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2015(cid:2)ANNUAL(cid:2)REPORT (cid:2)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Commission File Number 001-33307
RadNet, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1510 Cotner Avenue
Los Angeles, California
(Address of principal executive offices)
13-3326724
(I.R.S. Employer
Identification No.)
90025
(Zip Code)
Registrant’s telephone number, including area code: (310) 478-7808
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.0001 par value
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No ⌧
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 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 ⌧ No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ⌧ No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer (cid:133)
Non-Accelerated Filer (cid:133) (Do not check if a smaller reporting company)
Accelerated Filer ⌧
Smaller Reporting Company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes (cid:133) No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $266,105,775 on June 30, 2015
(the last business day of the registrant’s most recently completed second quarter) based on the closing price for the common stock on the NASDAQ
Global Market on June 30, 2015.
The number of shares of the registrant’s common stock outstanding on March 10, 2016, was 47,193,286
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2016 Annual Meeting of Stockholders are incorporated herein by reference in Part III of
this annual report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the registrant’s fiscal year.
RADNET, INC.
TABLE OF CONTENTS
FORM 10-K ITEM
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures.
PART II.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Controls and Procedures
Item 9A.
Other Information
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV.
Item 15.
Exhibits and Financial Statement Schedules
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34
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52
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Cautionary Note Regarding Forward-Looking Statements
This annual report 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. Forward-looking statements reflect current views about future events and are based on our currently
available financial, economic and competitive data and on current business plans. Actual events or results may differ materially depending on risks and
uncertainties that may affect our operations, markets, services, prices and other factors.
Statements in this annual report concerning our ability to successfully acquire and integrate new operations, to grow our contract management business,
our financial guidance, our future cost saving efforts, our increased business from new equipment or operations and our ability to finance our operations
are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable
terminology.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. These risks include those factors listed in Item 1 — “Business,” Item 1A— “Risk Factors,” Item 3— “Legal
Proceedings,” Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report
and in other reports that we file with the Securities and Exchange Commission.
We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or
circumstances that occur after the date of this annual report or any unanticipated events which may cause actual results to differ from those expressed or
implied by the forward-looking statements contained in this annual report, except to the extent required by law
ii
Item 1.
Business
Business Overview
PART I
We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of
locations and annual imaging revenue. At December 31, 2015, we operated directly or indirectly through joint ventures with hospitals, 300 centers
located in California, Delaware, Florida, Maryland, New Jersey, New York, and Rhode Island. Our centers provide physicians with imaging capabilities
to facilitate the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount
of care for patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear
medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer
multi-modality imaging services, a key point of differentiation from our competitors. Our multi-modality strategy diversifies revenue streams, reduces
exposure to reimbursement changes and provides patients and referring physicians one location to serve the needs of multiple procedures.
We seek to develop leading positions in regional markets in order to leverage operational efficiencies. Our scale and density within selected
geographies provide close, long-term relationships with key payors, radiology groups and referring physicians. Each of our center-level and regional
operations teams is responsible for managing relationships with local physicians and payors, meeting our standards of patient service and maintaining
profitability. We provide training programs, standardized policies and procedures and sharing of best practices among the physicians in our regional
networks.
In addition to our imaging services, one of our subsidiaries, eRAD, Inc., develops and sells computerized systems for the imaging industry,
including Picture Archiving Communications Systems (“PACS”). Another one of our subsidiaries, Imaging On Call LLC, provides teleradiology
services for remote interpretation of images on behalf of radiology groups, hospitals and imaging center customers. Teleradiology is the process of
transmitting radiological patient images, such as X-rays, CTs, and MRIs, from one location to another for the purposes of interpretation and/or
consultation. Teleradiology allows radiologists to provide services without actually having to be at the location of the patient and allows trained
specialists to be available 24/7. In addition to providing alternative revenue sources for us, the capabilities of both eRAD and Imaging On Call are
designed to make the RadNet imaging center operations more efficient and cost effective.
In December 2015 we entered into a multi-year strategic relationship with Imaging Advantage LLC. We will collaborate to develop business
models to deliver radiology services. In addition, the State of Qatar selected RadNet to help direct Screen for Life, a public-private partnership with the
Qatari government to provide screening services as part its national health strategy.
We derive substantially all of our revenue from fees charged for the diagnostic imaging services performed at our facilities. For the years ended
December 31, 2015, 2014 and 2013, we performed 5,638,979, 4,828,488, and 4,525,490 diagnostic imaging procedures and generated net revenue of
$809.6 million, $717.6 million, and $703.0 million, respectively. Additional information concerning RadNet, Inc., including our consolidated
subsidiaries, for each of the years ended December 31, 2015, 2014 and 2013 is included in the consolidated financial statements and notes thereto in this
annual report.
We typically experience some seasonality to our business. During the first quarter of each year we generally experience the lowest volumes of
procedures and the lowest level of revenue for any quarter during the year. This is primarily the result of two factors. First, our volumes and revenue
are typically impacted by winter weather conditions in our northeastern operations. It is common for snowstorms and other inclement weather to result
in patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have provided care to an increased number
of patients participating in high deductible health plans. The patient deductible amount resents each January resulting in initially greater patient out of
pocket expenditures until deductible limits are met. During this initial period of typically two to three months patients may defer medical service
History of our Business
We became incorporated in Delaware in 2008 and have been in business since 1985.
We develop our medical imaging business through a combination of organic growth and acquisitions. For a discussion of acquisitions, see Item
7 - “Management’s Discussion and Analysis and Results of Operations—Recent Developments and Facility Acquisitions” below.
1
In addition to our imaging business, our eRAD, Inc. subsidiary is a provider of PACS and related workflow solutions to the radiology industry.
Over 250 hospitals, teleradiology businesses, imaging centers and specialty physician groups use eRAD’s technology to distribute, display, store and
retrieve digital images taken from all diagnostic imaging modalities. eRAD has approximately 56 employees, including a research and development
team of 19 software engineers in Budapest, Hungary.
We have also assembled an industry leading team of software developers, based out of Prince Edward Island, Canada, to create radiology
workflow solutions known as Radiology Information Systems (“RIS”) focused exclusively on RadNet’s internal use. All 22 members of this Canadian
based team have significant software development expertise in radiology, and together with eRAD and its PACS technology, are creating fully integrated
solutions to manage all aspects of RadNet’s internal information needs.
In January 2011, we entered into a new line of business with the acquisition of Imaging On Call, LLC, a provider of teleradiology services to
radiology groups, hospitals and imaging centers located in Poughkeepsie, New York. Through our teleradiology business, we provide interpretation
services to approximately 50 hospitals and hospital-based radiology groups.
References to “RadNet,” “we,” “us,” “our” or the “Company” in this report refer to RadNet, Inc., its subsidiaries and affiliated entities.
See “Management’s Discussion and Analysis and Results of Operations—Overview.”
Available Information
All reports we file with the Securities and Exchange Commission are available free of charge via EDGAR through the SEC website at
www.sec.gov In addition you may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE.,
Washington, DC 20549, and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We also
maintain a website at www.radnet.com. where we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports as soon as is reasonably practicable after the material is electronically filed with the
Securities and Exchange Commission. References to our website in this report are provided as a convenience and the information contained on, or
otherwise accessible through, the website is not incorporated by reference into, nor does it form a part of this annual report on Form 10-K or any other
document that we file with the Securities and Exchange Commission.
Industry Overview
Diagnostic imaging involves the use of non-invasive procedures to generate representations of internal anatomy and function that can be
recorded on film or digitized for display on a video monitor. Diagnostic imaging procedures facilitate the early diagnosis and treatment of diseases and
disorders and may reduce unnecessary invasive procedures, often minimizing the cost and amount of care for patients. Diagnostic imaging procedures
include MRI, CT, PET, nuclear medicine, ultrasound, mammography, X-ray and fluoroscopy. We estimate that the national imaging market in the
United States is $100 billion annually and we project mid-single digit growth for MRI, CT and PET/CT over the next several years, driven by the aging
of the U.S. population, wider physician and payor acceptance for imaging technologies, and greater consumer and physician awareness of diagnostic
screening capabilities.
While X-ray remains the most commonly performed diagnostic imaging procedure, the fastest growing and higher margin procedures are MRI,
CT and PET. The rapid growth in PET scans is attributable to the increasing recognition of the efficacy of PET scans in the diagnosis and monitoring of
cancer. The number of MRI and CT scans performed annually in the United States continues to grow due to their wider acceptance by physicians and
payors, an increasing number of applications for their use and a general increase in demand due to the aging population.
Diagnostic Imaging Settings
Diagnostic imaging services are typically provided in one of the following settings:
Fixed-site, freestanding outpatient diagnostic facilities
These facilities range from single-modality to multi-modality facilities and are generally not owned by hospitals or clinics. These facilities
depend upon physician referrals for their patients and generally do not maintain dedicated, contractual relationships with hospitals or clinics. In fact,
these facilities may compete with hospitals or clinics that have their own imaging systems to provide services to these patients. These facilities bill third-
party payors, such as managed care organizations, insurance companies, Medicare or Medicaid. All of our facilities are in this category.
Hospitals
Many hospitals provide both inpatient and outpatient diagnostic imaging services, typically on site. These inpatient and outpatient centers are
owned and operated by the hospital or clinic, or jointly by both, and are primarily used by patients of the hospital or clinic. The hospital or clinic bills
third-party payors, such as managed care organizations, insurance companies, Medicare or Medicaid.
2
Mobile Imaging
While many hospitals own or lease their own equipment, certain hospitals provide diagnostic imaging services by contracting with providers of
mobile imaging services. Using specially designed trailers, mobile imaging service providers transport imaging equipment and provide services to
hospitals and clinics on a part-time or full-time basis, thus allowing small to mid-size hospitals and clinics that do not have the patient demand to justify
fixed on-site access to advanced diagnostic imaging technology. Diagnostic imaging providers contract directly with the hospital or clinic and are
typically reimbursed directly by them.
Diagnostic Imaging Modalities
The principal diagnostic imaging modalities we use at our facilities are:
MRI
MRI has become widely accepted as the standard diagnostic tool for a wide and fast-growing variety of clinical applications for soft tissue
anatomy, such as those found in the brain, spinal cord, abdomen, heart and interior ligaments of body joints such as the knee. MRI uses a strong
magnetic field in conjunction with low energy electromagnetic waves that are processed by a computer to produce high-resolution, three-dimensional,
cross-sectional images of body tissue. A typical MRI examination takes from 20 to 45 minutes. MRI systems are designed as either open or closed and
have magnetic field strength of 0.2 Tesla to 3.0 Tesla and are priced in the range of $0.6 million to $2.5 million. As of December 31, 2015, we had 231
MRI systems in operation.
CT
CT provides higher resolution images than conventional X-rays, but generally not as well defined as those produced by MRI. CT uses a
computer to direct the movement of an X-ray tube to produce multiple cross-sectional images of a particular organ or area of the body. CT is used to
detect tumors and other conditions affecting bones and internal organs. It is also used to detect the occurrence of strokes, hemorrhages and infections. A
typical CT examination takes from 15 to 45 minutes. CT systems are priced in the range of $0.3 million to $1.2 million. As of December 31, 2015, we
had 144 CT systems in operation.
PET
PET scanning involves the administration of a radiopharmaceutical agent with a positron-emitting isotope and the measurement of the
distribution of that isotope to create images for diagnostic purposes. PET scans provide the capability to determine how metabolic activity impacts other
aspects of physiology in the disease process by correlating the reading for the PET with other tools such as CT or MRI. PET technology has been found
highly effective and appropriate in certain clinical circumstances for the detection and assessment of tumors throughout the body, the evaluation of some
cardiac conditions and the assessment of epilepsy seizure sites. The information provided by PET technology often obviates the need to perform further
highly invasive or diagnostic surgical procedures. PET systems are priced in the range of $0.8 million to $2.5 million. In addition, we employ combined
PET/CT systems that blend the PET and CT imaging modalities into one scanner. These combined systems are priced in the range of $1.1 million to $2.8
million. As of December 31, 2015, we had 46 PET or combination PET/CT systems in operation.
Nuclear Medicine
Nuclear medicine uses short-lived radioactive isotopes that release small amounts of radiation that can be recorded by a gamma camera and
processed by a computer to produce an image of various anatomical structures or to assess the function of various organs such as the heart, kidneys,
thyroid and bones. Nuclear medicine is used primarily to study anatomic and metabolic functions. Nuclear medicine systems are priced in the range of
$300,000 to $400,000. As of December 31, 2015, we had 49 nuclear medicine systems in operation.
X-ray
X-rays use roentgen rays to penetrate the body and record images of organs and structures on film. Digital X-ray systems add computer image
processing capability to traditional X-ray images, which provides faster transmission of images with a higher resolution and the capability to store
images more cost-effectively. X-ray systems are priced in the range of $95,000 to $440,000. As of December 31, 2015, we had 393 X-ray systems in
operation.
3
Ultrasound
Ultrasound imaging uses sound waves and their echoes to visualize and locate internal organs. It is particularly useful in viewing soft tissues
that do not X-ray well. Ultrasound is used in pregnancy to avoid X-ray exposure as well as in gynecological, urologic, vascular, cardiac and breast
applications. Ultrasound systems are priced in the range of $90,000 to $250,000. As of December 31, 2015, we had 498 ultrasound systems in operation.
Mammography
Mammography is a specialized form of radiology using low dosage X-rays to visualize breast tissue and is the primary screening tool for breast
cancer. Mammography procedures and related services assist in the diagnosis of and treatment planning for breast cancer. Analog mammography
systems are priced in the range of $70,000 to $100,000, and digital mammography systems are priced in the range of $250,000 to $400,000. As of
December 31, 2015, we had 260 mammography systems in operation.
Fluoroscopy
Fluoroscopy uses ionizing radiation combined with a video viewing system for real time monitoring of organs. Fluoroscopy systems are priced
in the range of $100,000 to $400,000. As of December 31, 2015, we had 105 fluoroscopy systems in operation.
Industry Trends
We believe the diagnostic imaging services industry will continue to grow as a result of a number of factors, including the following:
Escalating Demand for Healthcare Services from an Aging Population
Persons over the age of 65 comprise one of the fastest growing segments of the population in the United States. According to the United States
Census Bureau, this group is expected to increase as much as 39% from 2010 to 2020. Because diagnostic imaging use tends to increase as a person
ages, we believe the aging population will generate more demand for diagnostic imaging procedures.
New Effective Applications for Diagnostic Imaging Technology
New technological developments are expected to extend the clinical uses of diagnostic imaging technology and increase the number of scans
performed. Recent technological advancements include:
• MRI spectroscopy, which can differentiate malignant from benign lesions;
• MRI angiography, which can produce three-dimensional images of body parts and assess the status of blood vessels;
• enhancements in teleradiology systems, which permit the digital transmission of radiological images from one location to another for
interpretation by radiologists at remote locations; and
• the development of combined PET/CT scanners, which combine the technology from PET and CT to create a powerful diagnostic
imaging system.
Additional improvements in imaging technologies, contrast agents and scan capabilities are leading to new non-invasive diagnostic imaging
application, including methods of diagnosing blockages in the heart’s vital coronary arteries, liver metastases, pelvic diseases and vascular abnormalities
without exploratory surgery. We believe that the use of the diagnostic capabilities of MRI and other imaging services will continue to increase because
they are cost-effective, time-efficient and non-invasive, as compared to alternative procedures, including surgery, and that newer technologies and future
technological advancements will further increase the use of imaging services. At the same time, the industry has increasingly used upgrades to existing
equipment to expand applications, extend the useful life of existing equipment, improve image quality, reduce image acquisition time and increase the
volume of scans that can be performed. We believe the use of equipment upgrades rather than equipment replacements will continue, as we do not
foresee new imaging technologies on the near-term horizon that will displace MRI, CT or PET as the principal advanced diagnostic imaging modalities.
Wider Physician and Payor Acceptance of the Use of Imaging
During the last 30 years, there has been a major effort undertaken by the medical and scientific communities to develop higher quality, cost-
effective diagnostic imaging technologies and to minimize the risks associated with the application of these technologies. The thrust of product
development during this period has largely been to reduce the hazards associated with conventional X-ray and nuclear medicine techniques and to
develop new, less harmful imaging technologies. As a result, the use of advanced diagnostic imaging modalities, such as MRI, CT and PET, which
provide superior image quality compared to other diagnostic imaging technologies, has increased rapidly in recent years. These advanced modalities
allow physicians to diagnose a wide variety of diseases and injuries quickly and accurately without exploratory surgery or other surgical or invasive
procedures, which are usually more expensive, involve greater risk to patients and result in longer rehabilitation time. Because advanced imaging
systems are increasingly seen as a tool for reducing long-term healthcare costs, they are gaining wider acceptance among payors.
4
Greater Consumer Awareness of and Demand for Preventive Diagnostic Screening
Diagnostic imaging, such as elective full-body scans, is increasingly being used as a screening tool for preventive care procedures. Consumer
awareness of diagnostic imaging as a less invasive and preventive screening method has added to the growth in diagnostic imaging procedures. We
believe that further technological advancements allowing for early diagnosis of diseases and disorders using less invasive procedures will create
additional demand for diagnostic imaging.
Expansion of Teleradiology Services
As hiring radiologists has become more difficult, the use of teleradiology is expected to continue to expand to provide patients better, more
specialized care and 24/7 services.
Our Competitive Strengths
Our Scale and Position as the Largest Provider of Freestanding, Fixed-site Outpatient Diagnostic Imaging Services in the United States,
Based on Number of Centers and Revenue
As of December 31, 2015, we operated 300 centers in California, Delaware, Florida, Maryland, New Jersey, New York and Rhode Island. Our
size and scale allow us to achieve operating, sourcing and administrative efficiencies, including equipment and medical supply sourcing savings and
favorable maintenance contracts from equipment manufacturers and other suppliers. Our specific knowledge of our geographic markets drives strong
relationships with key payors, radiology groups and referring physicians within our markets.
Our Comprehensive "Multi-Modality" Diagnostic Imaging Offering
The vast majority of our centers offer multiple types of imaging procedures, driving strong relationships with referring physicians and payors in
our markets and a diversified revenue base. At each of our multi-modality facilities, we offer patients and referring physicians one location to serve their
needs for multiple procedures. This prevents multiple patient visits or unnecessary travel between facilities, thereby increasing patient throughput and
decreasing costs and time delays. Our revenue is generated by a broad mix of modalities. We believe our multi-modality strategy lessens our exposure to
reimbursement changes in any specific modality.
Our Competitive Pricing
We believe our fees are generally lower than hospital fees for the services we provide.
Our Facility Density in Many Highly Populated Areas of the United States
The strategic organization of our diagnostic imaging facilities into regional networks concentrated in major population centers in seven states
offers unique benefits to our patients, our referring physicians, our payors and us. We are able to increase the convenience of our services to patients by
implementing scheduling systems within geographic regions, where practical. For example, many of our diagnostic imaging facilities within a particular
region can access the patient appointment calendars of other facilities within the same regional network to efficiently allocate time available and to meet
a patient's appointment, date, time, or location preferences. The grouping of our facilities within regional networks enables us to easily move
technologists and other personnel, as well as equipment, from under-utilized to over-utilized facilities on an as-needed basis, and drive referrals. Our
organization of referral networks results in increased patient throughput, greater operating efficiencies, better equipment utilization rates and improved
response time for our patients. We believe our networks of facilities and tailored service offerings for geographic areas drives local physician referrals,
makes us an attractive candidate for selection as a preferred provider by third-party payors, creates economies of scale and provides barriers to entry by
competitors in our markets.
5
Our Strong Relationships with Payors and Diversified Payor Mix
Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors, which
should mitigate our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience with capitation
arrangements has provided us with the expertise to manage utilization and pricing effectively, resulting in a predictable and recurring stream of revenue.
We believe that third-party payors representing large groups of patients often prefer to enter into managed care contracts with providers that offer a
broad array of diagnostic imaging services at convenient locations throughout a geographic area. In 2015, we received approximately 57% of our
payments from commercial insurance payors, 12% from managed care capitated payors, 20% from Medicare and 3% from Medicaid. With the exception
of Blue Cross/Blue Shield, which are managed by different entities in each of the states in which we operate, and Medicare, no single payor accounted
for more than 5% of our net revenue for the twelve months ended December 31, 2015.
Our Strong Relationships with Experienced and Highly Regarded Radiologists
Our contracted radiologists have outstanding credentials, strong relationships with referring physicians, and a broad mix of sub-specialties. The
collective experience and expertise of these radiologists translates into more accurate and efficient service to patients. Our close relationship with
Howard G. Berger, M.D., our President and Chief Executive Officer, and Beverly Radiology Medical Group (“BRMG”) in California and our long-term
arrangements with radiologists outside of California enable us to better ensure that medical service provided at our facilities is consistent with the needs
and expectations of our referring physicians, patients and payors.
Our Experienced and Committed Management Team
Our senior management group has more than 100 years of combined healthcare management experience. Our executive management team has
created our differentiated approach based on their comprehensive understanding of the diagnostic imaging industry and the dynamics of our regional
markets. We have a track record of successful acquisitions and integration of acquired businesses into RadNet, and have managed the business through a
variety of economic and reimbursement cycles.
Our Technologically Advanced Imaging Systems
In late 2010 and early 2011 we expanded our offering of imaging related services with our acquisition of eRad (development and sale of
computerized imaging systems for the imaging industry) and Imaging On Call (teleradiology services for interpretation of images for radiology groups,
hospitals and others after business hours, for overflow and specialty work). In addition, we have assembled an industry leading team of software
developers to create radiology workflow solutions for our internal use.
Business Strategy
Maximize Performance at Our Existing Facilities
We intend to enhance our operations and increase scan volume and revenue at our existing facilities by expanding physician relationships and
increasing the procedure offerings.
Expansion Into Related Businesses
With our acquisition of eRad we entered the business of the development and sale of software systems essential to the imaging industry.
Similarly, with our acquisition of Imaging On Call, we entered the teleradiology business. We intend to regularly evaluate potential acquisitions of other
businesses to the extent they complement our imaging business.
Focus on Profitable Contracting
We regularly evaluate our contracts with third-party payors, industry vendors and radiology groups, as well as our equipment and real property
leases, to determine how we may improve the terms to increase our revenues and reduce our expenses. Because many of our contracts with third party
payors are short-term in nature, we can regularly renegotiate these contracts, if necessary. We believe our position as a leading provider of diagnostic
imaging services and our long-term relationships with physician groups in our markets enable us to obtain more favorable contract terms than would be
available to smaller or less experienced imaging services providers.
Optimize Operating Efficiencies
We try to maximize our equipment utilization by adding, upgrading and re-deploying equipment where we experience excess demand. We will
continue to trim excess operating and general and administrative costs where it is feasible to do so. We may also continue to use, where appropriate,
highly trained radiology physician assistants to perform, under appropriate supervision of radiologists, basic services traditionally performed by
radiologists. We will continue to upgrade our advanced information technology system to create cost reductions for our facilities in areas such as image
storage, support personnel and financial management.
6
Expand Our Networks
We intend to continue to expand the number of our facilities both organically and through targeted acquisitions, using a disciplined approach
for evaluating and entering new areas, including consideration of whether we have adequate financial resources to expand. Our current plans are to
strengthen our market presence in geographic areas where we currently have existing operations and to expand into neighboring and other areas where
we believe we can compete effectively. We perform extensive due diligence before developing a new facility or acquiring an existing facility or entering
into a joint venture with a hospital to manage a facility, including surveying local referral sources and radiologists, as well as examining the
demographics, reimbursement environment, competitive landscape and intrinsic demand of the geographic market. We generally will only enter new
markets where:
• there is sufficient patient demand for outpatient diagnostic imaging services;
• we believe we can gain significant market share;
• we can build key referral relationships or we have already established such relationships; and
• payors are receptive to our entry into the market.
Our Services
We offer a comprehensive set of imaging services including MRI, CT, PET, nuclear medicine, X-ray, ultrasound, mammography, fluoroscopy
and other related procedures. We focus on providing standardized high quality imaging services, regardless of location, to ensure patients, physicians
and payors consistency in service and quality. To ensure the high quality of our services, we monitor patient satisfaction, timeliness of services to
patients and reports to physicians.
The key features of our services include:
• patient-friendly, non-clinical environments;
• a 24-hour turnaround on routine examinations;
• interpretations within one to two hours, if needed;
• flexible patient scheduling, including same-day appointments;
• extended operating hours, including weekends;
• reports delivered by courier, facsimile or email;
• availability of second opinions and consultations;
• availability of sub-specialty interpretations at no additional charge; and
• standardized fee schedules by region.
Radiology Professionals
In the states in which we provide services (except Florida), a lay person or any entity other than a professional corporation or similar
professional organization is not allowed to practice medicine, including by employing professional persons or by having any ownership interest or profit
participation in or control over any medical professional practice. This doctrine is commonly referred to as the prohibition on the “corporate practice” of
medicine. In order to comply with this prohibition, we contract with radiologists to provide professional medical services in our facilities, including the
supervision and interpretation of diagnostic imaging procedures. The radiology practice maintains full control over the physicians it employs. Pursuant
to each management contract, we make available the imaging facility and all of the furniture and medical equipment at the facility for use by the
radiology practice, and the practice is responsible for staffing the facility with qualified professional medical personnel. In addition, we provide
management services and administration of the non-medical functions relating to the professional medical practice at the facility, including among other
functions, provision of clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and
office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
As compensation for the services furnished under contracts with radiologists, we generally receive an agreed percentage of the medical practice billings
for, or collections from, services provided at the facility, typically varying between 75% to 85% of global net service fee revenue or collections after
deduction of the professional component of the medical practice billings.
7
At all but 13 of our California facilities, we contract for the provision of professional medical services directly with BRMG, or indirectly
through BRMG with other radiology groups.
Many states have also enacted laws prohibiting a licensed professional from splitting fees derived from the practice of medicine with an
unlicensed person or business entity. We do not believe that the management, administrative, technical and other non-medical services we provide to
each of our contracted radiology groups violate the corporate practice of medicine prohibition or that the fees we charge for such services violate the fee
splitting prohibition. However, the enforcement and interpretation of these laws by regulatory authorities and state courts vary from state to state. If our
arrangements with our independent contractor radiology groups are found to violate state laws prohibiting the practice of medicine by general business
corporations or fee splitting, our business, financial condition and ability to operate in those states could be adversely affected.
BRMG and New York Groups
BRMG, owned 99% indirectly by Dr. Berger, our President and CEO provides, directly or indirectly, all of the professional medical services at
nearly all of our facilities located in California under a management agreement with us, and employs physicians or contracts with various independent
physicians and physician groups to provide the professional medical services at most of our 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. BRMG is a partnership of ProNet
Imaging Medical Group, Inc., Breastlink Medical Group, Inc. and Beverly Radiology Medical Group, Inc..
We believe that physicians are drawn to BRMG and the other radiologist groups with whom we contract by the opportunity to work with the
state-of-the-art equipment we make available to them, as well as the opportunity to receive specialized training through our fellowship programs, and
engage in clinical research programs, which generally are available only in university settings and major hospitals.
As of December 31, 2015, BRMG employed or contracted for 209 full-time and 20 part-time radiologists. Under our management agreement
with BRMG, we are paid a percentage of the amounts collected for the professional services BRMG physicians render as compensation for our services
and for the use of our facilities and equipment. For the year ended December 31, 2015, this percentage was 78%. The percentage may be adjusted, if
necessary, to ensure that the parties receive the fair value for the services they render. The following are the other principal terms of our management
agreement with BRMG:
• The agreement expires on January 1, 2024. The agreement automatically renews for consecutive 10-year periods, unless either party
delivers a notice of non-renewal to the other party no later than six months prior to the scheduled expiration date. Either party may
terminate the agreement if the other party defaults under its obligations, after notice and an opportunity to cure. We may terminate the
agreement if Dr. Berger no longer owns at least 60% of the equity of BRMG; as of December 31, 2015, he owned indirectly 99% of the
equity of BRMG.
• At its expense, BRMG employs or contracts with an adequate number of physicians necessary to provide all professional medical
services at all of our California facilities, except for 13 facilities for which we contract with separate medical groups.
• At our expense, we provide all furniture, furnishings and medical equipment located at the facilities and we manage and administer all
non-medical functions at, and provide all nurses and other non-physician personnel required for the operation of, the facilities.
• If BRMG wants to open a new facility, we have the right of first refusal to provide the space and services for the facility under the same
terms and conditions set forth in the management agreement.
8
• If we want to open a new facility in California, BRMG must use its best efforts to provide medical personnel under the same terms and
conditions set forth in the management agreement. If BRMG cannot provide such personnel, we have the right to contract with other
physicians to provide services at the facility.
• BRMG must maintain medical malpractice insurance for each of its physicians with coverage limits not less than $1 million per incident
and $3 million in the aggregate per year. BRMG also has agreed to indemnify us for any losses we suffer that arise out of the acts or
omissions of BRMG and its employees, contractors and agents.
We contract with eight medical groups which provide professional medical services at all of our facilities in Manhattan and Brooklyn, New
York, the “New York Groups”. These contracts are similar to our contract with BRMG. Four of these groups are owned by John V Crues, III, M.D.,
Radnet’s Medical Director, a member of our Board of Directors, and a 1% owner of BRMG. Dr Berger owns a controlling interest in two of these
medical groups which provide professional medical services at one of our Manhattan facilities.
Non-BRMG and New York Groups entity locations
At the 13 centers in California where BRMG does not provide professional medical services, and at all of the centers which are located outside
of California, with the exception of centers located in the New York, New York area, we have entered into long-term contracts with prominent third-
party radiology groups in the area to provide physician services at those facilities. These arrangements also allow us to comply with the prohibition
against the “corporate practice” of medicine in other states in which we operate (except in Florida which does not have an equivalent statute prohibiting
the corporate practice of medicine).
These third-party radiology practice groups provide professional services, including supervision and interpretation of diagnostic imaging
procedures, in our diagnostic imaging centers. The radiology practices maintain full control over the provision of professional services. The contracted
radiology practices 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 have entered into long-term agreements (typically 10-40
years in length) under which, 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. We typically receive 100% of the
technical reimbursements associated with imaging procedures plus certain fees paid to us for providing additional management services. The radiology
practice groups retain the professional reimbursements associated with imaging procedures after deducting management service fees paid to us.
Additionally, we perform certain management services for a portion of the professional groups with whom we contract who provide
professional radiology services at local hospitals. For performing these management services, which include billing, collecting, transcription and medical
coding, we receive management fees.
Payors
The fees charged for diagnostic imaging services performed at our facilities are paid by a diverse mix of payors, as illustrated for the following
periods presented in the table below:
Commercial Insurance (1)(2)
Managed Care Capitated Payors
Medicare& Medicaid
Year Ended
December 31,
2015
% of Net Revenue
Year Ended
December 31,
2014
57%
12%
23%
56%
13%
24%
Year Ended
December 31,
2013
55%
13%
24%
(1) Includes Blue Cross/Blue Shield plans, which represented 20% of our net service fee revenue for the years ended December 31, 2015, 2014,
and 2013.
(2) Includes co-payments, direct patient payments and payments through contracts with physician groups and other non-insurance company
payors.
We have described below the types of reimbursement arrangements we have with third-party payors.
Commercial Insurance
Generally, insurance companies reimburse us, directly or indirectly, including through BRMG in California or through the contracted radiology
groups elsewhere, on the basis of agreed upon rates. These rates are negotiated and may differ materially with rates set forth in the Medicare Physician
Fee Schedule for the particular service. The patients may be responsible for certain co-payments or deductibles.
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Managed Care Capitation Agreements
Under these agreements, which are generally between BRMG in California and outside of California between the contracted radiology group
(typically an independent physician group or other medical group) and the payor (which in most cases are large medical groups or Independent Practice
Associations), the payor pays a pre-determined amount per-member per-month in exchange for the radiology group providing all necessary covered
services to the managed care members included in the agreement. These contracts pass much of the financial risk of providing outpatient diagnostic
imaging services, including the risk of over-use, from the payor to the radiology group and, as a result of our management agreement with the radiology
group, to us.
We believe that through our comprehensive utilization management, or UM, program we have become highly skilled at assessing and
moderating the risks associated with the capitation agreements, so that these agreements are profitable for us. Our UM program is managed by our UM
department, which consists of administrative and nursing staff as well as BRMG medical staff who are actively involved with the referring physicians
and payor management in both prospective and retrospective review programs. Our UM program includes the following features, all of which are
designed to manage our costs while ensuring that patients receive appropriate care:
• Physician Education
At the inception of a new capitation agreement, we provide the new referring physicians with binders of educational material comprised
of proprietary information that we have prepared and third-party information we have compiled, which are designed to address diagnostic
strategies for common diseases. We distribute additional material according to the referral practices of the group as determined in the
retrospective analysis described below.
• Prospective Review
Referring physicians are required to submit authorization requests for non-emergency high-intensity services: MRI, CT, special
procedures and nuclear medicine studies. The UM medical staff, according to accepted practice guidelines, considers the necessity and
appropriateness of each request. Notification is then sent to the imaging facility, referring physician and medical group. Appeals for cases
not approved are directed to us. The capitated payor has the final authority to uphold or deny our recommendation.
• Retrospective Review
We collect and sort encounter activity by payor, place of service, referring physician, exam type and date of service. The data is then
presented in quantitative and analytical form to facilitate understanding of utilization activity and to provide a comparison between fee-
for-service and Medicare equivalents. Our Medical Director prepares a quarterly report for each payor and referring physician. When we
find that a referring physician is over utilizing services, we work with the physician to modify referral patterns.
Medicare/Medicaid
Medicare is the federal health insurance program for people age 65 or older and people under age 65 with certain disabilities. Medicaid, funded
by both the federal government and states, is a state-administered health insurance program for qualifying low-income and medically needy persons. For
services for which we bill Medicare directly or indirectly, including through contracted radiologists, we are paid under the Medicare Physician Fee
Schedule. Under the Protecting Access to Medicare Act of 2014, Congress introduced a new quality incentive program that, effective January 1, 2016,
reduces Medicare payments for certain CT services reimbursed through the Medicare Physician Fee Schedule that are furnished using equipment that
does not meet certain dose optimization and management standards. Medicare patients usually pay a 20% co-payment unless they have secondary
insurance. Medicaid rates are set by the individual states for each state program and Medicaid patients may be responsible for a modest co-payment.
Contracts with Physician Groups and Other Non-Insurance Company Payors
For some of our contracts with physician groups and other providers, we do not bill payors, but instead accept agreed upon rates for our
radiology services. These rates are typically at or below the rates set forth in the current Medicare Fee Schedule for the particular service. However, we
often agree to a specified rate for MRI and CT procedures that is not tied to the Medicare Fee Schedule.
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Facilities
We operate 139 fixed-site, freestanding outpatient diagnostic imaging facilities in California, 12 in Delaware, 3 in Florida, 54 in Maryland, 19
in New Jersey, 23 in the Rochester and Hudson Valley areas of New York, 45 in New York Cityas well as 5 in Rhode Island. We lease the premises at
which these facilities are located.
Our facilities are primarily located in geographic networks that we refer to as regions. The majority of our facilities are multi-modality sites,
offering various combinations of MRI, CT, PET, nuclear medicine, ultrasound, X-ray, fluoroscopy services and other related procedures. A portion of
our facilities are single-modality sites, offering either X-ray or MRI services. Consistent with our regional network strategy, we locate our single-
modality facilities near multi-modality facilities, to help accommodate overflow in targeted demographic areas.
The following table sets forth the number of our facilities for each year during the five-year period ended December 31, 2015:
Total facilities owned or managed (at beginning of the year)
Facilities added by:
Acquisition
Internal development
Facilities closed or sold
Total facilities owned (at year end)
Diagnostic Imaging Equipment
2011
2012
Year Ended
December 31,
2013
2014
2015
201
33
2
-3
233
233
25
–
-12
246
246
12
–
-8
250
250
22
–
-13
259
259
43
1
-3
300
The following table indicates, as of December 31, 2015, the quantity of principal diagnostic equipment available at our facilities, by region:
California
Florida
Delaware
New Jersey
New York
Maryland
Rhode Island
Total
MRI Open/MRI
25
1
–
1
3
6
–
36
65
2
6
18
48
53
3
195
CT
49
2
6
14
34
36
3
144
PET/CT Mammo Ultrasound
209
5
14
29
125
112
4
498
92
3
5
17
75
66
2
260
21
1
–
3
7
14
–
46
X-ray NucMed Fluoroscopy
54
19
2
4
2
3
10
2
13
6
24
15
–
–
105
49
125
3
20
25
105
111
4
393
Total
659
23
56
119
416
437
16
1,726
The average age of our MRI and CT units is less than six years, and the average age of our PET units is less than four years. The useful life of
our MRI, CT and PET units is typically ten years.
