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, 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)
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, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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
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 12,
2008, was 35,667,891 shares (excluding treasury shares).
Table of Contents
RADNET, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 2008 (unaudited) and
December 31, 2007
Consolidated Statements of Operations (unaudited) for the Three
Months ended March 31, 2008 and 2007
Consolidated Statement of Stockholders' Deficit (unaudited) for
the Three Months ended March 31, 2008
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 2008 and 2007
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 4. Controls and Procedures
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
ITEM 1A. Risk Factors
ITEM 6 Exhibits
SIGNATURES
INDEX TO EXHIBITS
2
PART 1 - FINANCIAL INFORMATION
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
March 31, December 31,
2008 2007
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 18
Restricted cash 8,046 --
Accounts receivable, net 96,963 87,285
Refundable income taxes 103 105
Prepaid expenses and other current assets 11,356 10,273
------------ ------------
Total current assets 116,468 97,681
PROPERTY AND EQUIPMENT, NET 194,599 164,097
OTHER ASSETS
Goodwill 94,040 84,395
Other intangible assets 59,064 58,908
Deferred financing costs, net 12,825 9,161
Investment in joint ventures 16,011 15,036
Deposits and other 4,916 4,342
------------ ------------
Total other assets 186,856 171,842
------------ ------------
Total assets $ 497,923 $ 433,620
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 73,684 $ 59,965
Due to affiliates 809 1,350
Notes payable 4,802 3,536
Current portion of deferred rent 195 195
Obligations under capital leases 11,780 9,455
------------ ------------
Total current liabilities 91,270 74,501
------------ ------------
LONG-TERM LIABILITIES
Line of credit 12,379 4,222
Deferred rent, net of current portion 4,684 4,394
Deferred taxes 277 277
Notes payable, net of current portion 420,050 382,064
Obligations under capital lease, net of current portion 27,268 22,527
Other non-current liabilities 20,357 15,259
------------ ------------
Total long-term liabilities 485,015 428,743
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS 220 206
STOCKHOLDERS' DEFICIT
Common stock - $.0001 par value, 200,000,000 shares authorized;
35,667,891 and 35,239,558 shares issued and outstanding at
March 31, 2008 and December 31, 2007, respectively 4 4
Paid-in-capital 150,346 149,631
Accumulated other comprehensive loss (8,571) (4,579)
Accumulated deficit (220,361) (214,886)
------------ ------------
Total stockholders' deficit (78,582) (69,830)
------------ ------------
Total liabilities and stockholders' deficit $ 497,923 $ 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
March 31,
----------------------------
2008 2007
------------ ------------
NET REVENUE $ 114,698 $ 105,815
OPERATING EXPENSES
Operating expenses 88,966 82,405
Depreciation and amortization 12,469 10,910
Provision for bad debts 6,487 7,553
Loss on sale of equipment 8 --
Severance costs 31 538
------------ ------------
Total operating expenses 107,961 101,406
INCOME FROM OPERATIONS 6,737 4,409
OTHER EXPENSES (INCOME)
Interest expense 13,588 10,837
Other income (32) --
------------ ------------
Total other expense 13,556 10,837
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
JOINT VENTURES (6,819) (6,428)
Provision for income taxes (123) (16)
Minority interest in income of subsidiaries (24) (115)
Equity in earnings of joint ventures 1,491 995
------------ ------------
NET LOSS $ (5,475) $ (5,564)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.15) $ (0.16)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted 35,561,041 34,386,915
============ ============
The accompanying notes are an integral part of these financial statements.
