XNAS:RDNT RadNet Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q
 
Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                    

Commission File Number 0-19019

RadNet, Inc.
(Exact name of registrant as specified in charter)

Delaware
13-3326724
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
   
1510 Cotner Avenue
 
Los Angeles, California
90025
(Address of principal executive offices)
(Zip Code)
 
(310) 478-7808
(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   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 the definitions 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  ¨
   
(do not check if a 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

The number of shares of the registrant’s common stock outstanding on May 4, 2012, was 38,225,482 shares.



 
 

 

Table of Contents

RADNET, INC.

INDEX

PART I – FINANCIAL INFORMATION
Page
 
       
ITEM 1.
Condensed Consolidated Financial Statements
   
       
 
Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011
3
 
       
 
Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2012 and 2011
4
 
       
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months ended March 31, 2012 and  2011
5
 
       
 
Condensed Consolidated Statement of Equity Deficit for the Three Months ended March 31, 2012
6
 
       
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
7
 
       
 
Notes to Condensed Consolidated Financial Statements
9
 
       
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
 
       
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
36
 
       
ITEM 4.
Controls and Procedures
37
 
       
PART II – OTHER INFORMATION
   
       
ITEM 1.
Legal Proceedings
38
 
       
ITEM 1A.
Risk Factors
38
 
       
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38
 
       
ITEM 3.
Defaults Upon Senior Securities
38
 
       
ITEM 4.
Mine Safety Disclosures
38
 
       
ITEM 5.
Other Information
38
 
       
ITEM 6.
Exhibits
38
 
       
SIGNATURES
 
39
 
       
INDEX TO EXHIBITS
40
 

 
 
2

 
PART I - FINANCIAL INFORMATION
  
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
 
   
March 31,
2012
   
December 31,
2011
 
   
(unaudited)
       
ASSETS
 
CURRENT ASSETS
           
Cash and cash equivalents
  $ 1,834     $ 2,455  
Accounts receivable, net
    133,971       128,432  
Asset held for sale
    -       2,300  
Prepaid expenses and other current assets
    19,859       19,140  
Total current assets
    155,664       152,327  
PROPERTY AND EQUIPMENT, NET
    220,206       215,527  
OTHER ASSETS
               
Goodwill
    159,593       159,507  
Other intangible assets
    52,199       53,105  
Deferred financing costs, net
    12,719       13,490  
Investment in joint ventures
    22,933       22,326  
Deposits and other
    2,970       2,906  
Total assets
  $ 626,284     $ 619,188  
LIABILITIES AND EQUITY DEFICIT
 
CURRENT LIABILITIES
               
Accounts payable, accrued expenses and other
  $ 111,095     $ 103,101  
Due to affiliates
    3,213       3,762  
Deferred revenue
    1,162       1,076  
Current portion of notes payable
    6,243       6,608  
Current portion of deferred rent
    1,009       999  
Current portion of obligations under capital leases
    5,458       6,834  
Total current liabilities
    128,180       122,380  
LONG-TERM LIABILITIES
               
Deferred rent, net of current portion
    12,685       12,407  
Deferred taxes
    277       277  
Line of credit
    60,700       58,000  
Notes payable, net of current portion
    482,575       484,046  
Obligations under capital lease, net of current portion
    2,267       3,338  
Other non-current liabilities
    8,128       8,547  
Total liabilities
    694,812       688,995  
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY DEFICIT
               
Common stock - $.0001 par value, 200,000,000 shares authorized; 38,225,482, and 37,426,460 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
    4       4  
Paid-in-capital
    166,971       165,796  
Accumulated other comprehensive loss
    (664 )     (946 )
Accumulated deficit
    (235,721 )     (235,610 )
Total Radnet, Inc.'s equity deficit
    (69,410 )     (70,756 )
Noncontrolling interests
    882       949  
Total equity deficit
    (68,528 )     (69,807 )
Total liabilities and equity deficit
  $ 626,284     $ 619,188  

The accompanying notes are an integral part of these financial statements.