Facility Acquisitions
Information regarding our facility acquisitions can be found within Item 7 - “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, as well as Notes 4 and 5 to our consolidated financial statements included in this annual report on Form 10-K.
Information Technology
Our corporate headquarters and many of our facilities are interconnected through a state-of-the-art information technology system. This system,
which is compliant with the Health Insurance Portability and Accountability Act of 1996, is comprised of a number of integrated applications and
provides a single operating platform for billing and collections, electronic medical records, practice management and image management.
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This technology has created cost reductions for our facilities in areas such as image storage, support personnel and financial management and
has further allowed us to optimize the productivity of all aspects of our business by enabling us to:
• capture patient demographic, history and billing information at point-of-service;
• automatically generate bills and electronically file claims with third-party payors;
• record and store diagnostic report images in digital format;
• digitally transmit in real-time diagnostic images from one location to another, thus enabling networked radiologists to cover larger
geographic markets by using the specialized training of other networked radiologists;
• perform claims, rejection and collection analysis; and
• perform sophisticated financial analysis, such as analyzing cost and profitability, volume, charges, current activity and patient case mix,
with respect to each of our managed care contracts.
Diagnostic reports and images are currently accessible via the Internet by our California referring providers. We have worked with some of the
larger medical groups in California with whom we have contracts to provide access to this content through their web portals. We are in the process of
making such services available outside of California.
We have historically utilized third-party software for our front desk patient tracking system, which we refer to as a Radiology Information
System, or RIS. We have developed our own RIS through our team of software development engineers and began running this internally developed
system in the first quarter of 2015.
Personnel
At December 31, 2015, we had a total of 5,265 full-time, 815 part-time and 1,304 per diem employees, including those employed by BRMG.
These numbers include 209 full-time and 20 part-time physicians and 1,230 full-time, 469 part-time and 664 per-diem technologists.
We employ site managers who are responsible for overseeing day-to-day and routine operations at each of our facilities, including staffing,
modality and schedule coordination, referring physician and patient relations and purchasing of materials. These site managers report to regional
managers and directors, who are responsible for oversight of the operations of all facilities within their region, including sales, marketing and
contracting. The regional managers and directors, along with our directors of contracting, marketing, facilities, management/purchasing and human
resources report to our chief operating officers. These officers, our chief financial officer, our director of information services and our medical director
report to our chief executive officer.
None of our employees is subject to a collective bargaining agreement nor have we experienced any work stoppages. We believe our
relationship with our employees is good.
Sales and Marketing
At December 31, 2015, our California sales and marketing team consisted of one director of marketing and 47 customer service representatives,
while our eastern marketing team consisted of one director of marketing and 116 customer sales representatives. Our sales and marketing team employs
a multi-pronged approach to marketing, including physician, payor and sports marketing programs.
Physician Marketing
Each customer service representative on our physician marketing team is responsible for marketing activity on behalf of one or more facilities.
The representatives act as a liaison between the facility and referring physicians, holding meetings periodically and on an as-needed basis with them and
their staff to present educational programs on new applications and uses of our systems and to address particular patient service issues that have arisen.
In our experience, consistent hands-on contact with a referring physician and his or her staff generates goodwill and increases referrals to our facilities.
The representatives also continually seek to establish referral relationships with new physicians and physician groups. In addition to a base salary, each
representative receives a bonus based upon success.
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Payor Marketing
Our marketing team regularly meets with managed care organizations and insurance companies to solicit contracts and meet with existing
contracting payors to solidify those relationships. The comprehensiveness of our services, the geographic location of our facilities and the reputation of
the physicians with whom we contract all serve as tools for obtaining new or repeat business from payors.
Sports Marketing Program
RadNet Inc. has a sports marketing division. We provide diagnostic digital X-ray services for the Los Angeles Lakers, Clippers, Kings and
Sparks at the Staples Center. X-ray is performed at the Coliseum for the University of California football team. In exchange for these services, each team
provides RadNet with season tickets, parking and advertising space in the program book. RadNet also provides radiology services at many of our
imaging centers for the Los Angeles Angels, Anaheim Ducks, Oakland Athletics and Los Angeles Kiss Arena Football.
In December 2013 we entered into a three year sponsorship agreement with the Baltimore Ravens of the National Football League which
permits us to state “Proud Imaging Provider of the Baltimore Ravens”.
Suppliers
Historically, we have acquired our diagnostic imaging equipment from large suppliers such as GE Medical Systems, Inc., Hologic, Phillips,
Hitachi, Carestream and others, and we purchase medical supplies from various national vendors. We believe that we have excellent working
relationships with all of our major vendors. There are several comparable vendors for our supplies that would be available to us if one of our current
vendors becomes unavailable.
We primarily acquire our equipment with cash or through various financing arrangements with equipment vendors and third party equipment
finance companies involving the use of capital leases with purchase options at minimal prices at the end of the lease term. At December 31, 2015, capital
lease obligations, excluding interest, totaled approximately $16.4 million through 2021, including current installments totaling approximately $10.0
million. If we open or acquire additional imaging facilities, we may have to incur material capital lease obligations.
Timely, effective maintenance is essential for achieving high utilization rates of our imaging equipment. We have an arrangement with GE
Medical Systems, Inc. under which it has agreed to be responsible for the maintenance and repair of a majority of our equipment for a fee that is based
upon a percentage of our revenue, subject to a minimum payment.
Competition
The market for outpatient diagnostic imaging services is highly competitive. We compete locally for patients with groups of radiologists,
established hospitals, clinics and other independent organizations that own and operate imaging equipment. Our competitors include Alliance Healthcare
Services, Inc., to the extent it sells diagnostic services directly to outpatients, Diagnostic Imaging Group and several smaller regional competitors. In
addition, some physician practices have established their own diagnostic imaging facilities within their group practices to compete with us. We
experience additional competition as a result of those activities.
We compete principally on the basis of our reputation, our ability to provide multiple modalities at many of our facilities, the location of our
facilities, the quality of our diagnostic imaging services and technologists and the ability to establish and maintain relationships with healthcare
providers and referring physicians. See “Competitive Strengths” above. Some of our competitors may now or in the future have access to greater
financial resources than we do and may have access to newer, more advanced equipment
Each of the non-BRMG contracted radiology practices has entered into agreements with its physician shareholders and full-time employed
radiologists that generally prohibit those shareholders and radiologists from competing for a period of two years within defined geographic regions after
they cease to be owners or employees, as applicable. In certain states, like California, a covenant not to compete is enforced in limited circumstances
involving the sale of a business. In other states, a covenant not to compete will be enforced only:
• to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement;
• if it does not unreasonably restrain the party against whom enforcement is sought; and
• if it is not contrary to public interest.
Enforceability of a non-compete covenant is determined by a court based on all of the facts and circumstances of the specific case at the time
enforcement is sought. For this reason, it is not possible to predict whether or to what extent a court will enforce the contracted radiology practices’
covenants. The inability of the contracted radiology practices or us to enforce radiologist’s non-compete covenants could result in increased competition
from individuals who are knowledgeable about our business strategies and operations.
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Liability Insurance
We maintain insurance policies with coverage we believe is appropriate in light of the risks attendant to our business and consistent with
industry practice. However, adequate liability insurance may not be available to us in the future at acceptable costs or at all. We maintain general
liability insurance and professional liability insurance in commercially reasonable amounts. Additionally, we maintain workers’ compensation insurance
on all of our employees. Coverage is placed on a statutory basis and corresponds to individual state’s requirements.
Pursuant to our agreements with physician groups with whom we contract, including BRMG, each group must maintain medical malpractice
insurance for each physician in the group, having coverage limits of not less than $1.0 million per incident and $3.0 million in the aggregate per year.
California’s medical malpractice cap further reduces our exposure. California places a $250,000 limit on non-economic damages for medical
malpractice cases. Non-economic damages are defined as compensation for pain, suffering, inconvenience, physical impairment, disfigurement and other
non-pecuniary injury. The cap applies whether the case is for injury or death, and it allows only one $250,000 recovery in a wrongful death case. No cap
applies to economic damages. Other states in which we now operate do not have similar limitations and in those states we believe our insurance
coverage to be sufficient.
Regulation
General
The healthcare industry is highly regulated, and we can give no assurance that the regulatory environment in which we operate will not change
significantly in the future. Our ability to operate profitably will depend in part upon us, and the contracted radiology practices and their affiliated
physicians obtaining and maintaining all necessary licenses and other approvals, and operating in compliance with applicable healthcare regulations. We
believe that healthcare regulations will continue to change. Therefore, we monitor developments in healthcare law and modify our operations from time
to time as the business and regulatory environment changes.
Licensing and Certification Laws
Ownership, construction, operation, expansion and acquisition of diagnostic imaging facilities are subject to various federal and state laws,
regulations and approvals concerning licensing of facilities and personnel. In addition, free-standing diagnostic imaging facilities that provide services
not performed as part of a physician office must meet Medicare requirements to be certified as an independent diagnostic testing facility before it can be
authorized to bill the Medicare program. We have experienced a slowdown in the credentialing of our physicians over the last several years which has
lengthened our billing and collection cycle.
Corporate Practice of Medicine
In the states in which we operate, other than Florida, a lay person or any entity other than a professional corporation or other similar
professional organization is not allowed to practice medicine, including by employing professional persons or by having any ownership interest or profit
participation in or control over any medical professional practice. The laws of such states also prohibit a lay person or a non-professional entity from
exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting
professional fees with physicians. We structure our relationships with the radiology practices, including the purchase of diagnostic imaging facilities, in
a manner that we believe keeps us from engaging in the practice of medicine, exercising control over the medical judgments or decisions of the
radiology practices or their physicians, or violating the prohibitions against fee-splitting.
Medicare and Medicaid Fraud and Abuse – Federal Anti-kickback Statute
During the year ended December 31, 2015, approximately 20% of our revenue generated at our diagnostic imaging centers was derived from
federal government sponsored healthcare programs (Medicare) and 3% from state sponsored programs (Medicaid).
Federal law known as the Anti-kickback Statute prohibits the knowing and willful offer, payment, solicitation or receipt of any form of
remuneration in return for, or to induce, (i) the referral of a person, (ii) the furnishing or arranging for the furnishing of items or services reimbursable
under the Medicare, Medicaid or other governmental programs or (iii) the purchase, lease or order or arranging or recommending purchasing, leasing or
ordering of any item or service reimbursable under the Medicare, Medicaid or other governmental programs. Enforcement of this anti-kickback law is a
high priority for the federal government, which has substantially increased enforcement resources and is scheduled to continue increasing such
resources. Noncompliance with the federal Anti-kickback Statute can result in exclusion from the Medicare, Medicaid or other governmental programs
and civil and criminal penalties.
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The Anti-kickback Statute is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the healthcare
industry. Recognizing that the Anti-kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the
healthcare industry, the Office of the Inspector General of the U.S. Department of Health and Human Services issued regulations in July of 1991, which
the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will
assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-kickback Statute. Additional safe harbor provisions
providing similar protections have been published intermittently since 1991. Our arrangements with physicians, physician practice groups, hospitals and
other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in the various safe harbors. Although full
compliance with these provisions ensures against prosecution under the federal Anti-kickback Statute, the failure of a transaction or arrangement to fit
within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-kickback
Statute will be pursued.
Although some of our arrangements may not fall within a safe harbor, we believe that such business arrangements do not violate the Anti-
kickback Statute because we are careful to structure them to reflect fair value and ensure that the reasons underlying our decision to enter into a business
arrangement comport with reasonable interpretations of the Anti-kickback Statute. However, even though we continuously strive to comply with the
requirements of the Anti-kickback Statute, liability under the Anti-kickback Statute may still arise because of the intentions or actions of the parties with
whom we do business. While we are not aware of any such intentions or actions, we have only limited knowledge regarding the intentions or actions
underlying those arrangements. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased
scrutiny by government enforcement authorities such as the Office of the Inspector General.
Medicare and Medicaid Fraud and Abuse – Stark Law
Congress has placed significant legal prohibitions against physician referrals including the Ethics in Patient Referral Act of 1989 which is
commonly known as the Stark Law. The Stark Law prohibits a physician from referring Medicare patients to an entity providing designated health
services, as defined under the Stark Law, including, without limitation, radiology services, in which the physician (or immediate family member) has an
ownership or investment interest or with which the physician (or immediate family member) has entered into a compensation arrangement. The Stark
Law also prohibits the entity from billing for any such prohibited referral. The penalties for violating the Stark Law include a prohibition on payment by
these governmental programs and civil penalties of as much as $15,000 for each violation referral and $100,000 for participation in a circumvention
scheme. We believe that, although we receive fees under our service agreements for management and administrative services, we are not in a position to
make or influence referrals of patients.
Under the Stark Law, radiology and certain other imaging services and radiation therapy services and supplies are services included in the
designated health services subject to the self-referral prohibition. Such services include the professional and technical components of any diagnostic test
or procedure using X-rays, ultrasound or other imaging services, CT, MRI, radiation therapy and diagnostic mammography services (but not screening
mammography services). PET and nuclear medicine procedures are also included as designated health services under the Stark Law. The Stark Law,
however, excludes from designated health services: (i) X-ray, fluoroscopy or ultrasound procedures that require the insertion of a needle, catheter, tube
or probe through the skin or into a body orifice; (ii) radiology procedures that are integral to the performance of, and performed during, non-radiological
medical procedures; and (iii) invasive or interventional radiology, because the radiology services in these procedures are merely incidental or secondary
to another procedure that the physician has ordered.
The Stark Law provides that a request by a radiologist for diagnostic radiology services or a request by a radiation oncologist for radiation
therapy, if such services are furnished by or under the supervision of such radiologist or radiation oncologist pursuant to a consultation requested by
another physician, does not constitute a referral by a referring physician. If such requirements are met, the Stark Law self-referral prohibition would not
apply to such services. The effect of the Stark Law on the radiology practices, therefore, will depend on the precise scope of services furnished by each
such practice’s radiologists and whether such services derive from consultations or are self-generated.
We believe that, other than self-referred patients, all of the services covered by the Stark Law provided by the contracted radiology practices
derive from requests for consultation by non-affiliated physicians. Therefore, we believe that the Stark Law is not implicated by the financial
relationships between our operations and the contracted radiology practices. In addition, we believe that we have structured our acquisitions of the assets
of existing practices, and we intend to structure any future acquisitions, so as not to violate the Anti-kickback Statute and Stark Law and regulations.
Specifically, we believe the consideration paid by us to physicians to acquire the tangible and intangible assets associated with their practices is
consistent with fair value in arms’ length transactions and is not intended to induce the referral of patients or other business generated by such
physicians. Should any such practice be deemed to constitute an arrangement designed to induce the referral of Medicare or Medicaid patients, then our
acquisitions could be viewed as possibly violating anti-kickback and anti-referral laws and regulations. A determination of liability under any such laws
could have a material adverse effect on our business, financial condition and results of operations.
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Medicare and Medicaid Fraud and Abuse – General
The federal government embarked on an initiative to audit all Medicare carriers, which are the companies that adjudicate and pay Medicare
claims. These audits are expected to intensify governmental scrutiny of individual providers. An unsatisfactory audit of any of our diagnostic imaging
facilities or contracted radiology practices could result in any or all of the following: significant repayment obligations, exclusion from the Medicare,
Medicaid or other governmental programs, and civil and criminal penalties.
Federal regulatory and law enforcement authorities have increased enforcement activities with respect to Medicare, Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and regulations that govern our activities and the activities of the radiology practices.
The federal government also has increased funding to fight healthcare fraud and is coordinating its enforcement efforts among various agencies, such as
the U.S. Department of Justice, the U.S. Department of Health and Human Services Office of Inspector General, and state Medicaid fraud control units.
The government may investigate our or the radiology practices’ activities, claims may be made against us or the radiology practices and these increased
enforcement activities may directly or indirectly have an adverse effect on our business, financial condition and results of operations.
State Anti-kickback and Physician Self-referral Laws
Many states have adopted laws similar to the federal Anti-kickback Statute. Some of these state prohibitions apply to referral of patients for
healthcare services reimbursed by any source, not only the Medicare and Medicaid programs. Although we believe that we comply with both federal and
state Anti-kickback laws, any finding of a violation of these laws could subject us to criminal and civil penalties or possible exclusion from federal or
state healthcare programs. Such penalties would adversely affect our financial performance and our ability to operate our business.
Federal False Claims Act
The federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person who it believes has
knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false
statement or used a false record to get a claim approved. The federal False Claims Act further provides that a lawsuit thereunder may be initiated in the
name of the United States by an individual, a “whistleblower,” who is an original source of the allegations. The government has taken the position that
claims presented in violation of the federal anti-kickback law or Stark Law may be considered a violation of the federal False Claims Act. Penalties
include civil penalties of not less than $5,500 and not more than $11,000 for each false claim, plus three times the amount of damages that the federal
government sustained because of the act of that person.
Further, on May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA), which greatly
expanded the types of entities and conduct subject to the False Claims Act. Also, various states are considering or have enacted laws modeled after the
federal False Claims Act. Under the Deficit Reduction Act of 2005, or DRA, states are being encouraged to adopt false claims acts similar to the federal
False Claims Act, which establish liability for submission of fraudulent claims to the State Medicaid program and contain whistleblower provisions.
Even in instances when a whistleblower action is dismissed with no judgment or settlement, we may incur substantial legal fees and other costs relating
to an investigation. Future actions under the False Claims Act may result in significant fines and legal fees, which would adversely affect our financial
performance and our ability to operate our business.
We believe that we are in compliance with the rules and regulations that apply to the federal False Claims Act as well as its state counterparts.
Healthcare Reform Legislation
Healthcare reform legislation enacted in the first quarter of 2010 by the Patient Protection and Affordable Care Act or PPACA, specifically
requires the U.S. Department of Health and Human Services, in computing physician practice expense relative value units, to increase the equipment
utilization factor for advanced diagnostic imaging services (such as MRI, CT and PET) from a presumed utilization rate of 50% to 65% for 2010 through
2012, 70% in 2013, and 75% thereafter. Excluded from the adjustment are low-technology imaging modalities such as ultrasound, X-ray and
fluoroscopy. The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) or Reconciliation Act, which was passed by the Senate and
approved by the President on March 30, 2010, amends the provision for higher presumed utilization of advanced diagnostic imaging services to a
presumed rate of 75%. The higher utilization rate was fully implemented in the beginning of 2011 and replaced the phase-in approach provided in the
PPACA. This utilization rate was further increased to 90% by the American Taxpayer Relief Act of 2012 (“ATRA”), effective as of January 1, 2014.
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The aim of increased utilization of diagnostic imaging services is to spread the cost of the equipment and services over a greater number of
scans, resulting in a lower cost per scan. These changes have precipitated reductions in federal reimbursement for medical imaging and result in
decreased revenue for the scans we perform for Medicare beneficiaries. Other changes in reimbursement for services rendered by Medicare Advantage
plans may also reduce the revenues we receive for services rendered to Medicare Advantage enrollees.
Health Insurance Portability and Accountability Act of 1996
Congress enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and to protect
the privacy and security of patients’ individually identifiable healthcare information. HIPAA, among other things, amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-government healthcare benefit programs.
Under HIPAA, a healthcare benefit program includes any private plan or contract affecting interstate commerce under which any medical benefit, item
or service is provided. A person or entity that knowingly and willfully obtains the money or property of any healthcare benefit program by means of
false or fraudulent representations in connection with the delivery of healthcare services is subject to a fine or imprisonment, or potentially both. In
addition, HIPAA authorizes the imposition of civil money penalties against entities that employ or enter into contracts with excluded Medicare or
Medicaid program participants if such entities provide services to federal health program beneficiaries. A finding of liability under HIPAA could have a
material adverse effect on our business, financial condition and results of operations.
Further, HIPAA requires healthcare providers and their business associates to maintain the privacy and security of individually identifiable
protected health information (“PHI”). HIPAA imposes federal standards for electronic transactions, for the security of electronic health information and
for protecting the privacy of PHI. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), signed into law on
February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to “business associates,” or independent
contractors who receive or obtain PHI in connection with providing a service to a covered entity, (2) substantive security and privacy obligations,
including new federal security breach notification requirements to affected individuals, DHHS and prominent media outlets, of certain breaches of
unsecured PHI, (3) restrictions on marketing communications and a prohibition on covered entities or business associates from receiving remuneration in
exchange for PHI, and (4) the civil and criminal penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from
$25,000 to $1.5 million per year.
In addition, many states have enacted comparable privacy and security statutes or regulations that, in some cases, are more stringent than
HIPAA requirements. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws, which
may entail significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we fail to
comply with applicable state laws and regulations, we could be subject to additional sanctions.
We believe that we are in compliance with the current HIPAA requirements, as amended by HITECH, and comparable state laws, but we
anticipate that we may encounter certain costs associated with future compliance. Moreover, we cannot guarantee that enforcement agencies or courts
will not make interpretations of the HIPAA standards that are inconsistent with ours, or the interpretations of our contracted radiology practices or their
affiliated physicians. A finding of liability under the HIPAA standards may result in significant criminal and civil penalties. Noncompliance also may
result in exclusion from participation in government programs, including Medicare and Medicaid. These actions could have a material adverse effect on
our business, financial condition, and results of operations.
U.S. Food and Drug Administration or FDA
The FDA has issued the requisite pre-market approval for all of the MRI and CT systems we use. We do not believe that any further FDA
approval is required in connection with the majority of equipment currently in operation or proposed to be operated, except under regulations issued by
the FDA pursuant to the Mammography Quality Standards Act of 1992, as amended by the Mammography Quality Standards Reauthorization Acts of
1998 and 2004 (collectively, the MQSA). All mammography facilities are required to meet the applicable MQSA requirements, including quality
standards, be accredited by an approved accreditation body or state agency and certified by the FDA or an FDA-approved certifying state agency.
Pursuant to the accreditation process, each facility providing mammography services must comply with certain standards that include, among other
things, annual inspection of the facility's equipment, personnel (interpreting physicians, technologists and medical physicists) and practices.
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Compliance with these MQSA requirements and standards is required to obtain Medicare payment for services provided to beneficiaries and to
avoid various sanctions, including monetary penalties, or suspension of certification. Although the Mammography Accreditation Program of the
American College of Radiology is an approved accreditation body and currently accredits all of our facilities which provide mammography services, and
although we anticipate continuing to meet the requirements for accreditation, if we lose such accreditation, the FDA could revoke our certification.
Congress has extended Medicare benefits to include coverage of screening mammography but coverage is subject to the facility performing the
mammography meeting prescribed quality standards described above. The Medicare requirements to meet the standards apply to diagnostic
mammography and image quality examination as well as screening mammography.
Radiologist Licensing
The radiologists providing professional medical services at our facilities are subject to licensing and related regulations by the states in which
they provide services. As a result, we require BRMG and the other radiology groups with which we contract to require those radiologists to have and
maintain appropriate licensure. We do not believe that such laws and regulations will either prohibit or require licensure approval of our business
operations, although no assurances can be made that such laws and regulations will not be interpreted to extend such prohibitions or requirements to our
operations.
Insurance Laws and Regulation
States in which we operate have adopted certain laws and regulations affecting risk assumption in the healthcare industry, including those that
subject any physician or physician network engaged in risk-based managed care to applicable insurance laws and regulations. These laws and regulations
may require physicians and physician networks to meet minimum capital requirements and other safety and soundness requirements. Implementing
additional regulations or compliance requirements could result in substantial costs to the contracted radiology practices, limiting their ability to enter into
capitated or other risk-sharing managed care arrangements and indirectly affecting our revenue from the contracted practices.
U.S. Federal Budget and Sequestration
We derive a substantial portion of our revenue from direct billings to governmental healthcare programs, such as Medicare and Medicaid, and
private health insurance companies and/or health plans, including but not limited to those participating in the Medicare Advantage program. As a result,
any negative changes in governmental capitation or fee-for-service rates or methods of reimbursement for the services we provide could have a
significant adverse impact on our revenue and financial results.
Congress has a strong interest in reducing the federal debt, which may lead to new proposals designed to achieve savings by altering payment
policies. The Budget Control Act of 2011 (“BCA”) established a Joint Select Committee on Deficit Reduction, which had the goal of achieving a
reduction in the federal debt level of at least $1.2 trillion. As a result of the Joint Select Committee’s failure to draft a proposal by the BCA’s deadline,
automatic cuts in various federal programs (excluding cuts to Medicaid but including cuts to Medicare provider reimbursement in an amount not to
exceed 2%) were scheduled to commence on January 1, 2013. However, as a result of the enactment of the American Taxpayer Relief Act of 2012, on
January 2, 2013, any such cuts were delayed until March 1, 2013 so as to allow the Congress sworn in on January 3, 2013 to consider whether to allow
sequestration to take place or replace it with other cuts in federal spending and/or higher taxes.
On March 1, 2013, the new Congress did not replace automatic cuts and a 2% cut to Medicare payments began April 1, 2013, which has
negatively impacted our revenues. In addition, certain Congressional members have stated that the automatic federal spending cuts under the BCA are
insufficient to achieve the BCA’s goals of reducing federal spending and, in turn, the federal deficit. Such members suggested additional cuts to federal
entitlement programs, such as Medicare, to achieve the targeted deficit reductions. Therefore it is not possible at this time to estimate what further
impact, if any, other federal Medicare provider reimbursement cuts will have on our integrated care business or results of operations.
Because governmental healthcare programs generally reimburse on a fee schedule basis rather than on a charge-related basis, we generally
cannot increase our revenues from these programs by increasing the amount of charges for services. Moreover, if our costs increase, we may not be able
to recover our increased costs from these programs. Government and private payors have taken and may continue to take steps to control the cost,
eligibility for, use, and delivery of healthcare services as a result of budgetary constraints, cost containment pressures and other reasons. We believe that
these trends in cost containment will continue. These cost containment measures, and other market changes in non-governmental insurance plans have
generally restricted our ability to recover, or shift to non-governmental payors, any increased costs that we experience. Our integrated care business and
financial operations may be materially affected by these developments.
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Environmental Matters
The facilities we operate or manage generate hazardous and medical waste subject to federal and state requirements regarding handling and
disposal. We believe that the facilities that we operate and manage are currently in compliance in all material respects with applicable federal, state and
local statutes and ordinances regulating the handling and disposal of such materials. We do not believe that we will be required to expend any material
additional amounts in order to remain in compliance with these laws and regulations or that compliance will materially affect our capital expenditures,
earnings or competitive position.
Compliance Program
We maintain a program to monitor compliance with federal and state laws and regulations applicable to healthcare entities. We have a
compliance officer who is charged with implementing and supervising our compliance program, which includes the adoption of (i) Standards of Conduct
for our employees and affiliates and (ii) a process that specifies how employees, affiliates and others may report regulatory or ethical concerns to our
compliance officer. We believe that our compliance program meets the relevant standards provided by the Office of Inspector General of the Department
of Health and Human Services.
An important part of our compliance program consists of conducting periodic audits of various aspects of our operations and that of the
contracted radiology practices. We also conduct mandatory educational programs designed to familiarize our employees with the regulatory
requirements and specific elements of our compliance program.
Item 1A. Risk Factors
If BRMG or any of our other contracted radiology practices terminate their agreements with us, our business could substantially diminish.
Our relationship with BRMG is an integral part of our business. Through our management agreement, BRMG provides all of the professional
medical services at 126 of our 139 California facilities. Professional medical services are provided at our other facilities through management contracts
with other radiology groups. BRMG and these other radiology groups contract with various other independent physicians and physician groups to
provide all of the professional medical services at most of our facilities, and they must use their best efforts to provide the professional medical services
at any new facilities that we open or acquire in their areas of operation. In addition, BRMG and the other radiology groups’ strong relationships with
referring physicians are largely responsible for the revenue generated at the facilities they service. Although our management agreement with BRMG
runs until 2024, with automatic renewals for 10-year periods, and our management agreements with other groups are also for multiple years, BRMG and
the other radiology groups have the right to terminate the agreements if we default on our obligations and fail to cure the default. Also, the various
radiology groups’ ability to continue performing under the management agreements may be curtailed or eliminated due to the groups’ financial
difficulties, loss of physicians or other circumstances. If the radiology groups cannot perform their obligations to us, we would need to contract with one
or more other radiology groups to provide the professional medical services at the facilities serviced by the group. We may not be able to locate
radiology groups willing to provide those services on terms acceptable to us, if at all. Even if we were able to do so, any replacement radiology group’s
relationships with referring physicians may not be as extensive as those of the terminated group. In any such event, our business could be seriously
harmed. In addition, the radiology groups are party to substantially all of the managed care contracts from which we derive revenue. If we were unable to
readily replace these contracts, our revenue would be negatively affected.
We may experience risks associated with the new strategic partnership with Imaging Advantage LLC
In December 2015, we entered into a multi-year strategic relationship with Imaging Advantage LLC. Under the terms of such agreement, we
have agreed to collaborate to deploy innovative models of delivering radiology services. While we expect this strategic relationship to increase our
profitability and expand our operations, we may never realize the anticipated benefits of such relationship.
Our ability to generate revenue depends in large part on referrals from physicians.
We derive substantially all of our net revenue, directly or indirectly, from fees charged for the diagnostic imaging services performed at our
facilities. We depend on referrals of patients from unaffiliated physicians and other third parties who have no contractual obligations to refer patients to
us for a substantial portion of the services we perform. If a sufficiently large number of these physicians and other third parties were to discontinue
referring patients to us, our scan volume could decrease, which would reduce our net revenue and operating margins. Further, commercial third-party
payors have implemented programs that could limit the ability of physicians to refer patients to us. For example, prepaid healthcare plans, such as health
maintenance organizations, sometimes contract directly with providers and require their enrollees to obtain these services exclusively from those
providers. Some insurance companies and self-insured employers also limit these services to contracted providers. These “closed panel” systems are now
common in the managed care environment. Other systems create an economic disincentive for referrals to providers outside the system’s designated
panel of providers. If we are unable to compete successfully for these managed care contracts, our results and prospects for growth could be adversely
affected.
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If our contracted radiology practices, including BRMG, lose a significant number of their radiologists, our financial results could be adversely
affected.
At times, there has been a shortage of qualified radiologists in some of the regional markets we serve. In addition, competition in recruiting
radiologists may make it difficult for our contracted radiology practices to maintain adequate levels of radiologists. If a significant number of
radiologists terminate their relationships with our contracted radiology practices and those radiology practices cannot recruit sufficient qualified
radiologists to fulfill their obligations under our agreements with them, our ability to maximize the use of our diagnostic imaging facilities and our
financial results could be adversely affected. Increased expenses to BRMG will impact our financial results because the management fee we receive
from BRMG, which is based on a percentage of BRMG’s collections, is adjusted annually to take into account the expenses of BRMG. Neither we, nor
our contracted radiology practices, maintain insurance on the lives of any affiliated physicians.
We may become subject to professional malpractice liability, which could be costly and negatively impact our business.
The physicians employed by our contracted radiology practices are from time to time subject to malpractice claims. We structure our
relationships with the practices under our management agreements in a manner that we believe does not constitute the practice of medicine by us or
subject us to professional malpractice claims for acts or omissions of physicians employed by the contracted radiology practices. Nevertheless, claims,
suits or complaints relating to services provided by the contracted radiology practices have been asserted against us in the past and may be asserted
against us in the future. In addition, we may be subject to professional liability claims, including, without limitation, for improper use or malfunction of
our diagnostic imaging equipment or for accidental contamination or injury from exposure to radiation. We may not be able to maintain adequate
liability insurance to protect us against those claims at acceptable costs or at all.
Any claim made against us that is not fully covered by insurance could be costly to defend, result in a substantial damage award against us and
divert the attention of our management from our operations, all of which could have an adverse effect on our financial performance. In addition,
successful claims against us may adversely affect our business or reputation. Although California places a $250,000 limit on non-economic damages for
medical malpractice cases, no limit applies to economic damages and no such limits exist in the other states in which we provide services.
We may not receive payment from some of our healthcare provider customers because of their financial circumstances.
Some of our healthcare provider customers do not have significant financial resources, liquidity or access to capital. If these customers
experience financial difficulties they may be unable to pay us for the equipment and services that we provide. A significant deterioration in general or
local economic conditions could have a material adverse effect on the financial health of certain of our healthcare provider customers. As a result, we
may have to increase the amounts of accounts receivables that we write-off, which would adversely affect our financial condition and results of
operations.
Capitation fee arrangements could reduce our operating margins.
For the year ended December 31, 2015, we derived approximately 11.7% of our net service fee revenue from capitation arrangements, and we
intend to increase the revenue we derive from capitation arrangements in the future. Under capitation arrangements, the payor pays a pre-determined
amount per-patient per-month in exchange for us providing all necessary covered services to the patients covered under the arrangement. These contracts
pass much of the financial risk of providing diagnostic imaging services, including the risk of over-use, from the payor to the provider. Our success
depends in part on our ability to negotiate effectively, on behalf of the contracted radiology practices and our diagnostic imaging facilities, contracts with
health maintenance organizations, employer groups and other third-party payors for services to be provided on a capitated basis and to efficiently
manage the utilization of those services. If we are not successful in managing the utilization of services under these capitation arrangements or if patients
or enrollees covered by these contracts require more frequent or extensive care than anticipated, we would incur unanticipated costs not offset by
additional revenue, which would reduce operating margins.
Changes in the method or rates of third-party reimbursement could have a negative impact on our results
From time to time, changes designed to contain healthcare costs have been implemented, some of which have resulted in decreased
reimbursement rates for diagnostic imaging services that impact our business. For services for which we bill Medicare directly, we are paid under the
Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the Physician Fee
Schedule would have decreased for the past several years if Congress failed to intervene.
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Medicare program reimbursements for physician services as well as other services to Medicare beneficiaries who are not enrolled in Medicare
Advantage plans are based upon the fee-for-service rates set forth in the Medicare Physician Fee Schedule, which relies, in part, on a target-setting
formula system called the SGR. Each year, on January 1st, the Medicare program updates the Medicare Physician Fee Schedule reimbursement rates.
Many private payors use the Medicare Physician Fee Schedule to determine their own reimbursement rates.
On April 16, 2015, the President signed into law the Medicare Access and CHIP Reauthorization Act (H.R. 2), which provides for sweeping
changes to how Medicare pays physicians, as well as averts the 21% reduction to Medicare payments under the Medicare Physician Fee Schedule that
was scheduled to take effect on April 1, 2016. H.R. 2, among other things, repealed the Sustainable Growth Rate (“SGR”) formula. The SGR formula
was enacted in 1997 and was linked to the growth in the U.S. gross domestic product, which led Congress to repeatedly intervene to mitigate the
negative reimbursement impact associated with it. H.R. 2 provides that for services paid under the physician fee schedule and furnished during calendar
years 2016 through 2019, Medicare’s payment rates will increase by 0.5% per year over calendar year 2015. Fees will remain at the 2019 level through
2025, but high performing providers participating in alternative payment models will have the opportunity for additional payments. Such payments will
be based upon quality, resource use, clinical practice improvement activities and meaningful use of electronic health record technology. Given that the
value-based payment mechanisms have yet to take effect, we cannot determine the impact of such payments models on our business at this time.
However, in general, shifting to value-based care may decrease our revenue and require us to invest heavily in new IT infrastructure and analytic tools.
In 2013, Congress adjusted Medicare payment rates for physician imaging services in an attempt to better reflect actual usage, by revising
upward the assumed usage rate for diagnostic imaging equipment costing more than $1 million to 90% effective January, 1, 2014. Additionally, under
the Protecting Access to Medicare Act of 2014 (“PAMA”), Congress introduced a new quality incentive program that, effective January 1, 2016, reduces
Medicare payment for certain CT services reimbursed through the Medicare Physician Fee Schedule that are furnished using equipment that does not
meet certain dose optimization and management standards. Other changes in reimbursement for services rendered by Medicare Advantage plans may
reduce the revenues we receive for services rendered to Medicare Advantage enrollees.
Pressure to control healthcare costs could have a negative impact on our results.
One of the principal objectives of health maintenance organizations and preferred provider organizations is to control the cost of healthcare
services. Healthcare providers participating in managed care plans may be required to refer diagnostic imaging tests to certain providers depending on
the plan in which a covered patient is enrolled. In addition, managed care contracting has become very competitive, and reimbursement schedules are at
or below Medicare reimbursement levels. The expansion of health maintenance organizations, preferred provider organizations and other managed care
organizations within the geographic areas covered by our network could have a negative impact on the utilization and pricing of our services, because
these organizations will exert greater control over patients’ access to diagnostic imaging services, the selections of the provider of such services and
reimbursement rates for those services.
We experience competition from other diagnostic imaging companies and hospitals, and this competition could adversely affect our revenue and
business.
