ended September 30, 2008 compared to the previous period. The increase is in
line with our increase in procedure volumes at both existing centers as well as
newly acquired centers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1.7 million, or 14.8%, to
$13.1 million for the three months ended September 30, 2008 compared to the same
period last year. The increase is primarily due to property and equipment
additions for existing centers as well as newly acquired centers.
PROVISION FOR BAD DEBTS
Provision for bad debts increased $670,000, or 10.5%, to $7.1 million,
or 5.3% of net revenue, for the three months ended September 30, 2008 compared
to $6.4 million, or 5.8% of net revenue, for the three months ended September
30, 2007. The decrease in our provision for bad debts as a percentage of revenue
is primarily due to an increase in collection performance and the completion of
our billing system implementation which began in the first quarter of 2007.
LOSS ON DISPOSAL OF EQUIPMENT
Loss on disposal of equipment was $1.5 million and $180,000 for the
three months ended September 30, 2008 and 2007, respectively. The loss on
disposal in 2008 and 2007 primarily related to assets acquired in our November
2006 purchase of Radiologix.
SEVERANCE COSTS
During the three months ended September 30, 2008, we recorded severance
costs of $137,000 compared to $30,000 recorded during the three months ended
September 30, 2007. In each period, these costs were primarily associated with
the integration of Radiologix and other acquired operations.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2008
increased approximately $530,000, or 4.6%, from the same period in 2007.
Included in interest expense for the three months ended September 30, 2008 and
2007 is amortization of deferred loan costs of $669,000 and $498,000,
respectively as well as realized gains on our fair value hedges of $1.3 million
for the three months ended September 30, 2008 and realized losses of $712,000 in
2007, respectively. The increase in interest expense exclusive of adjustments
for our fair value hedges is primarily due to the $60 million increase in Term
Loans B & C and increased borrowing on the line of credit.
INCOME TAX EXPENSE
For the three months ended September 30, 2008, we recorded $14,000 in
income tax expense related to certain state tax obligations of Radiologix.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the three months ended September 30, 2008, we recognized equity in
earnings from unconsolidated joint ventures of $1.9 million compared to $1.1
million for the three months ended September 30, 2007. This increase is due to
our purchase of additional equity interests in certain existing joint ventures
as well as the deconsolidation in the fourth quarter of 2007of a previously
consolidated joint venture increasing the number of our consolidated joint
ventures from eight to nine.
21
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2007
NET REVENUE
Net revenue for the nine months ended September 30, 2008 was $373.9
million compared to $323.1 million for the nine months ended September 30, 2007,
an increase of $50.8 million, or 15.7%.
Net revenue, including only those centers which were in operation
throughout the first nine months of both 2008 and 2007, increased $15.8 million,
or 4.9%. This 4.9% increase is mainly due to an increase in procedure volumes.
This comparison excludes revenue contributions from centers that were acquired
or divested subsequent to January 1, 2007. For the nine months ended September
30, 2008, net revenue from centers that were acquired subsequent to January 1,
2007 and excluded from the above comparison (see Note 2) was $48.3 million. For
the nine months ended September 30, 2007, net revenue from centers that were
acquired subsequent to January 1, 2007 and excluded from the above comparison
(see Note 2) was $4.2 million. Also excluded was $9.1 million from centers that
were divested subsequent to January 1, 2007.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2008
increased approximately $48.5 million, or 16.2%, from $299.8 million for the
nine months ended September 30, 2007 to $348.3 million for the nine months ended
September 30, 2008. The following table sets forth our operating expenses for
the nine months ended September 30, 2008 and 2007 (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2008 2007
-------- --------
Salaries and professional reading fees,
excluding stock compensation $157,27 $131,214
Share-based compensation 1,887 2,883
Building and equipment rental 31,860 31,033
General administrative expenses 95,378 79,884
NASDAQ one-time listing fee -- 120
-------- --------
Operating expenses 286,404 245,134
Depreciation and amortization 39,623 32,352
Provision for bad debts 20,640 20,810
Loss on disposal of equipment 1,495 716
Severance costs 172 815
-------- --------
Total operating expenses $348,334 $299,827
======== ========
SALARIES AND PROFESSIONAL READING FEES, EXCLUDING STOCK COMPENSATION AND
SEVERANCE
Salaries and professional reading fees increased $26.1 million, or
19.9%, to $157.3 million for the nine months ended September 30, 2008 compared
to $131.2 million for the nine months ended September 30, 2007.
Salaries and professional reading fees, including only those centers
which were in operation throughout the first nine months of both 2008 and 2007,
increased $12.3 million, or 9.4%. This 9.4% increase is primarily due to
increased salaries and staffing to support the revenue growth of these existing
imaging centers. This comparison excludes contributions from centers that were
acquired or divested subsequent to January 1, 2007. For the nine months ended
September 30, 2008, salaries and professional reading fees from centers that
were acquired subsequent to January 1, 2007 and excluded from the above
comparison (see Note 2) was $17.5 million. For the nine months ended September
30, 2007, salaries and professional reading fees from centers that were acquired
subsequent to January 1, 2007 and excluded from the above comparison (see Note
2) was $1.1 million. Also excluded was $2.6 million from centers that were
divested subsequent to January 1, 2007.