 
3

 

RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
NET SERVICE FEE REVENUE
           
Service fee revenue, net of contractual allowances and discounts
  $ 168,500     $ 144,083  
Provision for bad debts
    (6,484 )     (5,031 )
Net service fee revenue
    162,016       139,052  
                 
OPERATING EXPENSES
               
Cost of operations
    135,400       115,828  
Depreciation and amortization
    14,892       13,921  
Loss on sale and disposal of equipment
    24       259  
Severance costs
    449       145  
Total operating expenses
    150,765       130,153  
                 
INCOME FROM OPERATIONS
    11,251       8,899  
                 
OTHER EXPENSES
               
Interest expense
    13,567       12,915  
Other income
    (1,147 )     (1,871 )
Total other expenses
    12,420       11,044  
                 
LOSS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF JOINT VENTURES
    (1,169 )     (2,145 )
Provision for income taxes
    (245 )     (147 )
Equity in earnings of joint ventures
    1,262       1,484  
NET LOSS
    (152 )     (808 )
Net (loss) income attributable to noncontrolling interests
    (41 )     68  
NET LOSS ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
  $ (111 )   $ (876 )
                 
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
  $ (0.00 )   $ (0.02 )
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted
    37,669,921       37,257,683  

The accompanying notes are an integral part of these financial statements.
 
 
 


 
4

 

RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
NET LOSS
  $ (152 )   $ (808 )
Foreign currency translation adjustments
    6       30  
Reclassification of net cash flow hedge losses included in net loss during the period
    276       306  
COMPREHENSIVE INCOME (LOSS)
    130       (472 )
Less comprehensive income (loss) attributible to non-controlling interests
    (41 )     68  
COMPREHENSIVE INCOME (LOSS) ATTRIBUTIBLE TO RADNET, INC.
COMMON STOCKHOLDERS
  $ 89     $ (404 )


The accompanying notes are an integral part of these financial statements.








 






 
5

 

RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
(unaudited)

   
Common Stock
   
Paid-in
   
Accumulated
   
Accumulated Other Comprehensive
   
Total
Radnet, Inc.'s
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Equity Deficit
   
Interests
   
Equity Deficit
 
                                                                 
BALANCE - JANUARY 1, 2012
    37,426,460     $ 4     $ 165,796     $ (235,610 )   $ (946 )   $ (70,756 )   $ 949     $ (69,807 )
                                                                 
Issuance of common stock upon exercise of options/warrants
    74,022       -       -       -       -       -       -       -  
                                                                 
Stock-based compensation
    -       -       1,175       -       -       1,175       -       1,175  
                                                                 
Issuance of restricted stock
    725,000               -                                          
                                                                 
Dividends paid to noncontrolling interests
    -       -       -       -       -       -       (26 )     (26 )
                                                                 
Change in cumulative foreign currency translation adjustment
    -       -       -       -       6       6       -       6  
                                                                 
Change in fair value of cash flow hedge from prior periods reclassified to earnings
    -       -       -       -       276       276       -       276  
                                                                 
Net loss
    -       -       -       (111 )     -       (111 )     (41 )     (152 )
                                                                 
 BALANCE - MARCH 31, 2012
    38,225,482     $ 4     $ 166,971     $ (235,721 )   $ (664 )   $ (69,410 )   $ 882     $ (68,528 )

The accompanying notes are an integral part of these financial statements.


 





 
6

 

RADNET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (IN THOUSANDS)
(unaudited)

   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
             
Net loss
  $ (152 )   $ (808 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    14,892       13,921  
Provision for bad debt
    6,484       5,031  
Equity in earnings of joint ventures
    (1,262 )     (1,484 )
Distributions from joint ventures
    1,575       1,764  
Deferred rent amortization
    288       105  
Amortization of deferred financing cost
    771       748  
Amortization of bond discount
    65       58  
Loss on sale and disposal of equipment
    24       259  
Amortization of cash flow hedge
    276       306  
Stock-based compensation
    1,175       1,048  
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in purchase transactions:
               