The market for diagnostic imaging services is highly competitive. We compete principally for patients on the basis of our reputation, our ability
to provide multiple modalities at many of our facilities, the location of our facilities and the quality of our diagnostic imaging services. We compete
locally with groups of radiologists, established hospitals, clinics and other independent organizations that own and operate imaging equipment. Our
competitors include Alliance Healthcare Services, Inc., to the extent it sells diagnostic imaging services directly to outpatients, Diagnostic Imaging
Group and several smaller regional competitors. Some of our competitors may now or in the future have access to greater financial resources than we do
and may have access to newer, more advanced equipment. In addition, some physician practices have established their own diagnostic imaging facilities
within their group practices and compete with us. We are experiencing increased competition as a result of such activities, and if we are unable to
successfully compete, our business and financial condition would be adversely affected.
Our success depends in part on our key personnel and loss of key executives could adversely affect our operations. In addition, former employees
and radiology practices we have previously contracted with could use the experience and relationships developed while employed or under contract
with us to compete with us.
Our success depends in part on our ability to attract and retain qualified senior and executive management, and managerial and technical
personnel. Competition in recruiting these personnel may make it difficult for us to continue our growth and success. The loss of their services or our
inability in the future to attract and retain management and other key personnel could hinder the implementation of our business strategy. The loss of the
services of Dr. Howard G. Berger, our President and Chief Executive Officer, and Norman R. Hames or Stephen M. Forthuber, our Chief Operating
Officers, West Coast and East Coast, respectively, could have a significant negative impact on our operations. We believe that they could not easily be
replaced with executives of equal experience and capabilities. We do not maintain key person insurance on the life of any of our executive officers.
Additionally, if we lose the services of Dr. Berger, our relationship with BRMG could deteriorate, which would materially adversely affect our business.
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Many of the states in which we operate do not enforce agreements that prohibit a former employee from competing with a former employer. As
a result, many of our employees whose employment is terminated are free to compete with us, subject to prohibitions on the use of trade secret
information and, depending on the terms of the employee’s employment agreement, on solicitation of existing employees and customers (if enforceable).
A former executive, manager or other key employee who joins one of our competitors could use the relationships he or she established with third party
payors, radiologists or referring physicians while our employee and the industry knowledge he or she acquired during that tenure to enhance the new
employer’s ability to compete with us.
The agreements with most of our radiology practices contain non-compete provisions; however the enforceability of these provisions is
determined by a court based on all the facts and circumstances of the specific case at the time enforcement is sought. Our inability to enforce
radiologists’ non-compete provisions could result in increased competition from individuals who are knowledgeable about our business strategies and
operations.
Our failure to successfully, and in a timely manner, integrate similar businesses and/or new lines of businesses we acquire could reduce our
profitability.
We may never realize expected synergies, business opportunities and growth prospects in connection with our acquisitions.. We may not be
able to capitalize on expected business opportunities, assumptions underlying estimates of expected cost savings may be inaccurate, or general industry
and business conditions may deteriorate. In addition, integrating operations will require significant efforts and expenses on our part. Personnel may leave
or be terminated because of an acquisition. Our management may have its attention diverted while trying to integrate an acquisition. If these factors limit
our ability to integrate the operations of an acquisition successfully or on a timely basis, our expectations of future results of operations, including certain
cost savings and synergies as a result of the acquisition, may not be met. In addition, our growth and operating strategies for a target’s business may be
different from the strategies that the target company pursued prior to our acquisition. If our strategies are not the proper strategies, they could have a
material adverse effect on our business, financial condition and results of operations.
In the past we have acquired, and may again in the future acquire, companies that create a new line of business. The process of integrating the
acquired business, technology, service and research and development component into our business and operations and entry into a new line of business
in which we are inexperienced may result in unforeseen operating difficulties and expenditures. In developing a new line of business we may invest
significant time and resources that take away the attention of management that would otherwise be available for ongoing development of our business
which may affect our results of operations and we may not be able to take full advantage of the business opportunities available to us as we expand a
new lines of business. In addition, there can be no assurance that our new lines of business will ultimately be successful. The failure to successfully
manage these risks in the development and implementation of new lines of business could have a material, adverse effect on the Company’s business,
financial condition, and results of operations.
We may not be able to successfully grow our business, which would adversely affect our financial condition and results of operations.
Historically, we have experienced substantial growth through acquisitions that have increased our size, scope and geographic distribution.
During the past two fiscal years, we have completed 15 acquisitions. These acquisitions have added 66 centers to our fixed-site outpatient diagnostic
imaging services. Our ability to successfully expand through acquiring facilities, developing new facilities, adding equipment at existing facilities, and
directly or indirectly entering into contractual relationships with high-quality radiology practices depends upon many factors, including our ability to:
• identify attractive and willing candidates for acquisitions;
• identify locations in existing or new markets for development of new facilities;
• comply with legal requirements affecting our arrangements with contracted radiology practices, including state prohibitions on fee-
splitting, corporate practice of medicine and self-referrals;
• obtain regulatory approvals where necessary and comply with licensing and certification requirements applicable to our diagnostic
imaging facilities, the contracted radiology practices and the physicians associated with the contracted radiology practices;
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• recruit a sufficient number of qualified radiology technologists and other non-medical personnel;
• expand our infrastructure and management; and
• compete for opportunities. We may not be able to compete effectively for the acquisition of diagnostic imaging facilities. Our
competitors may have more established operating histories and greater resources than we do. Competition may also make any
acquisitions more expensive.
Managing our recent acquisitions, as well as any other future acquisitions, will entail numerous operational and financial risks, including:
• inability to obtain adequate financing;
• failure to achieve our targeted operating results;
• diversion of management’s attention and resources;
• failure to retain key personnel;
• difficulties in integrating new operations into our existing infrastructure; and
• amortization or write-offs of acquired intangible assets, including goodwill.
If we are unable to successfully grow our business through acquisitions it could have an adverse effect on our financial condition and results of
operations. Further we cannot ensure we will be able to receive the required regulatory approvals for any future acquisitions, expansions or
replacements, and the failure to obtain these approvals could limit the market for our services and have an adverse effect on our financial condition and
results of operations.
We have experienced operating losses in the past. If we are unable to continue to generate sufficient income, we may be unable to pay our
obligations.
We had net income attributable to RadNet common stockholders of $7.7 million, $1.4 million, and $2.1 million for the years ended December
31, 2015, 2014, and 2013 respectively. As of December 31, 2015, our equity was $36.5 million. As a whole, results have shown improvement over the
past three years. However, if we cannot continue to generate income in sufficient amounts, we will not be able to pay our obligations as they become
due, which could adversely impact our business, financial condition and results of operations.
Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our obligations under our outstanding
indebtedness.
Our current substantial indebtedness and any future indebtedness we incur could adversely affect our financial condition. We are highly
leveraged. As of December 31, 2015, our total indebtedness was $640.7 million, $631.0 million of which constituted guaranty indebtedness. Our
substantial indebtedness could also:
• make it difficult for us to satisfy our payment obligations with respect to our outstanding indebtedness;
•
•
•
•
•
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the availability of our cash
flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;
expose us to the risk of interest rate increases on our variable rate borrowings, including borrowings under our new senior secured credit
facilities;
increase our vulnerability to adverse general economic and industry conditions;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit our ability to borrow additional funds on terms that are satisfactory to us or at all.
23
Increases in interest rates could increase the amount of our debt payments and reduce out operating cash flows.
We have incurred significant indebtedness that accrues interest at variable rate borrowing and we may incur additional debt in the future.
Increases in interest rates on our current outstanding debt or any other debt we may incur will reduce our operating cash flows and if we need to repay
any of our variable rate borrowing during period of high interest rates, we could be required to forgo other opportunities in order to repay the debt which
may not permit us to realize future earnings of those forgone opportunities.
We may not be able to finance future needs or adapt our business plan to changes because of restrictions placed on us by our credit facilities and
instruments governing our other indebtedness.
Our credit facilities contain affirmative and negative covenants which restrict, among other things, our ability to:
•
•
•
•
•
•
•
pay dividends or make certain other restricted payments or investments;
incur additional indebtedness and certain disqualified equity interests;
create liens (other than permitted liens) securing indebtedness or trade payables;
sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with affiliates;
create restrictions on dividends or other payments by our restricted subsidiaries; and
create guarantees of indebtedness by restricted subsidiaries.
All of these restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business
opportunities as they arise. A failure to comply with these covenants and restrictions would permit the relevant creditors to declare all amounts borrowed
under the applicable agreement governing such indebtedness, together with accrued interest and fees, to be immediately due and payable. If the
indebtedness under our credit facilities is accelerated, we may not have sufficient assets to repay amounts due under the credit facilities or on other
indebtedness then outstanding.
A restriction in our ability to make capital expenditures would restrict our growth and could adversely affect our business.
We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of new diagnostic imaging facilities and the acquisition of additional facilities and new diagnostic imaging
equipment. We incur capital expenditures to, among other things, upgrade and replace equipment for existing facilities and expand within our existing
markets and enter new markets. If we open or acquire additional imaging facilities, we may have to incur material capital lease obligations. To the extent
we are unable to generate sufficient cash from our operations, funds are not available from our lenders or we are unable to structure or obtain financing
through operating leases, long-term installment notes or capital leases, we may be unable to meet our capital expenditure requirements to support the
maintenance and continued growth of our operations.
We may be impacted by eligibility changes to government and private insurance programs
Due to potential decreased availability of healthcare through private employers, the number of patients who are uninsured or participate in
governmental programs may increase. Healthcare reform legislation will increase the participation of individuals in the Medicaid program in states that
elect to participate in the expanded Medicaid coverage. A shift in payor mix from managed care and other private payors to government payors as well
as an increase in the number of uninsured patients may result in a reduction in the rates of reimbursement or an increase in uncollectible receivables or
uncompensated care, with a corresponding decrease in net revenue. Changes in the eligibility requirements for governmental programs such as the
Medicaid program and state decisions on whether to participate in the expansion of such programs also could increase the number of patients who
participate in such programs and the number of uninsured patients. Even for those patients who remain in private insurance plans, changes to those plans
could increase patient financial responsibility, resulting in a greater risk of uncollectible receivables. These factors and events could have a material
adverse effect on our business, financial condition, and results of operations.
24
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial
reporting
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors,
misstatements or misrepresentations. While management will review the effectiveness of our disclosure controls and procedures and internal control
over financial reporting, there can be no guarantee that our disclosure controls and procedures or our internal control over financial reporting will be
effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial
reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, or otherwise
adversely impact our financial condition, results of operations, cash flows, and our ability to satisfy our debt service obligations.
The regulatory framework in which we operate is uncertain and evolving.
Although we believe that we are operating in compliance with applicable federal and state laws, neither our current or anticipated business
operations nor the operations of the contracted radiology practices have been the subject of judicial or regulatory interpretation. We cannot assure you
that a review of our business by courts or regulatory authorities will not result in a determination that could adversely affect our operations or that the
healthcare regulatory environment will not change in a way that restricts our operations. In addition, healthcare laws and regulations may change
significantly in the future. We continuously monitor these developments and modify our operations from time to time as the regulatory environment
changes. We cannot assure you however, that we will be able to adapt our operations to address new regulations or that new regulations will not
adversely affect our business.
Certain states have enacted statutes or adopted regulations affecting risk assumption in the healthcare industry, including statutes and
regulations that subject any physician or physician network engaged in risk-based managed care contracting to applicable insurance laws and
regulations. These laws and regulations, if adopted in the states in which we operate, may require physicians and physician networks to meet minimum
capital requirements and other safety and soundness requirements. Implementing additional regulations or compliance requirements could result in
substantial costs to us and the contracted radiology practices and limit our ability to enter into capitation or other risk-sharing managed care
arrangements.
State and federal anti-kickback and anti-self-referral laws may adversely affect income.
Various federal and state laws govern financial arrangements among healthcare providers. The federal Anti-Kickback Law prohibits the
knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of Medicare, Medicaid, or
other federal healthcare program patients, or in return for, or to induce, the purchase, lease or order of items or services that are covered by Medicare,
Medicaid, or other federal healthcare programs. Similarly, many state laws prohibit the solicitation, payment or receipt of remuneration in return for, or
to induce the referral of patients in private as well as government programs. Violation of these Anti-Kickback Laws may result in substantial civil or
criminal penalties for individuals or entities and/or exclusion from federal or state healthcare programs. We believe we are operating in compliance with
applicable law and believe that our arrangements with providers would not be found to violate the Anti-Kickback Laws. However, these laws could be
interpreted in a manner inconsistent with our operations.
Federal law prohibiting physician self-referrals, known as the Stark Law, prohibits a physician from referring Medicare or Medicaid patients to
an entity for certain “designated health services” if the physician has a prohibited financial relationship with that entity, unless an exception applies.
Certain radiology services are considered “designated health services” under the Stark Law. Although we believe our operations do not violate the Stark
Law, our activities may be challenged. If a challenge to our activities is successful, it could have an adverse effect on our operations. In addition,
legislation may be enacted in the future that further addresses Medicare and Medicaid fraud and abuse or that imposes additional requirements or
burdens on us.
In addition, under the DRA, states enacting false claims statutes similar to the federal False Claims Act, which establish liability for submission
of fraudulent claims to the State Medicaid program and contain qui tam or whistleblower provisions, receive an increased percentage of any recovery
from a State Medicaid judgment or settlement. Adoption of new false claims statutes in states where we operate may impose additional requirements or
burdens on us.
Federal and state privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and standards, or if
we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, we may be
subject to government or private actions due to privacy and security breaches, and our business, reputation, results of operations, financial position
and cash flows could be materially and adversely affected.
We must comply with numerous federal and state laws and regulations governing the collection, dissemination, access, use, security and
privacy of PHI, including HIPAA and its implementing privacy and security regulations, as amended by the federal HITECH Act and collectively
referred to as HIPAA. If we fail to comply with applicable privacy and security laws, regulations and standards, properly maintain the integrity of our
data, protect our proprietary rights to our systems, or defend against cybersecurity attacks, our business, reputation, results of operations, financial
position and cash flows could be materially and adversely affected.
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Information security risks have significantly increased in recent years in part because of the proliferation of new technologies, the use of the
internet and telecommunications technologies to conduct our operations, and the increased sophistication and activities of organized crime, hackers,
terrorists and other external parties, including foreign state agents. Our operations rely on the secure processing, transmission and storage of confidential,
proprietary and other information in our computer systems and networks.
We are continuously implementing multiple layers of security measures through technology, processes, and our people; utilize current security
technologies; and our defenses are monitored and routinely tested internally and by external parties. Despite these efforts, our facilities and systems may
be vulnerable to privacy and security incidents; security attacks and breaches; acts of vandalism or theft; computer viruses; coordinated attacks by
activist entities; emerging cybersecurity risks; misplaced or lost data; programming and/or human errors; or other similar events. Emerging and advanced
security threats, including coordinated attacks, require additional layers of security which may disrupt or impact efficiency of operations.
Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information, including
protected health information, financial data, competitively sensitive information, or other proprietary data, whether by us or a third party, could have a
material adverse effect on our business, reputation, financial condition, cash flows, or results of operations. The occurrence of any of these events could
result in interruptions, delays, the loss or corruption of data, cessations in the availability of systems or liability under privacy and security laws, all of
which could have a material adverse effect on our financial position and results of operations and harm our business reputation. If we are unable to
protect the physical and electronic security and privacy of our databases and transactions, we could be subject to potential liability and regulatory action,
our reputation and relationships with our patients and vendors would be harmed, and our business, operations, and financial results may be materially
adversely affected. Failure to adequately protect and maintain the integrity of our information systems (including our networks) and data, or to defend
against cybersecurity attacks, could subject us to monetary fines, civil suits, civil penalties or criminal sanctions and requirements to disclose the breach
publicly, and may further result in a material adverse effect on our results of operations, financial position, and cash flows.
Complying with federal and state regulations is an expensive and time-consuming process, and any failure to comply could result in substantial
penalties.
We are directly or indirectly, through the radiology practices with which we contract, subject to extensive regulation by both the federal
government and the state governments in which we provide services, including:
• the federal False Claims Act;
• the federal Medicare and Medicaid Anti-Kickback Laws, and state anti-kickback prohibitions;
• federal and state billing and claims submission laws and regulations;
• the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for
Economic and Clinical Health Act of 2009, and comparable state laws;
• the federal physician self-referral prohibition commonly known as the Stark Law and the state equivalent of the Stark Law;
• state laws that prohibit the practice of medicine by non-physicians and prohibit fee-splitting arrangements involving physicians;
• federal and state laws governing the diagnostic imaging and therapeutic equipment we use in our business concerning patient safety,
equipment operating specifications and radiation exposure levels; and
• state laws governing reimbursement for diagnostic services related to services compensable under workers compensation rules.
If our operations are found to be in violation of any of the laws and regulations to which we or the radiology practices with which we contract
are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines and the
curtailment of our operations. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our
ability to operate our business and our financial results. The risks of our being found in violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations.
Any action brought against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant
legal expenses and divert our management’s attention from the operation of our business.
26
If we fail to comply with various licensure, certification and accreditation standards, we may be subject to loss of licensure, certification or
accreditation, which would adversely affect our operations.
Ownership, construction, operation, expansion and acquisition of our diagnostic imaging facilities are subject to various federal and state laws,
regulations and approvals concerning licensing of personnel, other required certificates for certain types of healthcare facilities and certain medical
equipment. In addition, freestanding diagnostic imaging facilities that provide services independent of a physician’s office must be enrolled by Medicare
as an independent diagnostic treatment facility, or IDTF, to bill the Medicare program. Medicare carriers have discretion in applying the IDTF
requirements and therefore the application of these requirements may vary from jurisdiction to jurisdiction. In addition, federal legislation requires all
suppliers that provide the technical component of diagnostic MRI, PET/CT, CT, and nuclear medicine to be accredited by an accreditation organization
designated by CMS (which currently include the American College of Radiology (ACR), the Intersocietal Accreditation Commission (IAC) and the Joint
Commission) by January 1, 2012. Our MRI, CT, nuclear medicine, ultrasound and mammography facilities are currently accredited by the American
College of Radiology. We may not be able to receive the required regulatory approvals or accreditation for any future acquisitions, expansions or
replacements, and the failure to obtain these approvals could limit the opportunity to expand our services.
Our facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards
necessary for licensure and certification. If any facility loses its certification under the Medicare program, then the facility will be ineligible to receive
reimbursement from the Medicare and Medicaid programs. For the year ended December 31, 2015, approximately 23% of our net service fee revenue
came from the Medicare and Medicaid programs. A change in the applicable certification status of one of our facilities could adversely affect our other
facilities and in turn us as a whole. Credentialing of physicians is required by our payors prior to commencing payment. We have experienced a
slowdown in the credentialing of our physicians over the last several years which has lengthened our billing and collection cycle, and could negatively
impact our ability to collect revenue from patients covered by Medicare.
Our agreements with the contracted radiology practices must be structured to avoid the corporate practice of medicine and fee-splitting.
State law prohibits us from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting professional fees with physicians. These laws are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into management agreements with radiology practices. We provide management,
administrative, technical and other non-medical services to the radiology practices in exchange for a service fee typically based on a percentage of the
practice’s revenue. We structure our relationships with the radiology practices, including the purchase of diagnostic imaging facilities, in a manner that
we believe keeps us from engaging in the practice of medicine or exercising control over the medical judgments or decisions of the radiology practices
or their physicians, or violating the prohibitions against fee-splitting. There can be no assurance that our present arrangements with BRMG or the
physicians providing medical services and medical supervision at our imaging facilities will not be challenged, and, if challenged, that they will not be
found to violate the corporate practice of medicine or fee splitting prohibitions, thus subjecting us to potential damages, injunction and/or civil and
criminal penalties or require us to restructure our arrangements in a way that would affect the control or quality of our services and/or change the
amounts we receive under our management agreements. Any of these results could jeopardize our business.
Some of our imaging modalities use radioactive materials, which generate regulated waste and could subject us to liabilities for injuries or violations
of environmental and health and safety laws.
Some of our imaging procedures use radioactive materials, which generate medical and other regulated wastes. For example, patients are
injected with a radioactive substance before undergoing a PET scan. Storage, use and disposal of these materials and waste products present the risk of
accidental environmental contamination and physical injury. We are subject to federal, state and local regulations governing storage, handling and
disposal of these materials. We could incur significant costs and the diversion of our management’s attention in order to comply with current or future
environmental and health and safety laws and regulations. Also, we cannot completely eliminate the risk of accidental contamination or injury from
these hazardous materials. Although we maintain professional liability insurance coverage in amounts we believe is consistent with industry practice in
the event of an accident, we could be held liable for any resulting damages, and any liability could exceed the limits of or fall outside the coverage of our
professional liability insurance.
27
Technological change in our industry could reduce the demand for our services and require us to incur significant costs to upgrade our equipment.
The development of new technologies or refinements of existing modalities may require us to upgrade and enhance our existing equipment
before we may otherwise intend. Many companies currently manufacture diagnostic imaging equipment. Competition among manufacturers for a greater
share of the diagnostic imaging equipment market may result in technological advances in the speed and imaging capacity of new equipment. This may
accelerate the obsolescence of our equipment, and we may not have the financial ability to acquire the new or improved equipment and may not be able
to maintain a competitive equipment base. In addition, advances in technology may enable physicians and others to perform diagnostic imaging
procedures without us. If we are unable to deliver our services in the efficient and effective manner that payors, physicians and patients expect our
revenue could substantially decrease.
Because we have high fixed costs, lower scan volumes per system could adversely affect our business.
The principal components of our expenses, excluding depreciation, consist of debt service, capital lease payments, compensation paid to
technologists, salaries, real estate lease expenses and equipment maintenance costs. Because a majority of these expenses are fixed, a relatively small
change in our revenue could have a disproportionate effect on our operating and financial results depending on the source of our revenue. Thus,
decreased revenue as a result of lower scan volumes per system could result in lower margins, which could materially adversely affect our business.
We may be unable to effectively maintain our equipment or generate revenue when our equipment is not operational.
Timely, effective service is essential to maintaining our reputation and high use rates on our imaging equipment. Although we have an
agreement with GE Medical Systems pursuant to which it maintains and repairs the majority of our imaging equipment, this agreement does not
compensate us for loss of revenue when our systems are not fully operational and our business interruption insurance may not provide sufficient
coverage for the loss of revenue. Also, GE Medical Systems may not be able to perform repairs or supply needed parts in a timely manner, which could
result in a loss of revenue. Therefore, if we experience more equipment malfunctions than anticipated or if we are unable to promptly obtain the service
necessary to keep our equipment functioning effectively, our ability to provide services would be adversely affected and our revenue could decline.
Disruption or malfunction in our information systems could adversely affect our business.
Our information technology system is vulnerable to damage or interruption from:
• earthquakes, fires, floods and other natural disasters;
• power losses, computer systems failures, internet and telecommunications or data network failures, operator negligence, improper
operation by or supervision of employees, physical and electronic losses of data and similar events; and
• computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information and other breaches of security.
We rely on our information systems to perform functions critical to our ability to operate, including patient scheduling, billing, collections,
image storage and image transmission. We could face attempts by others to gain unauthorized access through the Internet or to introduce malicious
software to our information technology systems. If a malicious hacker gained unauthorized access to our systems and network, it could have a material
adverse impact on our business or operations. Such incidents, whether or not successful, could result in our incurring significant costs related to, for
example, rebuilding internal systems, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other
remedial steps with respect to third parties. In addition, these threats are constantly changing, thereby increasing the difficulty of successfully defending
against them or implementing adequate preventive measures. Accordingly, an extended interruption in our information technology system’s function
could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.
Adverse changes in general domestic and worldwide economic conditions and instability and disruption of credit markets could adversely affect our
operating results, financial condition, or liquidity.
28
We are subject to risk arising from adverse changes in general domestic and global economic conditions, including recession or economic
slowdown and disruption of credit markets. Continued concerns about the systemic impact of potential long-term and wide-spread recession, inflation,
energy costs, geopolitical issues, the availability and cost of credit have contributed to increased market volatility and diminished expectations for the
United States economy. The United States, and other western countries have responded to this economic situation by exercising monetary policy to keep
interest rates low. Any significant change in economic conditions or change in fiscal monetary policy could result in material changes in interest rates.
Continued turbulence in domestic and international markets and economies may adversely affect our liquidity and financial condition, and the
liquidity and financial condition of our patients. If these market conditions continue, they may increase expenses associated with borrowing, limit our
ability, and the ability of our patients, to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resulting in adverse
effects on our financial condition and results of operations.
Budget decisions by the California State Legislature could have an impact on our revenue.
139 of our 300 facilities are located in California and one to one-and-one-half percent (1% to 1.5%) of our revenues come from the California
Medicaid program. To the extent California is unable to provide these payments on a timely basis, or at all, our revenues will be negatively impacted.
We are vulnerable to earthquakes, harsh weather and other natural disasters.
Our corporate headquarters and 139 of our facilities are located in California, an area prone to earthquakes and other natural disasters. Several
of our facilities are located in areas of Florida and the east coast that have suffered from hurricanes and other harsh weather, including winter snow
storms that have in the past caused us to close our facilities. An earthquake, harsh weather conditions or other natural disaster could decrease scan
volume during affected periods and seriously impair our operations. Damage to our equipment or interruption of our business would adversely affect our
financial condition and results of operations.
Possible volatility in our stock price could negatively affect us and our stockholders.
The trading price of our common stock on the NASDAQ Global Market has fluctuated significantly in the past. During the period from January
1, 2014 through December 31, 2015, the trading price of our common stock fluctuated from a high of $10.35 per share to a low of $1.50 per share. In the
past, we have experienced a drop in stock price following an announcement of disappointing earnings or earnings guidance. Any such announcement in
the future could lead to a similar drop in stock price. The price of our common stock could also be subject to wide fluctuations in the future as a result of
a number of other factors, including the following:
• changes in expectations as to future financial performance or buy/sell recommendations of securities analysts;
• our, or a competitor’s, announcement of new services, or significant acquisitions, strategic partnerships, joint ventures or capital
commitments; and
• the operating and stock price performance of other comparable companies.
In addition, the U.S. securities markets have experienced significant price and volume fluctuations. These fluctuations often have been
unrelated to the operating performance of companies in these markets. Broad market and industry factors may lead to volatility in the price of our
common stock, regardless of our operating performance. Moreover, our stock has limited trading volume, and this illiquidity may increase the volatility
of our stock price.
In the past, following periods of volatility in the market price of an individual company’s securities, securities class action litigation often has
been instituted against that company. The institution of similar litigation against us could result in substantial costs and a diversion of management’s
attention and resources, which could negatively affect our business, results of operations or financial condition.
Provisions of the Delaware General Corporation Law and our organizational documents may discourage an acquisition of us.
In the future, we could become the subject of an unsolicited attempted takeover of our company. Although an unsolicited takeover could be in
the best interests of our stockholders, our organizational documents and the General Corporation Law of the State of Delaware both contain provisions
that will impede the removal of directors and may discourage a third-party from making a proposal to acquire us. For example, the provisions:
• permit the board of directors to increase its own size, within the maximum limitations set forth in the bylaws, and fill the resulting
vacancies;
29
• authorize the issuance of shares of preferred stock in one or more series without a stockholder vote;
• establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including
proposed nominations of persons for election to the board of directors; and
• prohibit transfers and/or acquisitions of stock (without consent of the Board of Directors ) that would result in any stockholder owning
greater than 5% of the currently outstanding stock resulting in a limitation on net operating loss carryovers, capital loss carryovers,
general business credit carryovers, alternative minimum tax credit carryovers and foreign tax credit carryovers, as well as any loss or
deduction attributable to a “net unrealized built-in loss” within the meaning of Section 382 of the internal revenue code of 1986, as
amended.
We are subject to Section 203 of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change in
control.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters is located in adjoining premises at 1508, 1510 and 1516 Cotner Avenue, Los Angeles, California 90025, and
approximately 21,500 square feet is occupied under these leases, which expire (with options to extend) on June 30, 2017. We also have a regional office
of approximately 39,000 square feet in Baltimore, Maryland under a lease, which expires September 30, 2018. In addition, we lease approximately
60,000 square feet of warehouse space under leases nationwide, which expire at various dates, including options, through August 2031. As of December
31, 2015, total square footage under lease, including medical office, administrative and storage locations was approximately 2.2 million square feet.
We operate 139 fixed-site, freestanding outpatient diagnostic imaging facilities in California, 12 in Delaware, 3 in Florida, 54 in Maryland, 19
in New Jersey, 23 in the Rochester and Hudson Valley areas of New York, 45 in New York City, as well as 5 in Rhode Island. We lease the premises at
which these facilities are located. Our facility lease terms vary in length from month to month to 15 years with renewal options upon prior written notice,
from 1 year to 15 years depending upon the agreed upon terms with the local landlord. Rents under our facility lease amounts generally increase from
1% to 6% on an annual basis. We do not have options to purchase the facilities we rent.
Item 3.
Legal Proceedings
We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We believe that the
outcome of our current litigation will not have a material adverse impact on our business, financial condition and results of operations. However, we
could be subsequently named as a defendant in other lawsuits that could adversely affect us.
Item 4.
Mine Safety Disclosures
Not applicable.
30
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the NASDAQ Global Market under the symbol “RDNT”. The following table indicates the high and low prices
for our common stock for the periods indicated based upon information supplied by the NASDAQ Global Market.
PART II
Quarter Ended
Low
High
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
$
$
$
$
5.19
5.25
6.18
7.15
6.36
4.71
2.82
1.50
7.50
7.85
9.30
9.40
10.35
8.12
7.67
3.00
The last low and high prices for our common stock on the NASDAQ Global Market for the period from January 1 to March 10, 2016 were
$4.87 and $6.33, respectively.
Holders
As of March 10, 2016, the number of holders of record of our common stock was 835. However, Cede & Co., the nominee for The Depository
Trust Company, the clearing agency for most broker-dealers, owned a substantial number of our outstanding shares of common stock of record on that
date. Our management believes that the number of beneficial owners of our common stock is approximately 4,000.
Dividends
We have never declared or paid cash dividends on our capital stock and we do not expect to pay any dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance the growth and development of our business. Our current credit facilities place restrictions on
our ability to issue dividends. See discussion under “Liquidity and Capital Resources” regarding our current credit facilities. Payment of future
dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements
and such other factors as the board of directors deems relevant.
Equity Compensation Plans Information
The information required by this item will be contained in our definitive proxy statement, to be filed with the SEC in connection with our 2016
annual meeting of stockholders, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2015, and is
incorporated in this report by reference.
Stock Performance Graph
The following graph compares the yearly percentage change in cumulative total stockholder return of our common stock during the period from
2010 to 2015 with (i) the cumulative total return of the S&P 500 index and (ii) the cumulative total return of the S&P 500 – Healthcare Sector index. The
comparison assumes $100 was invested on December 31, 2010 in our common stock and in each of the foregoing indices and the reinvestment of
dividends through December 31, 2015. The stock price performance on the following graph is not necessarily indicative of future stock price
performance.
This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing
under the Securities Act or under the Exchange Act, except to the extent that RadNet specifically incorporates this information by reference, and shall
not otherwise be deemed filed under the Securities Act or the Exchange Act.
31
ANNUAL RETURN PERCENTAGE
Years Ending
12/31/13
12/31/12
12/31/14
18.78
16.00
17.89
-33.99
32.39
41.46
411.38
13.69
25.34
12/31/15
-27,63
1.38
6.89
12/30/11
-24.47
2.11
12.73
Base
Period
12/31/10
100
100
100
12/30/11
12/31/12
INDEXED RETURNS
Years Ending
12/31/13
12/31/14
12/31/15
75.53
102.11
112.73
89.72
118.45
132.90
59.22
156.82
188.00
302.84
178.29
235.63
219,15
180.75
251.87
Company / Index
RadNet, Inc.
S&P 500 Index
S&P Health Care Sector
Company / Index
RadNet, Inc.
S&P 500 Index
S&P Health Care Sector
Recent Sales of Unregistered Securities
None.
Item 6.
Selected Consolidated Financial Data
The following table sets forth our selected historical consolidated financial data. The selected consolidated statements of operations data set
forth below for the years ended December 31, 2015, 2014 and 2013, and the consolidated balance sheet data as of December 31, 2015 and 2014, are
derived from our audited consolidated financial statements and notes thereto included elsewhere herein. The selected historical consolidated statements
of operations data set forth below for the years ended December 31, 2012 and 2011, and the consolidated balance sheet data set forth below as
of December 31, 2013, 2012 and 2011, are derived from our audited consolidated financial statements not included herein. This data should be read in
conjunction with and is qualified in its entirety by reference to the audited consolidated financial statements and the related notes included elsewhere in
this annual report and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
32
The financial data set forth below and discussed in this annual report are derived from the consolidated financial statements of RadNet, its
subsidiaries and certain affiliates. As a result of the contractual and operational relationship among BRMG, Dr. Berger, the New York Groups, Dr. Crues
and the Company, we are considered to have a controlling financial interest in BRMG and the New York Groups (collectively, the “Professional
Entities”) pursuant to applicable accounting guidance. Due to the deemed controlling financial interest, we are required to include the Professional
Entities as consolidated entities in our consolidated financial statements. This means, for example, that revenue generated by the Professional Entities
from the provision of professional medical services to our patients, as well as the Professional Entities costs of providing those services, are included as
net revenue and cost of operations in our consolidated statement of operations, whereas the management fee that the Professional Entities’ pay to us
under our management agreement with the Professional Entities is eliminated as a result of the consolidation of our results with those of the Professional
Entities. Also, because the Professional Entities are consolidated in our financial statements, any borrowings or advances we have received from or made
to the Professional Entities have been eliminated in our consolidated balance sheet. If the Professional Entities were not treated as consolidated entities
in our consolidated financial statements, the presentation of certain items in our income statement, such as net service fee revenue and costs and
expenses, would change but our net income would not, because in operation and historically, the annual revenue of the Professional Entities from all
sources closely approximates its expenses, including Dr. Berger’s and Dr Crues’ compensation, fees payable to us and amounts payable to third parties.
2015
2014
Years Ended December 31,
2013
(in thousands, except per share data)
2012
2011
Statement of Operations Data:
Net revenue
Operating expenses:
Cost of operations, excluding depreciation and
amortization
Depreciation and amortization
Loss (gain) on sale and disposal of equipment, net
Gain on sale of imaging center and de-consolidation
of joint venture
Meaningful use incentive
Loss on extinguishment of debt
Net income attributable to RadNet common
stockholders
Basic income per share attributable to RadNet
common stockholders
Diluted income per share attributable to RadNet
common stockholders
Balance Sheet Data:
Cash and cash equivalents
Total assets
Total long-term liabilities
Total liabilities
Working capital
Equity (deficit)
$
809,628
$
717,569
$
702,986 $
647,153
$
585,121
708,289
60,611
866
(5,434)
(3,270)
–
7,709
0.18
0.17
446
838,435
644,322
801,974
72,870
36,461
$
33
602,652
59,258
1,113
–
(2,034)
15,927
1,376
0.03
0.03
307
740,680
599,708
732,982
58,746
7,698
$
598,655
58,890
1,032
(2,108)
–
–
2,120
0.05
0.05
542,993
57,740
456
(2,777)
–
–
59,834
1.58
1.52
477,828
57,481
(2,240)
–
–
–
7,231
0.19
0.19
$
8,412 $
722,576
601,977
720,366
57,955
2,210
$
362
710,864
598,507
717,548
36,859
(6,684)
2,455
619,188
566,615
688,995
29,947
(69,807)
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading national provider of freestanding, fixed-site outpatient diagnostic imaging services in the United States based on number of
locations and annual imaging revenue. At December 31, 2015, we operated directly or indirectly through joint ventures, 300 centers located in
California, Delaware, Florida, Maryland, New Jersey, New York and Rhode Island. Our centers provide physicians with imaging capabilities to facilitate
the diagnosis and treatment of diseases and disorders and may reduce unnecessary invasive procedures, often reducing the cost and amount of care for
patients. Our services include magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine,
mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other related procedures. As of December 31, 2015, we had in operation 231
MRI systems, 144 CT systems, 46 PET or combination PET/CT systems, 49 nuclear medicine systems, 393 X-ray systems, 260 mammography systems,
498 ultrasound systems, and 105 fluoroscopy systems.
We derive substantially all of our revenue from fees charged for the diagnostic imaging services performed at our facilities. For the years ended
December 31, 2015, 2014 and 2013, we performed 5,638,979, 4,828,488, and 4,525,490 diagnostic imaging procedures and generated net revenue of
$809.6 million, $717.6 million, and $703.0 million, respectively. Additional information concerning RadNet, Inc., including our consolidated
subsidiaries, for each of the years ended December 31, 2015, 2014 and 2013 is included in the consolidated financial statements and notes thereto in this
annual report.
