<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-11772
UNITED DIAGNOSTIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-1411971
------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
476 Main Street -- Suite 3-DFL Wakefield, Rhode Island 02879
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 789-9995
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) 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 X
---- ----
As of October 15, 1999, there were issued and outstanding 682,622 shares of
common stock of the registrant, adjusted for a 70 for 1 reverse stock split
effected on December 23, 1998.
Transitional small business disclosure format
Yes No X
---- ----
Page 1 of 32
<PAGE> 2
United Diagnostic, Inc.
Quarterly Report on Form 10-QSB
Table of Contents
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 3
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 32
</TABLE>
Page 2 of 32
<PAGE> 3
United Diagnostic, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 260,975 $ 1,524,942
Accounts receivable -- (net of allowance for doubtful
accounts of approximately $2,200,000
and $1,434,900 at March 31, 1998,
and December 31, 1997, repectively) 11,234,000 11,000,608
Inventory 1,093,333 1,139,232
Prepaid expenses and other current assets 575,690 333,254
------------ ------------
Total current assets 13,163,998 13,998,036
Note receivable 100,000 100,000
Equipment and leasehold improvements, net 2,513,980 2,758,476
Goodwill (net of accumulated amortization of $90,255
at December 31, 1997) -- 664,336
Deposits 388,012 436,287
Reorganization value in excess of other identifiable net assets 24,012,605 24,401,605
------------ ------------
Total Assets $ 40,178,595 $ 42,358,740
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and lease obligations $ 49,154,069 $ 48,771,136
Line of credit 4,028,675 4,835,959
Accounts payable 5,587,566 5,057,184
Accrued expenses 9,564,536 7,826,434
Contract payable 55,571 55,571
------------ ------------
Total current liabilities 68,390,417 66,546,284
Long-term debt and lease obligations 2,340,305 2,480,697
Minority Interest (14,008,214) (12,654,000)
------------ ------------
Total liabilities 56,722,508 56,372,981
Commitments and contingencies -- --
Stockholders' deficit:
Series A convertible preferred stock, $.01 par value;
2,000,000 authorized; 2,826 issued and outstanding
at March 31, 1998, and December 31, 1997, (liquidation
preference of $2,826,000 at March 31, 1998) 28 28
Common stock, $.01 par value; 50,000,000
shares authorized; 682,622 shares issued and
outstanding at March 31, 1998 and December 31, 1997 6,826 6,826
Capital in excess of par value 39,310,422 39,310,422
Deferred consulting expense (27,507) (41,254)
Accumulated deficit (55,833,682) (53,290,263)
------------ ------------
Total stockholders' deficit (16,543,913) (14,014,241)
------------ ------------
Total liabilities and stockholders' deficit $ 40,178,595 $ 42,358,740
============ ============
</TABLE>
Page 3 of 32
<PAGE> 4
United Diagnostic, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31 March 31
1998 1997
---------------------------------
<S> <C> <C>
Revenues:
Assay sales, net $ -- $ 29,850
Laboratory revenues, net 15,747,736 1,798,361
Medical billing services revenues 90,750 109,081
Contract revenue -- 5,540
------------ ------------
Total revenues, net 15,838,486 1,942,832
Operating costs:
Laboratory expenses 10,460,777 1,418,293
Medical billing services expenses 129,473 123,930
Sales, general and administrative 4,536,456 892,243
Research and development -- 16,610
Provision for bad debts 1,202,576 91,643
Depreciation and amortization 757,507 206,349
Write down of intangibles 645,472 --
------------ ------------
Total operating costs 17,732,261 2,749,068
------------ ------------
Operating loss (1,893,775) (806,236)
Other income (expense):
Investment and interest income 28,319 10,265
Interest expense (2,032,177) (529,010)
------------ ------------
Total other income (expense) (2,003,858) (518,745)
------------ ------------
Net loss before minority interest (3,897,633) (1,324,981)
Minority interest 1,354,214 --
------------ ------------
NET LOSS (2,543,419) (1,324,981)
Deemed preferred stock dividends -- (1,653,432)
------------ ------------
Loss attributable to common stockholders $ (2,543,419) $ (2,978,413)
============ ============
Net loss per common share -- basic and diluted $ (3.73) $ (95.08)
============ ============
Weighted average shares outstanding 682,622 31,324
============ ============
</TABLE>
Page 4 of 32
<PAGE> 5
United Diagnostic, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
MARCH 31 March 31
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,543,419) $(1,324,981)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and write down of intangibles 1,402,979 215,997
Provision for bad debt 1,202,576 91,643
Interest expense from issuance of warrants -- 494,000
Minority interest (1,354,214) --
Changes in operating assets and liabilities:
Accounts receivable, prepaids, inventory
and other current assets (1,584,230) (222,975)
Accounts payable and accrued expenses 2,282,231 (689,650)
----------- -----------
Net cash used in operating activities (594,077) (1,435,966)
INVESTING ACTIVITIES
Capital expenditures (105,147) (15,394)
Sale proceeds of Medical Science Institute -- 2,512,154
Deferred acquisition costs -- (48,517)
Issuance of note receivable -- (100,000)
----------- -----------
Net cash provided by (used in) investing activities (105,147) 2,348,243
FINANCING ACTIVITIES
Proceeds from issuance of debt 250,000 --
Repayment of notes payable and lease obligations (814,743) (2,074,199)
Repayment of contract payable -- (10,000)
Proceeds from the sale of common stock -- 534,359
----------- -----------
Net cash used in financing activities (564,743) (1,549,840)
----------- -----------
Net decrease in cash and cash equivalents (1,263,967) (637,563)
Cash and cash equivalents at beginning of period 1,524,942 1,690,538
----------- -----------
Cash and cash equivalents at end of period $ 260,975 $ 1,052,975
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 203,494 $ 35,010
=========== ===========
</TABLE>
Page 5 of 32
<PAGE> 6
United Diagnostic, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Unaudited)
1. Basis of Presentation
United Diagnostic, Inc. ("United" or the "Company"), was originally
organized under the laws of the State of Delaware in September 1981 under the
name of "Applied DNA Systems, Inc." On November 16, 1994, the Company changed
its name to Nu-Tech Bio-Med, Inc. On December 23, 1998, the Company changed its
name to United Diagnostic, Inc.