22
SHARE-BASED COMPENSATION
Share-based compensation decreased $1.0 million, or 34.6%, to $1.9
million for the nine months ended September 30, 2008 compared to $2.9 million
for the nine months ended September 30, 2007. Share-based compensation for the
nine months ended September 30, 2007 included $1.7 million of additional stock
based compensation expense as a result of the acceleration of vesting of certain
warrants.
BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $827,000, or 2.7%, to
$31.9 million for the nine months ended September 30, 2008 compared to $31.1
million for the nine months ended September 30, 2007.
Building and equipment rental expenses, including only those centers
which were in operation throughout the first nine months of both 2008 and 2007,
decreased $2.0 million, or 6.5%. This 6.5% decrease is primarily due to the
conversion of certain equipment leases contracts from operating to capital
leases. This comparison excludes contributions from centers that were acquired
or divested subsequent to January 1, 2007. For the nine months ended September
30, 2008, building and equipment rental expenses from centers that were acquired
subsequent to January 1, 2007 and excluded from the above comparison (see Note
2) was $4.4 million. For the nine months ended September 30, 2007, building and
equipment rental expenses from centers that were acquired subsequent to January
1, 2007 and excluded from the above comparison (see Note 2) was $561,000. Also
excluded was $987,000 from centers that were divested subsequent to January 1,
2007.
GENERAL AND ADMINISTRATIVE EXPENSES
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 medical supplies and billing
fees, which increase with volume and repairs and maintenance under our GE
service agreement as a percentage of net revenue. Overall, general and
administrative expenses increased $15.5 million, or 19.4%, for the nine months
ended September 30, 2008 compared to the previous period. The increase is in
line with our increase in procedure volumes at both existing centers as well as
newly acquired centers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $7.3 million, or 22.5%, to
$39.6 million for the nine months ended September 30, 2008 when compared to the
same period last year. The increase is primarily due to property and equipment
additions for existing centers and newly acquired centers.
PROVISION FOR BAD DEBTS
Provision for bad debts decreased $170,000, or 0.8%, to $20.6 million,
or 5.5% of net revenue, for the nine months ended September 30, 2008 compared to
$20.8 million, or 6.4% of net revenue, for the nine months ended September 30,
2007. The decrease in our provision for bad debts as a percentage of revenue is
primarily due to an increase in collection performance and the completion of our
billing system implementation which began in the first quarter of 2007.
LOSS ON DISPOSAL OF EQUIPMENT
Loss on disposal of equipment was $1.5 million and $716,000 for the
nine months ended September 30, 2008 and 2007, respectively. The loss on
disposal in 2008 and 2007 primarily related to assets acquired in our November
2006 purchase of Radiologix.
SEVERANCE COSTS
During the nine months ended September 30, 2008, we recorded severance
costs of $172,000 compared to $815,000 recorded during the nine months ended
September 30, 2007. In each period, these costs were primarily associated with
the integration of Radiologix and other acquired operations.
23
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2008 increased
approximately $6.0 million, or 18.7%, from the same period in 2007. The increase
is primarily due to the $60 million increase in Term Loans B & C and increased
borrowing on the line of credit. Also included in interest expense for the nine
months ended September 30, 2008 and 2007 is amortization of deferred loan costs
of $1.5 million and $1.5 million, respectively, as well as realized gains of
$1.0 million and realized losses of $155,000 on our fair value hedges for the
nine months ended September 30, 2008 and 2007, respectively.
INCOME TAX EXPENSE
For the nine months ended September 30, 2008 and 2007, we recorded
$151,000 and $115,000, respectively, for income tax expense related to certain
state tax obligations of Radiologix.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the nine months ended September 30, 2008, we recognized equity in
earnings from unconsolidated joint ventures of $5.3 million compared to $3.1
million for the nine months ended September 30, 2007. This increase is due to
our purchase of additional equity interests in certain existing joint ventures
as well as the deconsolidation in the fourth quarter of 2007of a previously
consolidated joint venture increasing the number of our consolidated joint
ventures from eight to nine.
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 provide
financing for working capital needs post-acquisition. The facility consists of a
revolving credit facility of up to $45 million, a $225 million first lien 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.
On August 23, 2007, we secured an incremental $35 million ("Incremental
Facility") as part of our existing credit facilities with GE Commercial Finance
Healthcare Financial Services. The Incremental Facility consists of an
additional $25 million as part of our first lien Term Loan and $10 million of
additional capacity under our existing revolving line of credit. The Incremental
Facility will be used to fund certain identified strategic initiatives and for
general corporate purposes.
On February 22, 2008, we secured a second incremental $35 million
("Second Incremental Facility") of capacity as part of our existing credit
facilities with GE Commercial Finance Healthcare Financial Services. The Second
Incremental Facility consists of an additional $35 million as part of our second
lien term loan and the first lien term loan or revolving credit facility may be
increased by up to an additional $40 million sometime in the future. As part of
the transaction, partly due to the drop in LIBOR of over 2.00% since the credit
facilities were established in November 2006, we increased the Applicable LIBOR
Margin to 4.25% for the revolving credit facility and first lien term loan and
to 9.0% for the second lien term loan. The additions to our existing credit
facilities are intended to provide capital for near-term opportunities and
future expansion.
24
As part of the senior secured credit facility financing, we swapped 50%
of the aggregate principal amount of the facilities to a floating rate within 90
days of the closing. 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 that 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 a decrease to
interest expense of approximately $1.0 million, and an increase to interest
expense of $155,000 for the nine months ended September 30, 2008 and 2007,
respectively. The corresponding liability of approximately $500,000 is included
in the other non-current liabilities in the consolidated balance sheets at
September 30, 2008. Of the derivatives that were designated as cash flow hedging
instruments, we recorded $3.8 million to accumulated other comprehensive loss,
and an offsetting liability of the same amount for the fair value of these
hedging instruments at September 30, 2008.
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:
|X| Maximizing performance at our existing facilities;
|X| Focusing on profitable contracting;
|X| Expanding MRI, CT and PET applications;
|X| Optimizing operating efficiencies; and
|X| 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.
SOURCES AND USES OF CASH
Cash provided by operating activities was $22.1 million and $20.7
million for the nine months ended September 30, 2008 and 2007, respectively.
Cash used in investing activities was $50.2 million and $34.3 million
for the nine months ended September 30, 2008 and 2007, respectively. For the
nine months ended September 30, 2008, we purchased property and equipment for
approximately $21.0 million and acquired the assets and businesses of additional
imaging facilities for approximately $28.7 million (see Note 2). We also
purchased additional equity interests in joint ventures totaling $728,000.
25
Cash provided by financing activities was $28.0 million and $10.4
million for the nine months ended September 30, 2008 and 2007, respectively. The
cash provided by financing activities for the nine months ended September 30,
2008 was primarily related to our borrowing of an additional $35 million as part
of our second lien term loan with GE Commercial Healthcare Financial Services as
well as additional borrowings on our line of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency. 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.
Interest Rates. 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. 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. 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. Until February 22, 2008, the Applicable Index Margin on each the
revolving credit facility and the term loan was 2% and on the second lien term
loan was 6%. We may request that the interest rate instead be based on LIBOR
plus the Applicable LIBOR Margin, which was 3.5% for the revolving credit
facility and the term loan and 7.5% for the second lien term loan.
On February 22, 2008, we secured an incremental $35 million ("Second
Incremental Facility") as part of our existing credit facilities with GE
Commercial Finance Healthcare Financial Services. The Second Incremental
Facility consists of an additional $35 million as part of our second lien term
loan and the ability to further increase the second lien term loan by up to $25
million and the first line term loan or revolving credit facility by up to an
additional $40 million sometime in the future. As part of the transaction,
partly due to the drop in LIBOR of over 2.00% since the credit facilities were
established in November 2006, we increased the Applicable LIBOR Margin to 4.25%
for the revolving credit facility and the term loan and 9.0% for the second lien
term loan.
Debentures. As part of the financing, we were required to swap 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 November 15, 2006. 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.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as defined under Rule l3a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were not effective as of
September 30, 2008, the end of the period covered by this quarterly report on
Form 10-Q, due to the existence of material weaknesses in our financial
statement close process and our entity level controls.
26
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
At September 30, 2008, the status of all current legal matters
previously disclosed in Part 1, Item 3, of our Form 10-K for the year ended
December 31, 2007 is unchanged except:
In Re DVI, Inc. Securities Litigation. UNITED STATES DISTRICT COURT,
EASTERN DISTRICT OF PA, DOCKET NO. 2:03-CV-05336-LDD
This is a class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by shareholders of DVI,
Inc. ("DVI"), one of our former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.
The putative plaintiff class consists of those persons who purchased or
otherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the fact that existing
DVI loans on the centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.
We denied all allegations.
We and the plaintiff have executed a stipulation to dismiss us from the
case in consideration of our agreement to waive our claim for costs against the
plaintiff. The dismissal is subject to notice to the class and court approval.
ITEM 1A RISK FACTORS
In addition to the other information set forth in this report, we urge
you to carefully consider the factors discussed in Part I, "Item 1A Risk
Factors" in our Form 10-K for the year ended December 31, 2007, which could
materially affect our business, financial condition and results of operations.
The risks described in our Form 10-K 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
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
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.
27
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: November 10, 2008 By /s/ Howard G. Berger, M.D.
------------------------------------
Howard G. Berger, M.D., President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 2008 By /s/ Mark D. Stolper
------------------------------------
Mark D. Stolper, Chief Financial
Officer(Principal Financial and
Accounting Officer)
28
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
29