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)
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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
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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.
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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.
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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.
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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.
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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.
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.
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.
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)
------------ ------------
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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.
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
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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)
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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
==============
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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% --
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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.
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.
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.
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%
======= =======
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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
======== ========
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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.
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.
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
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.
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.
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
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* 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.
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)
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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
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EDGAR Ease+ -- , , -- Complete View
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into effective as May __, 2008 by and between RadNet, Inc., a New York corporation ("RADNET NY"), and if the proposal to reincorporate the Company in Delaware is approved by the Company's stockholders, RadNet, Inc., a Delaware corporation ("RADNET DE") and ______________ ("INDEMNITEE"). Both RadNet NY and RadNet DE are referred to herein collectively and individually as the "COMPANY."
WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims currently being asserted against directors and officers of corporations;
WHEREAS, the Certificate of Incorporation and Bylaws of RadNet NY, and, provided the proposed Certificate of Incorporation and Bylaws of RadNet DE are adopted by the Company's stockholders, the Certificate of Incorporation and Bylaws of RadNet DE require the Company to indemnify and advance expenses to its directors and officers to the fullest extent permitted under applicable law, and the Indemnitee has been serving and continues to serve as a director and/or officer of the Company in part in reliance on the Company's Certificate of Incorporation and Bylaws; and
WHEREAS, in recognition of Indemnitee's need for (i) substantial protection against personal liability based on Indemnitee's reliance on the aforesaid Certificate of Incorporation and Bylaws, (ii) specific contractual assurance that the protection promised by the Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the Certificate of Incorporation and Bylaws or any change in the composition of the Company's Board of Directors), and (iii) an inducement to provide effective services to the Company as a director and/or officer, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted under applicable law and as set forth in this Agreement, and, to the extent insurance is maintained, to provide for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies.
NOW, THEREFORE, in consideration of the above premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows:
1. CERTAIN DEFINITIONS:
(a) BOARD: the Board of Directors of the Company.
(b) AFFILIATE: any corporation or other person or entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.
(c) CHANGE IN CONTROL: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) (other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and other than any person holding shares of the Company on the date that the Company first registers its common stock under the Exchange Act or any transferee of such individual if such transferee is a spouse or lineal descendant of the transferee or a trust for the benefit of the individual, his spouse or lineal descendants), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets.
(d) EXPENSES: any expense, liability, or loss, including attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, any federal, state, local, or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement, and all other costs and obligations, paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding relating to any Indemnifiable Event.
(e) INDEMNIFIABLE EVENT: any event or occurrence that takes place either prior to or after the execution of this Agreement, related to the fact that Indemnitee is or was a director or officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by Indemnitee in any such capacity, whether or not the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent of the Company, as described above.
(f) INDEPENDENT COUNSEL: the person or body appointed in connection with
Section 3.
(g) PROCEEDING: any threatened, pending, or completed action, suit, or proceeding or any alternative dispute resolution mechanism (including an action by or in the right of the Company), or any inquiry, hearing, or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other.
(h) REVIEWING PARTY: the person or body appointed in accordance with
Section 3.
(i) VOTING SECURITIES: any securities of the Company that vote generally in the election of directors.
2. AGREEMENT TO INDEMNIFY.
(a) GENERAL AGREEMENT. In the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Company's Certificate of Incorporation, its Bylaws, vote of its shareholders or disinterested directors, or applicable law.
(b) INITIATION OF PROCEEDING. Notwithstanding anything in this Agreement
to the contrary, Indemnitee shall not be entitled to indemnification pursuant to
this Agreement in connection with any Proceeding initiated by Indemnitee against
the Company or any director or officer of the Company unless (i) the Company has
joined in or the Board has consented to the initiation of such Proceeding; (ii)
the Proceeding is one to enforce indemnification rights under Section 5; or
(iii) the Proceeding is instituted after a Change in Control (other than a
Change in Control approved by a majority of the directors on the Board who were
directors immediately prior to such Change in Control) and Independent Counsel
has approved its initiation.
(c) EXPENSE ADVANCES. If so requested by Indemnitee, the Company shall
advance (within ten business days of such request) any and all Expenses to
Indemnitee (an "EXPENSE ADVANCE"); provided that, (i) such an Expense Advance
shall be made only upon delivery to the Company of an undertaking by or on
behalf of the Indemnitee to repay the amount thereof if it is ultimately
determined that Indemnitee is not entitled to be indemnified by the Company, and
(ii) if and to the extent that the Reviewing Party determines that Indemnitee
would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid. If Indemnitee has commenced or commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, as provided in Section 4, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding, and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). Indemnitee's obligation to reimburse the Company for Expense Advances shall be unsecured and no interest shall be charged thereon.