Accounts receivable
    (12,023 )     (12,607 )
Other current assets
    (683 )     (2,345 )
Other assets
    (64 )     51  
Deferred revenue
    86       (186 )
Accounts payable, accrued expenses and other
    3,979       9,335  
Net cash provided by operating activities
    15,431       15,196  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of imaging facilities
    (580 )     (6,343 )
Purchase of property and equipment
    (13,962 )     (15,616 )
Proceeds from sale of equipment
    410       235  
Proceeds from sale of imaging facilities
    2,300       -  
Purchase of equity interest in joint ventures
    (920 )     (1,500 )
Net cash used in investing activities
    (12,752 )     (23,224 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Principal payments on notes and leases payable
    (4,479 )     (6,490 )
Deferred financing costs
    -       (218 )
Proceeds from, net of payments on, line of credit
    2,700       15,900  
Payments to counterparties of interest rate swaps, net of amounts received
    (1,500 )     (1,611 )
Distributions to noncontrolling interests
    (26 )     (33 )
Proceeds from issuance of common stock upon exercise of options/warrants
    -       99  
Net cash (used in) provided by financing activities
    (3,305 )     7,647  
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    5       13  
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (621 )     (368 )
CASH AND CASH EQUIVALENTS, beginning of period
    2,455       627  
CASH AND CASH EQUIVALENTS, end of period
  $ 1,834     $ 259  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for interest
  $ 6,841     $ 6,330  

The accompanying notes are an integral part of these financial statements.
 
7

 

RADNET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)

Supplemental Schedule of Non-Cash Investing and Financing Activities

We acquired equipment and certain leasehold improvements for approximately $12.7 million and $7.4 million during the three months ended March 31, 2012 and 2011, respectively, that we had not paid for as of March 31, 2012 and 2011, respectively.  The offsetting amount due was recorded in our consolidated balance sheet under accounts payable and accrued expenses.

As discussed in Note 6, we entered into interest rate swap modifications in the first quarter of 2009.  These modifications include a significant financing element and, as such, all cash inflows and outflows subsequent to the date of modification are presented as financing activities.  Also, as a result of our debt refinancing completed on April 6, 2010, our interest rate swaps are no longer effective.  Accordingly, all changes in their fair value after April 6, 2010 are, and will continue to be recognized in earnings as other expense.
 
Detail of investing activity related to acquisitions can be found in Note 3.


 
8

 

RADNET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

At March 31, 2012, we operated a group of regional networks comprised of 232 centers, which we operate directly or indirectly through joint ventures located in seven states with operations primarily in California, Maryland, Florida, Delaware, New Jersey, Rhode Island and New York.  We provide diagnostic imaging services including magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound, diagnostic radiology, or X-ray, fluoroscopy and other related procedures. Our operations comprise a single segment for financial reporting purposes.
 
The consolidated financial statements include the accounts of Radnet Management, Inc. (or “Radnet Management”) and Beverly Radiology Medical Group III, a professional partnership (“BRMG”).  The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc.,  Radiologix, Inc., Radnet Managed Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (“DIS”), all wholly owned subsidiaries of Radnet Management.  All of these affiliated entities are referred to collectively as “RadNet”, “we”, “us”, “our” or the “Company” in this report.
 
Accounting Standards Codification (“ASC”) Section 810-10-15-14 stipulates that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”).  We consolidate all voting interest entities in which we own a majority voting interest and all VIEs for which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or redesign of the entity.

