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If the concept of managed care is accepted as central to health-care reform--and we strongly believe it will be--then building a competitive capability will be the determinant of survival for medical services companies. Managed care will become a lower-margin, volume-driven business where the ability to compete on price and quality will be essential. Also, crucial to the success of managed care companies will be extensive provider networks, sophisticated administrative systems, and vertical integration of businesses within defined geographic areas. Our emphasis will be on aggressively expanding our Company in a manner compatible with the many opportunities we believe will be available in a managed care environment.
Primedex Health Systems, Inc., headquartered in Los Angeles, is engaged in the delivery and administration of managed health care. Through its RadNet subsidiary, the company owns and operates 19 imaging centers that provide high-quality, cost-effective diagnostic radiology services throughout California. The company also engages in administrative and managerial activities through subsidiaries such as RadNet Management, Inc.
Primedex Beginnings: The 1980s to Early-1990s
Primedex's beginnings can be traced to 1985, when a group of associates joined together to form a holding company called CCC Franchising Corporation. At that time, they had no way of knowing about the long, rocky journey the future held in store for their new enterprise. Controlled by financier Robert E. Brennan, the company went public just a year after inception, in 1986. CCC Franchising Corp. later made its entry into the medical services field in November 1990, when the company acquired 51 percent of an organization called Viromedics for the sum of $700,000. Viromedics was a company based in Hauppage, New York, and was a world leader in AIDS research; the company worked in cooperation with New York's Albert Einstein College of Medicine to develop a treatment for AIDS.
Soon thereafter, in 1992, the company purchased approximately 90 percent of common stock of the Moorhead, Minnesota-based Immuno Therapeutics, Inc. Like Viromedics, Immuno Therapeutics was a disease researcher; its work involved the research and development of treatments for cancer, as well as other diseases.
At that time, Robert E. Brennan held 60 percent of the shares for CCC Franchising, but did not serve as an officer or director for the company. In partnership with Los Angeles-area doctors, Brennan and the CCC Franchising associates announced plans to buy Primedex Corporation, a southern California workers' compensation medical enterprise which supplied management, administrative and financial services to six Los Angeles clinics. Shortly thereafter, in March of 1992, an agreement was also reached with RadNet Management, Inc. This $66 million deal would make RadNet, a service provider to 11 imaging centers in California, an important part of the ever-evolving CCC Franchising. Later in January, 1992, the company's wholly owned subsidiary, CCC Franchising Acquisition Corporation I, entered into an asset purchase agreement with Primedex Corp. for approximately $46 million. CCC Franchising Acquisition Corporation II, another wholly owned subsidiary, made a similar purchase agreement with RadNet Management, Inc.
Due to their ever-growing presence in the medical service industry, shareholders approved a corporate name change to Primedex Health Systems, Inc., in November, 1992. Now with a name that better reflected the company's role in the health care services market&mdash well as the acquisitions of Primedex Corp. and RadNet--the company began to focus on its medical field services. A concentration on management, financial and administrative support in workers' compensation, and diagnostic radiology and imaging was underway.
The company's subsidiaries remained intact, and their business operations were not changed much. RadNet managed and provided related services to a group with two imaging centers in the Los Angeles area, owned three imaging centers elsewhere in the state, and was a joint partner in seven others California centers, while developing plans for regional expansion. Primedex Corp. managed medical practices serving those with work-related injuries. To get an edge over competitors in the workers' compensation market, the company used the best available technology for x-ray capabilities, brain-mapping and computerized back-testing equipment. Workers' compensation attorneys sought providers who could expedite claims with fast, accurate evaluations, and Primedex filled that niche.
Late in fiscal 1993, the company acquired Advantage Health Systems, Inc. This addition brought what Primedex's president and CEO at the time, John H. Petillo, Ph.D., called "advanced medical management procedures which draw heavily on expert medical and technical systems to achieve efficient, high-quality and cost-effective health care delivery." Products offered by Advantage included Physician Directed Care Management--a medical/surgical management program--and Network Management Services, which was a network modification and management service used to lead traditional indemnity-type insurance into managed care.