(d) MANDATORY INDEMNIFICATION. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.
(e) PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
(f) PROHIBITED INDEMNIFICATION. No indemnification pursuant to this Agreement shall be paid by the Company on account of any Proceeding in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Exchange Act, or similar provisions of any federal, state, or local laws.
3. REVIEWING PARTY. Prior to any Change in Control, the Reviewing Party shall be any appropriate person or body consisting of a member or members of the Board or any other person or body appointed by the Board who is not a party to the particular Proceeding with respect to which Indemnitee is seeking indemnification; after a Change in Control, the Independent Counsel referred to below shall become the Reviewing Party. With respect to all matters arising after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or under applicable law or the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Company shall seek legal advice only from Independent Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with indemnification matters) within the last five years. The Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee should be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the engagement of Independent Counsel pursuant hereto.
4. INDEMNIFICATION PROCESS AND APPEAL.
(a) INDEMNIFICATION PAYMENT. Indemnitee shall be entitled to indemnification of Expenses, and shall receive payment thereof, from the Company in accordance with this Agreement as soon as practicable after Indemnitee has made written demand on the Company for indemnification, unless the Reviewing Party has given a written opinion to the Company that Indemnitee is not entitled to indemnification under applicable law.
(b) SUIT TO ENFORCE RIGHTS. Regardless of any action by the Reviewing Party, if Indemnitee has not received full indemnification within thirty days after making a demand in accordance with Section 4(a), Indemnitee shall have the right to enforce its indemnification rights under this Agreement by commencing litigation in any court in the State of California, the State of New York (if the Company at the time is RadNet NY) or the State of Delaware (if the Company at the time is RadNet DE) having subject matter jurisdiction thereof seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect thereof. The Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not challenged by the Indemnitee shall be binding on the Company and Indemnitee. The remedy provided for in this Section 4 shall be in addition to any other remedies available to Indemnitee at law or in equity.
(c) DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF, AND PRESUMPTIONS. It shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for Expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Company) that it is not permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on the Company. Neither the failure of the Reviewing Party or the Company (including its Board, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by Indemnitee that indemnification of the claimant is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or Company (including its Board, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.
(d) RELIANCE AS SAFE HARBOR. For purposes of this Agreement, Indemnitee shall be deemed to have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company if Indemnitee's actions or omissions to act are taken in good faith reliance upon the records of the Company, including its financial statements, or upon information, opinions, reports or statements furnished to Indemnitee by the officers or employees of the Company in the course of their duties, or by committees of the Company's Board of Directors, or by any other person (including legal counsel, accountants, consultants and financial advisors) as to matters Indemnitee reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. In addition, the knowledge and/or actions, or failures to act, of any director, officer, agent or employee of the Company shall not be imputed to Indemnitee for purposes of determining the right to indemnity hereunder.
5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS. The Company shall indemnify Indemnitee against any and all Expenses that are incurred by Indemnitee in connection with any action brought by Indemnitee for
(i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or under applicable law or the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, and/or
(ii) recovery under directors' and officers' liability insurance policies maintained by the Company, but only in the event that Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be. In addition, the Company shall, if so requested by Indemnitee, advance the foregoing Expenses to Indemnitee, subject to and in accordance with Section 2(c).
6. NOTIFICATION AND DEFENSE OF PROCEEDING.
(a) NOTICE. Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability that it may have to Indemnitee, except as provided in Section 6(c).
(b) DEFENSE. With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof, the Company will be entitled to participate in the Proceeding at its own expense and except as otherwise provided below, to the extent the Company so wishes, it may assume the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense of any Proceeding, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ legal
counsel in such Proceeding, but all Expenses related thereto incurred after notice from the Company of its assumption of the defense shall be at Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding, (iii) after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control), the employment of counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which cases all Expenses of the Proceeding shall be borne by the Company; and (v) if the Company has selected counsel to represent Indemnitee and other current and former directors, officers and employees of the Company in the defense of a Proceeding, and a majority of such persons, including Indemnitee, reasonably object to such counsel selected by the Company pursuant to this Section 6(b), then such persons, including Indemnitee, shall be permitted to employ one (1) additional counsel of their choice and the reasonable fees and expenses of such counsel shall be at the expense of the Company; PROVIDED, HOWEVER, that such counsel shall be chosen from amongst the list of counsel, if any, approved by any company with which the Company obtains or maintains insurance. In the event separate counsel is retained by an Indemnitee pursuant to this Section 6(b), the Company shall cooperate with Indemnitee with respect to the defense of the Proceeding, including making documents, witnesses and other reasonable information related to the defense available to the Indemnitee and such separate counsel pursuant to joint-defense agreements or confidentiality agreements, as appropriate. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the determination provided for in (ii), (iii) and (iv) above.