Howard G. Berger, M.D. is our President and Chief Executive Officer, a member of our Board of Directors and is deemed to be the beneficial owner, directly and indirectly, of approximately 14.1% of our outstanding common stock as of March 31, 2012. 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 employs physicians or 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 payers than if we obtained these services from unaffiliated physician groups. BRMG is a partnership of ProNet Imaging Medical Group, Inc., Breastlink Medical Group, Inc. and Beverly Radiology Medical Group, Inc., 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, pursuant to the terms of the management agreement.  Through the management agreement and our relationship with Dr. Berger, we have exclusive authority over all non-medical decision making related to the ongoing business operations of BRMG. Through our management agreement with BRMG we determine the annual budget of BRMG and make all physician employment decisions.  BRMG has insignificant operating assets and liabilities, and de minimis equity.  Through the management agreement with us, all of BRMG’s cash flows are transferred to us.  We have determined that BRMG is a variable interest entity, and that we are the primary beneficiary, and consequently, we consolidate the revenue and expenses of BRMG. BRMG recognized $12.7 million and $12.7 million of revenue, net of management service fees to RadNet, for the three months ended March 31, 2012 and 2011, respectively, and $12.7 million and $12.7 million of operating expenses for the three months ended March 31, 2012 and 2011, respectively.  RadNet recognized $50.4 million and $47.8 million of net revenue for the three months ended March 31, 2012 and 2011, respectively, for management services provided to BRMG relating primarily to the technical portion of total billed revenue.  The cash flows of BRMG are included in the accompanying consolidated statements of cash flows.  All intercompany balances and transactions have been eliminated in consolidation.


 
9

 

The creditors of BRMG do not have recourse to our general credit and there are no other arrangements that could expose us to losses.  However, BRMG is managed to recognize no net income or net loss and, therefore, RadNet may be required to provide financial support to cover any operating expenses in excess of operating revenues.

Aside from centers in California where we contract with BRMG for the provision of professional medical services and consolidate 100% of the patient service revenue, at the remaining centers in California and at all of the centers which are located outside of California, we have entered into long-term contracts with independent 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, we provide management services and receive a fee which includes 100% of the technical reimbursements associated with imaging procedures for the use of our diagnostic imaging equipment and the provision of technical services.  Our management service fees also include a portion of the practice group’s professional revenue, including revenue derived outside of our diagnostic imaging centers as well as fees for administrative services. The radiology practice groups retain the professional reimbursements associated with imaging procedures after deducting management service fees paid to us.  We have no financial controlling interest in the independent (non-BRMG) radiology practices; accordingly, we do not consolidate the financial statements of those practices in our consolidated financial statements and record only our management service fee revenue.

 The accompanying unaudited condensed 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 the financial position, results of operations and cash flows for the interim periods ended March 31, 2012 and 2011 have been made. The results of operations for any interim period are not necessarily indicative of the results for a full year. These interim condensed 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, 2011.

Significant accounting policies

As of the period covered in this report, there have been no material changes to the significant accounting policies we use, and have explained, in our annual report on Form 10-K for the fiscal year ended December 31, 2011 with the exception of the following:

Revenues

Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payers and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments.  As it relates to BRMG centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees from BRMG.  As it relates to non-BRMG centers, this service fee revenue  is earned through providing the administration of the non-medical functions relating to the professional medical practice at our non-BRMG centers, including among other functions, provision of clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.

Service fee revenues are recorded during the period the patient services are provided based upon the estimated amounts due from the patients and third-party payers. Third-party payers include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based upon predetermined rates per discounted fee-for-service rates. We also record a provision for doubtful accounts (based primarily on historical collection experience) related to patients and copayment and deductible amounts for patients who have health care coverage under one of our third-party payers.


 
10

 

Our service fee revenue, net of contractual allowances and discounts less the provision for bad debts for the three months ended March 31, are summarized in the following table (in thousands):

   
2012
   
2011
 
             
Commercial Insurance
  $ 93,518     $ 79,390  
Managed Care Capitated Payors
    24,770       21,612  
Medicare
    33,026       28,384  
Medicaid
    5,729       4,899  
Other
    11,458       9,798  
Service fee revenue, net of contractual allowances and discounts
    168,500       144,083  
                 
Provision for bad debts
    (6,484 )     (5,031 )
Net service fee revenue
  $ 162,016     $ 139,052  

The break-out of our service fee revenue, net of contractual allowances and discounts, is calculated based upon global payments received from consolidated imaging centers from dates of service from each respective period illustrated.

Provision for Bad Debts

Although outcomes vary, our policy is to attempt to collect amounts due from patients, including co-payments and deductibles due from patients with insurance, at the time of service. We provide for an allowance against accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by each type of payer over an 18-month look-back period, and other relevant factors. A significant portion of our provision for bad debt relates to co-payments and deductibles owed to us by patients with insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can have an impact on collection trends and our estimation process.