Legal Entanglements in the Mid-1990s
The company's acquisitions had been made in hopes of accommodating the expected growth in managed care due to 1990s health care reforms. With the additions of RadNet and Advantage, Primedex owned and provided management services and/or had interests in 17 different California diagnostic imaging centers. This enlargement of the company came with a price, however. In 1993, Primedex experienced a net loss of $47.8 million, or $1.25 per share; RadNet suffered operating losses of $13.5 million. These figures were due, at least in part, to the negative impact on the company's business that came from California legislation that cracked down on workers' compensation fraud. These reductions in collection percentages of the company's workers' compensation-related accounts receivable, resulted in a poor financial performance.
As a result of this negative financial impact, all offices of Primedex Corp. were closed. While this was a difficult decision for the company to make, Primedex Health System management determined that it was in the best interests of the company and its stockholders to phase out the workers' compensation business and to concentrate instead its other areas of business.
According to a June, 1994 New York Times article by Diana B. Henriques, the Los Angeles District Attorney's office issued search warrants to Primedex controlling shareholder, Robert E. Brennan, whom she described as an "embattled Wall Street financier." This investigation was to determine if the company committed fraud, as they allegedly submitted inflated bills to workers' compensation insurers. Additionally, the Los Angeles D.A.'s office searched executive Primedex offices in Newark, New Jersey, and other company facilities in California.
This investigation of the Primedex Corp. unit and its association with worker's compensation plan treatment and evaluation went on for about two years. Having first performed a raid of the Primedex Health Systems' California offices in late 1992, fraud squad investigators again raided offices in 1994 in Los Angeles, New Jersey and New York for evidence of wrongdoing. Specifically, the warrants pertained to activities including alleged criminal conspiracy, tax and securities fraud, and grand theft. A Los Angeles grand jury sought additional related documents, and Robert Brennan was charged with securities fraud and ordered to repay $71 million in illegal profits made from the manipulation of stock trading in the early 1980s. He and his new company--First Jersey Securities--filed for bankruptcy less than one week before they were due to pay the judgment against them.
Brennan also managed to sell 10 million shares of Primedex, which accounted for 26 percent of the company, in August of 1994 for a sum of approximately $1.4 million. These shares, bought by Dr. Howard G. Berger--the company secretary, as well as a director and chairman of RadNet--made him Primedex's principal shareholder, with about 32 percent ownership. The same shares that added to Brennan's wealth in August, soon dropped in value and were worth only about $.50 per share six months later.
The company decided to spin off its Care Advantage, Inc. subsidiary, and place former Primedex CEO John J. Petillo as its leader. This unit, which handled Advantage Health Systems, Inc., advised insurance companies on how to reduce medical claim costs. Declared effective as of June 12, 1995, over 40 million shares were distributed to company shareholders, one share per each Primedex share owned prior to market close on June 28, 1995.
Robert Caruso, who had served as vice-president and chief financial officer under Petillo, succeeded him as chairman. In June, 1995, authorities charged Caruso with 18 counts of alleged tax evasion, money laundering and fraud. These accusations stemmed from charitable donations he had made to his college alma mater. As Caruso donated money to the school, the company for which he had worked--the accounting firm of Coopers & Lybrand--reimbursed him. Then, Caruso had his donations refunded to him by the university on the premise that he would return the money. This meant that he was getting tax breaks and reimbursement dollars for donations that allegedly never existed. He claimed to have made more than $176,000 in contributions between 1987 and 1993; however, after reimbursements and refunds, the actual amount was stated to be roughly $2,000.
Less than a year later, the Los Angeles District Attorney's office announced that it was not investigating the current management or present business activities of Primedex Health Systems or its subsidiaries. The probe continued, however, with the investigation of activities of individuals who were part of Primedex Corp. One of the founders of Primedex Corp., Dr. David G. Gardner, surrendered to police in June of 1996 after being charged in a $4.2 million tax fraud and money-laundering scam relating to the said organization.
The Late 1990s and Beyond
Meanwhile, Primedex Health Systems continued to amass a wealth of medical service provider subsidiaries. November 1995, saw the acquisition of a California preferred provider organization network business, Future Diagnostics, Inc., for terms totaling approximately $3.2 million. The addition of this company formed the foundation of the new Primedex subsidiary, RadNet Managed Imaging Services. In addition to providing quality assurance and comprehensive utilization management, this new unit was now one of the largest diagnostic radiology networks in the state of California.
Diagnostic Imaging Services, Inc. (Diagnostic) became the next business associate of the company when a series of agreements were entered into in March 1996. Although the two companies intended to remain separate, the purchase of almost three million shares of Diagnostic stock--with arrangements to acquire about 1.5 million more shares over the next five years--made Primedex the single largest Diagnostic stockholder, owning roughly 31 percent of outstanding shares. In addition, the companies executed two management agreements. The first arranged for the company to assume the management of Diagnostic's corporate responsibilities. The second was in regard to the company assuming management responsibilities for various patient services, and billing and collection activities at all Diagnostic facilities. Primedex owned and operated 19 diagnostic imaging centers, and with this arrangement added the 10 imaging centers, 15 ultrasound laboratories located in hospitals, 13 mobile ultrasound units which served hospitals and office buildings, and one mobile magnetic resonance imaging unit owned and operated by Diagnostic. Diagnostic also operated a cancer care therapy center in California.
By May 1996, the two companies had begun to talk about merging. Together, Primedex and Diagnostic had a gross revenue of about $135 million. Upon completion of the merger, shareholders of Primedex were to receive one share of Diagnostic for every 1.33 shares of Primedex. Furthermore, Primedex still owned the warrant to acquire more than 1.5 million additional shares of Diagnostic common stock.
The Los Angeles District Attorney filed additional charges regarding the indictment of David Gardner on June 1, 1996. Other company executives were added to the now expanded fraud case. Stanley Goldblum, controller of Primedex Corp., and Vincent Punterere, medical staff director of Primedex Corp. were both charged as well. No current management or present business operations of Primedex Health Systems were included in the indictment. The defendants were charged with insurance fraud, providing illegal kickbacks to doctors, charging for medical services that were never performed, and ghostwriting medical reports. Gardner, who had previously turned himself in to authorities, was free on bail of $3.2 million.
Soon thereafter, merger negotiations were suspended indefinitely between Primedex and Diagnostic, for reasons which were not disclosed. All previously arranged management contracts, however, remained in place. Primedex continued to increase its ownership of Diagnostic with a purchase of approximately 2.5 million shares of Diagnostic Health common stock that had been owned by Norman Hames, president of Diagnostic. Primedex now held a controlling 53 percent interest in the company. Primedex was also to acquire Hames' options to buy up to 507,737 more various-priced shares of Diagnostic Imaging Systems. More Diagnostic stock acquired in August of 1996 raised the company's equity interest up to approximately 60 percent.
Dr. Howard Berger, the company's largest shareholder, filled the post of presidency after Herm Rosenman resigned from the position in September, 1996. Already chairman of Primedex, Berger added the duties of president and chief executive officer.
By late 1996, Primedex and its subsidiaries owned and operated 32 imaging centers for radiologic services. Diagnostic operated 15 ultrasound laboratories and 13 mobile ultrasound units. Through its Future Diagnostics subsidiary, Primedex arranged imaging services through a network of 180 contracted imaging centers in California which provide diagnostic services to health plans, insurance companies, and others. Future Diagnostics provided a variety of healthcare management services to contracted centers, as well as physician credentialing and financial information systems services.
In March of the following year, the first phase of a sales transaction between Diagnostic Services, Inc. and Diagnostic Health Services was arranged by Primedex. Through this agreement, Diagnostic was to sell Diagnostic Health 13 mobile ultrasound units and 15 ultrasound laboratories for approximately $7.5 million cash and assumption of about $1.5 million in debt. Intended to assist Diagnostic in reducing its debt, the sale would also allow the company to focus on the operations of its eight mostly multi-modality free-standing diagnostic imaging centers. As part of the agreement, Primedex was to provide information management and business services to Diagnostic Health for the operation of their four magnetic resonance imagining centers. By late 1997, Future Diagnostics was sold to Preferred Health Management, Inc.
Principal Subsidiaries: RadNet Management, Inc.; Diagnostic Imaging Services, Inc.; Primedex Corporation; RadNet Managed Imaging Services, Inc.; Beverly Radiology Medical Group III; Radnet Sub, Inc.; Woodward Park Imaging Center; Imaging Center of La Habra; Westchester Imaging Group; Wilshire Imaging Group; Scripps Chula Vista Imaging Center, L.P.
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