4
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 2008 (unaudited)
(IN THOUSANDS EXCEPT SHARE DATA)
Accumulated
Common Stock Other Total
-------------------------- Paid-in Accumulated 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 428,333 261 -- -- 261
Share-based compensation -- 454 -- -- 454
Change in fair value of -- --
cash flow hedge -- -- -- -- (3,992) (3,992)
Net loss -- -- -- (5,475) -- (5,475)
-----------
Comprehensive loss (9,467)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - MARCH 31, 2008 35,667,891 $ 4 $ 150,346 $ (220,361) $ (8,571) $ (78,582)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(unaudited)
Three Months Ended
March 31,
2008 2007
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,475) $ (5,564)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,469 10,910
Provision for bad debts 6,487 7,553
Minority interest in income of subsidiaries 24 115
Distributions to minority interests (10) (319)
Equity in earnings of joint ventures (1,491) (995)
Distributions from joint ventures 844 1,164
Deferred rent amortization 290 --
Amortization of deferred financing costs 531 469
Net loss on disposal of assets 8 --
Share-based compensation 454 2,220
Changes in operating assets and liabilities, net of assets
acquired and liabilities assumed in purchase transactions:
Accounts receivable (14,182) (14,406)
Other current assets (1,027) (1,072)
Other assets (573) 1,700
Accounts payable and accrued expenses (1,042) 7,237
------------ ------------
Net cash provided by (used in) operating activities (2,693) 9,012
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of imaging facilities (15,028) (540)
Purchase of property and equipment (9,743) (4,790)
Purchase of Radiologix, net of cash acquired -- (244)
Purchase of equity interest in joint ventures (328) --
Proceeds from sale of equipment 228 --
Purchase of covenant not to compete contract -- (250)
Payments collected on notes receivable -- 111
------------ ------------
Net cash used in investing activities (24,871) (5,713)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash disbursements in transit -- (4,413)
Change in restricted cash (8,046) --
Principal payments on notes and leases payable (4,410) (1,412)
Proceeds from borrowings on credit facility 35,000 --
Net proceeds from borrowings on notes and revolving credit facility 8,936 100
Deferred financing costs (4,195) --
Payments on line of credit -- (22)
Proceeds from issuance of common stock 261 402
------------ ------------
Net cash provided by (used in) financing activities 27,546 (5,345)
------------ ------------
NET DECREASE IN CASH (18) (2,046)
CASH, beginning of period 18 3,221
------------ ------------
CASH, end of period $ -- $ 1,175
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 11,446 $ 9,515
============ ============
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 $12.1 million and $4.2
million, excluding capital leases assumed in acquisitions, for the three months
ended March 31, 2008 and 2007, respectively. We also acquired capital equipment
for approximately $13.2 million during the three months ended March 31, 2008
that we had not paid for as of March 31, 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. We operate a group of
regional networks comprised of 155 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., 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 16% 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 80 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. At 13 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. 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. 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.
Outside of California (and in 13 of our California facilities) we contract
with third party radiology practices to 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 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. 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 $8.3 million and $7.9 million for the three
months ended March 31 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
presentation of financial position, results of operations and cash flows for the
interim periods ended March 31, 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.
8
LIQUIDITY AND CAPITAL RESOURCES
We had a working capital balance of $25.2 million and $23.2 million at
March 31, 2008, and December 31, 2007, respectively. We had net losses of $5.5
million and $5.6 million for the three months ended March 31, 2008 and 2007,
respectively. We also had a stockholders' deficit of $78.6 million and $69.8
million at March 31, 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:
o Maximizing performance at our existing facilities;
o Focusing on profitable contracting;
o Expanding MRI, CT and PET 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. 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 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 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
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 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 $3.2 million of goodwill, and $1.2
million for covenants not to compete, was recorded with respect to this
transaction.
9
NOTE 3 - LOSS PER SHARE
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):
Three Months Ended
March 31,
----------------------------
2008 2007
------------ ------------
(unaudited)
Net loss $ (5,475) $ (5,564)
BASIC LOSS PER SHARE
Weighted average number of common shares
outstanding during the period 35,561,041 34,386,915
------------ ------------
Basic loss per share $ (0.15) $ (0.16)
------------ ------------
DILUTED LOSS PER SHARE
Weighted average number of common shares
outstanding during the period 35,561,041 34,386,915
------------ ------------
Add additional shares issuable upon
exercise of stock options and warrants -- --
------------ ------------
Weighted average number of common shares
used in calculating diluted earnings per share 35,561,041 34,386,915
------------ ------------
Diluted loss per share $ (0.15) $ (0.16)
------------ ------------
For the three months ended March 31, 2008 and 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 $1.0 million to $16.0 million at March
31, 2008 compared to $15.0 million at December 31, 2007. This increase is
primarily related to our purchase of an additional $328,000 of share holdings in
joint ventures that were existing as of December 31, 2007 as well as our equity
earnings of $1.5 million for the three months ended March 31, 2008, offset by
$844,000 of distributions received during the period.