Reclassifications
 
Certain reclassifications have been made to the three months ended March 31, 2011 consolidated financial statements and accompanying notes to conform with the three months ended March 31, 2012 presentation. Additionally, we have adjusted prior year’s presentation as a result of the adoption of ASU 2011-07, Health Care Entities (Topic 954). In connection with this adjustment, we identified certain mechanical errors in our historical calculation of the provision for bad debts, resulting in the gross up of the provision for bad debts and revenues by $2.9 million for the three months ended March 31, 2011. The error has been corrected in these financial statements and upon adoption of the new guidance, resulted in no impact to net service fee revenue.
 
Liquidity and Capital Resources
 
We had a working capital balance of $27.5 million and $30.0 million at March 31, 2012 and December 31, 2011, respectively.  We had a net loss attributable to RadNet, Inc.’s common stockholders of $111,000 and $876,000 for the three months ended March 31, 2012 and 2011, respectively.  We also had an equity deficit of $68.5 million and $69.8 million at March 31, 2012 and December 31, 2011, 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.  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:
 
 
·
maximizing performance at our existing facilities;
     
  
·
focusing on profitable contracting;
     
  
·
expanding MRI, CT and PET applications;
     
  
·
optimizing operating efficiencies; and
     
  
·
expanding our networks.
 
 
11

 

On April 6, 2010, we completed a series of transactions which we refer to as our "debt refinancing plan" for an aggregate of $585.0 million.  As part of the debt refinancing plan, our wholly owned subsidiary Radnet Management, Inc. issued and sold $200.0 million in 10 3/8% senior notes due 2018 (the "senior notes"). All payments of the senior notes, including principal and interest, are guaranteed jointly and severally on a senior unsecured basis by RadNet, Inc. and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The senior notes were issued under an indenture, dated April 6, 2010, by and among Radnet Management, as issuer, RadNet, Inc., as parent guarantor, the subsidiary guarantors thereof and U.S. Bank National Association, as trustee, in a private placement that was not subject to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).  We subsequently exchanged the senior notes initially issued on April 6, 2010 in a private placement for publicly registered exchange notes with nearly identical terms.  The exchange offer was completed on February 14, 2011.

In addition to the issuance of senior notes, Radnet Management entered into a new Credit and Guaranty Agreement with a syndicate of lenders (the "New Credit Agreement"), whereby Radnet Management obtained $385.0 million in senior secured first-lien bank financing, consisting of (i) a $285.0 million, six-year term loan facility and (ii) a $100.0 million, five-year revolving credit facility, including a swing line subfacility and a letter of credit subfacility (collectively, the “New Credit Facilities”). Radnet Management’s obligations under the New Credit Agreement are unconditionally guaranteed by RadNet, Inc., all of Radnet Management’s current and future wholly owned domestic subsidiaries as well as certain affiliates, including Beverly Radiology Medical Group III and its equity holders (Beverly Radiology Medical Group, Inc., BreastLink Medical Group, Inc. and ProNet Imaging Medical Group, Inc.). These New Credit Facilities created by the New Credit Agreement are secured by a perfected first-priority security interest in all of Radnet Management’s and the guarantors’ tangible and intangible assets, including, but not limited to, pledges of equity interests of Radnet Management and all of our current and future wholly owned domestic subsidiaries.

In connection with the issuance of the outstanding senior notes and entering into the New Credit Agreement, Radnet Management used the net proceeds from the issuance of the senior notes and the New Credit Facilities created by the New Credit Agreement to repay in full its existing first lien term loan for $242.0 million in aggregate principal amount outstanding, which would have matured on November 15, 2012, and its second lien term loan for $170.0 million in aggregate principal amount outstanding, which would have matured on November 15, 2013.

On November 8, 2011, in conjunction with our acquisition of the U.S. imaging operations of CML HealthCare Inc. (RH), we increased the size of our revolving credit facility by $21.25 million, to $121.25 million of total borrowing capacity (the “Incremental Commitments”).  The increased facility size will provide additional borrowing availability to fund further acquisitions and general working capital needs.