(c) SETTLEMENT OF CLAIMS. The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Company's written consent, such consent not to be unreasonably withheld; provided, however, that if a Change in Control has occurred (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control), the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action; the Company's liability hereunder shall not be excused if participation in the Proceeding by the Company was barred by this Agreement.
7. ESTABLISHMENT OF TRUST. In the event of a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) the Company shall, upon written request by Indemnitee, create a Trust for the benefit of the Indemnitee and from time to time upon written request of Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating,
preparing for, participating in, and/or defending any Proceeding relating to an Indemnifiable Event. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Independent Counsel. The terms of the Trust shall provide that (i) the Trust shall not be revoked or the principal thereof invaded without the written consent of the Indemnitee, (ii) the Trustee shall advance, within ten business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the same circumstances for which the Indemnitee would be required to reimburse the Company under Section 2(c) of this Agreement), (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert to the Company upon a final determination by the Independent Counsel or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its obligations under this Agreement. All income earned on the assets held in the Trust shall be reported as income by the Company for federal, state, local, and foreign tax purposes. The Company shall pay all costs of establishing and maintaining the Trust and shall indemnify the Trustee against any and all expenses (including attorneys' fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the establishment and maintenance of the Trust.
8. NON-EXCLUSIVITY. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Certificate of Incorporation, Bylaws, applicable law, or otherwise; provided, however, that this Agreement shall supersede any prior indemnification agreement between the Company and the Indemnitee. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification than would be afforded currently under the Company's Certificate of Incorporation, Bylaws, applicable law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change.
9. LIABILITY INSURANCE. To the extent the Company maintains an insurance policy or policies providing general and/or directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer.
10. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any Affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors, or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, or such longer period as may be required by state law under the circumstances. Any claim or cause of action of the Company or its Affiliate shall be extinguished and deemed released unless asserted by the timely filing and notice of a legal action within such period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, the shorter period shall govern.
11. AMENDMENT OF THIS AGREEMENT. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be binding unless in the form of a writing signed by the party against whom enforcement of the waiver is sought, and no such waiver shall operate as a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof.
12. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.
13. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, Bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder.
14. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation, or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though he may have ceased to serve in such capacity at the time of any Proceeding.
15. SEVERABILITY. If any provision (or portion thereof) of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void, or otherwise unenforceable, that is not itself invalid, void, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, void, or unenforceable.
16. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York if the Company is RadNet NY or the State of Delaware if the Company is RadNet DE applicable to contracts made and to be performed in such State without giving effect to its principles of conflicts of laws.
17. NOTICES. All notices, demands, and other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at:
RadNet, Inc.
1510 Cotner Avenue
Los Angeles, CA 90025
Attention: Chief Executive Officer
and to Indemnitee at:
[______________]
In care of:
RadNet, Inc.
1510 Cotner Avenue
Los Angeles, CA 90025
Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this Section shall be deemed to have been received on the date of hand delivery or on the third business day after mailing.
18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day specified above.
RADNET, INC.
a New York corporation
By:____________________________
Name:
Title:
RADNET, INC.
a Delaware corporation
By:____________________________
Name:
Title:
INDEMNITEE
[SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT]
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard G. Berger, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of RadNet, Inc. for the period ended March 31, 2008.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial (as defined in Exchange Act Rules 13a-15(e) and 15(d) -15(e)) and internal control over reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of this period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 12, 2008
/s/ Howard G. Berger, M.D.
--------------------------------------
Howard G. Berger, M.D.
President, Chief Executive Officer and
Chairman of the Board of Directors
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark D. Stolper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RadNet, Inc. for the period ended March 31, 2008.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial (as defined in Exchange Act Rules 13a-15(e) and 15(d) -15(e)) and internal control over reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of this period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 12, 2008
/s/ Mark D. Stolper
-----------------------------------
Mark D. Stolper
Executive Vice President and
Chief Financial Officer
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RadNet, Inc. (the "Company") on Form
10-Q for the quarterly period ended March 31, 2008, as filed with the Securities
and Exchange Commission on May 12, 2008 (the "Report"), I, Howard G. Berger,
M.D., Chairman of the Board of Directors and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
/s/ Howard G. Berger, M.D. ----------------------------------------------- Howard G. Berger, M.D. Chairman, President and Chief Executive Officer (Principal Executive Officer) May 12, 2008 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of RadNet, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2008, as filed with the Securities and Exchange Commission on May 12, 2008 (the "Report"), I, Mark D. Stolper, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
/s/ Mark D. Stolper --------------------------------- Mark D. Stolper Chief Financial Officer (Principal Financial Officer) May 12, 2008 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request.