Our revenue is derived from a diverse mix of payors, including private payors, managed care capitated payors and government payors. We
believe our payor diversity mitigates our exposure to possible unfavorable reimbursement trends within any one payor class. In addition, our experience
with capitation arrangements over the last several years has provided us with the expertise to manage utilization and pricing effectively, resulting in a
predictable stream of revenue. For the year ended December 31, 2015, we received approximately 69% of our payments from commercial insurance
payors and from managed care capitated payors, 20% from Medicare 3% from Medicaid, 4% from Workers Compensation programs and 4% from other
sources. With the exception of Blue Cross/Blue Shield, which represents approximately 20% and government payors amounting to approximately 23%
of revenues respectively, no single payor accounted for more than 5% of our net revenue for the twelve months ended December 31, 2015.
We have developed our medical imaging business through a combination of organic growth and acquisitions. For a discussion of acquisitions
and dispositions of facilities, see “Recent Developments and Facility Acquisitions and Dispositions” below.
We typically experience some seasonality to our business. During the first quarter of each year we generally experience the lowest volumes of
procedures and the lowest level of revenue for any quarter during the year. This is primarily the result of two factors. First, our volumes and revenue are
typically impacted by winter weather conditions in our northeastern operations. It is common for snowstorms and other inclement weather to result in
patient appointment cancellations and, in some cases, imaging center closures. Second, in recent years, we have observed greater participation in high
deductible health plans by patients. As these high deductibles reset in January for most of these patients, we have observed that patients utilize medical
services less during the first quarter, when securing medical care will result in significant out-of-pocket expenditures.
During 2015 we continued to focus on those core activities which have contributed to our success. We invested in or acquired a number of new
facilities, adding a net of forty-one facilities over the number in operation at the beginning of the year. Those acquisitions were concentrated in our key
markets of California and New York, and enhanced our position in those leading markets.
We finished the year with cash and cash equivalents of $446,000 and accounts receivable of $162.8 million. Working capital increased to $72.9
million at December 31, 2015 from $58.7 million at December 31, 2014. We continue to maintain our $101.25 million revolving credit facility. At
December 31, 2015 we had no aggregate balance on the revolving credit line and the total borrowing capacity is available.
The consolidated financial statements in this annual report include the accounts of Radnet Management, BRMG and the New York Groups. The
consolidated financial statements also include Radnet Management I, Inc., Radnet Management II, Inc., Radiologix, Inc., Radnet Management Imaging
Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all wholly owned
subsidiaries of Radnet Management.
Accounting Standards Codification (ASC) 810-10-15-14, Consolidation, stipulates that generally any entity with a) insufficient equity to
finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the
characteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). We
consolidate all voting interest entities in which we own a majority voting interest and all VIEs for which we are the primary beneficiary. We determine
whether we are the primary beneficiary of a VIE through a qualitative analysis that identifies which variable interest holder has the controlling financial
interest in the VIE. The variable interest holder who has both of the following has the controlling financial interest and is the primary beneficiary: (1) the
power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of, or the
right to receive benefits from, the VIE that could potentially be significant to the VIE. In performing our analysis, we consider all relevant facts and
circumstances, including: the design and activities of the VIE, the terms of the contracts the VIE has entered into, the nature of the VIE’s variable
interests issued and how they were negotiated with or marketed to potential investors, and which parties participated significantly in the design or
redesign of the entity.
34
Facility Acquisitions and Dispositions
Acquisitions
On October 1, 2015 we completed our acquisition of certain assets of Diagnostic Imaging Group, LLC (DIG), consisting of seventeen multi-
modality imaging centers located in the boroughs of Brooklyn and Queens, New York, for the following: cash consideration of $54.6 million ($49.6
million paid at execution, $5 million to be paid 18 months after acquisition or earlier if certain conditions are met), the assumption of $2.1 million in
equipment debt, and issuance of 1.5 million RadNet common shares valued at $8.3 million on the acquisition date. The facilities provide a full range of
radiology services including MRI, PET/CT, Mammography, Ultrasound, X-ray and other related services. The transaction also includes contingent
consideration that is payable equal to five times the amount by which collections on the sellers’ historical revenue exceeds a defined threshold. The
estimated fair value of the liability on the acquisition date and as of December 31, 2015 is zero which is based on the probability of exceeding defined
thresholds. Detail of the assets acquired and liabilities assumed are stated in Note 4 to our consolidated financial statements.
On October 1, 2015 we completed our acquisition of certain assets of Philip L. Chatham, M.D., Inc., an oncology practice with offices in the
Los Angeles, CA area, for consideration of $916,000, paid in shares of equal value of the common stock of RadNet, Inc. and $300,000 in cash. We have
made a fair value determination of the acquired assets and approximately $26,000 of fixed assets, $100,000 covenant not to compete intangible asset,
$300,000 of medical supplies and $790,000 of goodwill were recorded with respect to this transaction.
On September 1, 2015 we completed our acquisition of certain assets of Murray Hill Radiology and Mammography, P.C. and Murray Hill MRI
Holding, LLC, consisting of a single multi-modality imaging center located in Manhattan, New York for a cash consideration of $5.8 million. The
facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value determination of the acquired assets and approximately $1.6
million of fixed assets, $95,000 of prepaid assets and $4.1 million of goodwill were recorded.
On August 3, 2015 we completed our acquisition of certain assets of Hanford Imaging, LP, consisting of a single multi-modality imaging center
located in Hanford, CA for cash consideration of $1.0 million. The facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value
determination of the acquired assets and approximately $215,000 of fixed asset and $785,000 of goodwill were recorded.
On June 1, 2015 we completed our acquisition of certain assets of Healthcare Radiology and Diagnostic systems, PLLC, consisting of a single
multi-modality imaging center located in the Bronx, NY area for cash consideration of $425,000. The facility provides MRI, CT, Ultrasound and X-ray
services. We have made a fair value determination of net assets and acquired approximately $134,500 of fixed assets and $290,500 of leasehold
improvements.
On May 1, 2015 we completed our acquisition of certain assets of California Radiology consisting of six multi-modality imaging centers
located in Los Angeles, California for cash consideration of $4.2 million. The facilities provide MRI, PET/CT, Ultrasound and X-ray services. We have
made a fair value determination of the acquired assets and approximately $217,000 of equipment, $1.7 million of leasehold improvements, $34,000 in
other assets, $100,000 of other intangible assets relating to a covenant not to compete contract and $2.1 million of goodwill were recorded with respect
to this transaction.
On April 15, 2015 we completed our acquisition of certain assets of New York Radiology Partners, consisting of eleven multi-modality imaging
centers located in Manhattan, New York for cash consideration of $29.8 million, a note to seller of $1.5 million, and the assumption of equipment debt
of $2.3 million. The facilities provide a full range of radiology services including MRI, PET/CT, Mammography, Ultrasound, X-ray and other related
services. With the use of an outside valuation expert, we have made a fair value determination of the acquired assets and assumed liabilities. In total,
RadNet acquired assets of $34.5 million and assumed current liabilities of $891,000. Asset amounts acquired were $6.9 million in equipment, $11.6
million in leasehold improvements, $9.9 million in goodwill, $1.2 million in intangible assets, and $4.9 million of accounts receivable and other assets.
Current liabilities assumed related to accounts payable, payroll and other related short term obligations.
35
Dispositions
On September 30, 2015 we completed a sale of 10 wholly owned imaging centers from New Jersey Imaging Partners, Inc. This sale was made
to one of our non-consolidated joint ventures for which we hold a 49% non-controlling interest, The New Jersey Imaging Network, L.L.C., for
approximately $35.5 million. We recorded a gain of $5.4 million with respect to this transaction.
On August 3, 2015 we sold a 25% non-controlling interest in one of our wholly owned entities, Baltimore County Radiology, LLC (“BCR”) to
Lifebridge Health for $5.0 million. On the date of sale, the net book value of this 25% interest was $1.3 million. In accordance with ASC 810-10-45-23,
Consolidation, the proceeds in excess of this net book value amounting to $3.7 million was recorded to equity. In addition to the proceeds already
received, RadNet has the opportunity to receive approximately $1.2 million in additional proceeds if certain operating performance targets of BCR are
achieved within the next 12 months following the effective date of the sale. Any additional amounts received under these contingent performance
provisions will be recorded to equity accordingly.
Results of Operations
The following table sets forth, for the periods indicated, the percentage that certain items in the statements of operations bears to net revenue
before provision for bad debts.
2015
Years Ended December 31,
2014
2013
NET REVENUE
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
Revenue under capitation arrangements
Total net revenue
OPERATING EXPENSES
Cost of operations, excluding depreciation and amortization
Depreciation and amortization
Loss on sale and disposal of equipment
Severance costs
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME AND EXPENSES
Interest expense
Meaningful use incentive
Equity in earnings of joint ventures
Gain on sale of imaging centers
Loss on early extinguishment of senior notes
Total other expenses
INCOME BEFORE INCOME TAXES
Provision for income taxes
NET INCOME
Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON
STOCKHOLDERS
36
88.3%
-4.3%
84.0%
11.7%
95.7%
83.8%
7.2%
0.1%
0.1%
91.1%
4.6%
4.9%
-0.4%
-1.1%
-0.6%
0.0%
2.8%
1.8%
-0.7%
1.1%
0.1%
1.0%
89.7%
-4.0%
85.7%
10.3%
96.0%
80.6%
7.9%
0.1%
0.2%
88.9%
7.1%
5.7%
-0.3%
-0.9%
0.0%
2.1%
6.6%
0.5%
-0.3%
0.2%
0.0%
0.2%
91.0%
-3.8%
87.2%
9.0%
96.2%
81.9%
8.1%
0.1%
0.1%
90.2%
6.0%
6.3%
0.0%
-0.8%
-0.3%
0.0%
5.1%
0.8%
-0.5%
0.4%
0.0%
0.3%
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Service Fee Revenue, net of contractual allowances and discounts
Service fee revenue, net of contractual allowances and discounts for the year ended December 31, 2015 was $746.8 million compared to
$670.1 million for the year ended December 31, 2014, an increase of $76.6 million, or 11.4%.
Service fee revenue, net of contractual allowances and discounts, including only those centers which were in operation throughout the full
fiscal years of both 2015 and 2014, increased $10.6 million, or 1.7%. This comparison excludes revenue contributions from centers that were
acquired subsequent to January 1, 2014. For the year ended December 31, 2015, service fee revenue, net of contractual allowances and discounts,
from centers that were acquired subsequent to January 1, 2014 and excluded from the above comparison was $113.8 million. For the year ended
December 31, 2014, net revenue from centers that were acquired subsequent to January 1, 2014 and excluded from the above comparison was $47.7
million.
Provision for bad debts
Provision for bad debts increased $6.2 million, or 20.9%, to $36.0 million, or 4.3% of net revenue, for the year ended December 31, 2015
compared to $29.8 million, or 4.0% of net revenue, for the year ended December 31, 2014.
Revenue under capitation arrangements
Revenue under capitation arrangements for the year ended December 31, 2015 was $98.9 million compared to $77.2 million for the year ended
December 31, 2014, an increase of $21.7 million, or 28.0%.
Revenue under capitation arrangements, including only those centers which were in operation throughout the full fiscal years of both 2015
and 2014, increased $16.6 million, or 22.2%. This 22.2% increase is due to additional capitation contracts entered into during 2015 over 2014. This
comparison excludes revenue contributions from centers that were acquired subsequent to January 1, 2014. For the year ended December 31, 2015,
revenue under capitation arrangements from centers that were acquired subsequent to January 1, 2014 and excluded from the above comparison was
$7.3 million. For the year ended December 31, 2014, net revenue from centers that were acquired subsequent to January 1, 2014 and excluded from
the above comparison was $2.2 million.
Operating expenses
Cost of operations for the year ended December 31, 2015 increased approximately $105.6 million, or 17.5%, from $602.7 million for the year
ended December 31, 2014 to $708.3 million for the year ended December 31, 2015. The following table sets forth our operating expenses for the years
ended December 31, 2015 and 2014 (in thousands):
Salaries and professional reading fees, excluding stock-based
compensation
Stock-based compensation
Building and equipment rental
Medical supplies
Other operating expenses *
Cost of operations
Depreciation and amortization
Loss on sale and disposal of equipment
Severance costs
Total operating expenses
Years Ended December 31,
2014
2015
$
$
376,407
7,647
71,666
49,417
203,152
708,289
60,611
866
745
$
770,511
$
329,394
2,500
64,492
41,348
164,918
602,652
59,258
1,113
1,241
664,264
* Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities, marketing, travel
and other expenses.
37
• Salaries and professional reading fees, excluding stock-based compensation and severance
Salaries and professional reading fees increased $47.0 million, or 14.3%, to $376.4 million for the year ended December 31, 2015, compared to
$329.4 million for the year ended December 31, 2014.
Salaries and professional reading fees, including only those centers which were in operation throughout the full fiscal years of both 2015 and
2014, increased $13.4 million, or 4.3%. This 4.3% increase driven by increases in volume resulting in staffing needs to service increased
procedures. This comparison excludes contributions from centers that were acquired subsequent to January 1, 2014. For the year ended
December 31, 2015, salaries and professional reading fees from centers that were acquired subsequent to January 1, 2014 and excluded from the
above comparison was $51.3 million. For the year ended December 31, 2014, salaries and professional reading fees from centers that were
acquired subsequent to January 1, 2014, and excluded from the above comparison was $17.7 million.
• Stock-based compensation
Stock-based compensation increased $5.1 million, or 205.9%, to $7.6 million for the year ended December 31, 2015 compared to $2.5 million
for the year ended December 31, 2014. This increase was driven by the higher fair value of stock based compensation awarded and vested in the
year 2015 as compared to 2014.
• Building and equipment rental
Building and equipment rental expenses increased $7.2 million, or 11.1%, to $71.7 million for the year ended December 31, 2015, compared to
$64.5 million for the year ended December 31, 2014.
Building and equipment rental expenses, including only those centers which were in operation throughout the full fiscal years of both 2015 and
2014, decreased $149,000, or 0.2%. This comparison excludes contributions from centers that were acquired subsequent to January 1, 2014. For
the year ended December 31, 2015, building and equipment rental expenses from centers that were acquired subsequent to January 1, 2014, and
excluded from the above comparison, was $11.2 million. For the year ended December 31, 2014, building and equipment rental expenses from
centers that were acquired subsequent to January 1, 2014, and excluded from the above comparison, was $3.9 million.
• Medical supplies
Medical supplies expense increased $8.1 million, or 19.5%, to $49.4 million for the year ended December 31, 2015, compared to $41.3 million
for the year ended December 31, 2014.
Medical supplies expense, including only those centers which were in operation throughout the full fiscal years of both 2015 and 2014,
increased $3.4 million, or 8.7%. This 8.7% increase is primarily due to the increased procedure volumes of advanced imaging procedures such
as MRIs, PET, and CT scans. This comparison excludes contributions from centers that were acquired or divested subsequent to January 1,
2014. For the year ended December 31, 2015, medical supplies expense from centers that were acquired subsequent to January 1, 2014, and
excluded from the above comparison was $6.7 million. For the year ended December 31, 2014, medical supplies expense from centers that were
acquired subsequent to January 1, 2014, and excluded from the above comparison was $2.0 million.
• Other operating expenses
Other operating expenses increased $38.2 million, or 23.2%, to $203.2 million for the year ended December 31, 2015 compared to $164.9
million for the year ended December 31, 2014.
Other operating expenses, including only those centers which were in operation throughout the full fiscal years of both 2015 and 2014,
increased $22.7 million or 14.7%. The 14.7% increase relates to additional outside services to support the sub-contracting of imaging operations
in areas where we do not have centers, repairs and maintenance of equipment post the initial warranty period, and additional administration
expenses in support of the rollout of the RIS system.. This comparison excludes contributions from centers that were acquired or divested
subsequent to January 1, 2014. For the year ended December 31, 2015, other operating expenses from centers that were acquired subsequent to
January 1, 2014, and excluded from the above comparison were $25.7 million. For the year ended December 31, 2014, other operating expenses
from centers that were acquired subsequent to January 1, 2014, and excluded from the above comparison were $10.1 million.
38
• Depreciation and amortization expense
Depreciation and amortization expense increased $1.4 million, or 2.3%, to $60.6 million for the year ended December 31, 2015 when compared
to the same period last year.
Depreciation and amortization expense at those centers which were in operation throughout the full fiscal years of both 2015 and 2014,
decreased $2.2 million or 4.0%. This comparison excludes contributions from centers that were acquired or divested subsequent to January 1,
2014. For the year ended December 31, 2015, depreciation and amortization from centers that were acquired or divested subsequent to January
1, 2014 and excluded from the above comparison was $7.9 million. For the year ended December 31, 2014, depreciation and amortization from
centers that were acquired subsequent to January 1, 2014, and excluded from the above comparison was $4.4 million.
• Loss on sale and disposal of equipment
Loss on sale of equipment was $866,000 and $1.1 million for the years ended December 31, 2015 and 2014, respectively, and primarily related
to the difference between the net book value of certain equipment sold and proceeds we received from the sale.
• Severance costs
During the year ended December 31, 2015, we recorded severance costs of $745,000 compared to $1.2 million recorded during the year ended
December 31,2014. In each period, these costs were primarily associated with the integration of acquired operations and other cost saving
measures.
Interest expense
Interest expense decreased approximately $1.0 million, or 2.4%, to $41.7 million for the year ended December 31, 2015 compared to $42.7
million for the year ended December 31, 2014. Interest expense for the year ended December 31, 2015 included $5.4 million of amortization of
deferred financing costs and discount on issuance of debt. Interest expense for the year ended December 31, 2014 included $5.1 million of
amortization of deferred financing costs and discount on issuance of debt, as well as a write off of $665,000 of deferred financing costs in relation to
the early extinguishment of $200 million in 10 3/8% senior unsecured notes due 2018. Excluding these adjustments to interest expense for each
period, interest expense decreased approximately $680,000 for the year ended December 31, 2015 compared to the year ended December 31, 2014.
This decrease was primarily due to the 2014 Amendment and the Second Lien Credit Agreement. See “Liquidity and Capital Resources” below for
more details on our financing activity during 2015.
Meaningful use incentive
For the year ended December 31, 2015, we recognized other income from meaningful use incentive in the amount of $3.3 million. This
amount was earned under a Medicare program to promote the use of electronic health record technology. See Note 2 to our consolidated financial
statements contained herein for more detail regarding this meaningful use incentive.
Equity in earnings from unconsolidated joint ventures
Equity in earnings from our unconsolidated joint ventures increased $2.0 million or 28.1% to $8.9 million for the year ended December 31,
2015 compared to $7.0 million for the year ended December 31, 2014. The increase was mainly due to the sale of our imaging centers from our New
Jersey reporting unit, New Jersey Imaging Partners, Inc. to one of our non-consolidated joint ventures for which we hold a 49% non-controlling
interest, The New Jersey Imaging Network, L.L.C., during 2015. See Note 4 to our consolidated financial statements contained herein for more
details.
Gain on sale of imaging center
We recognized a gain on the sale of 10 wholly owned imaging centers to The New Jersey Imaging Network, L.L.C. in the amount of $5.4
million for the twelve months ended December 31, 2015. See Note 4 to consolidated financial statements contained herein for more details.
39
Other expenses / income
For the year ended December 31, 2015 we recorded approximately $419,000 of other expenses, mainly related to acquisition activity. For
the year ended December 31, 2014, we recorded $3,000 of other expenses.
Provision for income tax expense
For the years ended December 31, 2015 and December 31, 2014, we recorded income tax expense of $6.0 million and $2.0 million,
respectively. See Note 10 to our consolidated financial statements contained herein for more details.
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Service fee revenue, net of contractual allowances and discounts
Service fee revenue, net of contractual allowances and discounts for the year ended December 31, 2014 was $670.1 million compared to
$665.3 million for the year ended December 31, 2013, an increase of $4.8 million, or 0.7%.
Service fee revenue, net of contractual allowances and discounts, including only those centers which were in operation throughout the full
fiscal years of both 2014 and 2013, decreased $10.6 million, or 1.6%. This 1.6% decrease is primarily the result of a slight reduction in procedure
volumes as well as lower Medicare reimbursement rates beginning in March 2014. This comparison excludes revenue contributions from centers
that were acquired subsequent to January 1, 2013. For the year ended December 31, 2014, service fee revenue, net of contractual allowances and
discounts, from centers that were acquired subsequent to January 1, 2013 and excluded from the above comparison was $21.8 million. For the year
ended December 31, 2013, net revenue from centers that were acquired subsequent to January 1, 2013 and excluded from the above comparison was
$6.6 million.
Provision for bad debts
Provision for bad debts increased $1.9 million, or 6.8%, to $29.8 million, or 4.0% of net revenue, for the year ended December 31, 2014
compared to $27.9 million, or 3.8% of net revenue, for the year ended December 31, 2013.
Revenue under capitation arrangements
Revenue under capitation arrangements for the year ended December 31, 2014 was $77.2 million compared to $65.6 million for the year ended
December 31, 2013, an increase of $11.7 million, or 17.8%.
Revenue under capitation arrangements, including only those centers which were in operation throughout the full fiscal years of both 2014
and 2013, increased $8.8 million, or 13.4%. This 13.4% increase is due to additional capitation contracts entered into subsequent to the year 2013.
This comparison excludes revenue contributions from centers that were acquired subsequent to January 1, 2013. For the year ended December 31,
2014, revenue under capitation arrangements from centers that were acquired subsequent to January 1, 2013 and excluded from the above
comparison was $3.1 million. For the year ended December 31, 2013, net revenue from centers that were acquired subsequent to January 1, 2013
and excluded from the above comparison was $176,000.
Operating expenses
Cost of operations for the year ended December 31, 2014 increased approximately $4.0 million, or 0.7%, from $598.7 million for the year
ended December 31, 2013 to $602.7 million for the year ended December 31, 2014. The following table sets forth our operating expenses for the years
ended December 31, 2014 and 2013 (in thousands):
Salaries and professional reading fees, excluding stock-based compensation
Stock-based compensation
Building and equipment rental
Medical supplies
Other operating expenses *
Cost of operations
Depreciation and amortization
Loss on sale and disposal of equipment
Severance costs
Total operating expenses
Years Ended December 31,
2013
2014
$
$
329,394
2,500
64,492
41,348
164,918
602,652
59,258
1,113
1,241
664,264
$
$
322,080
2,573
64,998
37,185
171,819
598,655
58,890
1,032
806
659,383
* Includes billing fees, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities, marketing, travel
and other expenses.
40
• Salaries and professional reading fees, excluding stock-based compensation and severance
Salaries and professional reading fees increased $7.3 million, or 2.3%, to $329.4 million for the year ended December 31, 2014, compared to
$322.1 million for the year ended December 31, 2013.
Salaries and professional reading fees, including only those centers which were in operation throughout the full fiscal years of both 2014 and
2013, decreased $1.7 million, or 0.5%. This 0.5% decrease is in line with our decrease in procedure volumes at these centers. This comparison
excludes contributions from centers that were acquired subsequent to January 1, 2013. For the year ended December 31, 2014, salaries and
professional reading fees from centers that were acquired subsequent to January 1, 2013 and excluded from the above comparison was $12.1
million. For the year ended December 31, 2013, salaries and professional reading fees from centers that were acquired subsequent to January 1,
2013, and excluded from the above comparison was $3.1 million.
• Stock-based compensation
Stock-based compensation decreased $73,000, or 2.8%, to $2.5 million for the year ended December 31, 2014 compared to $2.6 million for the
year ended December 31, 2013.
• Building and equipment rental
Building and equipment rental expenses decreased $506,000, or 0.8%, to $64.5 million for the year ended December 31, 2014, compared to
$65.0 million for the year ended December 31, 2013.
Building and equipment rental expenses, including only those centers which were in operation throughout the full fiscal years of both 2014 and
2013, decreased $2.1 million, or 3.3%. This 3.3% decrease is due to the conversion of equipment operating leases to capital leases occurring in
the first quarter of 2014. This comparison excludes contributions from centers that were acquired subsequent to January 1, 2013. For the year
ended December 31, 2014, building and equipment rental expenses from centers that were acquired subsequent to January 1, 2013, and
excluded from the above comparison, was $3.5 million. For the year ended December 31, 2013, building and equipment rental expenses from
centers that were acquired subsequent to January 1, 2013, and excluded from the above comparison, was $1.9 million.
• Medical supplies
Medical supplies expense increased $4.2 million, or 11.2%, to $41.3 million for the year ended December 31, 2014, compared to $37.2 million
for the year ended December 31, 2013.
Medical supplies expense, including only those centers which were in operation throughout the full fiscal years of both 2014 and 2013,
increased $3.9 million, or 10.7%. This 10.7% increase is primarily due to a combination of a $400,000 decrease in rebates we received from
certain vendors in the first quarter of 2014 and no medical rebates received in the third quarter of 2014. This comparison excludes contributions
from centers that were acquired or divested subsequent to January 1, 2013. For the year ended December 31, 2014, medical supplies expense
from centers that were acquired subsequent to January 1, 2013, and excluded from the above comparison was $1.5 million. For the year ended
December 31, 2013, medical supplies expense from centers that were acquired subsequent to January 1, 2013, and excluded from the above
comparison was $1.2 million.
• Other operating expenses
Other operating expenses decreased $6.9 million, or 4.0%, to $164.9 million for the year ended December 31, 2014 compared to $171.8 million
for the year ended December 31, 2013.
41
Other operating expenses, including only those centers which were in operation throughout the full fiscal years of both 2014 and 2013,
decreased $9.2 million or 5.7%. The 5.7% decrease relates to higher employee health insurance contributions in 2014 as well as a decrease in
licensing and other contractual fees. This comparison excludes contributions from centers that were acquired or divested subsequent to
January 1, 2013. For the year ended December 31, 2014, other operating expenses from centers that were acquired subsequent to January 1,
2013, and excluded from the above comparison were $4.7 million. For the year ended December 31, 2013, other operating expenses from
centers that were acquired subsequent to January 1, 2013, and excluded from the above comparison were $2.4 million.
• Depreciation and amortization expense
Depreciation and amortization expense increased $368,000, or 0.6%, to $59.3 million for the year ended December 31, 2014 when compared to
the same period last year.
Depreciation and amortization expense at those centers which were in operation throughout the full fiscal years of both 2014 and 2013,
decreased $1.5 million or 2.5%. This comparison excludes contributions from centers that were acquired or divested subsequent to January 1,
2013. For the year ended December 31, 2014, depreciation and amortization from centers that were acquired or divested subsequent to January
1, 2013 and excluded from the above comparison was $2.8 million. For the year ended December 31, 2013, depreciation and amortization from
centers that were acquired subsequent to January 1, 2013, and excluded from the above comparison was $969,000.
• Loss on sale and disposal of equipment
Loss on sale of equipment was approximately $1.1 million and $1.0 million for the years ended December 31, 2014 and 2013, respectively, and
primarily related to the difference between the net book value of certain equipment sold and proceeds we received from the sale.
• Severance costs
During the year ended December 31, 2014, we recorded severance costs of $1.2 million compared to $806,000 recorded during the year ended
December 31, 2013. In each period, these costs were primarily associated with the integration of acquired operations and other cost saving
measures.
Interest expense
Interest expense decreased approximately $3.1 million, or 6.7%, to $42.7 million for the year ended December 31, 2014 compared to $45.8
million for the year ended December 31, 2013. Interest expense for the year ended December 31, 2014 included $5.1 million of amortization of
deferred financing costs and discount on issuance of debt, as well as a write off of $665,000 of deferred financing costs in relation to the early
extinguishment of $200 million in 10 3/8% senior unsecured notes due 2018. Interest expense for the year ended December 31, 2013 included $4.6
million of amortization of deferred financing costs and discount on issuance of debt. Excluding these adjustments to interest expense for each
period, interest expense decreased approximately $4.3 million for the year ended December 31, 2014 compared to the year ended December 31,
2013. This decrease was primarily due to the 2014 Amendment and Second Lien Credit Agreement. See “Liquidity and Capital Resources” below
for more details on our financing activity during 2014.
Meaningful use incentive
For the year ended December 31, 2014, we recognized other income from meaningful use incentive in the amount of $2.0 million. This
amount was earned under a Medicare program to promote the use of electronic health record technology. See Note 2 to our consolidated financial
statements contain herein for more detail regarding this meaningful use incentive.
Equity in earnings from unconsolidated joint ventures
Equity in earnings from our unconsolidated joint ventures increased $776,000 or 12.5% to $7.0 million for the year ended December 31,
2014 compared to $6.2 million for the year ended December 31, 2013.
Loss on early extinguishment of senior notes
For the year ended December 31, 2014, we recognized a $15.9 million loss on early extinguishment of debt through our tender offer for our
senior notes. Completion of the tender was conditioned on the closing of the 2014 Amendment and the Second Lien Credit Agreement. See
“Liquidity and Capital Resources” below and Note 8 to our consolidated financial statements contained herein for more details on our debt
refinancing.
42
Other expenses / income
For the year ended December 31, 2014 we recorded approximately $3,000 of other expenses. For the year ended December 31, 2013, we
recorded $228,000 of other expenses primarily relating to costs associated with our credit facilities. See “Liquidity and Capital Resources” below
for more details on our debt refinancing.
Provision for income tax expense
For the years ended December 31, 2014 and December 31, 2013, we recorded income tax expense of $2.0 million and $3.5 million,
respectively. See Note 10 to our consolidated financial statements contained herein for more details.
Adjusted EBITDA
We use both GAAP and non-GAAP metrics to measure our financial results. We believe that, in addition to GAAP metrics, these non-GAAP
metrics assist us in measuring our cash generated from operations and ability to service our debt obligations.
One non-GAAP measure we believe assists us is Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes,
depreciation and amortization, as adjusted to exclude losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments,
bargain purchase gains, loss on de-consolidation of joint ventures and non-cash equity compensation. Adjusted EBITDA includes equity earnings in
unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or one-time
events that take place during the period. We believe this information is useful to investory and other interested parties because we are highly leveraged
and our Adjusted EBITDA metric removes non-cash and nonrecurring charges that occur in the affected period and provides a basis for measuring the
Company’s financial condition against other quarters.
Adjusted EBITDA is a non-GAAP financial measure used as an analytical indicator by us and the healthcare industry to assess business
performance, and is a measure of leverage capacity and ability to service debt. Adjusted EBITDA should not be considered a measure of financial
performance under GAAP, and the items excluded from Adjusted EBITDA should not be considered in isolation or as alternatives to net income, cash
flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an
indicator of financial performance or liquidity. As Adjusted EBITDA is not a measurement determined in accordance with GAAP and is therefore
susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures of other companies.
The following is a reconciliation of the nearest comparable GAAP financial measure, net income, to Adjusted EBITDA for the years ended
December 31, 2015, 2014, and 2013, respectively (in thousands):
Net income attributable to RadNet, Inc. common stockholders
Plus provision for income taxes
Plus other expenses
Plus loss on early extinguishment of Senior Notes
Plus interest expense
Plus severance costs
Plus loss on sale and disposal of equipment
Plus legal settlements
Less gain on sale of imaging center
Plus depreciation and amortization
Plus non-cash employee stock-based compensation
Adjusted EBITDA
2015
Years Ended December 31,
2014
2013
$
$
7,709
6,007
419
–
41,684
745
866
1,425
(5,434)
60,611
7,647
121,679
$
$
1,376
1,967
3
15,927
42,727
1,241
1,113
401
–
59,258
2,500
126,513
$
$
2,120
3,510
228
–
45,791
806
1,032
–
(2,108)
58,890
2,574
112,843
43
Liquidity and Capital Resources
We had net income attributable to RadNet, Inc.’s common stockholders of $7.7 million, $1.4 million and $2.1 for the years ended December 31,
2015, 2014 and 2013, respectively. We had cash and cash equivalents of $446,000 and accounts receivable of $162.8 million at December 31, 2015,
compared to cash of $307,000 million and accounts receivable of $148.2 million at December 31, 2014. We had a working capital balance of $72.9
million and $58.7 million at December 31, 2015 and 2014, respectively. We also had total equity of $36.5 million and $7.7 million at December 31,
2015 and 2014, 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 of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment. Because our cash flows from operations have been insufficient to fund all of these capital
requirements, we have depended on the availability of financing under credit arrangements with third parties.
Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings from
our senior secured credit facilities, will be adequate to meet our short-term liquidity needs. Our future liquidity requirements will be for working capital,
capital expenditures, debt service and general corporate purposes. Our ability to meet our working capital and debt service requirements, however, is
subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are not able to meet such
requirements, we may be required to seek additional financing. There can be no assurance that we will be able to obtain financing from other sources on
the terms acceptable to us, if at all.
On a continuing basis, we also consider various transactions to increase stockholder value and enhance our business results, including
acquisitions, divestitures and joint ventures. These types of transactions may result in future cash proceeds or payments but the general timing, size or
success of any acquisition, divestiture or joint venture effort and the related potential capital commitments cannot be predicted. We expect to fund any
future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our senior secured
credit facilities or through new equity or debt issuances.
We and our subsidiaries or affiliates may from time to time, in our or their sole discretion, continue to purchase, repay, redeem or retire any of
our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise. However, we have no formal
plan of doing so at this time.
Sources and Uses of Cash
Cash provided by operating activities was $67.0 million, $61.0 million, and $66.4 million, for the years ended December 31, 2015, 2014 and
2013, respectively.
Cash used in investing activities was $96.8 million, $53.6 million, and $50.7 million, for the years ended December 31, 2015, 2014 and 2013,
respectively. For the year ended December 31, 2015, we purchased property and equipment for approximately $43.0 million, acquired the assets and
businesses of additional imaging facilities for approximately $90.8 million (see Notes 4 and 5 to the consolidated financial statements of this annual
report), and contributed $265,000 to one of our non-consolidated joint ventures. Offsetting our cash used in investing activities was the $35.5 million
sale of 10 wholly owned imaging centers in New Jersey, $1.3 million in proceeds from the sale of imaging equipment and $443,000 in outside sales of
imaging software. See Note 4 to the consolidated financial statements of this annual report for more information on the New Jersey sale.
Cash provided by financing activities was $29.9 million for the year ended December 31, 2015, compared to cash used by financing activities
of $15.4 million and $7.6 million for the years ended December 31, 2014 and December 31, 2013 respectively. The cash provided by financing for the
year ended December 31, 2015 consisted of $75.0 million in new borrowings from the 2015 Incremental First Lien Term Loans (defined below). See
financing activity in 2015 below for a further description on this event. Payments on secured debt and revolver loans amounted to $39.0 million, while
contractual payments of equipment notes and capital leases totaled $9.8 million. The sale of a 25% of non-controlling interest in a wholly owned
subsidiary netted $5.0 million. See Note 4 to the consolidated financial statement of this annual report for more information on this sale.
At December 31, 2015, we had $451.0 million aggregate principal amount of first lien term loans and $180.0 million aggregate principal
amount of second lien term loan debt outstanding and no principal borrowed under the revolving credit facility. The revolving credit facility provides for
a maximum borrowing limit of $101.25 million, subject to customary drawing conditions.
Our credit facilities are comprised of a Credit and Guaranty Agreement that we entered into on October 10, 2012 (the “Original Credit
Agreement” and as amended by the 2013 Amendment (as defined below) and the 2014 Amendment (as defined below), (the “Credit Agreement”), as
subsequently amended by a first amendment dated April 3, 2013 (the “2013 Amendment”), and a second amendment dated March 25, 2014 (the “2014
Amendment”). We also entered into a a Second Lien Credit and Guaranty Agreement dated March 25, 2014 (the “Second Lien Credit Agreement”). On
April 30, 2015 we entered into a joinder agreement to the Credit Agreement (the “2015 Joinder”). Each of the foregoing is described in more detail
below.
44
As of December 31, 2015, we were in compliance with all covenants under the Original Credit Agreement (as amended by the 2013
Amendment, the 2014 Amendment, and the 2015 Joinder) and the Second Lien Credit Agreement.
The following describes our 2015 financing activities:
2015 Incremental First Lien Term Loans:
On April 30, 2015, we entered into the 2015 Joinder to the Credit Agreement to provide for the borrowing of $75.0 million of
incremental first lien term loans (“2015 Incremental First Lien Term Loans”). The 2015 Incremental First Lien Term Loans are treated as part
of the same class as the existing tranche B term loans currently outstanding under the Credit Agreement. We used the proceeds from the 2015
Incremental First Lien Term Loans to repay all of the borrowings outstanding under the first lien revolving loan facility and to pay
approximately $1.1 million of fees and expenses associated with the transaction.
Interest. The interest rates payable on the 2015 Incremental First Lien Term Loans are the same rates currently payable on the
existing tranche B term loans under the Credit Agreement, which are (a) the Adjusted Eurodollar Rate (as defined in the Credit Agreement) plus
3.25% per annum or (b) the Base Rate (as defined in the Credit Agreement) plus 2.25% per annum. As applied to the first lien tranche B term
loans, the Adjusted Eurodollar Rate has a minimum floor of 1.0%. The Adjusted Eurodollar Rate at December 31, 2015 was 0.85%.
Payments. The scheduled quarterly amortization of the 2015 Incremental First Lien Term Loans is approximately $987,000,
beginning in June 2015. The scheduled quarterly amortization for all of the term loans under the Credit Agreement, including the 2015
Incremental First Lien Term Loans, was increased to approximately $6.2 million, beginning in June 2015.
Maturity Date. The maturity date for the 2015 Incremental First Lien Term Loans shall be on the earlier to occur of (i) October 10,
2018, and (ii) the date on which the 2015 Incremental First Lien Term Loans shall otherwise become due and payable in full under the Credit
Agreement, whether by acceleration or otherwise.
Guarantees and Collateral. The obligations under the Credit Agreement, including the 2015 Incremental First Lien Term Loans,
are guaranteed by RadNet, Inc., all of our current and future domestic subsidiaries and certain of our affiliates (other than certain excluded
foreign subsidiaries). The obligations under the Credit Agreement, including the 2015 Incremental First Lien Term Loans, and the guarantees
are secured by a perfected first priority security interest (subject to certain permitted exceptions) in substantially all of Radnet Management’s
and the guarantors’ tangible and intangible assets, including, but not limited to, pledges of equity interests of Radnet Management and all of our
current and future domestic subsidiaries.
Restrictive Covenants. In addition to certain customary covenants, the Credit Agreement places limits on our ability to declare
dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make
loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers,
acquisitions and asset sales, enter into transactions with affiliates and alter the business we and our subsidiaries currently conduct.
Financial Covenants. The Credit Agreement contains financial covenants including a maximum total leverage ratio and a limit on
annual capital expenditures.
Events of Default. In addition to certain customary events of default, events of default under the Credit Agreement include failure
to pay principal of any loans as and on the date when due, failure to pay any interest on any loan or any fee or other amount payable under the
Credit Agreement, as modified by the 2015 Joinder, within five days after the due date, failure of any loan party to comply with any covenant or
agreement in the loan documents (subject to applicable grace periods and/or notice requirement), a representation or warranty contained in the
loan documents is false in a material respect, events of bankruptcy and a change of control. The occurrence of an event of default could permit
the lenders under the Credit Agreement to declare all amounts borrowed, together with accrued interest and fees, to be immediately due and
payable and to exercise other default remedies.
45
The following describes our 2014 financing activities:
2014 Amendment to the Original Credit Agreement and Second Lien Credit and Guaranty Agreement:
On March 25, 2014, we simultaneously entered into two agreements which resulted in the creation of a direct financial obligation as follows:
2014 Amendment of the Original Credit Agreement. We entered into the 2014 Amendment to provide for, among other things, the
borrowing of $30.0 million of additional first lien term loans (the “2014 First Lien Term Loans”).
Second Lien Credit and Guaranty Agreement. We entered into the Second Lien Credit Agreement to provide for, among other
things, the borrowing of $180.0 million of second lien term loans (the “Second Lien Term Loans”). The proceeds from the Second Lien Term
Loans and the 2014 First Lien Term Loans were used to redeem the Senior Notes, as more fully described below under the heading “Senior
Notes”, to pay the expenses related to the transaction and for general corporate purposes.
Revolving Credit Facility. The $101.25 million revolving credit line established in the Credit Agreement was unaltered by the
agreements above and remains in place. The termination date for the $101.25 million revolving credit facility is the earliest to occur of (i)
October 10, 2017, (ii) the date the revolving credit facility is permanently reduced to zero pursuant to section 2.13(b) of the Credit Agreement,
which addresses voluntary commitment reductions and (iii) the date of the termination of the revolving credit facility due to specific events of
default pursuant to section 8.01 of the Credit Agreement. The revolving credit facility bears interest based on types of borrowings as follows: (i)
unpaid principal at the Adjusted Eurodollar Rate (as defined in the Credit Agreement) plus 4.25% per annum or the Base Rate (as defined in the
Credit Agreement) plus 3.25% per annum, (ii) letter of credit and fronting fees at 4.5% per annum, and (iii) commitment fee of 0.5% per annum
on the unused revolver balance. The Adjusted Eurodollar Rate at December 31, 2015 was 0.85%.
The 2014 Amendment provided for the following:
Interest. The interest rates payable on the 2014 First Lien Term Loans are the same as the rates currently payable under the
Original Credit Agreement, as amended by the 2013 Amendment, which are (a) the Adjusted Eurodollar Rate (as defined in the Credit
Agreement) plus 3.25% or (b) the Base Rate (as defined in the Credit Agreement) plus 2.25%. With respect to all of the term loans under the
Credit Agreement, the Adjusted Eurodollar Rate has a minimum floor of 1.0%. The Adjusted Eurodollar Rate at December 31, 2015 was
0.85%.
Payments. The scheduled amortization of the term loans under the Original Credit Agreement, as amended by the 2013
Amendment and the 2014 Amendment, was increased, starting in June 2014 from quarterly payments of $975,000 to quarterly payments of
approximately $5.2 million, with the remaining balance to be paid at maturity. Scheduled amortization increased annually by $16.8 million
from pre-2014 Amendment terms, representing a rise from 1% per annum to 5% per annum of the initial amount borrowed. This $16.8 million
additional cash obligation will be partially offset by annual interest savings of approximately $5.0 million under the terms of the Second Lien
Term Loan as compared to that under the retired Senior Notes. We expect to fund this approximately $11.8 million net increase in amortization
payments from cash provided by operating activities.
The Second Lien Credit Agreement provides for the following:
Interest. The interest rates payable on the Second Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the Second
Lien Credit Agreement) plus 7.0% or (b) the Base Rate (as defined in the Second Lien Credit Agreement) plus 6.0%. The Adjusted Eurodollar
Rate has a minimum floor of 1.0% on the Second Lien Term Loans. The Eurodollar Rate at December 31, 2015 was 0.85%. The rate paid on
the Second Lien Credit Agreement at December 31, 2015 was 8%.
Payments. There is no scheduled amortization of the principal of the Second Lien Term Loans. Unless otherwise prepaid as a
result of the occurrence of certain mandatory prepayment events, all principal will be due and payable on the termination date described below.
Termination. The maturity date for the Second Lien Term Loans is the earlier to occur of (i) March 25, 2021, and (ii) the date on
which the Second Lien Term Loans shall otherwise become due and payable in full under the Second Lien Credit Agreement, whether by
voluntary prepayment per section 2.13(a) of the Second Lien Credit Agreement or events of default per section 8.01 of the Second Lien Credit
Agreement as described below.
Restrictive Covenants. In addition to certain customary covenants, the Second Lien Credit Agreement places limits on our ability
declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leasebacktransactions,
make loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers,
acquisitions and asset sales, enter into transactions with affiliates and alter the business we and our subsidiaries currently conduct.
46
Events of Default. In addition to certain customary events of default, events of default under the Second Lien Credit Agreement
include failure to pay principal of any loans as and on the date when due, failure to pay any interest on any loan or any fee or other amount
payable under the Second Lien Term Loans within five days after the due date, failure of any loan party to comply with any covenant or
agreements in the loan documents (subject to applicable grace periods and/or notice requirements), a representation or warranty contained in the
loan documents is false in a material respect, events of bankruptcy and a change of control. The occurrence of an event of default could permit
the lenders under the Second Lien Credit Agreement to declare all amounts borrowed, together with accrued interest and fees, to be
immediately due and payable and to exercise other default remedies.
Senior Notes
On April 6, 2010, we issued and sold $200 million of 10 3/8% senior unsecured notes due 2018 at a price of 98.680% (the “Senior
Notes”). All payments of the Senior Notes, including principal and interest, were guaranteed jointly and severally on a senior secured basis by
RadNet, Inc., and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The Senior Notes were issued
under an indenture dated April 6, 2010 (the “Indenture”), by and among Radnet Management, Inc., as issuer, RadNet, Inc., as parent guarantor,
the subsidiary guarantors thereof and U.S. Bank National Association, as trustee. We paid interest on the senior notes on April 1 and October 1
of each year, commencing October 1, 2010, and they were scheduled to expire on April 1, 2018.
We completed the retirement of our $200 million in Senior Notes on April 24, 2014 and following such retirement the Company
completed the satisfaction and discharge of the Indenture. The transactions leading to the retirement of the Senior Notes are described below:
Tender Offer and Exercise of Optional Redemption on March 7, 2014. On March 7, 2014, we commenced a tender offer to
purchase for cash any and all outstanding Senior Notes. In connection with the tender offer, we also commenced a consent solicitation to amend
the Indenture to eliminate or modify certain restrictive covenants. On March 25, 2014, we made a payment in cash for all Senior Notes tendered
prior to 5:00 P.M., New York City time, on March 20, 2014 (the “Consent Payment Deadline”). As of the Consent Payment Deadline, we
received tenders and consents in respect of $193,464,000 aggregate principal amount of the Senior Notes, representing 96.73% of the
outstanding Senior Notes, all of which were accepted for purchase. The total consideration for each $1,000 principal amount of Senior Notes
validly tendered and not withdrawn at or prior to the Consent Payment Deadline and accepted for purchase was $1,056.88, which amount
included a consent payment (the “Consent Payment”) of $30.00 per $1,000 principal amount of Senior Notes. In addition, all Senior Notes
accepted for payment received accrued and unpaid interest in respect of such notes from the last interest payment date prior to the applicable
settlement date to, but not including, the applicable settlement date. The tender offer expired on April 3, 2014 and between the Consent
Payment Deadline and the expiration of the tender offer, no additional Senior Notes were tendered. With a net carrying amount including
discount and unamortized issue costs of $189.2 million, a loss on early extinguishment of debt of $15.5 million was recorded in the first quarter
of 2014.
Tender Offer and Exercise on Optional Redemption of March 25, 2014. On March 25, 2014, we called for redemption all of our
remaining outstanding Senior Notes not purchased prior to the expiration of the tender offer described above, with a redemption date of April
24, 2014 (the “Redemption Date”). Upon redemption on April 24, 2014, the holders of the Senior Notes being redeemed received a redemption
price equal to 105.188% of the outstanding principal amount of the Senior Notes being redeemed (or $1,051.88 per $1,000 in principal amount
of the Senior Notes) in accordance with the terms of the Indenture, or approximately $6.9 million in total, including approximately $43,000 of
accrued and unpaid interest up to, but excluding the Redemption Date. As of that date, we completed the satisfaction and discharge of the
Indenture in accordance with its terms and no Senior Notes remained outstanding. With a net carrying amount including discount and
unamortized issue costs of $6.4 million, a loss on early extinguishment of debt of $471,000 was recorded in the second quarter of 2014.
The following describes our key financing activities prior to 2014:
2013 Amendment to the Credit Agreement
On April 3, 2013, we entered into the 2013 Amendment. Pursuant to this amendment, we re-priced the balance of our term loan of
$348.3 million and borrowed an additional $40.0 million for a new senior secured term loan total of $388.3 million. The proceeds from the
amendment were used to: (i) repay in full all existing term loans under the Original Credit Agreement; (ii) repay outstanding revolving loans;
(iii) repay premium, fees and expenses incurred; and (iv) general corporate purposes.
47
2012 Refinancing and Original Credit Agreement
On October 10, 2012 we completed the refinancing of our then existing credit facilities by entering into the Original Credit
Agreement with a syndicate of banks and other financial institutions. The total amount of refinancing was $451.25 million, consisting of (i) a
$350 million senior secured term loan and (ii) a $101.25 million senior secured revolving credit facility. The obligations under the Original
Credit Agreement are guaranteed by RadNet, Inc. and our current and future domestic subsidiaries and certain of our affiliates (other than
certain excluded foreign subsidiaries). The obligations under the Original Credit Agreement, including the guarantees, are secured by a
perfected first-priority security interest in all of our tangible and intangible assets, including, but not limited to, pledges of equity interests of
Radnet Management and all of our current and future domestic subsidiaries.
We used the net proceeds of the Original Credit Agreement to repay in full our then existing six year term loan facility for $277.9
million in principal amount outstanding, which would have matured on April 6, 2016, and our revolving credit facility for $59.8 million in
principal amount outstanding, which would have matured on April 6, 2015.
Contractual Commitments
Our future obligations for notes payable, equipment under capital leases, lines of credit, equipment and building operating leases and purchase
and other contractual obligations for the next five years and thereafter include (dollars in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
Notes payable (1)
Capital leases (2)
Operating leases (3)
Total
$
$
60,136 $
10,660
66,587
137,383 $
$
57,982
4,325
58,145
120,452 $
$
430,021
1,713
48,633
480,367 $
$
14,880
246
39,170
54,296 $
14,651 $
201
29,932
44,784 $
$
183,360
98
80,304
263,762 $
761,030
17,243
322,771
1,101,044
(1)
(2)
(3)
Includes variable rate debt for which the contractual obligation was estimated using the applicable rate at December 31, 2015.
Includes interest component of capital lease obligations.
Includes all operating leases through the end of their main lease term, excluding options on facility leases.
We have an arrangement with GE Medical Systems under which it has agreed to be responsible for the maintenance and repair of a majority of
our equipment for a fee that is based on the type and age of the equipment. Under this agreement, we are committed to minimum payments of
approximately $23.5 million per year through 2016.
Critical Accounting Policies
Use of 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:
• our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the financial statements;
• our disclosure of contingent assets and liabilities at the dates of the financial statements; and
• our reported amounts of net revenue and expenses in our consolidated statements of operations during the reporting periods.
48
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 differ materially from these estimates.
The SEC defines critical accounting estimates as those that are both most important to the portrayal of a company’s financial condition and
results of operations and require management’s most difficult, subjective or complex judgment, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent periods. In Note 2 to our consolidated financial statements, we discuss our
significant accounting policies, including those that do not require management to make difficult, subjective or complex judgments or estimates. The
most significant areas involving management’s judgments and estimates are described below.
Revenues
Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payors and patients
themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates to BRMG and
the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by BRMG and
the NY Groups as well as the payment for all other aspects related to our providing the imaging services, for which we earn management fees from
BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely the affiliated physician groups, this service fee revenue is
earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing administration
services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office
supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
Service fee revenues are recorded during the period the services are provided based upon the estimated amounts due from the patients and third-
party payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans,
commercial insurance companies and employers. Estimates of contractual allowances under managed care health plans are based upon the payment
terms specified in the related contractual agreements. Contractual payment terms in managed care agreements are generally based upon predetermined
rates per discounted fee-for-service rates. We also record a provision for doubtful accounts (based primarily on historical collection experience) related
to patients and copayment and deductible amounts for patients who have health care coverage under one of our third-party payors.
Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging
services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period which we are
obligated to provide services to plan enrollees under contracts with various health plans.
Our service fee revenue, net of contractual allowances and discounts, the provision for bad debts, and revenue under capitation arrangements
for the years ended December 31, are summarized in the following table (in thousands):
Commercial insurance (1)
Medicare
Medicaid
Workers' compensation/personal injury
Other (2)
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
Revenue under capitation arrangements
Total net revenue
2015
Years Ended December 31,
2014
2013
$
$
$
486,489
168,545
23,948
32,728
35,046
746,756
(36,033)
710,723
98,905
809,628 $
$
437,525
159,562
24,499
30,543
18,007
670,136
(29,807)
640,329
77,240
717,569 $
430,735
156,066
24,017
34,821
19,668
665,307
(27,911)
637,396
65,590
702,986
(1) 20% of our net service fee revenue for each of the years ended December 31, 2015, 2014 and 2013 were earned from a single payor.
(2) Other consists of revenue from teleradiology services, consulting fees and software revenue.
49
Provision for Bad Debts
We provide for an allowance against accounts receivable that could become uncollectible to reduce the carrying value of such receivables to
their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable, historical payments pattern of each type
of payor, write-off trends, and other relevant factors. A significant portion of our provision for bad debt relates to co-payments and deductibles owed to
us from patients with insurance. Although we attempt to collect deductibles and co-payments due from patients with insurance at the time of service, this
attempt to collect at the time of service is not an assessment of the patient’s ability to pay nor are revenues recognized based on an assessment of the
patient’s ability to pay. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the
increased burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can have an impact on
collection trends and our estimation process. Our allowance for bad debts at December 31, 2015 and 2014 was $20.8 million and $15.1 million,
respectively.
Depreciation and Amortization of Long-Lived Assets
We depreciate our long-lived assets over their estimated economic useful lives with the exception of leasehold improvements where we use the
shorter of the assets useful lives or the lease term of the facility for which these assets are associated.
Deferred Tax Assets
We evaluate the realizability of the net deferred tax assets and assess the valuation allowance periodically. If future taxable income or other
factors are not consistent with our expectations, an adjustment to our allowance for net deferred tax assets may be required. For net deferred tax assets
we consider estimates of future taxable income, including tax planning strategies, in determining whether our net deferred tax assets are more likely than
not to be realized.
Valuation of Goodwill and Indefinite Lived Intangible Assets
Goodwill at December 31, 2015 totaled $239.4 million. Indefinite lived intangible assets at December 31, 2015 totaled $7.9 million and are
associated with the value of certain trade name intangibles. Goodwill and trade name intangibles are recorded as a result of business combinations.
Management evaluates goodwill and trade name intangibles, at a minimum, on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s
carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a reporting unit is estimated using a combination of the
income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the reporting unit
exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Impairment of
trade name intangibles is tested at the subsidiary level by comparing the subsidiary’s trade name carrying amount to its respective fair value. We tested
both goodwill and trade name intangibles for impairment on October 1, 2015, noting no impairment, and have not identified any indicators of
impairment through December 31, 2015.
We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment whenever indicators of
impairment exist. Generally accepted accounting principles (GAAP) requires that if the sum of the undiscounted expected future cash flows from a long-
lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the
impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows
from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were identified with respect to our
long-lived assets as of December 31, 2015.
Recent Accounting Standards
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU
2016-02”), Leases, (Topic 842): Amendments to the FASB Accounting Standards Codification. ASU 2016-02 amends the existing accounting standards
for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The
new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date initial application, with an
option to use certain transition relief. The amendments in this update are effective for fiscal years (and interim reporting periods within fiscal years)
beginning after December 15, 2018. Early adoption of the amendments is permitted for all entities. We are currently evaluating the impact of the GAAP
update on our results of operations and cash flows.
50
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 changes the classification of deferred taxes to be a noncurrent asset or liability regardless of the classification of the related asset or
liability for financial reporting. The update is effective for fiscal years beginning after December 15, 2016. Early application is permitted at the
beginning of an interim or annual reporting period. We are currently evaluating the impact of the GAAP update on our results of operations and cash
flows.
In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), Business Combinations, (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement to retrospectively apply adjustments made to provisional amounts
recognized in a business combination. An entity will now recognize any adjustments in the reporting period in which the amounts are determined,
calculated as if the accounting had been completed at the acquisition date. Disclosure is required for the portion of adjustments recorded in current-
period earnings that would have been recorded in previous reporting periods had they been recognized as of the acquisition date. The update is effective
for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
In August 2015, the FASB issued ASU No. 2015-15 (“ASU 2015-15”), Interest – Imputation of Interest, (Subtopic 835-30): Presentation and
Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to the
presentation of debt issuance costs discussed originally in ASU No. 2015-03, which was issued in April 2015 and described below. ASU 2015-15 noted
that ASU 2015-03 did not address the debt issue costs in regards to line-of-credit arrangements, which by their nature have fluctuating balances. ASU
2015-15 permits debt issuance costs specifically related to line-of-credit arrangements to be presented as an asset with subsequent amortization to
interest expense ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement.
The update is effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted
for financial statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations
and cash flows.
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-03 (“ASU 2015-03”), Interest – Imputation of
Interest, (Subtopic 835-30). ASU 2015-03 changes the accounting method for debt issuance costs from a deferred charge (i.e. an asset) to a contra
liability in part because such costs provide no future economic benefit. Debt issue costs related to a recognized debt liability are to be presented in the
balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The update is
effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
In February 2015, the FASB issued ASU No. 2015-02 (“ASU 2015-02”), Consolidation – Amendments to the Consolidation Analysis, (Topic
810). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It
is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, (Topic 606). ASU 2014-09
requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange
for the goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers. The update was effective for fiscal years (and interim reporting periods
within fiscal years) beginning after December 15, 2016, which has recently been extended to December 31, 2017. We are currently evaluating the impact
of the GAAP update on our results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk. We 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.
We maintain research and development facilities in Prince Edward Island, Canada and Budapest, Hungary for which expenses are paid in the
local currency. Accordingly, we do have currency risk resulting from fluctuations between such local currency and the United States Dollar. At the
present time, we do not have any foreign exchange currency contracts to mitigate this risk. A hypothetical 1% increase in the rate of exchange of foreign
currencies against the dollar for 2015 would have resulted in an increase of approximately $32,000 in our operating expenses for the year.
51
Interest Rate Sensitivity We pay interest on various types of debt instruments to our suppliersand lending institutions. The agreements entail
either fixed or variable interest rates. Instruments which have fixed rates are mainly leases on radiology equipment. Variable rate interest obligations
relate primarily to amounts borrowed under our outstanding credit facilities. As described in the Liquidity and Capital Resources section above, we can
elect Eurodollar or Base Rate interest rate options on the 2014 First Lien Term Loans, 2015 Incremental First Lien Term Loans and the Second Lien
Credit Agreement.
At December 31, 2015, we had $444.8 million outstanding subject to an Adjusted Eurodollar election on all first lien tranche B term loans
under the Credit Agreement and $180.0 million on the Second Lien Term Loans. As the Adjusted Eurodollar Rate floor exceeds the current spot rate of 6
month Adjusted Eurodollar, the spot rate would have to increase more than 15 basis points before an additional interest expense would be accrued. An
increase of 115 basis points would be necessary to realize a hypothetical 1% increase in the borrowing rate and an annual increase of $6.2 million of
interest expense under our first and second lien term loans. At December 31, 2015, an additional $12.4 million in debt instruments is tied to the prime
rate. A hypothetical 1% increase in the prime rate for 2014-2015 would have resulted in an annual increase in interest expense of approximately
$124,000.
Item 8.
Financial Statements and Supplementary Data
The Financial Statements are attached hereto and begin on page 60.
52
The Board of Directors and Stockholders of RadNet, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of RadNet, Inc. and subsidiaries (the ”Company”) as of December 31, 2015 and 2014,
and the related consolidated statements of operations, comprehensive income, equity (deficit), and cash flows for each of the three years in the period
ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).These financial statements and
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RadNet, Inc. and
subsidiaries at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), RadNet Inc.’s internal
control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2016, expressed an adverse
opinion thereon.
Los Angeles, California
March 15, 2016
/s/ Ernst & Young LLP
53
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
As of December 31,
2015
2014
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Current portion of deferred tax assets
Due from affiliates
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT, NET
OTHER ASSETS
Goodwill
Other intangible assets
Deferred financing costs, net of current portion
Investment in joint ventures
Deferred tax assets, net of current portion
Deposits and other
Total assets
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other
Due to affiliates
Deferred revenue
Current portion of notes payable
Current portion of deferred rent
Current portion of obligations under capital leases
Total current liabilities
LONG-TERM LIABILITIES
Deferred rent, net of current portion
Line of credit
Notes payable, net of current portion
Obligations under capital lease, net of current portion
Other non-current liabilities
Total liabilities
EQUITY
RadNet, Inc. stockholders' equity:
Common stock - $.0001 par value, 200,000,000 shares authorized; 46,281,189 and 42,825,676 shares
issued and outstanding at December 31, 2015 and 2014, respectively
Paid-in-capital
Accumulated other comprehensive loss
Accumulated deficit
Total RadNet, Inc.'s stockholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
$
$
$
$
$
$
446
162,843
22,279
4,815
40,139
230,522
256,722
239,408
45,253
3,696
33,584
24,685
4,565
838,435
113,813
6,564
1,598
23,076
2,563
10,038
157,652
26,865
–
601,229
6,385
9,843
801,974
4
197,297
(153)
(164,571)
32,577
3,884
36,461
838,435 $
307
148,235
17,246
1,561
24,671
192,020
223,127
200,304
47,624
6,122
32,123
35,334
4,026
740,680
97,816
6,289
1,964
19,468
2,100
5,637
133,274
20,965
15,300
551,059
6,143
6,241
732,982
4
177,750
(112)
(172,280)
5,362
2,336
7,698
740,680
The accompanying notes are an integral part of these financial statements.
54
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NET REVENUE
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
Revenue under capitation arrangements
Total net revenue
OPERATING EXPENSES
Cost of operations, excluding depreciation and amortization
Depreciation and amortization
Loss on sale and disposal of equipment
Severance costs
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME AND EXPENSES
Interest expense
Meaningful use incentive
Equity in earnings of joint ventures
Gain on sale of imaging centers
Loss on early extinguishment of senior notes
Other expenses
Total other expenses
INCOME BEFORE INCOME TAXES
Provision for income taxes
NET INCOME
Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO RADNET, INC. COMMON
STOCKHOLDERS
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.
COMMON STOCKHOLDERS
DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET,
INC. COMMON STOCKHOLDERS
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
Diluted
2015
Years Ended December 31,
2014
2013
$
$
$
$
746,756
(36,033)
710,723
98,905
809,628
708,289
60,611
866
745
770,511
39,117
41,684
(3,270)
(8,927)
(5,434)
–
419
24,472
14,645
(6,007)
8,638
929
7,709
0.18
0.17
$
$
$
$
670,136
(29,807)
640,329
77,240
717,569
602,652
59,258
1,113
1,241
664,264
53,305
42,727
(2,034)
(6,970)
–
15,927
3
49,653
3,652
(1,967)
1,685
309
1,376
0.03
0.03
$
$
$
$
665,307
(27,911)
637,396
65,590
702,986
598,655
58,890
1,032
806
659,383
43,603
45,791
–
(6,194)
(2,108)
–
228
37,717
5,886
(3,510)
2,376
256
2,120
0.05
0.05
43,805,794
45,171,372
41,070,077
43,149,196
39,140,480
39,814,535
The accompanying notes are an integral part of these financial statements.
55
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
NET INCOME
Foreign currency translation adjustments
COMPREHENSIVE INCOME
Less comprehensive income attributable to non-controlling interests
COMPREHENSIVE INCOME ATTRIBUTABLE TO RADNET, INC.
COMMON STOCKHOLDERS
2015
Years Ended December 31,
2014
2013
$
$
$
8,638
(153)
8,485
929
$
1,685
(62)
1,623
309
7,556
$
1,314
$
2,376
(89)
2,287
256
2,031
The accompanying notes are an integral part of these financial statements.
56
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE DATA)
Common Stock
Shares
Amount
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income
(Loss)
Total Radnet,
Inc.
Stockholders’
Deficit)
Equity
Noncontrolling
Interests
Total (Deficit)
Equity
38,540,482
$
4
$
168,415
$
(175,776)
$
39
$
(7,318) $
634
$
(6,684)
BALANCE - JANUARY 1,
2013
Issuance of common stock
upon exercise of
options/warrants
Stock-based compensation
Sale of a noncontrolling
interest in one of our
consolidated joint ventures
Purchase of non-controlling
interests
Issuance of restricted stock
Dividends paid to
noncontrolling interests
Change in cumulative foreign
currency translation
adjustment
Net income
BALANCE - DECEMBER 31,
2013
Issuance of common stock
upon exercise of
options/warrants
Stock-based compensation
Issuance of restricted stock
and other awards
Purchase of non-controlling
interests
Sale of non-controlling
interests
Dividends paid to
noncontrolling interests
Change in cumulative foreign
currency translation
adjustment
Net income
BALANCE - DECEMBER 31,
2014
Issuance of common stock
upon exercise of
options/warrants
Stock-based compensation
Issuance of restricted stock
and other awards
Forfeiture of restricted stock
Issuance of stock for
acquisitions
Sale of non-controlling
interests
Distributions paid to
noncontrolling interests
Change in cumulative foreign
currency translation
adjustment
Net income
898,714
–
–
–
650,000
–
–
–
40,089,196
$
1,579,695
–
1,156,785
–
–
–
–
–
42,825,676
$
835,098
–
1,014,423
(59,053)
1,665,045
–
–
–
–
–
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
–
–
4
469
2,537
2,201
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,120
(89)
–
469
2,537
2,201
–
–
–
(89)
2,120
–
–
439
979
–
(18)
–
256
$
173,622
$
(173,656)
$
(50)
$
(80)
$
2,290
$
1,546
2,463
–
119
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,376
(62)
–
1,546
2,463
–
119
–
–
(62)
1,376
–
–
–
(315)
200
(148)
–
309
$
177,750
$
(172,280)
$
(112)
$
5,362
$
2,336
$
594
7,635
–
–
9,241
2,077
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,709
(41)
–
594
7,635
–
–
9,241
2,077
–
(41)
7,709
–
–
–
–
–
1,348
(729)
–
929
469
2,537
2,640
979
–
(18)
(89)
2,376
2,210
1,546
2,463
–
(196)
200
(148)
(62)
1,685
7,698
594
7,635
–
–
9,241
3,425
(729)
(41)
8,638
$
197,297
$
(164,571)
$
(153)
$
32,577
$
3,884
$
36,461
BALANCE - DECEMBER 31,
2015
46,281,189
$
The accompanying notes are an integral part of these financial statements.
57
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2015
Years Ended December 31,
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for bad debts
Equity in earnings of joint ventures
Distributions from joint ventures
Amortization and write off of deferred financing costs and loan discount
Loss on sale and disposal of equipment
Loss on early extinguishment of senior notes
Gain on sale of imaging centers
Stock-based compensation
Changes in operating assets and liabilities, net of assets acquired and liabilities
assumed in purchase transactions:
Accounts receivable
Other current assets
Other assets
Deferred taxes
Deferred rent
Deferred revenue
Accounts payable , accrued expenses and other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of imaging facilities
Purchase of property and equipment
Proceeds from sale of equipment
Proceeds from sale of imaging facilities
Proceeds from sale of joint venture interests
Proceeds from sale of internal use software
Equity contributions in existing and purchase of interest in joint ventures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes and leases payable
Proceeds from borrowings
Payments on senior notes
Deferred financing costs
Net (payments) proceeds on revolving credit facility
Dividends paid to noncontrolling interests
Proceeds from the sale of non-controlling interests
Purchase of non-controlling interests
Proceeds from issuance of common stock upon exercise of options/warrants
Net cash provided by (used in) financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
Cash paid during the period for income taxes
$
8,638
$
1,685
$
60,611
36,033
(8,927)
7,731
5,369
866
–
(5,434)
7,647
(34,514)
(14,198)
(3,813)
4,036
7,011
(366)
(3,653)
67,037
(90,792)
(42,964)
1,282
35,500
–
443
(265)
(96,796)
(9,773)
74,400
(23,727)
(531)
(15,300)
(729)
5,005
–
594
29,939
(41)
139
307
446
36,028
1,781
$
$
$
59,258
29,807
(6,970)
7,358
5,732
1,113
15,927
–
2,500
(43,973)
(5,514)
(281)
655
2,180
620
(9,093)
61,004
(9,428)
(41,740)
1,088
–
–
–
(3,562)
(53,642)
(23,913)
210,000
(211,344)
(6,650)
15,300
(148)
–
(196)
1,546
(15,405)
(62)
(8,105)
8,412
307
41,584
1,070
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements.
58
2,376
58,890
27,911
(6,194)
7,204
4,565
1,032
–
(2,108)
2,574
(31,531)
(2,243)
260
2,907
3,871
71
(3,163)
66,422
(7,223)
(48,623)
635
3,920
2,640
–
(2,009)
(50,660)
(9,764)
35,122
–
(432)
(33,000)
(18)
–
–
469
(7,623)
(89)
8,050
362
8,412
41,841
1,142
RADNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental Schedule of Non-Cash Investing and Financing Activities
We acquired equipment and certain leasehold improvements for approximately $32.4 million, $19.4 million, and $16.7 million during the years
ended December 31, 2015, 2014 and 2013, respectively, that we had not paid for as of December 31, 2015, 2014 and 2013, respectively. The offsetting
amount due was recorded in our consolidated balance sheet under “accounts payable, accrued expenses and other.”
During the twelve months ended December 31, 2015, we added capital lease debt of approximately $7.8 million relating to radiology
equipment.
Detail of investing activity related to acquisitions can be found in Note 4.
59
NOTE 1 – NATURE OF BUSINESS
RADNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are a national provider of freestanding, fixed-site outpatient diagnostic imaging services. At December 31, 2015, we operated directly or
indirectly through joint ventures with hospitals, 300 centers located in California, Delaware, Flordia, Maryland, New Jersey, New York and Rhode
Island. Our centers provide physicians with imaging capabilities to facilitate the diagnosis and treatment of diseases and disorders. Our services include
magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine, mammography, ultrasound,
diagnostic radiology (X-ray), fluoroscopy and other related procedures. The vast majority of our centers offer multi-modality imaging services. Our
multi-modality strategy diversifies revenue streams, reduces exposure to reimbursement changes and provides patients and referring physicians one
location to serve the needs of multiple procedures. Our operations comprise a single segment for financial reporting purposes.
The consolidated financial statements include the accounts of Radnet Management, Inc. (or “Radnet Management”) and Beverly Radiology
Medical Group III, a professional partnership (“BRMG”). BRMG is a partnership of ProNet Imaging Medical Group, Inc., Breastlink Medical Group,
Inc. and Beverly Radiology Medical Group, Inc. The consolidated financial statements also include Radnet Management I, Inc., Radnet Management II,
Inc., Radiologix, Inc., Radnet Managed Imaging Services, Inc., Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and Diagnostic
Imaging Services, Inc. (“DIS”), all wholly owned subsidiaries of Radnet Management. All of these affiliated entities are referred to collectively as
“RadNet”, “we”, “us”, “our” or the “Company” in this report.
Accounting Standards Codification (“ASC”) 810-10-15-14, Consolidation, stipulates that generally any entity with a) insufficient equity to
finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the
characteristics specified in the ASC which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). We consolidate all
VIEs in which we are the primary beneficiary. We determine whether we are the primary beneficiary of a VIE through a qualitative analysis that
identifies which variable interest holder has the controlling financial interest in the VIE. The variable interest holder who has both of the following has
the controlling financial interest and is the primary beneficiary: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s
economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the
VIE. In performing our analysis, we consider all relevant facts and circumstances, including: the design and activities of the VIE, the terms of the
contracts the VIE has entered into, the nature of the VIE’s variable interests issued and how they were negotiated with or marketed to potential investors,
and which parties participated significantly in the design or redesign of the entity.
Howard G. Berger, M.D., is our President and Chief Executive Officer, a member of our Board of Directors, and also owns, indirectly, 99% of
the equity interests in BRMG. BRMG provides all of the professional medical services at nearly all of our facilities located in California under a
management agreement with us, and employs physicians or contracts with various other independent physicians and physician groups to provide the
professional medical services at most of our other California facilities. We generally obtain professional medical services from BRMG in California,
rather than provide such services directly or through subsidiaries, in order to comply with California’s prohibition against the corporate practice of
medicine. However, as a result of our close relationship with Dr. Berger and BRMG, we believe that we are able to better ensure that medical service is
provided at our California facilities in a manner consistent with our needs and expectations and those of our referring physicians, patients and payors
than if we obtained these services from unaffiliated physician groups.
We contract with eight medical groups which provide professional medical services at all of our facilities in Manhattan and Brooklyn, New
York. These contracts are similar to our contract with BRMG. Four of these groups are owned by John V Crues, III, M.D., Radnet’s Medical Director, a
member of our Board of Directors, and a 1% owner of BRMG. Dr Berger owns a controlling interest in two of these medical groups which provide
professional medical services at one of our Manhattan facilities.
RadNet provides non-medical, technical and administrative services to BRMG and the eight medical groups mentioned above (“NY Groups”)
for which it receives a management fee, pursuant to the related management agreements. Through the management agreements we have exclusive
authority over all non-medical decision making related to the ongoing business operations of BRMG and the NY Groups and we determine the annual
budget of BRMG and the NY Groups. BRMG and the NY Groups both have insignificant operating assets and liabilities, and de minimis equity.
Through the management agreement with us, all cash flows of BRMG and the NY Groups are transferred to us.
60
We have determined that BRMG and the NY Groups are variable interest entities, and that we are the primary beneficiary, and consequently,
we consolidate the revenue and expenses, assets and liabilities of each. BRMG and the NY Groups on a combined basis recognized $113.1 million,
$89.3 million and $76.7 million of revenue, net of management service fees to RadNet, for the years ended December 31, 2015, 2014 and 2013,
respectively, and $113.1 million, $89.3 million and $76.7 million of operating expenses for the years ended December 31, 2015, 2014 and 2013,
respectively. RadNet recognized $343.9 million, $287.4 million and $267.6 million of net revenues for the years ended December 31, 2015, 2014 and
2013, respectively, for management services provided to BRMG and the NY Groups relating primarily to the technical portion of total billed revenue.
The cash flows of BRMG and the NY Groups are included in the accompanying consolidated statements of cash flows. All intercompany balances and
transactions have been eliminated in consolidation. In our consolidated balance sheets at December 31, 2015 and 2014, we have included approximately
$89.8 million and $79.7 million, respectively, of accounts receivable and approximately $8.5 million and $9.0 million of accounts payable and accrued
liabilities related to BRMG and the NY Groups.
The creditors of BRMG and the NY Groups do not have recourse to our general credit and there are no other arrangements that could expose us
to losses on behalf of BRMG and the NY Groups. However, both BRMG and the NY Groups are managed to recognize no net income or net loss and,
therefore, RadNet may be required to provide financial support to cover any operating expenses in excess of operating revenues.
Aside from centers in California where we contract with BRMG for the provision of professional medical services and centers in New York,
New York, where we contract with the NY Groups for the provision of professional medical services, at the remaining centers in California and at all of
the centers which are located outside of California and New York, New York, we have entered into long-term contracts with independent radiology
groups in the area to provide physician services at those facilities. These third party radiology practices provide professional services, including
supervision and interpretation of diagnostic imaging procedures, in our diagnostic imaging centers. The radiology practices maintain full control over the
provision of professional services. 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 paid
to us. We have no financial controlling interest in the independent (non-BRMG or non-NY Groups) radiology practices; accordingly, we do not
consolidate the financial statements of those practices in our consolidated financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The operating activities of subsidiaries are included in the accompanying consolidated financial
statements from the date of acquisition. Investments in companies in which the Company has the ability to exercise significant influence, but not control,
are accounted for by the equity method. All intercompany transactions and balances, with our consolidated entities and the unsettled amount of
intercompany transactions with our equity method investees, have been eliminated in consolidation. As stated in Note 1 above, the BRMG and NY
Groups are variable interest entities and we consolidate the operating activities and balance sheets of each.
USE OF ESTIMATES - The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates
and assumptions affect various matters, including our reported amounts of assets and liabilities in our consolidated balance sheets at the dates of the
financial statements; our disclosure of contingent assets and liabilities at the dates of the financial statements; and our reported amounts of revenues 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.
REVENUES - Service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various payors and
patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. As it relates to
BRMG and the NY Groups centers, this service fee revenue includes payments for both the professional medical interpretation revenue recognized by
BRMG and the NY Groups as well as the payment for all other aspects related to our providing the imaging services, for which we earn management
fees from BRMG and the NY Groups. As it relates to non-BRMG and NY Groups centers, namely the affiliated physician groups, this service fee
revenue is earned through providing the use of our diagnostic imaging equipment and the provision of technical services as well as providing
administration services such as clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical
and office supplies, secretarial, reception and transcription services, maintenance of medical records, and advertising, marketing and promotional
activities.
Service fee revenues are recorded during the period the services are provided based upon the estimated amounts due from the patients and third-
party payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care health plans,
commercial insurance companies and employers. Estimates of contractual allowances are based on historical collection rates of payor reimbursement
contract agreements. We also record a provision for doubtful accounts based primarily on historical collection rates from related to patient copayments
and deductible amounts for patients who have health care coverage under one of our third-party payors.
61
Under capitation arrangements with various health plans, we earn a per-enrollee amount each month for making available diagnostic imaging
services to all plan enrollees under the capitation arrangement. Revenue under capitation arrangements is recognized in the period which we are
obligated to provide services to plan enrollees under contracts with various health plans.
Our service fee revenue, net of contractual allowances and discounts, the provision for bad debts, and revenue under capitation arrangements
for the years ended December 31, are summarized in the following table (in thousands) :
2015
Years Ended December 31,
2014
2013
$
Commercial insurance (1)
Medicare
Medicaid
Workers' compensation/personal injury
Other (2)
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
Revenue under capitation arrangements
Total net revenue
_________________
(1) 20% of our net service fees revenue for each of the years ended December 31, 2015, 2014 and 2013 were earned from a single payor.
(2) Other consists of revenue from teleradiology services, consulting fees and software revenue.
486,489
168,545
23,948
32,728
35,046
746,756
(36,033)
710,723
98,905
809,628
437,525
159,562
24,499
30,543
18,007
670,136
(29,807)
640,329
77,240
717,569
$
$
$
$
$
430,735
156,066
24,017
34,821
19,668
665,307
(27,911)
637,396
65,590
702,986
PROVISION FOR BAD DEBTS - We provide for an allowance against accounts receivable that could become uncollectible to reduce the
carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable by
the historical payment pattern of each type of payor, write-off trends, and other relevant factors. A significant portion of our provision for bad debt
relates to co-payments and deductibles owed to us from patients with insurance. Although we attempt to collect deductibles and co-payments due from
patients with insurance at the time of service, this attempt to collect at the time of service is not an assessment of the patient’s ability to pay nor are
revenues recognized based on an assessment of the patient’s ability to pay. There are various factors that can impact collection trends, such as changes in
the economy, which in turn have an impact on the increased burden of co-payments and deductibles to be made by patients with insurance. These factors
continuously change and can have an impact on collection trends and our estimation process. Our allowance for bad debts at December 31, 2015 and
2014 was $20.8 million and $15.1 million, respectively.
MEANINGFUL USE INCENTIVE - Under the American Recovery and Reinvestment Act of 2009, a program was enacted that provides
financial incentives for providers that successfully implement and utilize electronic health record technology to improve patient care. Our software
development team in Canada established an objective to build a Radiology Information System (RIS) software platform that has been awarded
Meaningful Use certification. As this certified RIS system is implemented throughout our imaging centers, the radiologists that utilize this software can
be eligible for the available financial incentives. In order to receive such incentive payments providers must attest that they have demonstrated
meaningful use of the certified RIS in each stage of the program. We account for this meaningful use incentive under the Gain Contingency Model
outlined in ASC 450-30. Under this model, we record within non-operating income, meaningful use incentive only after Medicare accepts an attestation
from the qualified eligible professional demonstrating meaningful use. We recorded approximately $3.3 million and $2.0 million during the twelve
months ended December 31, 2015 and 2014 relating to this incentive.
ACCOUNTS RECEIVABLE - Substantially all of our accounts receivable are due under fee-for-service contracts from third party payors, such
as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided pursuant to one-year
contracts with healthcare providers. We continuously monitor collections from our payors and maintain an allowance for bad debts based upon specific
payor collection issues that we have identified and our historical experience.
62
SOFTWARE REVENUE RECOGNITION – Our subsidiary, eRAD, Inc., sells Picture Archiving Communications Systems (“PACS”) and
related services, primarily in the United States. The PACS systems sold by eRAD are primarily composed of certain elements: hardware, software,
installation and training, and support. Sales are made primarily through eRAD’s sales force. These sales are multiple-element arrangements that
generally include hardware, software, software installation, configuration, system installation, training and first-year warranty support. Hardware, which
is not unique or special purpose, is purchased from a third-party and resold to eRAD’s customers with a small mark-up.
We have determined that our core software products, such as PACS, are essential to most of our arrangements as hardware, software and related
services are sold as an integrated package. Therefore, these transactions are accounted for under ASC 605-25, Multiple-Element Arrangements (as
modified by ASU 2009-13). Non-essential software and related services, and essential software sold on a stand-alone basis without hardware, would
continue to be accounted for under ASC 985-605, Software.
We recognize revenue for four units of accounting, hardware, software, installation (including manufacturing and configuration, training,
implementation and project management) and post-contract support (“PCS”), as follows:
• Hardware – Revenue is recognized when the hardware is shipped. The hardware qualifies as a separate unit of accounting under ASC 605-25-
25-5, as it meets the following criteria:
o The hardware has standalone value as it is sold separately by other vendors and the customer could resell the hardware on a standalone
basis; and
o Delivery or performance of the undelivered items is probable and substantially within our control.
• Software– We sell essential software. This software revenue is recognized along with the related hardware revenue.
• Installation – Installation revenue related to essential software that is sold with hardware, is recognized when the installation is completed, as
it qualifies as a separate unit of accounting once delivered as it can be provided by a third party.
• Post-Contract Support – Revenue is recognized over the term of the agreement, usually one year.
Our transactions do not generally contain refund provisions. We allocate the transaction price to each unit of accounting using relative selling
price. We consider historical pricing, list price and market considerations in determining estimated selling price in the allocation.
For the years ended December 31, 2015, 2014 and 2013, we recorded approximately $6.1 million, $5.5 million and $4.9 million, respectively,
in revenue related to our eRAD business which is included in net service fee revenue in our consolidated statement of operations. At December 31, 2015
we had a deferred revenue liability of approximately $1.5 million associated with eRAD sales which we expect to recognize into revenue over the next
12 months.
SOFTWARE DEVELOPMENT COSTS - Costs related to the research and development of new software products and enhancements to
existing software products all for resale to our customers are expensed as incurred.
We utilize a variety of computerized information systems in the day to day operation of our diagnostic imaging facilities. One such system is
our front desk patient tracking system or Radiology Information System (“RIS”). We have historically utilized third party RIS software solutions and
pay monthly fees to outside third party software vendors for the use of this software. We have developed our own RIS solution from the ground up
through our wholly owned subsidiary, Radnet Management Information Systems (“RMIS”) and began utilizing this system beginning in the first quarter
of 2015.
In accordance with ASC 350-40, Accounting for the Costs of Computer Software Developed for Internal Use, the costs incurred by RMIS
toward the development of our RIS system, which began in August, 2010 and continued until December 2014, were capitalized and are being amortized
over its useful life which we determined to be 5 years. Total costs capitalized were approximately $6.4 million. We began recording amortization of
$107,000 per month for our use of this software in January 2015.
During the twelve months ended December 31, 2015, we entered into an agreement to license our RIS system to an outside customer. As of
December 31, 2015, we received approximately $443,000 with respect to this licensing agreement. In accordance with ASC 350-40, we recorded the
receipt of these funds against the capitalized software costs explained above. We intend to record any future proceeds in the same manner until the
carrying value of our capitalized software costs are brought to zero. As of December 31, 2015, the net carrying value of our capitalized software costs
was approximately $4.7 million.
CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject us to credit risk are primarily cash equivalents and
accounts receivable. We have placed our cash and cash equivalents with one major financial institution. At times, the cash in the financial institution is
temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. Substantially all of our accounts receivable are due
under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, or directly from
patients. Services are generally provided pursuant to one-year contracts with healthcare providers. We continuously monitor collections from our clients
and maintain an allowance for bad debts based upon our historical collection experience.
63
CASH AND CASH EQUIVALENTS - We consider all highly liquid investments that mature in three months or less when purchased to be cash
equivalents. The carrying amount of cash and cash equivalents approximates their fair market value.
DEFERRED FINANCING COSTS - Costs of financing are deferred and amortized on a straight-line basis over the life of the associated loan,
which approximates the effective interest rate method. Deferred financing costs, net of accumulated amortization, were $4.9 million and $6.7 million, as
of December 31, 2015 and 2014, respectively. In conjunction with our 2015 Incremental First Lien Supplemental term loan borrowing, approximately
$531,000 was added to deferred financing costs. As part of our early extinguishment of senior notes during March and April of 2014, approximately $3.4
million of deferred financing costs were written off. See Note 8, Notes Payable, Line of Credit, and Capital Leases for more information.
INVENTORIES - Inventories, consisting mainly of medical supplies, are stated at the lower of cost or market with cost determined by the first-
in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years.
Leasehold improvements are amortized at the lesser of lease term or their estimated useful lives, whichever is shorter, which range from 3 to 30 years.
Maintenance and repairs are charged to expense as incurred.
BUSINESS COMBINATION - Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the
liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the
net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately
value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during
the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed
with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or
liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
GOODWILL AND INDEFINITE LIVED INTANGIBLES - Goodwill at December 31, 2015 totaled $239.4 million. Indefinite lived intangible
assets at December 31, 2015 totaled $7.9 million and are associated with the value of certain trade name intangibles. Goodwill and trade name
intangibles are recorded as a result of business combinations. Management evaluates goodwill and trade name intangibles, at a minimum, on an annual
basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at
the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of a
reporting unit is estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable
market data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to
measure the amount of impairment loss, if any. Impairment of trade name intangibles is tested at the subsidiary level by comparing the subsidiary’s trade
name carrying amount to its respective fair value. We tested both goodwill and trade name intangibles for impairment on October 1, 2015, noting no
impairment, and have not identified any indicators of impairment through December 31, 2015.
LONG-LIVED ASSETS - We evaluate our long-lived assets (property and equipment) and intangibles, other than goodwill, for impairment
whenever indicators of impairment exist. Generally accepted accounting principles (GAAP) requires that if the sum of the undiscounted expected future
cash flows from a long-lived asset or definite-lived intangible is less than the carrying value of that asset, an asset impairment charge must be
recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents
the discounted future cash flows from that asset or in the case of assets we expect to sell, at fair value less costs to sell. No indicators of impairment were
identified with respect to our long-lived assets as of December 31, 2015.
INCOME TAXES - Income tax expense is computed using an asset and liability method and using expected annual effective tax rates. Under
this method, deferred income tax assets and liabilities result from temporary differences in the financial reporting bases and the income tax reporting
bases of assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefit that, based on available
evidence, is not expected to be realized. When it appears more likely than not that deferred taxes will not be realized, a valuation allowance is recorded
to reduce the deferred tax asset to its estimated realizable value. For net deferred tax assets we consider estimates of future taxable income in
determining whether our net deferred tax assets are more likely than not to be realized. Income taxes are further explained in Note 10.
64
UNINSURED RISKS - On November 1, 2008 we obtained a fully funded and insured workers’ compensation policy, thereby eliminating any
uninsured risks for employee injuries occurring on or after that date. This fully funded policy remained in effect through November 1, 2013 and
continues to cover any claims incurred through this date.
On November 1, 2013 we entered into a high-deductible workers’ compensation insurance policy. We have recorded liabilities as of
December 31, 2015, and 2014 of $2.2 million and $1.0 million, respectively for the estimated future cash obligations associated with the unpaid portion
of the workers compensation claims incurred.
We and our affiliated physicians carry an annual medical malpractice insurance policy that protects us for claims that are filed during
the policy year and that fall within policy limits. The policy has a deductible for which we have recorded liabilities and included it in our
consolidated balance sheets at December 31, 2015 and December 31, 2014 of approximately $24,000 and $88,000, respectively.
In December 2008, in order to eliminate the exposure for claims not reported during the regular malpractice policy period, we
purchased a medical malpractice tail policy, which provides coverage for any claims reported in the event that our medical malpractice policy
expires. As of December 31, 2015, this policy remains in effect.
We have entered into an arrangement with Blue Shield to administer and process claims under a self-insured plan that provides health insurance
coverage for our employees and dependents. We have recorded liabilities as of December 31, 2015 and 2014 of $1.8 million and $2.0 million,
respectively, for the estimated future cash obligations associated with the unpaid portion of the medical and dental claims incurred by our participants.
Additionally, we entered into an agreement with Blue Shield for a stop loss policy that provides coverage for any claims that exceed $250,000 up to a
maximum of $1.0 million in order for us to limit our exposure for unusual or catastrophic claims.
LOSS AND OTHER UNFAVORABLE CONTRACTS – We assess the profitability of our contracts to provide management services to our
contracted physician groups and identify those contracts where current operating results or forecasts indicate probable future losses. Anticipated future
revenue is compared to anticipated costs. If the anticipated future cost exceeds the revenue, a loss contract accrual is recorded. In connection with the
acquisition of Radiologix in November 2006, we acquired certain management service agreements for which forecasted costs exceeds forecasted
revenue. As such, an $8.9 million loss contract accrual was established in purchase accounting, and is included in other non-current liabilities. The
recorded loss contract accrual is being accreted into operations over the remaining term of the acquired management service agreements. As of
December 31, 2015 and 2014, the remaining accrual balance is $5.7 million, and $6.1 million, respectively.
As part of our ongoing acquisition activities, we have certain operating lease commitments for facilities that are not in use. Accordingly, we
have recorded a loss contract accrual related to the remaining payments under these lease commitments. As of December 31, 2015 and 2014, the
remaining loss contract accrual for these leases is $85,000 and $218,000, respectively.
In addition and related to acquisition activity, we have certain operating lease commitments for facilities where the fair market rent differs from
the lease contract rate. We have recorded an unfavorable contract liability representing the difference between the total value of the fair market rent and
the contract rent over the current term of the lease applicable from the date of acquisition. As of December 31, 2015 and 2014, the unfavorable contract
liability on these leases is $581,000 and $1.2 million, respectively.
EQUITY BASED COMPENSATION – We have one long-term incentive plan which we refer to as the 2006 Plan, which we amended and
restated as of April 20, 2015 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 11,
2015. As of December 31, 2015, we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issue options, stock
awards, stock appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees are intended to
qualify as incentive stock options under existing tax regulations. Stock options and warrants generally vest over two to five years and expire five to ten
years from date of grant.
The compensation expense recognized for all equity-based awards is net of estimated forfeitures and is recognized over the awards’ service
periods. Equity-based compensation is classified in operating expenses within the same line item as the majority of the cash compensation paid to
employees.
FOREIGN CURRENCY TRANSLATION - The functional currency of our foreign subsidiaries is the local currency. In accordance with ASC
830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies are translated using the exchange rate at the balance sheet dates.
Revenues and expenses are translated using average exchange rates prevailing during the reporting period. Any translation adjustments resulting from
this process are shown separately as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are
included in the determination of net income.
65
COMPREHENSIVE INCOME - ASC 220, Comprehensive Income, establishes rules for reporting and displaying comprehensive income and
its components. Unrealized gains or losses on the change in fair value of the Company’s cash flow hedging activities and foreign currency translation
adjustments are included in comprehensive income. The components of comprehensive income for the three years in the period ended December 31,
2015 are included in the consolidated statements of comprehensive income.
FAIR VALUE MEASUREMENTS – Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or
permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is
significant to a fair value measurement:
Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include
quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can
also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves
significant and subjective judgment.
The table below summarizes the estimated fair value and carrying amount of our long-term debt as follows (in thousands):
First Lien Term Loans
Second Lien Term Loans
First Lien Term Loans
Second Lien Term Loans
$
$
$
Level 1
$
$
$
–
–
–
–
Level 1
Level 2
As of December 31, 2015
Level 3
444,258
173,700
$
$
–
–
Total Fair Value
444,258
$
173,700
Total Face Value
451,023
$
180,000
$
Level 2
As of December 31, 2014
Level 3
394,753
178,200
$
$
–
–
Total
394,753
178,200
Total Face Value
399,750
$
180,000
Our revolving credit facility had no aggregate principal amount outstanding as of December 31, 2015.
The estimated fair value of our long-term debt, which is discussed in Note 8, was determined using Level 2 inputs primarily related to
comparable market prices.
We consider the carrying amounts of cash and cash equivalents, receivables, other current assets, current liabilities and other notes payables to
approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization or
payment. Additionally, we consider the carrying amount of our capital lease obligations to approximate their fair value because the weighted average
interest rate used to formulate the carrying amounts approximates current market rates.
66
EARNINGS PER SHARE - Earnings per share is based upon the weighted average number of shares of common stock and common stock
equivalents outstanding, net of common stock held in treasury, as follows (in thousands except share and per share data):
Net income attributable to RadNet, Inc. common stockholders
BASIC NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.
COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period
Basic net income per share attributable to RadNet, Inc. common stockholders
DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO RADNET, INC.
COMMON STOCKHOLDERS
Weighted average number of common shares outstanding during the period
Add nonvested restricted stock subject only to service vesting
Add additional shares issuable upon exercise of stock options and warrants
Weighted average number of common shares used in calculating diluted net income
per share
Diluted net income per share attributable to RadNet, Inc. common stockholders
$
$
$
2015
Years Ended December 31,
2014
2013
7,709
$
1,376
$
2,120
43,805,794
0.18
43,805,794
865,326
500,252
45,171,372
0.17
$
$
41,070,077
0.03
41,070,077
994,610
1,084,509
43,149,196
0.03
$
$
39,140,480
0.05
39,140,480
316,905
357,150
39,814,535
0.05
For the years ended December 31, 2015, 2014 and 2013 we excluded 265,000, 245,000, and 4,663,750, respectively, outstanding options, in the
calculation of diluted earnings per share because their effect would be antidilutive.
INVESTMENT IN JOINT VENTURES – We have ten unconsolidated joint ventures with ownership interests ranging from 35% 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.
We evaluate our investment in joint ventures, including cost in excess of book value (equity method goodwill) for impairment whenever indicators of
impairment exist. No indicators of impairment existed as of December 31, 2015. Activity in investment in joint ventures for the years ended December
31, 2014 and 2015, is provided below (in thousands):
Balance as of December 31, 2013
Purchase of a 49% interest in a new joint venture
Equity contributions in existing joint ventures
Equity in earnings in these joint ventures
Distribution of earnings
Balance as of December 31, 2014
Equity contributions in existing joint ventures
Equity in earnings in these joint ventures
Distribution of earnings
Balance as of December 31, 2015
$
$
$
28,949
2,168
1,394
6,970
(7,358)
32,123
265
8,927
(7,731)
33,584
We received management service fees from the centers underlying these joint ventures of approximately $9.3 million per year for the years
ended December 31, 2015, 2014 and 2013. We eliminate any unrealized portion of our management service fees with our equity in earnings of joint
ventures.
67
The following table is a summary of key financial data for these joint ventures as of December 31, 2015 and 2014, respectively, and for the
years ended December 31, 2015, 2014 and 2013, respectively, (in thousands):
Balance Sheet Data:
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total net assets
Book value of RadNet joint venture interests
Cost in excess of book value of acquired joint venture interests
Elimination of intercompany profit remaining on Radnet's
consolidated balance sheet
Total value of Radnet joint venture interests
Total book value of other joint venture partner interests
December 31,
2015
2014
$
$
$
$
$
28,186
91,660
(15,258)
(44,059)
60,529
28,397
4,970
217
33,584
32,132
$
$
$
$
$
23,636
49,347
(9,534)
(6,386)
57,063
26,791
4,970
362
32,123
30,272
Net revenue
Net income
NOTE 3 – RECENT ACCOUNTING STANDARDS
2015
2014
2013
$
$
125,544
19,485
$
$
101,189 $
14,854 $
93,134
13,633
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (“ASU
2016-02”), Leases, (Topic 842): Amendments to the FASB Accounting Standards Codification. ASU 2016-02 amends the existing accounting standards
for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The
new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date initial application, with an
option to use certain transition relief. The amendments in this update are effective for fiscal years (and interim reporting periods within fiscal years)
beginning after December 15, 2018. Early adoption of the amendments is permitted for all entities. We are currently evaluating the impact of the GAAP
update on our results of operations and cash flows.
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 changes the classification of deferred taxes to be a noncurrent asset or liability regardless of the classification of the related asset or
liability for financial reporting. The update is effective for fiscal years beginning after December 15, 2016. Early application is permitted at the
beginning of an interim or annual reporting period. We are currently evaluating the impact of the GAAP update on our results of operations and cash
flows.
In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), Business Combinations, (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement to retrospectively apply adjustments made to provisional amounts
recognized in a business combination. An entity will now recognize any adjustments in the reporting period in which the amounts are determined,
calculated as if the accounting had been completed at the acquisition date. Disclosure is required for the portion of adjustments recorded in current-
period earnings that would have been recorded in previous reporting periods had they been recognized as of the acquisition date. The update is effective
for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
68
In August 2015, the FASB issued ASU No. 2015-15 (“ASU 2015-15”), Interest – Imputation of Interest, (Subtopic 835-30): Presentation and
Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 provides additional guidance to the
presentation of debt issuance costs discussed originally in ASU No. 2015-03, which was issued in April 2015 and described below. ASU 2015-15 noted
that ASU 2015-03 did not address the debt issue costs in regards to line-of-credit arrangements, which by their nature have fluctuating balances. ASU
2015-15 permits debt issuance costs specifically related to line-of-credit arrangements to be presented as an asset with subsequent amortization to
interest expense ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement.
The update is effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted
for financial statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations
and cash flows.
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2015-03 (“ASU 2015-03”), Interest – Imputation of
Interest, (Subtopic 835-30). ASU 2015-03 changes the accounting method for debt issuance costs from a deferred charge (i.e. an asset) to a contra
liability in part because such costs provide no future economic benefit. Debt issue costs related to a recognized debt liability are to be presented in the
balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The update is
effective for fiscal years (and interim reporting periods within fiscal years) beginning after December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
In February 2015, the FASB issued ASU No. 2015-02 (“ASU 2015-02”), Consolidation – Amendments to the Consolidation Analysis, (Topic
810). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It
is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. We are currently evaluating the impact of the GAAP update on our results of operations and cash flows.
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, (Topic 606). ASU 2014-09
requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange
for the goods or services. It also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers. The update was effective for fiscal years (and interim reporting periods
within fiscal years) beginning after December 15, 2016, which has recently been extended to December 31, 2017. We are currently evaluating the impact
of the GAAP update on our results of operations and cash flows.
NOTE 4 – FACILITY ACQUISITIONS AND DISPOSITIONS
Acquisitions
On October 1, 2015 we completed our acquisition of certain assets of Diagnostic Imaging Group, LLC (DIG), consisting of seventeen multi-
modality imaging centers located in the boroughs of Brooklyn and Queens, New York, for the following: Cash consideration of $54.6 million ($49.6
million paid at execution, $5 million to be paid 18 months after acquisition or earlier if certain conditions are met), the assumption of $2.1 million in
equipment debt, and issuance of 1.5 million RadNet common shares valued at $8.3 million on the acquisition date. The facilities provide a full range of
radiology services including MRI, PET/CT, Mammography, Ultrasound, X-ray and other related services. The transaction also includes contingent
consideration that is payable equal to five times the amount by which collections on the sellers’ historical revenue exceeds a defined threshold. The
estimated fair value of the liability on the acquisition date and as of December 31, 2015 is zero which is based on the probability of collections
exceeding defined thresholds.
The total purchase price for the above business is as follows (in thousands):
Cash
1.5 million shares of Radnet common stock
Total combined purchase price
$
$
54,555
8,325
62,880
69
The determination of the net tangible and intangible assets acquired and liabilities assumed is based on the estimated fair values of the acquired
assets and liabilities assumed as of the date of acquisition. The following table summarizes the preliminary fair value determination (in thousands):
Accounts receivable, net
Prepaid expenses and other current assets
Property and equipment
Goodwill
Other intangibles
Accounts payable, accrued expenses and other
Obligations under capital lease
$
$
12,346
377
17,959
40,035
50
(4,939)
(2,948)
62,880
The final fair value determination is expected to be completed in the first quarter of 2016 upon receipt of a final valuation report from an
external valuation firm.
The revenue and earnings of DIG included in our consolidated statement of operations from the acquisition date to December 31, 2015 are as
follows (in thousands):
Net revenue
Pretax income
Net income
$
17,498
1,880
1,166
The following unaudited pro-forma financial information for the years ended December 31, 2015 and 2014 represents the combined results of
operations of RadNet and DIG as if DIG’s acquisition had occurred on January 1, 2014. The unaudited pro-forma financial information does not
necessarily reflect the results of operations that would have occurred had the entities comprising DIG constituted a single entity during such periods (in
thousands, except per share data).
Net revenue
Net income
Pro-forma diluted net income per share
(unaudited)
Years ended
December 31,
2015
2014
882,478
7,329
$
0.16
$
46,421
795,620
3,644
0.08
44,649
$
$
On October 1, 2015 we completed our acquisition of certain assets of Philip L. Chatham, M.D., Inc., an oncology practice with offices in the
Los Angeles, CA area, for consideration of $916,000, paid in shares of equal value of the common stock of RadNet, Inc. and $300,000 in cash. We have
made a fair value determination of the acquired assets and approximately $26,000 of fixed assets, $100,000 covenant not to compete intangible asset,
$300,000 of medical supplies and $790,000 of goodwill were recorded with respect to this transaction.
On September 1, 2015 we completed our acquisition of certain assets of Murray Hill Radiology and Mammography, P.C. and Murray Hill MRI
Holding, LLC, consisting of a single multi-modality imaging center located in Manhattan, New York for a cash consideration of $5.8 million. The
facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value determination of the acquired assets and approximately $1.6
million of fixed assets, $95,000 of prepaid assets and $4.1 million of goodwill were recorded.
On August 3, 2015 we completed our acquisition of certain assets of Hanford Imaging, LP, consisting of a single multi-modality imaging center
located in Hanford, CA for cash consideration of $1.0 million. The facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair value
determination of the acquired assets and approximately $215,000 of fixed asset and $785,000 of goodwill were recorded.
On June 1, 2015 we completed our acquisition of certain assets of Healthcare Radiology and Diagnostic systems, PLLC, consisting of a single
multi-modality imaging center located in the Bronx, NY area for cash consideration of $425,000. The facility provides MRI, CT, Ultrasound and X-ray
services. We have made a fair value determination of assets acquired and approximately $134,500 of fixed assets and $290,500 of leasehold
improvements were recorded.
70
On May 1, 2015 we completed our acquisition of certain assets of California Radiology consisting of six multi-modality imaging centers
located in Los Angeles, California for cash consideration of $4.2 million. The facilities provide MRI, PET/CT, Ultrasound and X-ray services. We have
made a fair value determination of the acquired assets and approximately $217,000 of equipment, $1.7 million of leasehold improvements, $34,000 in
other assets, $100,000 of other intangible assets relating to a covenant not to compete contract and $2.1 million of goodwill were recorded with respect
to this transaction.
On April 15, 2015 we completed our acquisition of certain assets of New York Radiology Partners, consisting of eleven multi-modality imaging
centers located in Manhattan, New York for cash consideration of $29.8 million, a note to seller of $1.5 million, and the assumption of equipment debt
of $2.3 million. The facilities provide a full range of radiology services including MRI, PET/CT, Mammography, Ultrasound, X-ray and other related
services. With the use of an outside valuation expert, we have made a fair value determination of the acquired assets and assumed liabilities. In total,
RadNet acquired assets of $34.5 million and assumed current liabilities of $891,000. Asset amounts acquired were $6.9 million in equipment, $11.6
million in leasehold improvements, $9.9 million in goodwill, $1.2 million in intangible assets, and $4.9 million of accounts receivable and other assets.
Current liabilities assumed related to accounts payable, payroll and other related short term obligations.
On September 1, 2014 we completed our acquisition of certain assets of Hematology Oncology Consultants located in Van Nuys, CA for cash
consideration of $553,000. We have made a fair value determination of the acquired assets and approximately $15,000 of fixed assets, $164,000 of
medical supplies inventory, $39,000 of other assets, $100,000 covenant not to compete intangible asset, and $235,000 of goodwill were recorded with
respect to this transaction.
On September 1, 2014 we completed our acquisition of certain assets of Imaging Centers of Pasadena consisting of a single multi-modality
imaging center located in Pasadena, CA for cash consideration of $1.8 million. The facility provides MRI, PET/CT, Ultrasound and X-ray services. We
have made a fair value determination of the acquired assets and approximately $1.7 million of fixed assets and $105,000 of a covenant not to compete
intangible asset were recorded with respect to this transaction.
On July 3, 2014 we completed our acquisition of certain imaging center equipment from Healthcare Partners for which we agreed to pay $2.1
million. We paid cash of $300,000 and signed a promissory note for the remainder of $1.8 million.
On July 1, 2014 we completed our acquisition of certain assets of Moreno Valley Imaging consisting of a single multi-modality imaging center
located in Moreno Valley, CA for cash consideration of $700,000. The facility provides MRI, CT, Ultrasound and X-ray services. We have made a fair
value determination of the acquired assets and approximately $285,000 of fixed assets, $3,000 of other assets, $50,000 for a non compete covenant and
$362,000 of goodwill were recorded with respect to this transaction.
On July 1, 2014 we completed our acquisition of certain assets of Liberty Pacific Imaging Long Beach consisting of a single multi-modality
imaging center located in Signal Hill, CA for cash consideration of $1.9 million and assumed capital lease debt of $65,000. The facility provides MRI,
CT, Ultrasound and X-ray services. We have made a fair value determination of the acquired assets and assumed liabilities and $577,000 of fixed assets,
$100,000 for a covenant not to compete and $1.3 million of goodwill were recorded with respect to this transaction.
On July 1, 2014 we completed our acquisition of certain assets of Medical Imaging of Manhattan consisting of a single modality mammography
center located in New York, New York for cash consideration of $2.4 million. We have made a fair value determination of the acquired assets and
approximately $672,000 of fixed assets, $139,000 of other assets, a covenant not to compete of $150,000 and $1.4 million of goodwill were recorded
with respect to this transaction.
On April 1, 2014, we acquired the diagnostic imaging practice of certain assets of Sidney Friedman, M.D. located in Westchester, CA for $1.4
million. We have made a fair value determination of the assets acquired and have allocated $600,000 to Imaging equipment, $470,000 to accounts
receivable, a covenant not to compete of $100,000 and $231,000 to goodwill.
On January 2, 2014, we acquired the diagnostic imaging practice of Leslie A. Saint-Louis, M.D. located in New York, New York for $360,000.
Upon acquisition, we relocated the practice to a nearby existing center in New York, New York. We have made a fair value determination of the assets
acquired and have allocated $310,000 to goodwill and $50,000 to other intangible assets related to a covenant not to compete contract with Dr. Saint-
Louis.
71
Dispositions
On September 30, 2015 we completed a sale of 10 wholly owned imaging centers to one of our non-consolidated joint ventures for which we
hold a 49% non-controlling interest, The New Jersey Imaging Network, L.L.C., for approximately $35.5 million. We recorded a gain of $5.4 million
with respect to this transaction.
On August 3, 2015 we sold a 25% non-controlling interest in one of our wholly owned entities, Baltimore County Radiology, LLC (“BCR”) to
Lifebridge Health for $5.0 million. On the date of sale, the net book value of this 25% interest was $1.3 million. In accordance with ASC 810-10-45-23,
the proceeds in excess of this net book value amounting to $3.7 million was recorded to equity. In addition to the proceeds already received, RadNet has
the opportunity to receive approximately $1.2 million in additional proceeds if certain operating performance targets of BCR are achieved within the
next 12 months. Any additional amounts received under these contingent performance provisions will be recorded to equity accordingly.
NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is recorded as a result of business combinations. Activity in goodwill for the years ended December 31, 2014 and 2015, is provided
below (in thousands):
Balance as of December 31, 2013
Goodwill acquired through the acquisition of Corinthian
Goodwill acquired through the acquisition of Westchester Imaging
Goodwill acquired through the acquisition of Garden State Radiology
Goodwill acquired through the acquisition of Medical Imaging of Manhattan
Goodwill acquired through the acquisition of Liberty Pacific
Goodwill acquired through the acquisition of Moreno Valley
Goodwill acquired through the acquisition of Hematology-Oncology
Balance as of December 31, 2014
Adjustment to our allocation of goodwill for the acquisition of Liberty Pacific
Goodwill acquired through the acquisition of California Radiology
Goodwill acquired through the acquisition of New York Radiology Partners
Goodwill disposed through the sale of New Jersey Imaging Partners
Goodwill acquired through the acquisition of Hanford Imaging, LP
Goodwill acquired through the acquisition of Murry Hill Radiology and MRI
Goodwill acquired through the acquisition of Phillip L Chatam, M.D., Inc.
Goodwill acquired through the acquisition of Diagnostic Imaging Group, LLC
Balance as of December 31, 2015
196,395
310
231
50
1,433
1,288
362
235
200,304
200
2,107
9,897
(18,833)
785
4,123
790
40,035
239,408
$
The amount of goodwill from these acquisitions that is deductible for tax purposes as of December 31, 2015 is $109.9 million.
Other intangible assets are primarily related to the value of management service agreements obtained through our acquisition of Radiologix,
Inc. in 2006 and are recorded at a cost of $57.5 million less accumulated amortization of $21.1 million at December 31, 2015. Also included in other
intangible assets is the value of covenant not to compete contracts associated with our facility acquisitions totaling $5.8 million less accumulated
amortization of $4.9 million, as well as the value of trade names associated with acquired imaging facilities totaling $10.2 million less accumulated
amortization of $1.5 million and dispositions of $750,000. Also in connection with our purchase of eRAD and included in other intangible assets is the
value of eRAD’s developed technology and its customer relationships.
Total amortization expense for the years ended December 31, 2015, 2014 and 2013 was $3.0 million, $3.1 million, and $3.1 million,
respectively. Intangible assets are amortized using the straight-line method. Management service agreements are amortized over 25 years using the
straight line method. Developed technology and customer relationships are amortized over 5 years using the straight line method.
72
The following table shows annual amortization expense, by asset classes that will be recorded over the next five years (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
Weighted
average
amortization
period
remaining
in years
$
Management Service
Contracts
Covenant not to compete
contracts
Customer relationships
Developed technology and in-
process R&D
Trade Names*
Total Annual Amortization $
2,309 $
2,309
$
2,309
$
2,309
$
2,309
$
24,861 $
36,406
15.7
304
1
241
–
198
–
112
–
30
–
–
–
885
1
24
–
2,638 $
–
–
2,550 $
–
–
2,507 $
–
–
2,421 $
–
–
2,339 $
–
7,937
32,798 $
24
7,937
45,253
3.4
–
0.8
–
* These trade name intangibles have an indefinite life
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization are as follows (in thousands):
Land
Medical equipment
Computer and office equipment, furniture and fixtures
Software development costs
Leasehold improvements
Equipment under capital lease
Accumulated depreciation and amortization
December 31,
2015
2014
$
$
$
250
352,005
107,014
6,391
232,550
29,796
728,006
(471,284)
256,722 $
250
334,893
90,031
6,391
206,224
22,753
660,542
(437,415)
223,127
Depreciation and amortization expense of property and equipment, including amortization of equipment under capital leases, for the years
ended December 31, 2015, 2014 and 2013 was $57.6, $56.2 million, and $55.8 million, respectively.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES (IN THOUSANDS)
Accounts payable
Accrued expenses
Accrued payroll and vacation
Accrued professional fees
Total
December 31,
2015
2014
$
$
52,296
32,950
17,692
10,875
113,813
$
$
46,855
28,809
11,937
10,215
97,816
73
NOTE 8 - NOTES PAYABLE, REVOLVING CREDIT FACILITY AND CAPITAL LEASES
Notes payable, long-term debt, line of credit and capital lease obligations consist of the following (in thousands):
Revolving lines of credit
First Lien Term Loans
Second Lien Term Loans
Discounts on term loans
Promissory note payable to the former owner of a practice acquired
at an interest rate of 1.5% due through 2019
Promissory note payable to Healthcare Partners for imaging
equipment acquired through acquisition at an interest rate of
5.25%
Equipment notes payable at interest rates ranging from 3.3% to
10.2%, due through 2020, collateralized by medical equipment
Obligations under capital leases at interest rates ranging from 2.5%
to 10.8%, due through 2022, collateralized by medical and office
equipment
Total debt obligations
Less: current portion
Long term portion debt obligations
December 31,
2015
2014
$
–
$
15,300
451,023
180,000
399,750
180,000
(9,542)
(11,966)
1,361
431
1,032
–
1,590
1,153
16,423
640,728
(33,114)
607,614
$
11,780
597,607
(25,105)
572,502
$
The following is a listing of annual principal maturities of notes payable exclusive of all related discounts, capital leases and repayments on our
revolving credit facilities for years ending December 31 (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total notes payable obligations
$
$
26,217
25,247
402,097
276
11
180,000
633,848
We lease equipment under capital lease arrangements. Future minimum lease payments under capital leases for years ending December 31 (in
thousands) is as follows:
2016
2017
2018
2019
2020
Thereafter
Total minimum payments
Amount representing interest
Present value of net minimum lease payments
Less current portion
Long-term portion lease obligations
74
$
$
10,660
4,325
1,713
246
201
98
17,243
(820)
16,423
(10,038)
6,385
Term Loans and Financing Activity Information:
Included in our consolidated balance sheet at December 31, 2015 are $621.5 million of senior secured term loan debt (net of unamortized
discounts of $9.5 million), broken down by loan agreement as follows (in thousands):
First Lien Term Loans
Second Lien Term Loans
Total
As of December 31, 2015
Face Value
Discount
Total Carrying
Value
$
$
$
451,023
$
180,000 $
$
631,023
(7,305) $
(2,237) $
(9,542) $
443,718
177,763
621,481
Our revolving credit facility had no aggregate principal amount outstanding as of December 31, 2015.
Our credit facilities are comprised of a Credit and Guaranty Agreement that we entered into on October 10, 2012 (the “Original Credit
Agreement” and as amended by the 2013 Amendment (as defined below) and the 2014 Amendment (as defined below), (the “Credit Agreement”), as
subsequently amended by a first amendment dated April 3, 2013 (the “2013 Amendment”), and a second amendment dated March 25, 2014 (the “2014
Amendment”). We also entered into a Second Lien Credit and Guaranty Agreement dated March 25, 2014 (the “Second Lien Credit Agreement”). On
April 30, 2015 we entered into a joinder agreement to the Credit Agreement (the “2015 Joinder”). Each of the foregoing is described in more detail
below.
As of December 31, 2015, we were in compliance with all covenants under the Original Credit Agreement (as amended by the 2013
Amendment, the 2014 Amendment, and the 2015 Joinder) and the Second Lien Credit Agreement.
The following describes our 2015 financing activities:
2015 Incremental First Lien Term Loans:
On April 30, 2015, we entered into the 2015 Joinder to the Credit Agreement to provide for the borrowing of $75.0 million of incremental
first lien term loans (“2015 Incremental First Lien Term Loans”). The 2015 Incremental First Lien Term Loans are treated as part of the same class
as the existing tranche B term loans currently outstanding under the Credit Agreement. We used the proceeds from the 2015 Incremental First Lien
Term Loans to repay all of the borrowings outstanding under the first lien revolving loan facility and to pay approximately $1.1 million of fees and
expenses associated with the transaction.
Interest. The interest rates payable on the 2015 Incremental First Lien Term Loans are the same rates currently payable on the existing
tranche B term loans under the Credit Agreement, which are (a) the Adjusted Eurodollar Rate (as defined in the Credit Agreement) plus 3.25% per
annum or (b) the Base Rate (as defined in the Credit Agreement) plus 2.25% per annum. As applied to the first lien tranche B term loans, the
Adjusted Eurodollar Rate has a minimum floor of 1.0%. The Adjusted Eurodollar Rate at December 31, 2015 was 0.85%.
Payments. The scheduled quarterly amortization of the 2015 Incremental First Lien Term Loans is approximately $987,000, beginning in
June 2015. The scheduled quarterly amortization for all of the term loans under the Credit Agreement, including the 2015 Incremental First Lien
Term Loans, was increased to approximately $6.2 million, beginning in June 2015.
Maturity Date. The maturity date for the 2015 Incremental First Lien Term Loans shall be on the earlier to occur of (i) October 10, 2018,
and (ii) the date on which the 2015 Incremental First Lien Term Loans shall otherwise become due and payable in full under the Credit Agreement,
whether by acceleration or otherwise.
Guarantees and Collateral. The obligations under the Credit Agreement, including the 2015 Incremental First Lien Term Loans, are
guaranteed by RadNet, Inc., all of our current and future domestic subsidiaries and certain of our affiliates (other than certain excluded foreign
subsidiaries). The obligations under the Credit Agreement, including the 2015 Incremental First Lien Term Loans, and the guarantees are secured by
a perfected first priority security interest (subject to certain permitted exceptions) in substantially all of Radnet Management’s and the guarantors’
tangible and intangible assets, including, but not limited to, pledges of equity interests of Radnet Management and all of our current and future
domestic subsidiaries.
Restrictive Covenants. In addition to certain customary covenants, the Credit Agreement places limits on our ability to declare dividends or
redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leaseback transactions, make loans and
investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers, acquisitions and asset
sales, enter into transactions with affiliates and alter the business we and our subsidiaries currently conduct.
75
Financial Covenants. The Credit Agreement contains financial covenants including a maximum total leverage ratio and a limit on annual
capital expenditures.
Events of Default. In addition to certain customary events of default, events of default under the Credit Agreement include failure to pay
principal of any loans as and on the date when due, failure to pay any interest on any loan or any fee or other amount payable under the Credit
Agreement, as modified by the 2015 Joinder, within five days after the due date, failure of any loan party to comply with any covenant or agreement
in the loan documents (subject to applicable grace periods and/or notice requirement), a representation or warranty contained in the loan documents
is false in a material respect, events of bankruptcy and a change of control. The occurrence of an event of default could permit the lenders under the
Credit Agreement to declare all amounts borrowed, together with accrued interest and fees, to be immediately due and payable and to exercise other
default remedies.
The following describes our 2014 financing activities:
2014 Amendment to the Original Credit Agreement and Second Lien Credit and Guaranty Agreement:
On March 25, 2014, we simultaneously entered into two agreements which resulted in the creation of a direct financial obligation as follows:
2014 Amendment of the Original Credit Agreement. We entered into the 2014 Amendment to provide for, among other things, the
borrowing of $30.0 million of additional first lien term loans (the “2014 First Lien Term Loans”).
Second Lien Credit and Guaranty Agreement. We entered into the Second Lien Credit Agreement to provide for, among other things, the
borrowing of $180.0 million of second lien term loans (the “Second Lien Term Loans”). The proceeds from the Second Lien Term Loans and the
2014 First Lien Term Loans were used to redeem the Senior Notes, as more fully described below under the heading “Senior Notes”, to pay the
expenses related to the transaction and for general corporate purposes.
Revolving Credit Facility. The $101.25 million revolving credit line established in the Credit Agreement was unaltered by the agreements
above and remains in place. The termination date for the $101.25 million revolving credit facility is the earliest to occur of (i) October 10, 2017, (ii)
the date the revolving credit facility is permanently reduced to zero pursuant to section 2.13(b) of the Credit Agreement, which addresses voluntary
commitment reductions and (iii) the date of the termination of the revolving credit facility due to specific events of default pursuant to section 8.01
of the Credit Agreement. The revolving credit facility bears interest based on types of borrowings as follows: (i) unpaid principal at the Adjusted
Eurodollar Rate (as defined in the Credit Agreement) plus 4.25% per annum or the Base Rate (as defined in the Credit Agreement) plus 3.25% per
annum, (ii) letter of credit and fronting fees at 4.5% per annum, and (iii) commitment fee of 0.5% per annum on the unused revolver balance. The
Adjusted Eurodollar Rate at December 31, 2015 was 0.85%.
The 2014 Amendment provided for the following:
Interest. The interest rates payable on the 2014 First Lien Term Loans are the same as the rates currently payable under the Original Credit
Agreement, as amended by the 2013 Amendment, which are (a) the Adjusted Eurodollar Rate (as defined in the Credit Agreement) plus 3.25% or
(b) the Base Rate (as defined in the Credit Agreement) plus 2.25%. With respect to all of the term loans under the Credit Agreement, the Adjusted
Eurodollar Rate has a minimum floor of 1.0%. The Adjusted Eurodollar Rate at December 31, 2015 was 0.85%.
Payments. The scheduled amortization of the term loans under the Original Credit Agreement, as amended by the 2013 Amendment and
the 2014 Amendment, was increased, starting in June 2014 from quarterly payments of $975,000 to quarterly payments of approximately $5.2
million, with the remaining balance to be paid at maturity. Scheduled amortization increased annually by $16.8 million from pre-2014 Amendment
terms, representing a rise from 1% per annum to 5% per annum of the initial amount borrowed. This $16.8 million additional cash obligation will be
partially offset by annual interest savings of approximately $5.0 million under the terms of the Second Lien Term Loan as compared to that under
the retired Senior Notes. We expect to fund this approximately $11.8 million net increase in amortization payments from cash provided by operating
activities.
The Second Lien Credit Agreement provides for the following:
Interest. The interest rates payable on the Second Lien Term Loans are (a) the Adjusted Eurodollar Rate (as defined in the Second Lien
Credit Agreement) plus 7.0% or (b) the Base Rate (as defined in the Second Lien Credit Agreement) plus 6.0%. The Adjusted Eurodollar Rate has a
minimum floor of 1.0% on the Second Lien Term Loans. The Eurodollar Rate at December 31, 2015 was 0.85%. The rate paid on the Second Lien
Credit Agreement at December 31, 2015 was 8%.
76
Payments. There is no scheduled amortization of the principal of the Second Lien Term Loans. Unless otherwise prepaid as a result of the
occurrence of certain mandatory prepayment events, all principal will be due and payable on the termination date described below.
Termination. The maturity date for the Second Lien Term Loans is the earlier to occur of (i) March 25, 2021, and (ii) the date on which the
Second Lien Term Loans shall otherwise become due and payable in full under the Second Lien Credit Agreement, whether by voluntary
prepayment per section 2.13(a) of the Second Lien Credit Agreement or events of default per section 8.01 of the Second Lien Credit Agreement as
described below.
Restrictive Covenants. In addition to certain customary covenants, the Second Lien Credit Agreement places limits on our ability declare
dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-leasebacktransactions, make loans
and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers, acquisitions and
asset sales, enter into transactions with affiliates and alter the business we and our subsidiaries currently conduct.
Events of Default. In addition to certain customary events of default, events of default under the Second Lien Credit Agreement include
failure to pay principal of any loans as and on the date when due, failure to pay any interest on any loan or any fee or other amount payable under
the Second Lien Term Loans within five days after the due date, failure of any loan party to comply with any covenant or agreements in the loan
documents (subject to applicable grace periods and/or notice requirements), a representation or warranty contained in the loan documents is false in
a material respect, events of bankruptcy and a change of control. The occurrence of an event of default could permit the lenders under the Second
Lien Credit Agreement to declare all amounts borrowed, together with accrued interest and fees, to be immediately due and payable and to exercise
other default remedies.
Senior Notes
On April 6, 2010, we issued and sold $200 million of 10 3/8% senior unsecured notes due 2018 at a price of 98.680% (the “Senior Notes”).
All payments of the Senior Notes, including principal and interest, were guaranteed jointly and severally on a senior secured basis by RadNet, Inc.,
and all of Radnet Management’s current and future domestic wholly owned restricted subsidiaries. The Senior Notes were issued under an indenture
dated April 6, 2010 (the “Indenture”), by and among Radnet Management, Inc., as issuer, RadNet, Inc., as parent guarantor, the subsidiary
guarantors thereof and U.S. Bank National Association, as trustee. We paid interest on the senior notes on April 1 and October 1 of each year,
commencing October 1, 2010, and they were scheduled to expire on April 1, 2018.
We completed the retirement of our $200 million in Senior Notes on April 24, 2014 and following such retirement the Company completed
the satisfaction and discharge of the Indenture. The transactions leading to the retirement of the Senior Notes are described below:
Tender Offer and Exercise of Optional Redemption on March 7, 2014. On March 7, 2014, we commenced a tender offer to purchase for
cash any and all outstanding Senior Notes. In connection with the tender offer, we also commenced a consent solicitation to amend the Indenture to
eliminate or modify certain restrictive covenants. On March 25, 2014, we made a payment in cash for all Senior Notes tendered prior to 5:00 P.M.,
New York City time, on March 20, 2014 (the “Consent Payment Deadline”). As of the Consent Payment Deadline, we received tenders and
consents in respect of $193,464,000 aggregate principal amount of the Senior Notes, representing 96.73% of the outstanding Senior Notes, all of
which were accepted for purchase. The total consideration for each $1,000 principal amount of Senior Notes validly tendered and not withdrawn at
or prior to the Consent Payment Deadline and accepted for purchase was $1,056.88, which amount included a consent payment (the “Consent
Payment”) of $30.00 per $1,000 principal amount of Senior Notes. In addition, all Senior Notes accepted for payment received accrued and unpaid
interest in respect of such notes from the last interest payment date prior to the applicable settlement date to, but not including, the applicable
settlement date. The tender offer expired on April 3, 2014 and between the Consent Payment Deadline and the expiration of the tender offer, no
additional Senior Notes were tendered. With a net carrying amount including discount and unamortized issue costs of $189.2 million, a loss on early
extinguishment of debt of $15.5 million was recorded in the first quarter of 2014.
Tender Offer and Exercise on Optional Redemption of March 25, 2014. On March 25, 2014, we called for redemption all of our remaining
outstanding Senior Notes not purchased prior to the expiration of the tender offer described above, with a redemption date of April 24, 2014 (the
“Redemption Date”). Upon redemption on April 24, 2014, the holders of the Senior Notes being redeemed received a redemption price equal to
105.188% of the outstanding principal amount of the Senior Notes being redeemed (or $1,051.88 per $1,000 in principal amount of the Senior
Notes) in accordance with the terms of the Indenture, or approximately $6.9 million in total, including approximately $43,000 of accrued and unpaid
interest up to, but excluding the Redemption Date. As of that date, we completed the satisfaction and discharge of the Indenture in accordance with
its terms and no Senior Notes remained outstanding. With a net carrying amount including discount and unamortized issue costs of $6.4 million, a
loss on early extinguishment of debt of $471,000 was recorded in the second quarter of 2014.
77
The following describes our key financing activities prior to 2014:
2013 Amendment to the Credit Agreement
On April 3, 2013, we entered into a first amendment to the Original Credit Agreement. Pursuant to this amendment, we re-priced the
balance of our term loan of $348.3 million and borrowed an additional $40.0 million for a new senior secured term loan total of $388.3 million. The
proceeds from the amendment were used to: (i) repay in full all existing term loans under the Original Credit Agreement; (ii) repay outstanding
revolving loans; (iii) repay premium, fees and expenses incurred; and (iv) general corporate purposes.
2012 Refinancing and Original Credit Agreement
On October 10, 2012 we completed the refinancing of our then existing credit facilities by entering into the Original Credit Agreement with
a syndicate of banks and other financial institutions. The total amount of refinancing was $451.25 million, consisting of (i) a $350 million senior
secured term loan and (ii) a $101.25 million senior secured revolving credit facility. The obligations under the Original Credit Agreement are
guaranteed by RadNet, Inc. and our current and future domestic subsidiaries and certain of our affiliates (other than certain excluded foreign
subsidiaries). The obligations under the Original Credit Agreement, including the guarantees, are secured by a perfected first-priority security
interest in all of our tangible and intangible assets, including, but not limited to, pledges of equity interests of Radnet Management and all of our
current and future domestic subsidiaries.
We used the net proceeds of the Original Credit Agreement to repay in full our then existing six year term loan facility for $277.9 million
in principal amount outstanding, which would have matured on April 6, 2016, and our revolving credit facility for $59.8 million in principal amount
outstanding, which would have matured on April 6, 2015.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Leases – We lease various operating facilities and certain medical equipment under operating leases with renewal options expiring through 2046.
Certain leases contain renewal options from two to ten years and escalation based either on the consumer price index or fixed rent escalators. Leases
with fixed rent escalators are recorded on a straight-line basis. We record deferred rent for tenant leasehold improvement allowances received from
certain lessors and amortize the deferred rent expense over the term of the lease agreement. Minimum annual payments under operating leases for future
years ending December 31 are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Facilities
Equipment
Total
$
$
57,899
49,755
42,497
36,581
29,037
80,289
296,058
$
$
8,688
8,389
6,136
2,589
896
14
26,712
$
$
66,587
58,144
48,633
39,170
29,933
80,303
322,770
Total rent expense, including equipment rentals, for the years ended December 31, 2015, 2014 and 2013 was $61.5 million, $64.5 million and
$65.0 million, respectively.
78
Litigation – We are engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of our business. We
believe that the outcome of our current litigation will not have a material adverse impact on our business, financial condition and results of operations.
However, we could be subsequently named as a defendant in other lawsuits that could adversely affect us.
NOTE 10 – INCOME TAXES
For the years ended December 31, 2015, 2014 and 2013, we recognized income tax expense comprised of the following (in thousands):
Federal current tax
State current tax
Other current tax
Federal deferred tax
State deferred tax
Income tax expense
2015
December 31,
2014
$
237
1,705
28
3,625
412
–
1,283
29
869
(214)
2013
$
6,007
$
1,967
$
$
$
A reconciliation of the statutory U.S. federal rate and effective rates is as follows (in thousands):
Federal tax
State franchise tax, net of federal benefit
Other Non deductible expenses
Meals and entertainment
Noncontrolling Interest in Partnerships
Equity compensation
Changes in valuation allowance
Return-to-provision
Deferred true-ups and other
Uncertain tax positions
Expiring net operating losses
Income tax expense
2015
Years Ended
December 31,
2014
34.00%
8.50%
-0.01%
1.75%
-2.16%
-1.74%
-17.32%
3.29%
13.41%
0.01%
1.28%
41.01%
34.00%
-3.64%
0.00%
4.85%
-2.88%
-8.72%
24.52%
-9.57%
16.34%
-3.67%
2.61%
53.85%
–
643
(39)
3,794
(888)
3,510
2013
34.00%
-14.20%
0.07%
1.98%
-1.48%
35.39%
-17.88%
-1.96%
0.00%
-2.92%
26.64%
59.64%
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial and
income tax reporting purposes and operating loss carryforwards.
79
Our deferred tax assets and liabilities comprise the following (in thousands):
Deferred tax assets:
Net operating losses
Accrued expenses
Straight-Line Rent Adjustment
Unfavorable contract liability
Equity compensation
Allowance for doubtful accounts
Other
Valuation Allowance
Total Deferred Tax Assets
Deferred tax liabilities:
Property Plant & Equipment
Goodwill
Intangibles
NAEM Reserve
Other
Total Deferred Tax Liabilities
Net Deferred Tax Asset
December 31,
2015
2014
$
78,912
4,125
11,263
2,142
846
4,341
1,092
(3,841)
98,880 $
(8,582)
(18,617)
(12,088)
(7,882)
(4,747)
87,709
3,594
8,897
2,811
253
2,124
1,891
(6,378)
100,901
(7,755)
(17,833)
(12,105)
(6,441)
(4,189)
(51,916)
$
(48,323)
46,964 $
52,578
$
$
$
$
As of December 31, 2015, the Company had federal net operating loss carryforwards of approximately $233.9 million, which expire at various
intervals from the years 2017 to 2035. The Company also had state net operating loss carryforwards of approximately $123.3 million, which expire at
various intervals from the years 2016 through 2035. As of December 31, 2015, $40.6 million of our federal net operating loss carryforwards acquired in
connection with business combinations are subject to limitations related to their utilization under Section 382 of the Internal Revenue Code. Future
ownership changes as determined under Section 382 of the Internal Revenue Code could further limit the utilization of net operating loss carryforwards.
Cumulative excess tax benefits of $7.1 million, related to the exercise of stock options, will be recorded in equity when realized.
We considered all evidence available when determining whether deferred tax assets are more likely-than-not to be realized, including projected
future taxable income, scheduled reversals of deferred tax liabilities, prudent tax planning strategies, and recent financial operations. The evaluation of
this evidence requires significant judgment about the forecasts of future taxable income, based on the plans and estimates we are using to manage the
underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income. As
of December 31, 2015, we have determined that deferred tax assets of $98.9 million are more likely-than-not to be realized.
80
For the next five years, and thereafter, federal net operating loss carryforwards expire as follows (in thousands):
Year Ended
2017
2018
2019
2020
Thereafter
Total Net
Operating Loss
Carryforwards
3,356
12,284
7,178
–
211,094
233,912
$
Amount Subject
to 382 limitation
–
–
–
–
40,610
40,610
$
For the next five years, and thereafter, California net operating loss carryforwards expire as follows (in thousands):
Year Ended
2016
2017
2018
2019
2020
Thereafter
Total Net
Operating Loss
Carryforwards
3,683
9,292
–
–
–
18,247
31,222
$
We file consolidated income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With limited exceptions, we
are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2011. We do not anticipate
the results of any open examinations would result in a material change to its financial position.
A reconciliation of the total gross amounts of unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013 is as follows (in
thousands):
Balance at beginning of year
Decreases related to prior year tax positions
Expiration of the statute of limitations for the assessment of taxes
Balance at end of year
2015
December 31,
2014
2013
$
$
3,761
(3,667)
–
94
$
$
3,970
–
(209)
3,761
$
$
4,184
(214)
–
3,970
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31,
2015 we accrued an insignificant amount of interest expense. As of December 31, 2015, accrued interest and penalties were insignificant.
81
NOTE 11 – STOCK-BASED COMPENSATION
Stock Incentive Plans
Options
We have one long-term equity incentive plan which we refer to as the 2006 Equity Incentive Plan, which we amended and restated as of April
20, 2015 (the “Restated Plan”). The Restated Plan was approved by our stockholders at our annual stockholders meeting on June 11, 2015. As of
December 31, 2015, we have reserved for issuance under the Restated Plan 12,000,000 shares of common stock. We can issue options, stock awards,
stock appreciation rights and cash awards under the Restated Plan. Certain options granted under the Restated Plan to employees are intended to qualify
as incentive stock options under existing tax regulations. Stock options generally vest over two to five years and expire five to ten years from the date of
grant.
As of December 31, 2015, we had outstanding options to acquire 931,667 shares of our Common Stock, of which options to acquire 918,334
shares were exercisable. During the twelve months ended December 31, 2015, we did not grant any stock options under our Restated Plan.
The following summarizes all of our option transactions during the year ended December 31, 2015:
Outstanding Options Under the 2006 Plan
Shares
Weighted
Average
Exercise price
Per Common
Share
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic Value
Balance, December 31, 2014
Exercised
Canceled, forfeited or expired
Balance, December 31, 2015
Exercisable at December 31, 2015
$
2,092,509
(1,135,833)
(25,009)
931,667
918,334
3.58
2.69
2.22
4.69
4.73
0.82 $
0.79
2,109,751
2,054,551
Aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between our closing stock price on
December 31, 2015 and the exercise price, multiplied by the number of in-the-money options as applicable) that would have been received by the holder
had all holders exercised their options on December 31, 2015. Total intrinsic value of options exercised during the year ended December 31, 2015 and
2014 was approximately $6.2 million and $7.3 million, respectively. As of December 31, 2015, total unrecognized stock-based compensation expense
related to non-vested employee awards was $9,815, which is expected to be recognized over a weighted average period of approximately 0.87 years.
Restricted Stock Awards (“RSA’s”)
The Restated Plan permits the award of restricted stock awards (“RSA’s”). As of December 31, 2015, we have issued a total of 3,461,208
RSA’s of which 771,342 were unvested at December 31, 2015.
The following summarizes all unvested RSA’s activities during the year ended December 31, 2015:
RSA's unvested at December 31, 2014
Changes during the period
Granted
Vested
Forfeited
RSA's unvested at December 31, 2015
Weighted-
Average
Remaining
Contractual
Term (Years)
Weighted-
Average
Fair Value
$
$
$
$
$
0.71
1.96
8.60
4.59
5.59
5.17
RSA's
942,024
744,423
(856,052)
(59,053)
771,342
We determine the fair value of all RSA’s based of the closing price of our common stock on award date.
82
Other stock bonus awards
The Restated Plan also permits the award of stock bonuses not subject to any future service period. These awards are valued and expensed
based on the closing price of our common stock on the date of award. During the year ended December 31, 2015 we issued 170,000 shares relating to
these awards.
In sum, of the 12,000,000 shares of common stock reserved for issuance under the Restated Plan, at December 31, 2015, we had issued
11,059,958 total shares between options, RSA’s and other stock awards. With options cancelled and RSA’s forfeited amounting to 2,825,009 and 59,053
shares, respectively, there remain 3,824,104 shares available under the Restated Plan for future issuance.
NOTE 12 – EMPLOYEE BENEFIT PLAN
We adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue Code that covers substantially all non-professional
employees. Eligible employees may contribute on a tax-deferred basis a percentage of compensation, up to the maximum allowable under tax law.
Employee contributions vest immediately. The plan does not require a matching contribution by us. There was no expense for any periods presented in
the report.
NOTE 13 – QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table sets forth a summary of our unaudited quarterly operating results for each of the last eight quarters in the years ended
December 31, 2015 and 2014. This quarterly data has been derived from our unaudited consolidated interim financial statements which, in our opinion,
have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring
adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in
conjunction with our financial statements and notes thereto, included elsewhere in this report. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future period (in thousands except for share and per share data).
Statement of Operations Data:
Net revenue
$
181,267
$
204,289
$
208,366
$
215,706
$
168,876
$
179,082
$
184,059
$
185,552
Mar 31
June 30
Sept 30
Dec 31
Mar 31
June 30
Sept 30
Dec 31
2015 Quarter Ended
2014 Quarter Ended
Total operating expenses
183,213
190,905
191,137
205,256
161,328
163,436
168,824
170,676
Total other expenses
Equity in earnings of joint ventures
Benefit from (provision for) income
taxes
Net (loss) income
Net income attributable to
noncontrolling interests
Net (loss) income attributable to
6,723
(1,102)
3,091
(4,476)
10,836
(3,207)
(2,192)
3,563
5,731
(1,992)
(5,199)
8,291
10,109
(2,626)
(1,707)
1,260
25,468
(1,067)
4,478
(12,375)
10,803
(1,646)
(1,233)
5,256
10,401
(2,009)
(2,334)
4,509
9,951
(2,248)
(2,878)
4,295
78
168
304
379
49
112
58
90
Radnet, Inc. common stockholders
$
(4,554) $
3,395
$
7,987
$
881
$
(12,424)
$
5,144
$
4,451
$
4,205
Basic net (loss) income attributable to
Radnet, Inc. common stockholders
(loss) earnings per share:
Diluted net (loss) income attributable
to Radnet, Inc. common
stockholders (loss) earnings per
share:
Weighted average shares outstanding
$
$
Basic
Diluted
(0.11) $
0.08
$
0.18
$
0.02
$
(0.31)
$
0.13
$
0.11
$
0.10
(0.11) $
0.08
$
0.18
$
0.02
$
(0.31)
$
0.12
$
0.10
$
0.10
42,747
42,747
43,370
44,686
43,637
44,752
45,454
46,545
40,010
40,010
40,817
43,263
41,645
44,034
41,783
44,182
83
NOTE 14 – RELATED PARTY TRANSACTIONS
We use World Wide Express, a package delivery company owned by our western operations chief operating officer, to provide delivery
services for us. For the years ended December 31, 2015, 2014 and 2013, we paid approximately $693,000, $833,000, $955,000, and respectively, to
World Wide Express for those services. At December 31, 2015 and 2014, we had outstanding amounts due to World Wide Express of $116,000 and
$61,000, respectively.
NOTE 15 – SUBSEQUENT EVENTS
On March 1, 2016 we completed our acquisition of certain assets of Advanced Radiological Imaging – Astoria P.C. consisting of a three multi-
modality imaging centers located in Astoria, NY for cash consideration of $5.0 million. The facility provides MRI, PET/CT, Ultrasound and X-ray
services.
84
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and procedures under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended, as of December 31, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were not effective as of December 31, 2015 because deficiencies in the design and operating effectiveness of
certain information technology general controls (“ITGC’s) and information technology dependent manual controls related to the revenue and accounts
receivable process caused a material weakness in our internal control over financial reporting as described in more detail below.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are transacted in accordance with authorizations of management and
directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial statements.
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an assessment of the
effectiveness of its internal control over financial reporting as of December 31, 2015 based on the criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management
concluded that our internal control over financial reporting was not effective as of December 31, 2015 because of the material weakness described
below.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with existing policies or procedures may deteriorate. A material weakness is defined as “a deficiency, or a combination of
deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual
or interim financial statements will not be prevented or detected on a timely basis.”
Based upon this assessment, management concluded that, as of December 31, 2015, the following control deficiencies related to the Company’s
revenue and accounts receivable process aggregate to a material weakness in the Company’s internal control over financial reporting:
•
•
ITGCs were ineffective for multiple systems which capture and bill revenue transactions as a result of deficiencies pertaining to user access and
program change controls
Certain information technology dependent manual controls which are designed to ensure the completeness of revenue transaction processing
and appropriate valuation of the account receivable were not performed timely or reviewed with sufficient precision.
The ineffective design and operation of these ITGCs and the related information technology dependent manual controls impacts a material
portion of our revenue transactions.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has audited the Company’s internal control over financial
reporting as of December 31, 2015, as stated in their report, which is included in this Annual Report on Form 10-K.
85
Remediation Plan for Material Weakness
Our management, with oversight of our Audit Committee, has been actively engaged in developing a remediation plan to address the material
weakness reported as of December 31, 2015. The remediation efforts expected to be implemented include the following:
•
•
•
Continue our plan to streamline the number and improve the quality of systems utilized by the Company for the capture and billing of revenue
transactions.
Implement effective user access controls across all revenue related systems to ensure proper authentication for established users and timely
removal of terminated users, and improve documentation surrounding program change controls.
Ensure that all revenue-related IT dependent manual controls are performed on a timely basis with a sufficient level of precision.
If the remedial measures described above are insufficient to address the material weakness described above, or are not implemented timely, or
additional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future and could have the
effects described in “Item 1A. Risk Factors” in Part I of this Form 10-K.
Changes in Internal Control over Financial Reporting
Except as described above, management did not identify any change in internal control over financial reporting occurring during the fourth
quarter that materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting.
86
Board of Directors and Stockholders of RadNet, Inc.
Report of Independent Registered Public Accounting Firm
We have audited RadNet, Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management’s assessment. Management has identified a material weakness in the design and
operating effectiveness of information technology general controls and certain information technology dependent manual controls related to the
Company’s revenue and accounts receivables process. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of RadNet, Inc. and subsidiaries as of December 31, 2015 and 2014 and the related
consolidated statements of operations, comprehensive income, equity (deficit), and cash flows for each of the three years in the period ended December
31, 2015. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2015 financial
statements, and this report does not affect our report dated March 15, 2016, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, RadNet, Inc.
and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
Los Angeles, California
March 15, 2016
/s/ Ernst & Young LLP
87
Item 9B. Other Information.
None
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item 10 will be included under the captions “Election of Directors,” “Executive Officers,” “Board of Directors
and Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2016 Annual
Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year (the “Proxy Statement”) and is incorporated herein by
reference.
We have adopted a code of financial ethics applicable to our directors, officers and employees which is designed to deter wrongdoing and to
promote:
•
•
•
•
honest and ethical conduct;
full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the SEC and in our other public
communications;
compliance with applicable laws, rules and regulations, including insider trading compliance; and
accountability for adherence to the code and prompt internal reporting of violations of the code, including illegal or unethical behavior
regarding accounting or auditing practices.
You may obtain a copy of our Code of Financial Ethics on our website at www.radnet.com under Investor Relations — Corporate Governance.
The Audit Committee is responsible for reviewing the Code of Financial Ethics and amending as necessary. Any amendments will be disclosed on our
website.
Item 11.
Executive Compensation
The information required by this Item 11 will be included under the captions “Compensation of Directors,” “Compensation of Executive
Officers,” “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee
Report “in the Proxy Statement and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be included under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be included under the captions “Certain Relationships and Related Party Transactions” and
“Board of Directors and Corporate Governance” in the Proxy Statement and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this Item 14 will be included under the caption “ Independent Registered Public Accounting Firm Fees” in the
Proxy Statement and is incorporated herein by reference.
88
Item 15. Exhibits and Financial Statements Schedule
Page No.
(a)(1) Financial Statements – The following financial statements are filed herewith:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statements Schedules
Schedules – The following financial statement schedules are filed herewith:
Schedule II – Valuation and Qualifying Accounts
52
53
54
55
56
57
59 to 82
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes
thereto.
89
RADNET, INC. AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2015
Accounts Receivable-Allowance for Bad Debts
Year Ended December 31, 2014
Accounts Receivable-Allowance for Bad Debts
Year Ended December 31, 2013
Accounts Receivable-Allowance for Bad Debts
Balance at
Beginning of
Year
Additional
Charges Against
Income
Deductions from
Reserve
Balance at End
of Year
$
$
$
15,109
12,735
16,687
$
$
$
36,033
29,807
27,911
$
$
$
(30,348)
(27,433)
(31,863)
$
$
$
20,794
15,109
12,735
(a)(3) Exhibits – The following exhibits are filed herewith or incorporated by reference herein:
Exhibit
No.
2.1
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
Description of Exhibit
Asset Purchase Agreement dated October 1, 2015 by and among Mid Rockland Imaging Partners, Inc., a Delaware corporation and a
subsidiary of the registrant, Diagnostic Imaging Group LLC, a Delaware limited liability company, Diagnostic Imaging Group
Holdings, LLC,, a Delaware limited liability company, New Primecare LLC, a Delaware limited liability company, and Flushing
Medical Arts Building, Inc. (incorporated by reference to exhibit filed with Form 8-K on October 20, 2015).
Certificate of Incorporation of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on
September 4, 2008).
Certificate of Amendment to Certificate of Incorporation of RadNet, Inc., a Delaware corporation, dated September 2, 2008
(incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).
Bylaws of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).
Credit and Guaranty Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantors
thereunder, General Electric Capital Corporation, Deutsche Bank Securities, Inc., RBC Capital Markets and Barclays Bank PLC
(incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).