At March 31, 2012, we had $200.0 million aggregate principal amount of senior notes outstanding, $279.3 million of senior secured term loan debt outstanding and $60.7 million outstanding under the revolving credit facility.  We had $60.55 million of available credit under our revolving credit facility, subject to borrowing conditions under that facility as further described in our annual report on Form 10-K for the fiscal year ended December 31, 2011.  As of March 31, 2012, we were in compliance with all covenants under the New Credit Facilities and the senior notes.
 
NOTE 2 — SUPPLEMENTAL GUARANTOR INFORMATION
 
The following tables present unaudited interim condensed consolidating financial information for: (a) RadNet, Inc. (the “Parent”) on a stand-alone basis as a guarantor of the senior secured term loan due 2016 and the senior notes due 2018 ; (b) Radnet Management, Inc., the subsidiary issuer (the “Subsidiary Issuer”) of the senior secured term loan due 2016 and the senior notes due 2018; (c) on a combined basis, the guarantor subsidiaries (the “Guarantor Subsidiaries”) of the senior secured term loan due 2016 and the senior notes due 2018, which include all other 100% owned subsidiaries of the Subsidiary Issuer; (d) on a combined basis, the non-guarantor subsidiaries, which include joint venture partnerships of which the Subsidiary Issuer holds investments of 50% or greater, as well as BRMG, which we consolidate as a variable interest entity. Separate financial statements of the Subsidiary Issuer or the Guarantor Subsidiaries are not presented because the guarantee by the Parent and each Guarantor Subsidiary is full and unconditional, joint and several. In lieu thereof, the Parent includes the following:
 
 
 
 
 

 
12

 

RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2012
(in thousands)
(unaudited)

   
Parent
   
Subsidiary Issuer
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
                                     
ASSETS
 
CURRENT ASSETS
                                   
Cash and cash equivalents
  $ -     $ -     $ 881     $ 953     $ -     $ 1,834  
Accounts receivable, net
    -       -       77,300       56,671       -       133,971  
Prepaid expenses and other current assets
    -       10,572       8,194       1,093       -       19,859  
Total current assets
    -       10,572       86,375       58,717       -       155,664  
PROPERTY AND EQUIPMENT, NET
    -       47,014       172,378       814       -       220,206  
OTHER ASSETS
                                               
Goodwill
    -       42,871       115,878       844       -       159,593  
Other intangible assets
    -       33       52,034       132       -       52,199  
Deferred financing costs, net
    -       12,719       -       -       -       12,719  
Investment in subsidiaries
    (69,410 )     256,851       9,898       -       (197,339 )     -  
Investment in joint ventures
    -       -       22,933       -       -       22,933  
Deposits and other
    -       1,298       1,672       -       -       2,970  
Total assets
  $ (69,410 )   $ 371,358     $ 461,168     $ 60,507     $ (197,339 )   $ 626,284  
LIABILITIES AND EQUITY
 
CURRENT LIABILITIES
                                               
Intercompany
  $ -     $ (166,883 )   $ 124,700     $ 42,183     $ -     $ -  
Accounts payable, accrued expenses and other
    -       58,710       44,841       7,544       -       111,095  
Due to affiliates
    -       -       3,213       -       -       3,213  
Deferred revenue
    -       -       1,162       -       -       1,162  
Current portion of notes payable
    -       2,953       3,290       -       -       6,243  
Current portion of deferred rent
    -       506       503       -       -       1,009  
Current portion of obligations under capital leases
    -       2,597       2,861       -       -       5,458  
Total current liabilities
    -       (102,117 )     180,570       49,727       -       128,180  
LONG-TERM LIABILITIES
                                               
Deferred rent, net of current portion
    -       7,766       4,919       -       -       12,685  
Deferred taxes
    -       -       277       -       -       277  
Line of credit
    -       60,700       -       -       -       60,700  
Notes payable, net of current portion
    -       473,562       9,013       -       -       482,575  
Obligations under capital leases,net of current portion
    -       857       1,410       -       -       2,267  
Other non-current liabilities
    -       -       8,128       -       -       8,128  
Total liabilities
    -       440,768       204,317       49,727       -       694,812  
                                                 