Total assets at March 31, 2008 include notes receivable from certain
unconsolidated joint ventures aggregating $254,000. Interest income related to
these notes receivable was approximately $5,000 and $17,000 for the three months
ended March 31, 2008 and 2007, respectively. We also received management service
fees from the centers underlying these joint ventures of $1.8 million and $1.0
million for the three months ended March 31, 2008 and 2007, respectively.
10
The following table is a summary of key financial data for these joint
ventures as of and for the three months ended March 31, 2008 and 2007 (in
thousands):
March 31,
----------------------------
Balance Sheet Data: 2008 2007
------------ ------------
Current assets $ 17,322 $ 16,578
Noncurrent assets 24,826 12,995
Current liabilities (5,342) (3,365)
Noncurrent liabilities (9,397) (811)
------------ ------------
Total net assets $ 27,409 $ 25,397
============ ============
Book value of Radnet joint venture interests $ 12,831 $ 9,957
Cost in excess of book value of acquired joint venture interests 3,180 --
------------ ------------
Total value of Radnet joint venture interests $ 16,011 $ 9,957
============ ============
Total book value of other joint venture partner interests $ 14,578 $ 15,440
============ ============
Statement of Operations Data:
Net revenue $ 19,507 $ 14,709
Net income $ 3,831 $ 3,206
NOTE 5 - SHARE BASED COMPENSATION
We have three long-term incentive 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 2,500,000
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 and warrants from time to time in connection
with acquisitions and for other purposes and have also issued stock under the
plans. Employee stock options and warrants generally vest over three to five
years and expire five to ten years from date of grant.
As of March 31, 2008, 345,250, or approximately 28.3%, of all the
outstanding stock options and warrants are fully vested. During the three months
ended March 31, 2008, we granted options and warrants to acquire 120,000 shares
of common stock.
We have issued warrants outside the 2006 plan under various types of
arrangements to employees, in conjunction with debt financing and in exchange
for outside services. 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 issuance. 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 issuance.
As of March 31, 2008, 2,817,904, or approximately 79.5%, of all the
outstanding warrants outside the 2006 plan are fully vested. During the three
months ended March 31, 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):
For the Three Months Ended March 31,
--------------------------------------------------------
2008 2007
-------------------------- --------------------------
Impact of Equity-Based Impact of Equity-Based
Compensation Compensation
As Reported Compensation As Reported Compensation
----------- ----------- ----------- -----------
Income from operations $ 6,737 $ (454) $ 4,409 $ (2,220)
Loss before income tax $ (5,352) $ (454) $ (5,548) $ (2,220)
Net loss $ (5,475) $ (454) $ (5,564) $ (2,220)
Net basic and diluted loss per share $ (0.15) $ (0.01) $ (0.16) $ (0.06)
11
The following summarizes all of our option and warrant activity for the
three months ended March 31, 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 120,000 7.78
Exercised (50,000) 1.44
Canceled or expired (15,000) 9.50
------------
Balance, March 31, 2008 1,220,250 $ 6.07 5.48 $ 1,751,780
============
Exercisable at March 31, 2008 345,250 $ 3.96 1.08 $ 1,113,780
============
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, 2006 3,996,667 $ 1.85
Granted - --
Exercised (378,333) 1.07
Canceled or expired (73,763) 1.85
--------------
Balance, March 31, 2008 3,544,571 $ 1.93 3.53 $ 18,116,393
==============
Exercisable at March 31, 2008 2,817,904 $ 1.29 2.77 $ 16,194,325
==============
The aggregate intrinsic value in the table above represents the difference
between our closing stock price on March 31, 2008 and the exercise price,
multiplied by the number of in-the-money options and warrants on March 31, 2008.
Total intrinsic value of options and warrants exercised during the three months
ended March 31, 2008 was approximately $3.2 million. As of March 31, 2008, total
unrecognized share-based compensation expense related to non-vested employee
awards was approximately $5.6 million, which is expected to be recognized over a
weighted average period of approximately 4.0 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
------------- --------- ---------- ---------
March 31, 2008 2.52% 4.2 years 86.17% --
March 31, 2007 4.66% 3.8 years 94.36% --
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 three months ended March 31, 2008 and 2007 was $4.95 and
$3.19, respectively.
12
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 March, 31, 2008 the fair value
of these swaps of $11.1 million was determined using Level 2 inputs and is
included in other non-current liabilities.
NOTE 7 - SUBSEQUENT EVENTS
On April 15, 2008, we completed our purchase of the assets of five of six
previously announced Los Angeles area imaging centers from InSight Health Corp.
The completion of our purchase of the sixth center, in Van Nuys, California, is
pending third-party approvals. The centers we acquired include the former
InSight centers in Simi Valley, Thousand Oaks, Westlake, Encino, and Valencia.
The centers provide a combination of imaging modalities, including MRI, CT,
X-ray, Ultrasound and Mammography. The cash purchase price was funded by a
portion of the recently completed incremental term loan provided by GE
Healthcare Financial Services. The operations of the five centers historically
have produced approximately $7 million in annual revenue.
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, 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," 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 of 1933 and Section 21E of the Securities
Exchange Act of 1934. 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.
13
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 Securities and
Exchange Commission on Form 10-K, Form 10-Q and Form 8-K.
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 155 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 the date of
acquisition, November 15, 2006. 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., Diagnostic Imaging
Services, Inc. (DIS), Delaware Imaging Partners, Inc. and Radiologix, Inc., 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 16% 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 77 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 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. At 13 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. The operations of BRMG are
consolidated with us 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. 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 (see "BRMG" for a discussion of
our management agreement with BRMG).
Outside of California we contract with radiology practices to provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our non-California diagnostic imaging centers and 10
California 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.
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.
14
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 reflect 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.
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
---------------------
2008 2007
------- -------
NET REVENUE 100.0% 100.0%
OPERATING EXPENSES
Operating expenses 77.6% 77.9%
Depreciation and amortization 10.9% 10.3%
Provision for bad debts 5.7% 7.1%
Loss on sale of equipment 0.0% 0.0%
Severance costs 0.0% 0.5%
------- -------
Total operating expenses 94.1% 95.8%
INCOME FROM OPERATIONS 5.9% 4.2%
OTHER EXPENSES (INCOME)
Interest expense 11.8% 10.2%
Other expense 0.0% 0.0%
------- -------
Total other expense 11.8% 10.2%
LOSS BEFORE INCOME TAXES, MINORITY
INTERESTS AND EARNINGS FROM
JOINT VENTURES -5.9% -6.1%
Provision for income taxes -0.1% 0.0%
Minority interest in income of subsidiaries 0.0% -0.1%
Equity in earnings of joint ventures 1.3% 0.9%
------- -------
NET LOSS -4.8% -5.3%
======= =======
15
THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2007
NET REVENUE
Net revenue for the three months ended March 31, 2008 was $114.7 million
compared to $105.8 million for the three months ended March 31, 2007, an
increase of $8.9 million, or 8.4%. This increase is mainly due to an
increase in procedure volumes from existing centers as well as from the
addition of new centers.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2008 increased
approximately $6.6 million, or 8.0%, from $82.4 million for the three
months ended March 31, 2007 to $89.0 million for the three months ended
March 31, 2008. The following table sets forth our operating expenses for
the three months ended March 31, 2008 and 2007 (in thousands):
Three Months Ended
March 31,
-----------------------
2008 2007
-------- --------
Salaries and professional reading fees,
excluding stock compensation $ 49,385 $ 45,294
Stock compensation 454 2,220
Building and equipment rental 10,256 10,062
General administrative expenses 28,871 24,709
NASDAQ one-time listing fee -- 120
-------- --------
Operating expenses 88,966 82,405
Depreciation and amortization 12,469 10,910
Provision for bad debts 6,487 7,553
Loss on sale of equipment, net 8 --
Severance costs 31 538
-------- --------
Total operating expenses $107,961 $101,406
======== ========
SALARIES AND PROFESSIONAL READING FEES (EXCLUDING STOCK COMPENSATION AND
SEVERANCE)
Salaries and professional reading fees increased $4.1 million, or 9.0%, to
$49.4 million for the three months ended March 31, 2008 compared to $45.3
million for the three months ended March 31, 2007. The increase is
primarily due to increased staffing related to the addition of imaging
centers acquired during the second half of 2007 and the first half of
2008.