Pledge and Security Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantors
thereunder, and Barclays Bank PLC (incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).
Form of Trademark Security Agreement by and among the guarantors thereunder and Barclays Bank PLC (filed as an exhibit to the
Pledge and Security Agreement, dated October 10, 2012, by among the guarantors thereunder and Barclays Bank PLC, included as
Exhibit 10.2).
First Amendment Agreement dated April 3, 2013 to the Credit and Guaranty Agreement dated October 10, 2012, by and among RadNet
Management, Inc., RadNet, Inc., certain subsidiaries and affiliates of RadNet Management, Inc., certain lenders identified therein and
Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed with Form 8-K on
April 4, 2013).
Second Amendment Agreement dated March 25, 2014 to the Credit and Guaranty Agreement, dated as of October 10, 2012 (as
amended, by the First Amendment Agreement, dated as of April 3, 2013), by and among RadNet, Inc., Radnet Management, Inc.,
certain subsidiaries and affiliates of Radnet Management, Inc., certain lenders identified therein, and Barclays Bank PLC, as
administrative agent and collateral agent. (incorporated by reference to Exhibit 99.1 filed with Form 8-K on March 31, 2014).
90
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Second Lien Credit and Guaranty Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., RadNet, Inc.,
certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain other financial
institutions and Barclays Bank PLC, as administrative agent and collateral agent. (incorporated by reference to Exhibit 99.2 filed with
Form 8-K on March 31, 2014).
Second Lien Pledge and Security Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., the Grantors
identified therein, and Barclays Bank PLC, as collateral agent. (incorporated by reference to Exhibit 99.3 filed with Form 8-K on March
31, 2014).
Joinder Agreement, dated as of April 30, 2015, by and y and among Barclays Bank Plc, Radnet Management, Inc., a California
corporation, Radnet Inc., a Delaware corporation, and certain affiliates and subsidiaries of Radnet Management Inc. (incorporated by
reference to exhibit filed with Form 8-K on May 1, 2015).
RadNet, Inc. 2006 Equity Incentive Plan (Amended and Restated as of April 20, 2015) 2011 (incorporated by reference to exhibit filed
with Form S-8 registration statement on August 15, 2011).*
Form of Stock Option Agreement for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form S-8
registration statement on August 12, 2015).*
Form of Restricted Stock Award for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form 10-Q for the
quarter ended March 31, 2012).*
Form of Warrant recharacterized as under the 2006 Equity Incentive Plan – Form A (incorporated by reference to exhibit filed with
Form 10-Q for the quarter ended June 30, 2008).*
Form of Warrant recharacterized as under the 2006 Equity Incentive Plan – Form B (incorporated by reference to exhibit filed with
Form 10-Q for the quarter ended June 30, 2008).*
Form of Indemnification Agreement between the registrant and each of its officers and directors (incorporated by reference to exhibit
filed with Form 10-Q for the quarter ended March 31, 2008).*
Employment Agreement dated as of June 12, 1992 with Howard G. Berger, M.D. (incorporated by reference to exhibit filed with an
amendment to Form 8-K report for June 12, 1992).*
Amendment to Employment Agreement dated January 30, 2004 with Howard G. Berger, M.D. (incorporated by reference to exhibit
filed with Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Howard G. Berger, M.D.
Employment Agreement dated as of April 16, 2001 with Jeffrey L. Linden (incorporated by reference to exhibit filed with Form 10-K
for the year ended October 31, 2001).*
Amendment to Employment Agreement dated January 30, 2004 with Jeffrey L. Linden (incorporated by reference to exhibit filed with
Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Jeffrey L. Linden.
Employment Agreement dated as of May 1, 2001 with Norman R. Hames (incorporated by reference to exhibit filed with Form 10-K
for the year ended October 31, 2001).*
Amendment to Employment Agreement dated January 30, 2004 with Norman R. Hames (incorporated by reference to exhibit filed with
Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Norman R. Hames.
Employment Agreement with Mark Stolper effective January 1, 2009 (incorporated by reference to exhibit filed with Form 10-K for the
year ended December 31, 2009).*
91
10.25
10.26
10.27
10.28
12.1
14.1
21.1
23.1
24.1
31.1
31.2
32.1
32.2
First Amendment to Employment Agreement dated November 16, 2015 with Mark Stolper.
Retention Agreement with Stephen Forthuber dated November 15, 2006 (incorporated by reference to exhibit filed with Form 10-K/T
for the year ended December 31, 2006).*
First Amendment to Retention Agreement dated November 16, 2015 with Stephen Forthuber.
Amended and Restated Management and Service Agreement between Radnet Management, Inc. and Beverly Radiology Medical Group
III dated January 1, 2004 (incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 2003).
Computation of Ratios of Earnings to Fixed Charges.
Code of Financial Ethics
List of Subsidiaries.
Consent of Registered Independent Public Accounting Firm.
Power of Attorney (included on signature page attached hereto).
CEO Certification pursuant to Section 302.
CFO Certification pursuant to Section 302.
CEO Certification pursuant to Section 906.
CFO Certification pursuant to Section 906.
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
* Indicates management contract or compensatory plan.
†Certain schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The company agrees to furnish supplementally a
copy of all omitted schedules to the SEC upon its request.
92
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.
SIGNATURES
Date: March 15, 2016
RADNET, INC.
/s/ HOWARD G. BERGER, M.D .
Howard G. Berger, M.D., President,
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints
Howard G. Berger, M.D. and Mark D. Stolper, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and re-
substitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or necessary fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
registrant in the capacities and on the dates indicated.
By/s/ HOWARD G. BERGER, M.D.
Howard G. Berger, M.D., Director, Chief Executive Officer and President
Date: March 15, 2016
By/s/ MARVIN S. CADWELL
Marvin S. Cadwell, Director
Date: March 15, 2016
By/s/ JOHN V. CRUES, III, M.D.
John V. Crues, III, M.D., Director
Date: March 15, 2016
By/s/ NORMAN R. HAMES
Norman R. Hames, Director
Date: March 15, 2016
By/s/ DAVID L. SWARTZ
David L. Swartz, Director
Date: March 15, 2016
By/s/ LAWRENCE L. LEVITT
Lawrence L. Levitt, Director
Date: March 15, 2016
By/s/ MICHAEL L. SHERMAN, M.D.
Michael L. Sherman, M.D., Director
Date: March 15, 2016
By/s/ MARK D. STOLPER
Mark D. Stolper,Chief Financial Officer (Principal Accounting Officer)
Date: March 15, 2016
93
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
(cid:59) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-33307
RadNet, Inc.
(Exact name of registrant as specified in charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1510 Cotner Avenue
Los Angeles, California
(Address of principal executive offices)
13-3326724
(I.R.S. Employer
Identification No.)
90025
(Zip Code)
Registrant’s telephone number, including area code: (310) 478-7808
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.0001 par value
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the act. Yes (cid:133) No ⌧
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 ⌧ No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ⌧ No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer (cid:133)
Non-Accelerated Filer (cid:133) (Do not check if a smaller reporting company)
Accelerated Filer ⌧
Smaller Reporting Company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes (cid:133) No ⌧
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $266,105,775 on June 30, 2015
(the last business day of the registrant’s most recently completed second quarter) based on the closing price for the common stock on the NASDAQ
Global Market on June 30, 2015.
The number of shares of the registrant’s common stock outstanding on March 10, 2016, was 47,193,286.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of the Form 10-K, to the extent not set forth herein or in the Annual Report on Form 10-K filed on March 15,
2016, is incorporated herein by reference from the registrant’s definitive proxy statement for the Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year.
EXPLANATORY NOTE
We are filing this Form 10-K/A (Amendment No. 1) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, originally filed
with the U.S. Securities and Exchange Commission on March 15, 2016 (the "Original Filing"), solely for the purpose of including the financial
statements of certain unconsolidated joint ventures in accordance with Rule 3-09 of Regulation S-X. Rule 3-09 requires that we file financial
statements of unconsolidated joint ventures in which we hold equity interests of 50% or less and account for them under the equity method, to the
extent that the unconsolidated joint ventures are individually significant. Such statements are required to be audited only for the years in which such
unconsolidated joint ventures met applicable significance tests. Under Rule 3-09 of Regulation S-X, we are permitted to file the financial statements for
these unconsolidated joint ventures within 90 days of the end of our fiscal year.
We determined that as of and for the year ended December 31, 2014, four of our unconsolidated joint venture interests, including Franklin Imaging
Joint Venture, Carroll County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore Diagnostic Imaging Partnership
(collectively, the “Group”), were significant unconsolidated joint ventures under Rule 3-09 and the accompanying financial statements for the Group
for the year ended December 31, 2014 have been audited accordingly. The Group did not meet the significance test for year 2015; therefore, the
Group’s financial statements are required to be included for the year ended December 31, 2015, but are not required to be audited. We are permitted to
file combined financial statements for individually significant joint ventures which are in the same line of business. Accordingly, we are filing this
Amendment No. 1 to include the combined financial statements of the Group under Item 15 - Exhibits and Financial Statement Schedules, and are
amending the list of the financial statements and exhibits being filed herewith. We are also filing an updated Exhibit Index and updated Certificates of
our Chief Executive Officer and Chief Financial Officer under Sections 302 and 906 of the Sarbanes Oxley Act of 2002.
Except as described above, this Form 10-K/A does not amend or change any other items or disclosures in the Original Filing. The disclosure in this
Form 10-K/A has not been updated to reflect events occurring after the Original Filing. Accordingly, this Amendment should be read in conjunction
with the Original Filing and our other filings with the SEC subsequent to the Original Filing.
2
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
PART IV
The following financial statements of RadNet, Inc. and consolidated subsidiaries were filed with the Original Filing on March 15, 2016:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statements Schedules
51
52
53
54
55
56
58 to 90
Schedules – The following financial statement schedules of Radnet, Inc. and consolidated subsidiaries were filed with the Original Filing on March 15,
2016:
Schedule II – Valuation and Qualifying Accounts
(a)(3) Exhibit Index
See the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K/A (Amendment No. 1).
(c) Financial Statement Schedules
The following combined financial statements of the Group are filed herewith pursuant to Rule 3-09 of Regulation S-X:
Report of Independent Registered Public Accounting Firm
Combined Balance Sheets of Certain RadNet, Inc. Affiliates
Combined Statements of Income of Certain RadNet, Inc. Affiliates
Combined Statements of Partners’ Capital of Certain RadNet, Inc. Affiliates
Combined Statements of Cash Flows of Certain RadNet, Inc. Affiliates
Notes to Combined Financial Statements
3
Page No
5
6
7
8
9
10 to 14
Report of Independent Registered Public Accounting Firm
To the partners of:
Franklin Imaging Joint Venture;
Carroll County Radiology, LLC;
MRI at St. Joseph Medical Center, LLC; and
Greater Baltimore Diagnostic Imaging Partnership
We have audited the accompanying combined balance sheets of certain RadNet, Inc. affiliates including Franklin Imaging Joint Venture, Carroll
County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore Diagnostic Imaging Partnership (collectively, the “Group”),
as of December 31, 2014, and the related combined statements of income, partners’ capital, and cash flows for each of the two years in the period
ended December 31, 2014. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Group’s internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Group at
December 31, 2014, and the combined results of their operations and their cash flows for each of the two years in the period ended December 31, 2014,
in conformity with U.S. generally accepted accounting principles.
March 31, 2015
Los Angeles, California
/s/ Ernst & Young, LLP
1
CERTAIN RADNET, INC. AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
December 31,
2015
(unaudited)
December 31,
2014
December 31,
2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Due from affiliates
Prepaid expenses and other current assets
Total current assets
PROPERTY AND EQUIPMENT, NET
OTHER ASSETS
Goodwill
Other intangible assets
Total assets
$
$
–
5,671
5,260
538
11,469
13,752
9,923
350
35,494
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses
Current portion of deferred rent
Current portion of equipment notes payable
Current portion of obligations under capital leases
Total current liabilities
LONG-TERM LIABILITIES
Deferred rent, net of current portion
Equipment notes payable, net of current portion
Total liabilities
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
RadNet, Inc.
Other partners
Total partners' capital
Total liabilities and partners' capital
$
$
$
$
$
$
$
$
3
7,439
5,507
129
13,078
13,845
9,923
470
37,316
1,483
231
692
–
2,406
1,169
565
4,140
288
8,603
2,788
667
12,346
17,794
9,923
589
40,652
1,942
207
668
167
2,984
1,399
1,257
5,640
837
274
208
–
1,319
1,028
357
2,704
15,123
17,667
32,790
35,494 $
15,339
17,837
33,176
37,316 $
16,833
18,179
35,012
40,652
The accompanying notes are an integral part of these financial statements.
2
CERTAIN RADNET, INC. AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
NET SERVICE FEE REVENUE
Years Ended December 31,
2014
2013
2015
(unaudited)
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
$
$
55,008
(2,824)
52,184
$
55,058
(2,832)
52,226
OPERATING EXPENSES
Cost of operations
Depreciation and amortization
Net loss (gain) on sale of equipment
Total operating expenses
INCOME FROM OPERATIONS
Net interest expense
34,802
4,139
31
38,972
13,212
34
36,767
4,718
19
41,504
10,722
60
57,210
(2,777)
54,433
38,220
4,728
(143)
42,805
11,628
86
NET INCOME
$
13,178 $
10,662 $
11,542
The accompanying notes are an integral part of these financial statements.
3
CERTAIN RADNET, INC. AFFILIATES
COMBINED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
BALANCE - January 1, 2013
Net Income
Distributions
BALANCE - December 31, 2013
Net Income
Distributions
BALANCE - December 31, 2014
Net Income (unaudited)
Distributions (unaudited)
BALANCE - December 31, 2015 (unaudited)
RadNet, Inc.
Other Partners
Total
$
$
17,717 $
5,369
(6,253)
16,833
4,949
(6,443)
15,339
6,133
(6,349)
15,123 $
18,253 $
6,173
(6,247)
18,179
5,713
(6,055)
17,837
7,045
(7,215)
17,667 $
35,970
11,542
(12,500)
35,012
10,662
(12,498)
33,176
13,178
(13,564)
32,790
The accompanying notes are an integral part of these financial statements.
4
CERTAIN RADNET, INC. AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2015
Years Ended December 31,
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES
(unaudited)
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
13,178
$
10,662
$
11,542
Depreciation and amortization
Provision for bad debts
Deferred rent amortization
Net loss (gain) on sale of equipment
Changes in operating assets and liabilities
Accounts receivable
Prepaid expenses and other current assets
Due from affiliates
Accounts payable and accrued expenses
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
Proceeds from sale of equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes and leases payable
Distributions to partners
Net cash used in financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
4,139
2,824
(98)
31
(1,056)
(409)
247
(646)
18,210
(3,958)
1
(3,957)
(692)
(13,564)
(14,256)
(3)
3
–
34
$
$
4,718
2,832
(206)
19
(1,669)
537
(2,718)
(459)
13,716
(669)
1
(668)
(835)
(12,498)
(13,333)
(285)
288
3
60
$
$
4,728
2,777
(155)
(143)
(2,783)
(69)
(1,668)
(84)
14,145
(1,965)
30
(1,935)
(1,200)
(12,500)
(13,700)
(1,490)
1,778
288
86
$
$
The accompanying notes are an integral part of these financial statements.
5
CERTAIN RADNET, INC. AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited as of and for the year ended December 31, 2015)
NOTE 1 – DESCRIPTION OF BUSINESS
Franklin Imaging Joint Venture, Carroll County Radiology, LLC, MRI at St. Joseph Medical Center, LLC, and Greater Baltimore Diagnostic
Imaging Partnership (collectively, the “Group”), are joint ventures between RadNet, Inc. and, as applicable, hospitals, health systems or radiology
practices operating within the state of Maryland 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. Each joint venture within the Group is an affiliate of RadNet, Inc. as follows:
Franklin Imaging Joint Venture
Carroll County Radiology, LLC
MRI at St. Joseph Medical Center, LLC
Greater Baltimore Diagnostic Imaging Partnership ("GBDIP")
% owned by RadNet,
Inc.
49%
40%
49%
50%
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION – Under Rule 3-09 of Regulation S-X, RadNet, Inc. is permitted to file combined financial statements for
individually significant unconsolidated joint ventures which are in the same line of business. The combined financial statements include the assets,
liabilities, and operations of each member of the Group. The operating activities of each of these joint ventures are completely separate from one
another and are in no way affiliated with one another. Accordingly there are no intercompany transactions and balances to be eliminated when
combining each together.
USE OF ESTIMATES - The preparation of these financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These
estimates and assumptions affect various matters including the Group’s reported amounts of assets and liabilities in the combined balance sheets at the
dates of the financial statements; disclosure of contingent assets and liabilities at the dates of the financial statements; and reported amounts of
revenues and expenses in the combined statements of income 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.
REVENUES – Combined service fee revenue, net of contractual allowances and discounts, consists of net patient fees received from various
payors and patients themselves based mainly upon established contractual billing rates, less allowances for contractual adjustments and discounts. This
service fee revenue is earned through providing the use of diagnostic imaging equipment and the provision of technical services as well as providing
administrative services such as clerical and administrative personnel, billing and collection, provision of medical and office supplies, secretarial,
reception and transcription services, maintenance of medical records, and advertising, marketing and promotional activities.
The Group's combined service fee revenues are recorded during the period the services are provided based upon the estimated amounts due
from patients and third-party payors. Third-party payors include federal and state agencies (under the Medicare and Medicaid programs), managed care
health plans, commercial insurance companies and employers. Estimates of contractual allowances are based on historical collection rates of pre-
determined payment rates specified in the related contractual agreements. The Group also records a provision for doubtful accounts (based primarily on
historical collection experience) related to patient financial responsibility including copayment and deductible amounts for patients who have health
care coverage with third-party payors.
6
The Group’s service fee revenue, net of contractual allowances and discounts less the provision for bad debts for the years ended December
31, are summarized in the following table (in thousands):
Commercial Insurance
Medicare
Medicaid
Workers' Compensation/Personal Injury
Other
Service fee revenue, net of contractual allowances and discounts
Provision for bad debts
Net service fee revenue
Years Ended December 31,
2014
2013
2015
(unaudited)
$
$
$
36,911
12,322
1,980
2,805
990
55,008
$
37,384
12,003
1,872
2,643
1,156
55,058
(2,824)
52,184 $
(2,832)
52,226 $
38,846
12,472
1,945
2,746
1,201
57,210
(2,777)
54,433
ACCOUNTS RECEIVABLE - Substantially all of the Group’s accounts receivable are due under fee-for-service contracts from third party
payors, such as insurance companies and government-sponsored healthcare programs, or directly from patients. Services are generally provided
pursuant to one-year contracts with healthcare providers. The Group continuously monitors collections from payors and maintains an allowance for bad
debts based upon specific payor collection issues that have been identified as well as historical collection experience.
PROVISION FOR BAD DEBTS - Although outcomes vary, the Group’s policy is to attempt to collect amounts due from patients, including
co-payments and deductibles due from patients with insurance, at the time of service. The Group provides for an allowance against accounts receivable
that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value.
The Group estimates this allowance based on the aging of accounts receivable by each type of payor over a minimum 18-month look-back period, and
other relevant factors. A significant portion of the provision for bad debt relates to co-payments and deductibles owed to the Group by patients with
insurance. There are various factors that can impact collection trends, such as changes in the economy, which in turn have an impact on the increased
burden of co-payments and deductibles to be made by patients with insurance. These factors continuously change and can have an impact on collection
trends and the Group’s estimation process. The combined allowance for bad debts at December 31, 2015 and 2014 was $365,000 (unaudited) and
$351,000, respectively.
CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject the Group to credit risk are primarily cash
equivalents and accounts receivable. Each joint venture places its cash and cash equivalents with a financial institution. At times, the cash in the
financial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation, or FDIC. Substantially all accounts
receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare
programs, or directly from patients. Services are generally provided pursuant to one-year contracts with healthcare providers. The Group continuously
monitors collections from its clients and maintains an allowance for bad debts based upon any specific payor collection issues that are identified and
historical experience.
CASH AND CASH EQUIVALENTS – The Group considers all highly liquid investments that mature in three months or less when purchased
to be cash equivalents. The carrying amount of cash and cash equivalents approximates their fair market value.
PROPERTY AND EQUIPMENT – Property, furniture and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization of property, furniture and equipment are provided using the straight-line method over the estimated useful lives, which
range from 3 to 15 years. Leasehold improvements are amortized at the shorter of the related lease term or their estimated useful lives which range
from 3 to 30 years.
GOODWILL – Combined goodwill of the Group at December 31, 2015 totaled $9.9 million (unaudited). Goodwill is recorded by each
member of the Group as a result of business combinations. Management of each member of the Group evaluates goodwill, at a minimum, on an annual
basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Each member of the Group
evaluated its respective share of the combined goodwill at October 1, 2015 for signs of impairment under the provisions of ASU 2011-08. By utilizing
certain qualitative measures outlined in the guidance, each member determined that its respective share of the combined goodwill was not impaired.
7
INCOME TAXES - Each member of the Group is treated as a partnership for federal and state income tax purposes where all taxable income
is allocated to the partners in accordance with the respective partnership agreement and so accordingly federal and state taxes on income are the
responsibility of the joint venture partners individually. Accordingly, no income tax provision is recorded by any joint ventures in the Group.
Open tax years are those that are open for examination by taxing authorities, and include all returns for tax years ending on or after December
31, 2012, for federal returns and December 31, 2012, for Maryland returns. The Group has no examinations in process and has not been notified of any
future examinations at this time. Management of each member of the Group has reviewed all open tax years and major jurisdictions, and has not
recorded an unrecognized tax benefit relating to uncertain income tax positions taken or expected to be taken in future tax returns. The Group has
recognized no interest or penalties related to uncertain tax positions taken or expected to be taken.
FAIR VALUE MEASUREMENTS –The combined balance sheets include the following financial instruments: cash and cash equivalents,
receivables, trade accounts payable, capital leases, equipment notes payable and other liabilities. The Group considers the carrying amounts of cash and
cash equivalents, receivables, other current assets and current liabilities to approximate their fair value because of the relatively short period of time
between the origination of these instruments and their expected realization or payment. Additionally, the Group considers the carrying amount of its
equipment notes payable and capital lease obligations to approximate their fair value because the weighted average interest rate used to formulate the
carrying amounts approximates current market rates.
NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS
Combined goodwill of the Group totaled $9.9 million (unaudited) at December 31, 2015 and 2014. Goodwill is recorded as a result of
business combinations.
Other intangible assets are primarily related to the value of management service contracts on the books of MRI at St. Joseph Medical Center,
LLC and covenant not to compete contracts acquired through GBDIP’s acquisition of a controlling interest of a previously held non-consolidated joint
venture investment and totaled $608,138 on the date of acquisition. Accumulated amortization of the management service contract and covenant not to
compete contract intangible assets through December 31, 2015 was $141,000 (unaudited) and $418,000 (unaudited), respectively. Amortization
expense for the year ended December 31, 2015 was $120,000 (unaudited). The value of these covenant not to compete contracts is amortized using the
straight-line method over five years. Management service contracts are amortized over 25 years.
The following table (unaudited) shows annual amortization expense, by asset classes that will be recorded over the next five years (in
thousands):
2016
2017
2018
2019
2020
Thereafter
Total
Management service contracts
Covenant not to compete
contracts
Total annual amortization
$
$
16 $
16
$
16
$
16
$
16
$
165 $
105
121 $
–
16 $
16 $
8
–
16 $
–
16 $
–
165 $
Weighted
average
amortization
period
remaining in
years
17.0
1.0
245
105
350
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation and amortization are as follows (in thousands):
Medical equipment
Office equipment, furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
December 31,
2015
(Unaudited)
2014
$
$
39,841
3,280
14,440
57,561
(43,809)
13,752
$
$
36,618
3,238
14,335
54,191
(40,346)
13,845
Depreciation and amortization expense on property and equipment, including amortization of equipment under capital leases, for the years
ended December 31, 2015, 2014 and 2013 totaled $4.0 million (unaudited), $4.7 million and $4.6 million, respectively.
NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are as follows (in thousands):
Accounts payable
Accrued expenses
Accrued payroll and vacation
Total
NOTE 6 – EQUIPMENT NOTES PAYABLE
December 31,
2015
(unaudited)
2014
$
$
1
628
208
837
$
$
98
230
1,155
1,483
One member of the Group, Greater Baltimore Diagnostic Imaging Partnership holds four promissory notes issued by two financing companies
for the purpose of acquiring imaging equipment. These notes have interest rates between 3.5% and 4.5%, mature on or before October 2018 and are
collateralized by the acquired equipment.
The following is a listing of annual principal maturities of the equipment notes discussed above for years ending December 31 (in thousands):
2016
2017
2018
2019
2020
Thereafter
(unaudited)
208
201
156
–
–
–
565
$
$
9
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Leases – The Group leases various operating facilities and certain medical equipment under operating leases with renewal options expiring through
2018. Certain leases contain renewal options from two to ten years and escalation clauses based either on the consumer price index or fixed rent
escalators. Leases with fixed rent escalators are recorded on a straight-line basis. The Group records deferred rent for tenant leasehold improvement
allowances received from a lessor and amortizes the deferred rent expense over the term of the lease agreement. Minimum annual payments under
operating leases for future years ending December 31 (in thousands):
2016
2017
2018
2019
2020
Thereafter
Facilities
(unaudited)
Equipment
(unaudited)
Total
(unaudited)
$
$
1,923
1,457
1,189
938
496
549
6,552
$
$
282
39
35
18
–
–
374
$
$
2,205
1,496
1,224
956
496
549
6,926
Total rent expense, including equipment rentals, for the years ended December 31, 2015, 2014 and 2013 was $2.7 million (unaudited), $3.5
million and $3.9 million, respectively.
NOTE 8 – RELATED PARTY TRANSACTIONS
RadNet, Inc. contracts with each joint venture within the Group to provide certain administrative services including assistance with
accounting, payroll and employee benefits processing, and billing and collection functions on behalf of these joint ventures. RadNet Inc. remits to the
joint ventures all amounts collected through its administration of the billing and collection functions.
RadNet, Inc., as administrator over payroll and employee benefits, pays salary and benefit obligations on behalf of these joint ventures and
then bills each joint venture for its respective portion.
RadNet, Inc. contracts with certain members of its contracted radiologist groups to perform professional services for the joint ventures.
RadNet, Inc. assures that these radiologists are adequately covered under medical malpractice insurance policies. RadNet, Inc., on behalf of its
contracted radiologist groups, bills each joint venture for its respective share of the professional fees incurred through its utilization of these contracted
radiologists. RadNet, Inc. remits to its contracted radiologist groups all amounts collected from the joint ventures for the billed professional fees.
Amounts receivable from and payable to RadNet Inc. for the activities listed above are summarized in due from affiliates on the Group’s
combined balance sheets and were $5.3 million (unaudited) and $5.5 million at December 31, 2015 and 2014, respectively.
NOTE 9 – SUBSEQUENT EVENTS
The members of the Group evaluated subsequent events through March 30, 2016 and concluded that no additional disclosures were required.
10
The following exhibits are filed, or incorporated by reference into this Annual Report on Form 10-K/A (Amendment No. 1):
Exhibit No.
Description of Exhibit
Exhibit Index
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Certificate of Incorporation of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on
September 4, 2008).
Certificate of Amendment to Certificate of Incorporation of RadNet, Inc., a Delaware corporation, dated September 2, 2008
(incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).
Bylaws of RadNet, Inc., a Delaware corporation (incorporated by reference to exhibit filed with Form 8-K on September 4, 2008).
Credit and Guaranty Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantors
thereunder, General Electric Capital Corporation, Deutsche Bank Securities, Inc., RBC Capital Markets and Barclays Bank PLC
(incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).
Pledge and Security Agreement, dated October 10, 2012, by and among Radnet Management, Inc., RadNet, Inc., the guarantors
thereunder, and Barclays Bank PLC (incorporated by reference to exhibit filed with Form 8-K on October 12, 2012).
Form of Trademark Security Agreement by and among the guarantors thereunder and Barclays Bank PLC (filed as an exhibit to
the Pledge and Security Agreement, dated October 10, 2012, by among the guarantors thereunder and Barclays Bank PLC,
included as Exhibit 10.2).
First Amendment Agreement dated as of April 3, 2013 to the Credit and Guaranty Agreement dated as of October 10, 2012, by
and among Radnet Management, Inc., RadNet, Inc., the guarantors thereunder, Barclays Bank PLC, General Electric Capital
Corporation and deutsche Bank Securities Inc. and RBC Capital Markets (incorporated by reference to Exhibit 99.1 filed with
Form 8-K on April 4, 2013).
Second Amendment Agreement dated March 25, 2014 to the Credit and Guaranty Agreement, dated as of October 10, 2012 (as
amended, by the First Amendment Agreement, dated as of April 3, 2013), by and among RadNet, Inc., Radnet Management, Inc.,
certain subsidiaries and affiliates of Radnet Management, Inc., certain lenders identified therein, and Barclays Bank PLC, as
administrative agent and collateral agent (incorporated by reference to Exhibit 99.1 filed with Form 8-K on March 31, 2014).
Second Lien Credit and Guaranty Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., RadNet, Inc.,
certain subsidiaries and affiliates of Radnet Management, Inc., the lenders party thereto from time to time, certain other financial
institutions and Barclays Bank PLC, as administrative agent and collateral agent (incorporated by reference to Exhibit 99.2 filed
with Form 8-K on March 31, 2014).
Second Lien Pledge and Security Agreement, dated as of March 25, 2014, by and among Radnet Management, Inc., the Grantors
identified therein, and Barclays Bank PLC (incorporated by reference to Exhibit 99.3 filed with Form 8-K on March 31, 2014).
11
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Joinder Agreement, dated as of April 30, 2015, by and among Barclays Bank Plc, Radnet Management, Inc., a California
Corporation, Radnet Inc., a Delaware Corporation, and certain affiliates and subsidiaries of Radnet Management Inc.
(Incorporated by reference to exhibit filed with Form 8-K on May 1, 2015).
2006 Equity Incentive Plan, amended and restated as of April 19, 2011 (incorporated by reference to exhibit filed with Form S-8
registration statement on August 15, 2011).*
Form of Stock Option Agreement for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form S-8
registration statement on August 15, 2011).*
Form of Restricted Stock Award for the 2006 Equity Incentive Plan (incorporated by reference to exhibit filed with Form 10-Q
for the quarter ended March 31, 2012).*
Form of Warrant recharacterized as under the 2006 Equity Incentive Plan – Form A (incorporated by reference to exhibit filed
with Form 10-Q for the quarter ended June 30, 2008).*
Form of Warrant recharacterized as under the 2006 Equity Incentive Plan – Form B (incorporated by reference to exhibit filed
with Form 10-Q for the quarter ended June 30, 2008).*
Form of Indemnification Agreement between the registrant and each of its officers and directors (incorporated by reference to
exhibit filed with Form 10-Q for the quarter ended March 31, 2008).*
Employment Agreement dated as of June 12, 1992 with Howard G. Berger, M.D. (incorporated by reference to exhibit filed with
an amendment to Form 8-K report for June 12, 1992).*
Amendment to Employment Agreement dated January 30, 2004 with Howard G. Berger, M.D. (incorporated by reference to
exhibit filed with Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Howard G. Berger, M.D. (incorporated by
reference to exhibit filed with Form 10-K for the year ended December 31, 2015).*
Employment Agreement dated as of April 16, 2001 with Jeffrey L. Linden (incorporated by reference to exhibit filed with Form
10-K for the year ended October 31, 2001).*
Amendment to Employment Agreement dated January 30, 2004 with Jeffrey L. Linden (incorporated by reference to exhibit filed
with Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Jeffrey L. Linden (incorporated by reference to
exhibit filed with Form 10-K for the year ended December 31, 2015).*
Employment Agreement dated as of May 1, 2001 with Norman R. Hames (incorporated by reference to exhibit filed with Form
10-K for the year ended October 31, 2001).*
Amendment to Employment Agreement dated January 30, 2004 with Norman R. Hames (incorporated by reference to exhibit
filed with Form 10-Q for the quarter ended January 31, 2004).*
Second Amendment to Employment Agreement dated November 16, 2015 with Normal R. Hames (incorporated by reference to
exhibit filed with Form 10-K for the year ended December 31, 2015).*
Employment Agreement with Mark Stolper effective January 1, 2009 (incorporated by reference to exhibit filed with Form 10-K
for the year ended December 31, 2009).*
First Amendment to Employment Agreement dated November 16, 2015 with Mark Stopler (incorporated by reference to exhibit
filed with Form 10-K for the year ended December 31, 2015).*
Retention Agreement with Stephen Forthuber dated November 15, 2006 (incorporated by reference to exhibit filed with Form 10-
K/T for the year ended December 31, 2006).*
First Amendment to Retention Agreement dated November 16, 2015 with Stephen Forthuber (incorporated by reference to exhibit
filed with Form 10-K for the year ended December 31, 2015).*
Amended and Restated Management and Service Agreement between Radnet Management, Inc. and Beverly Radiology Medical
Group III dated January 1, 2004 (incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 2003).
12
12.1
14.1
21.1
23.1
23.2
24.1
31.1
31.2
32.1
32.2
Computation of Ratio of Earnings to Fixed Charges (incorporated by reference to exhibit filed with Form 10-K for the year ended
December 31, 2015).
Code of Financial Ethics (incorporated by reference to exhibit filed with Form 10-K for the year ended December 31, 2015).
List of Subsidiaries (incorporated by reference to exhibit filed with Form 10-K for the year ended December 31, 2015.
Consent of Registered Independent Public Accounting Firm (incorporated by reference to exhibit filed with Form 10-K for the
year ended December 31, 2015).
Consent of Registered Independent Public Accounting Firm.
Power of Attorney (included on signature page to the Form 10-K for the year ended December 31, 2015).
CEO Certification pursuant to Section 302.
CFO Certification pursuant to Section 302.
CEO Certification pursuant to Section 906.
CFO Certification pursuant to Section 906.
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
* Indicates management contract or compensatory plan.
13
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.
SIGNATURES
Date: March 30, 2016
RADNET, INC.
/ s/ HOWARD G . BERGER, M.D.
Howard G. Berger, M.D., President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
registrant in the capacities and on the dates indicated.
By/ s/ HOWARD G . BERGER, M.D.
Howard G. Berger, M.D., Director, Chief Executive Officer and
President
Date: March 30, 2016
By/s/ MARVIN S. CADWELL *
Marvin S. Cadwell, Director
By/s/ JOHN V. CRUES, III, M.D. *
John V. Crues, III, M.D., Director
By/s/ NORMAN R. HAMES *
Norman R. Hames, Director
By/s/ DAVID L. SWARTZ *
David L. Swartz, Director
By/s/ LAWRENCE L. LEVITT *
Lawrence L. Levitt, Director
By/s/ MICHAEL L. SHERMAN, M.D. *
Michael L. Sherman, M.D., Director
By/s/ MARK D. STOLPER
Mark D. Stolper, Chief Financial Officer (Principal Accounting
Officer)
* By Mark D. Stolper, as attorney- in-fact
14
Date: March 30, 2016
Date: March 30, 2016
Date: March 30, 2016
Date: March 30, 2016
Date: March 30, 2016
Date: March 30, 2016
Date: March 30, 2016
HEADQUARTERS
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
RadNet, Inc.
1510 Cotner Avenue
Los Angeles, CA 90025
(310) 445-2800
COMMON STOCK
The Common Stock of
RadNet, Inc. is listed on the
NASDAQ Global Market under
the symbol "RDNT."
TRANSFER AGENT
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(718) 921-8124
(800) 937-5449
INDEPENDENT AUDITORS
Ernst & Young LLP
Los Angeles, CA
Howard G. Berger, M.D.
President, CEO and Chairman
of the Board
Mark D. Stolper
Executive Vice President
and Chief Financial Officer
Jeffrey L. Linden
Executive Vice President
and General Counsel
Norman R. Hames
Executive Vice President,
Secretary and Chief Operating
Officer-Western Operations
Stephen M. Forthuber
Executive Vice President
and Chief Operating
Officer-Eastern Operations
Michael M. Murdock
Executive Vice President
and Chief Development Officer
John V. Crues, III, M.D.
Vice President and Medical Director
Howard G. Berger, M.D.
President, CEO and Chairman
of the Board
RadNet, Inc.
Marvin S. Cadwell
Retired
John V. Crues, III, M.D.
Vice President and Medical Director
RadNet, Inc.
Norman R. Hames
Executive Vice President,
Secretary and Chief Operating
Officer-Western Operations
RadNet, Inc.
Lawrence L. Levitt
President and CFO
Canyon Management Company
Michael L. Sherman, M.D.
Retired
David L. Swartz
President
David L. Swartz Consulting, Inc.
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BR750491-0416-AR