EQUITY DEFICIT
                                               
Total Radnet, Inc.'s equity deficit
    (69,410 )     (69,410 )     256,851       9,898       (197,339 )     (69,410 )
Noncontrolling interests
    -       -       -       882       -       882  
Total equity deficit
    (69,410 )     (69,410 )     256,851       10,780       (197,339 )     (68,528 )
Total liabilities and equity deficit
  $ (69,410 )   $ 371,358     $ 461,168     $ 60,507     $ (197,339 )   $ 626,284  


 
13

 

RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 December 31, 2011
(in thousands)

   
Parent
   
Subsidiary Issuer
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
                                     
ASSETS
 
CURRENT ASSETS
                                   
Cash and cash equivalents
  $ -     $ 1,366     $ -     $ 1,089     $ -     $ 2,455  
Accounts receivable, net
    -       -       78,229       50,203       -       128,432  
Asset held for sale
    -       -       2,300       -       -       2,300  
Prepaid expenses and other current assets
    -       11,858       6,651       631       -       19,140  
Total current assets
    -       13,224       87,180       51,923       -       152,327  
PROPERTY AND EQUIPMENT, NET
    -       46,445       168,213       869       -       215,527  
OTHER ASSETS
                                               
Goodwill
    -       42,784       115,878       845       -       159,507  
Other intangible assets
    -       50       52,916       139       -       53,105  
Deferred financing costs, net
    -       13,490       -       -       -       13,490  
Investment in subsidiaries
    (70,756 )     249,763       9,974       -       (188,981 )     -  
Investment in joint ventures
    -       -       22,326       -       -       22,326  
Deposits and other
    -       1,279       1,627       -       -       2,906  
Total assets
  $ (70,756 )   $ 367,035     $ 458,114     $ 53,776     $ (188,981 )   $ 619,188  
LIABILITIES AND EQUITY
 
CURRENT LIABILITIES
                                               
Intercompany
  $ -     $ (160,017 )   $ 124,679     $ 35,338     $ -     $ -  
Accounts payable, accrued expenses and other
    -       50,262       45,324       7,515       -       103,101  
Due to affiliates
    -       -       3,762       -       -       3,762  
Deferred revenue
    -       -       1,076       -       -       1,076  
Current portion of notes payable
    -       2,981       3,627       -       -       6,608  
Current portion of deferred rent
    -       502       497       -       -       999  
Current portion of obligations under capital leases
    -       2,996       3,838       -       -       6,834  
Total current liabilities
    -       (103,276 )     182,803       42,853       -       122,380  
LONG-TERM LIABILITIES
                                               
Deferred rent, net of current portion
    -       7,734       4,673       -       -       12,407  
Deferred taxes
    -       -       277       -       -       277  
Line of credit
    -       58,000       -       -       -       58,000  
Notes payable, net of current portion
    -       474,165       9,881       -       -       484,046  
Obligations under capital leases,net of current portion
    -       1,168       2,170       -       -       3,338  
Other non-current liabilities
    -       -       8,547       -       -       8,547  
Total liabilities
    -       437,791       208,351       42,853       -       688,995  
                                                 
EQUITY DEFICIT
                                               
Total Radnet, Inc.'s equity deficit
    (70,756 )     (70,756 )     249,763       9,974       (188,981 )     (70,756 )
Noncontrolling interests
    -       -       -       949       -       949  
Total equity deficit
    (70,756 )     (70,756 )     249,763       10,923       (188,981 )     (69,807 )
Total liabilities and equity deficit
  $ (70,756 )   $ 367,035     $ 458,114     $ 53,776     $ (188,981 )   $ 619,188  



 
14

 

RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended  March 31, 2012
(in thousands)
(unaudited)

   
Parent
   
Subsidiary Issuer
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
NET SERVICE FEE REVENUE
                                   
Service fee revenue, net of contractual allowances and discounts
  $ -     $ 34,544     $ 119,581     $ 14,375     $ -     $ 168,500  
Provision for bad debts
    -       (1,267 )     (4,598 )     (619 )     -       (6,484 )
Net service fee revenue
    -       33,277       114,983       13,756       -       162,016  
                                                 