STOCK BASED COMPENSATION
Stock compensation decreased $1.8 million to $454,000 for the three months
ended March 31, 2008 compared to $2.2 million for the three months ended
March 31, 2007. This decrease is primarily due to $1.7 million of stock
based compensation expense recorded during the three months ended March
31, 2007 as a result of the acceleration of vesting of certain warrants.
16
BUILDING AND EQUIPMENT RENTAL
Building and equipment rental expenses increased $194,000, or 1.9%, to
$10.3 million for the three months ended March 31, 2008 compared to $10.0
million for the three months ended March 31, 2007. The increase is
primarily due to increased facility rent related to the addition of
imaging centers acquired during the second half of 2007 and the first half
of 2008. Also included in this increase is our adjustment to building
lease expense resulting from straight-lining the built-in rent escalators
existing in some of our lease contracts.
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 $4.2 million, or
16.8%, for the three months ended March 31, 2008 compared to the previous
period. The increase is in line with our increase in procedure volumes at
both existing centers as well as new centers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1.6 million, or 14.3%, to $12.5
million for the three months ended March 31, 2008 when compared to the
same period last year. The increase is primarily due to property and
equipment additions for new and existing centers.
PROVISION FOR BAD DEBTS
Provision for bad debts decreased $1.1 million, or 14.1%, to $6.5 million,
or 5.7% of net revenue, for the three months ended March 31, 2008 compared
to $7.6 million, or 7.1% of net revenue, for the three months ended March
31, 2007. The decrease 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.
SEVERANCE
During the three months ended March 31, 2008, we recorded severance costs
of $31,000 associated with the integration of Radiologix, compared to
$538,000 recorded during the three months ended March 31, 2007.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2008 increased
approximately $2.8 million, or 25.4%, from the same period in 2007. The increase
is primarily due to the $60M increase in Term Loans B & C and increased
borrowing on the line of credit as well as $951,000 of realized losses on our
fair value hedges recorded for the three months ended March 31, 2008 compared to
$138,000 recorded for the three months ended March 31, 2007. Also included in
interest expense for the three months ended March 31, 2008 and 2007 is
amortization of deferred loan costs of $531,000 and 469,000, respectively.
INCOME TAX EXPENSE
For the three months ended March 31, 2008, we recorded $123,000 in income
tax expense related to certain state tax obligations of Radiologix.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES
For the three months ended March 31, 2008, we recognized equity in
earnings from unconsolidated joint ventures of $1.5 million compared to $1.0
million for the three months ended March 31, 2007. This increase is due to our
purchase of additional equity holdings in existing joint ventures as well as the
deconsolidation in the fourth quarter of 2007of a consolidated joint venture
bringing the number of these 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 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 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.
17
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. The terms of our first lien term loan as explained
above will remain unchanged.
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 the term loan and to 9.0%
from 6.0% 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.
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 an increase to
interest expense of approximately $951,000, and $138,000 for the three months
ended March 31, 2008 and 2007, respectively. The corresponding liability of
approximately $2.5 million is included in the other non-current liabilities in
the consolidated balance sheets at March 31, 2008. Of the derivatives that were
designated as cash flow hedging instruments, we recorded $8.6 million to
accumulated other comprehensive loss, and an offsetting liability of the same
amount for the fair value of these hedging instruments at December 31, 2007.
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, CT and PET 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 used by operating activities was $2.7 million for the three months
ended March 31, 2008 compared to cash provided by operating activities of $9.0
million for the three months ended March 31, 2007.
Cash used by investing activities was $24.9 million and $5.7 million for
the three months ended March 31, 2008 and 2007, respectively. For the three
months ended March 31, 2008, we purchased property and equipment for
approximately $9.7 million and acquired the assets and businesses of additional
imaging facilities for approximately $15.0 million. We also purchased additional
equity interests in joint ventures of $328,000.
Cash provided by financing activities was $27.5 million for the three
months ended March 31, 2008 and cash used in financing activities was $5.3
million for the three months ended March 31, 2007. The cash provided by
financing activities for the three months ended March 31, 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.
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. 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.
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.
19
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
March 31, 2008, the end of the period covered by this quarterly report on Form
10-Q, due to the existence of the material weaknesses in our financial statement
close process and our entity level controls.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the period covered in the report on Form 10-Q for the three months
ended March 31, 2008, we implemented improvements to our internal controls as
explained below:
VALUATION OF ACCOUNTS RECEIVABLE
We have formed a Revenue Committee, which includes the participation of
the Chief Executive Officer, Chief Financial Officer, Director of Reimbursement
Operations and other financial personnel. The Committee meets every month to
review the collection statistics applied to monthly and year-to-date gross
charges as well as review the collectability of accounts receivable balances as
of the end of each month. The Committee has reviewed and analyzed collection
run-out statistics and compared cash collections to historical data and trends
during the three months ended March 31, 2008. We believe that the implementation
of our Revenue Committee enhanced our controls and improved our ability to
accurately value our accounts receivable balances.
FIXED ASSET RECORDING
We have assigned additional resources to track, record and depreciate
fixed assets. We have scheduled monthly meetings with the purchasing department
and monthly calls with the regional controllers and have identified assets when
they were delivered to sites and have recorded correct in-service dates during
the three months ended March 31, 2008.
LIABILITY FOR MEDICAL MALPRACTICE EXPOSURE
We have engaged a third-party actuary that assisted us in the
determination of IBNR as of March 31, 2008 which we used to adjust our IBNR
reserve as of March 31, 2008.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
At March 31, 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 the Matter of the Arbitration Between St. Paul Radiology and Questar
Duluth, Inc. AAA Case No. 33-193Y00282-07.
In connection with our sale of our Duluth, Minnesota imaging center assets
in June 2007 we received a demand for arbitration from the radiologists
providing professional services at the center stating they were entitled to at
least $1.2 million of the $1.3 million paid to us for the imaging center assets.
In May 2008, the arbitration panel granted a summary judgment in our favor
thereby dismissing the claim against us.
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.
20
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
EQUITY COMPENSATION PLAN INFORMATIN
The following table summarizes information with respect to options,
warrants and other rights under our equity compensation plans at March 31, 2008
(as adjusted to reflect the reverse one-for-two stock split effected November
2006):
NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES REMAINING
OUTSTANDING OPTIONS WARRANTS PRICE OF OUTSTANDING OPTIONS AVAILABLE FOR FUTURE ISSUANCE
PLAN CATEGORY AND RIGHTS WARRANTS AND RIGHTS UNDER EQUITY COMPENSATION PLANS
--------------------------------- --------------------------------- -------------------------------- -------------------------------
Equity compensation plans
approved by security holders 1,220,250 $6.07 1,279,750
Equity compensation plans not
approved by security holders * 3,544,571 $1.93 N/A
------------ -----------------
TOTAL 4,754,821 1,279,750
* These represent warrants issued in connection with securing the services
of various parties for us. In a few instances they were issued in
connection with obtaining financing.
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.
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 12, 2008 By /s/ Howard G. Berger, M.D.
--------------------------------------------
Howard G. Berger, M.D., President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2008 By /s/ Mark D. Stolper
--------------------------------------------
Mark D. Stolper, Chief Financial Officer
(Principal Financial and Accounting Officer)
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
---------- ----------------------
10.1 Form of Indemnification Agreement between the registrant and each of
its officers and directors.
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
23