Highly Leveraged, Imaging Company Ekes Out a Profit

By LAURENCE DARMIENTO

Staff Reporter

By most measures, Primedex Health Systems Inc. has had a rotten year.

Earnings are off and the stock price has fallen nearly 50 percent since February, to around $1 recently. But compared with three years ago, things are looking pretty rosy.

Back then, stock of the Los Angeles-based operator of 49 medical diagnostic imaging centers traded for less than 10 cents a share, after a former executive was convicted of running a workers’ compensation scam through a separate business unit that has been closed.

Now, problems at the company which offers high-tech PET, CT and MRI scans, as well as traditional X-ray services are more mundane.

In a field that requires hefty capital expenditures, Primedex has ramped up its debt by one-third over the past four years, betting that an expansion into a fragmented marketplace can lead to profitability.

With debt now totaling $123.4 million, Primedex had revenues of just $111 million in its most recent fiscal year.

“We are not fooling anyone. We are heavily leveraged,” said finance director John Corrigan. “This business has become a very high-volume game.”

Checkered past

Founded by a group of six local radiologists, Primedex opened its first imaging center in 1981 in Beverly Hills. In 1990, Dr. Howard Berger and a partner assumed ownership of the outpatient clinics.

Two years later, Berger sold control of the company to financier Robert Brennan, who merged it into the holding company that gave it its current name. Its stock traded as high as $9 in 1992.

But the holding company also operated a string of workers’ compensation clinics that came under investigation for allegations of insurance fraud. The executive who headed that unit was eventually convicted of money laundering.

Berger, who continued to operate the imaging clinics, bought back controlling interest in 1995 and currently holds one-third of Primedex’s shares.

During the mid-1990s, problems with the workers’ compensation unit tarnished the company’s image. “There were a lot of clouds over the company,” Berger said.

It also was hemorrhaging money. The losses were cut, but not eliminated as Berger pressed for aggressive growth. By last year, Primedex operated 40 clinics, predominantly in Southern California.

The company eked out a profit in the year ended Oct. 31, 2000, with net income of $2.6 million. Next year it grew to $14.5 million. However, Berger has doubled up on his growth gamble, investing those profits into the recent acquisition or opening of eight more clinics.

The company expects growing demand for outpatient diagnostic imaging in an industry now dominated by “mom and pop” radiological groups that may operate only a single or handful of outpatient centers. “We have a company that is capable of running these offices more efficiently and on a large scale,” said Berger.

Mitra Ramgopal, an industry analyst with Sidoti & Co., agrees there will be continuing demand for high-tech imaging services prompted primarily by an aging population and new technology that has made it easier to diagnose conditions through imaging.

“The whole idea is you can do one of these scans as opposed to years ago when you may have actually had to cut someone open,” he said.

Costly machines

But the machines are expensive. A PET scanner, able to detect brain tumors, can cost $3 million a piece, while MRIs can cost up to $2 million and CT scans over $1 million. Primedex doesn’t pay up front for the equipment, but enters into capital leases with terms of five to seven years.

Those leases have burdened the company with debt.

In the last six months alone, the company has added $15.2 million in long-term debt, which as of April 30 stood at $123.4 million. That has eaten into operating profits, as depreciation and amortization rose nearly 50 percent, to $2.3 million, over the first six months of the current year.

Net income fell to $836,000 for the second quarter ended April 30, compared with $5.2 million in the like period a year earlier, as the company has struggled to digest the growth. (The prior year’s quarter included $3.4 million in revenue from a clinic sale.)

Those kinds of numbers have scared off Wall Street from diagnostic imaging firms, with only a handful of publicly traded companies even in the business. “These operations are capital intensive and investors don’t like seeing that kind of debt,” Ramgopal said.

Primedex’s biggest competitor is Comprehensive Medical Imaging, which operates about 30 centers in the state and is a unit of Woodland Hills-based Syncor International Corp. Syncor recently agreed to be acquired by Cardinal Health Inc., which did not want the business. It is now being sold off separately.

“That kind of tells you something,” Ramgopal said.