OPERATING EXPENSES
                                               
Cost of operations
    -       30,386       91,505       13,509       -       135,400  
Depreciation and amortization
    -       3,147       11,683       62       -       14,892  
Loss on sale of equipment
    -       137       (113 )     -       -       24  
Severance costs
    -       33       390       26       -       449  
Total operating expenses
    -       33,703       103,465       13,597       -       150,765  
                                                 
                                                 
INCOME (LOSS) FROM OPERATIONS
    -       (426 )     11,518       159       -       11,251  
                                                 
OTHER EXPENSES
                                               
Interest expense
    -       7,978       5,589       -       -       13,567  
Other expenses (income)
    -       (1,213 )     66       -       -       (1,147 )
Total other expenses
    -       6,765       5,655       -       -       12,420  
                                                 
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF JOINT VENTURES
    -       (7,191 )     5,863       159       -       (1,169 )
Provision for income taxes
    -       (2 )     (243 )     -       -       (245 )
Equity in earnings (losses) of consolidated subsidiaries
    (111 )     7,082       200       -       (7,171 )     -  
Equity in earnings of joint ventures
    -       -       1,262       -       -       1,262  
NET INCOME (LOSS)
    (111 )     (111 )     7,082       159       (7,171 )     (152 )
Net loss attributable to noncontrolling interests
    -       -       -       (41 )     -       (41 )
NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC.COMMON STOCKHOLDERS
  $ (111 )   $ (111 )   $ 7,082     $ 200     $ (7,171 )   $ (111 )

 
 
 
 
 

 
15

 

RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended  March 31, 2011
(in thousands)
(unaudited)

   
Parent
   
Subsidiary Issuer
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
NET SERVICE FEE REVENUE
                                   
Service fee revenue, net of contractual allowances and discounts
  $ -     $ 31,116     $ 97,839     $ 15,128     $ -     $ 144,083  
Provision for bad debts
    -       (991 )     (3,488 )     (552 )     -       (5,031 )
Net service fee revenue
    -       30,125       94,351       14,576       -       139,052  
                                                 
OPERATING EXPENSES
                                               
Cost of operations
    -       26,728       75,112       13,988       -       115,828  
Depreciation and amortization
    -       3,496       10,315       110       -       13,921  
Loss on sale of equipment
    -       87       172       -       -       259  
Severance costs
    -       69       76       -       -       145  
Total operating expenses
    -       30,380       85,675       14,098       -       130,153  
                                                 
INCOME (LOSS) FROM OPERATIONS
    -       (255 )     8,676       478       -       8,899  
                                                 
OTHER EXPENSES
                                               
Interest expense
    -       7,319       5,578       18       -       12,915  
Other income
    -       (1,871 )     -       -       -       (1,871 )
Total other expenses
    -       5,448       5,578       18       -       11,044  
                                                 
INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF JOINT VENTURES
    -       (5,703 )     3,098       460       -       (2,145 )
Provision for income taxes
    -       (13 )     (132 )     (2 )     -       (147 )
Equity in earnings (losses) of consolidated subsidiaries
    (876 )     4,840       390       -       (4,354 )     -  
Equity in earnings of joint ventures
    -       -       1,484       -       -       1,484  
NET INCOME (LOSS)
    (876 )     (876 )     4,840       458       (4,354 )     (808 )
Net income attributable to noncontrolling interests
    -       -       -       68       -       68  
NET INCOME (LOSS) ATTRIBUTABLE TO RADNET, INC.COMMON STOCKHOLDERS
  $ (876 )   $ (876 )   $ 4,840     $ 390     $ (4,354 )   $ (876 )
 
 
 
 
 

 
16

 

RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended  March 31, 2012
(in thousands)
(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES
 
Parent
   
Subsidiary Issuer
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
                                     
Net income (loss)
  $ (111 )   $ (111 )   $ 7,082     $ 159     $ (7,171 )   $ (152 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities: