RadNet, Inc. - Annual Report: 2011 (Form 10-K)

Delaware	13-3326724
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1510 Cotner Avenue
Los Angeles, California	90025
(Address of principal executive offices)	(Zip Code)

Title of Each Class	Name of each exchange on which registered
Common Stock, $.0001 par value	NASDAQ Global Market

 

	Large Accelerated Filer    ¨		Accelerated Filer   x
	Non-Accelerated Filer    ¨   (Do not check if a smaller reporting company)		Smaller Reporting Company    ¨

The information required by Part III of the Form 10-K, to the extent not set forth herein, 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.

 

FORM 10-K ITEM		PAGE
PART I.
Item 1.	Business	3
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures.	31
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Consolidated Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 8.	Financial Statements and Supplementary Data	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	96
Item 9A.	Controls and Procedures	96
Item 9B.	Other Information	98
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	98
Item 11.	Executive Compensation	98
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	98
Item 13.	Certain Relationships and Related Transactions, and Director Independence	98
Item 14.	Principal Accountant Fees and Services	98
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	99

 

Item 1.

Business

 

 

 

 

 

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:

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MRI spectroscopy, which can differentiate malignant from benign lesions;

 

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MRI angiography, which can produce three-dimensional images of body parts and assess the status of blood vessels;

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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

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the development of combined PET/CT scanners, which combine the technology from PET and CT to create a powerful diagnostic imaging system.

 

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there is sufficient patient demand for outpatient diagnostic imaging services;

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we believe we can gain significant market share;

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we can build key referral relationships or we have already established such relationships; and

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payors are receptive to our entry into the market.

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patient-friendly, non-clinical environments;

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a 24-hour turnaround on routine examinations;

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interpretations within one to two hours, if needed;

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flexible patient scheduling, including same-day appointments;

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extended operating hours, including weekends;

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reports delivered by courier, facsimile or email;

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availability of second opinions and consultations;

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availability of sub-specialty interpretations at no additional charge; and

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standardized fee schedules by region.

 

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The agreement expires on January 1, 2014. However, 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, 2011, he owned 99% of the equity of BRMG.

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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 10 facilities for which we contract with separate medical groups.

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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.

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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.

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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.

 

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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.

		% of Net Revenue
		Year Ended December 31, 2011				Year Ended December 31, 2010				Year Ended December 31, 2009
Commercial Insurance (1)(2)			55%				56%				56%
Managed Care Capitated Payors			15%				15%				15%
Medicare & Medicaid			23%				23%				23%

 

 

	●	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, which we send to them. When we find that a referring physician is over utilizing services, we work with the physician to modify referral patterns.

 

 

 

 

 

 

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capture patient demographic, history and billing information at point-of-service;

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automatically generate bills and electronically file claims with third-party payors;

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record and store diagnostic report images in digital format;

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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;

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perform claims, rejection and collection analysis; and

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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.

 

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to the extent it is necessary to protect a legitimate business interest of the party seeking enforcement;

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if it does not unreasonably restrain the party against whom enforcement is sought; and

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if it is not contrary to public interest.

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

	●	make it difficult for us to satisfy our 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.

 

 

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pay dividends or make certain other restricted payments or investments;

 

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incur additional indebtedness and issue preferred stock;

 

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create liens (other than permitted liens) securing indebtedness or trade payables unless the notes are secured on an equal and ratable basis with the obligations so secured, and, if such liens secure subordinated indebtedness, the notes are secured by a lien senior to such liens;

 

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sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of our assets;

 

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enter into certain transactions with affiliates;

 

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create restrictions on dividends or other payments by our restricted subsidiaries; and

 

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create guarantees of indebtedness by restricted subsidiaries.

 

 

 

 

 

 

 

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identify attractive and willing candidates for acquisitions;

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identify locations in existing or new markets for development of new facilities;

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comply with legal requirements affecting our arrangements with contracted radiology practices, including state prohibitions on fee-splitting, corporate practice of medicine and self-referrals;

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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;

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expand our infrastructure and management; and

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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.

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inability to obtain adequate financing;

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possible adverse effects on our operating results;

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diversion of management’s attention and resources;

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failure to retain key personnel;

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difficulties in integrating new operations into our existing infrastructure; and

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amortization or write-offs of acquired intangible assets, including goodwill.

 

 

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earthquakes, fires, floods and other natural disasters;

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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

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computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information and other breaches of security.

 

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the federal False Claims Act;

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the federal Medicare and Medicaid Anti-Kickback Laws, and state anti-kickback prohibitions;

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federal and state billing and claims submission laws and regulations;

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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;

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the federal physician self-referral prohibition commonly known as the Stark Law and the state equivalent of the Stark Law;

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state laws that prohibit the practice of medicine by non-physicians and prohibit fee-splitting arrangements involving physicians;

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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

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state laws governing reimbursement for diagnostic services related to services compensable under workers compensation rules.

 

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changes in expectations as to future financial performance or buy/sell recommendations of securities analysts;

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our, or a competitor’s, announcement of new services, or significant acquisitions, strategic partnerships, joint ventures or capital commitments; and

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the operating and stock price performance of other comparable companies.

 

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permit the board of directors to increase its own size, within the maximum limitations set forth in the bylaws, and fill the resulting vacancies;

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authorize the issuance of additional shares of preferred stock in one or more series without a stockholder vote;

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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

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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.

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 4.

Mine Safety Disclosures

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Quarter Ended		Low				High
December 31, 2011		$	1.94			$	2.79
September 30, 2011			2.30				4.58
June 30, 2011			3.40				5.19
March 31, 2011			2.87				4.00
December 31, 2010		$	2.00			$	2.96
September 30, 2010			1.83				2.58
June 30, 2010			2.37				4.04
March 31, 2010			2.04				3.18

Equity Compensation Plans Information.