Due to the Company's delay in retaining new independent auditors,
compounded by the Company's acquisition of a majority interest in a significant
subsidiary in October 1997 which required audited financial statements of such
acquired subsidiary, the Company was unable to complete certain financial and
textual information required to be included in its annual report on Form 10-KSB
for the years ended December 31, 1997 and December 31, 1998, or its quarterly
reports on Form 10-QSB for the periods ended March 31, 1998, June 30, 1998,
September 30, 1998, March 31, 1999, and June 30, 1999, within the time which
such reports were otherwise required to be filed. Accordingly, this report on
Form 10-QSB for the quarter ended March 31, 1998, is being filed late. The
Company's report on Form 10-KSB for the year ended December 31, 1997, was filed
on September 2, 1999. The Company has determined that the inclusion by way of
subsequent event notes to its consolidated financial statements of certain
events and transactions subsequent to March 31, 1998, is necessary to make a
fair presentation of the business of the Company and to enable the reader to
have a fair understanding of the events and transactions that have transpired.
Unless otherwise indicated, as used herein, all references to shares of the
Company's Common Stock and to prices with respect to shares of the Company's
Common Stock give effect to a seventy to one reverse stock split effective
December 23, 1998.
In the opinion of management of United Diagnostic, Inc., the accompanying
unaudited financial statements contain all adjustments necessary to present
fairly the financial position of the Company at March 31, 1998, and the results
of operations and cash flows for the three months ended March 31, 1998, and
1997.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Analytical Biosystems Corporation ("ABC")
(inactive since November 3, 1997), NTBM Billing Services, Inc. ("NTBM")
(inactive since April 1998) and Medical Science Institute, Inc. ("MSI"), a
wholly-owned subsidiary of United from November 18, 1996, until February 26,
1997, when United sold equity interests in MSI to Physicians Clinical
Laboratory, Inc. (Note 3a). The 1997 consolidated financial statements also
include the accounts of Physicians Clinical Laboratory, Inc. ("PCL") originally
a 52.6%-owned subsidiary of the Company (as of October 3, 1997) and now a
49.9%-owned subsidiary (as of June 16, 1998)
Page 6 of 32
<PAGE> 7
(inactive since May 10, 1999, when substantially all of the assets of PCL were
sold) (Note 3b). All material intercompany transactions and balances have been
eliminated. Where appropriate, prior year amounts have been reclassified to
permit comparison.
ABC was a clinical oncology laboratory service and research company located
in Rhode Island. As of November 3, 1997, ABC ceased processing specimens for
assay and has suspended its laboratory operations (Note 3c). NTBM was a medical
billing service business located in Florida (inactive since April 1998). MSI was
a full service medical laboratory facility which operated throughout the State
of California (Note 3a). PCL was a full service medical laboratory facility
which operated throughout the State of California (inactive since May 10, 1999,
Note 3b).
The consolidated financial statements have been prepared on the basis that
the Company will continue as a going concern. The Company has expended cash in
excess of cash generated from operations, has not achieved sufficient revenues
to support future operations and has a working capital deficiency. In addition,
the Company's subsidiary is in default under a substantial portion of its debt
agreements, which allows its lenders the right to accelerate the debt repayment.
Subsequent to default, PCL sold all of its assets and the consideration for the
sale was paid to the debt holders. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities or any other adjustments that might be
necessary should the Company be unable to continue as a going concern.
On December 23, 1998, the Company effected a seventy to one common stock
reverse split. An amount equal to the par value of the common shares
relinquished was transferred from the common stock account to capital in excess
of par value. All references to number of common shares and to per share
information in the consolidated financial statements have been adjusted to
reflect the stock reverse split on a retroactive basis. The shares authorized
and par value per share did not change (Note 6d).
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1997.
2. Summary of Significant Accounting Policies
The Company commenced full consolidation of PCL in October 1997 upon its
acquisition of a majority ownership (52.6%) of PCL. Accordingly, for the fourth
quarter of 1997
Page 7 of 32
<PAGE> 8
and the first quarter of 1998, the operating results of PCL are consolidated
with the operating results of the Company and its other wholly owned
subsidiaries, and the assets and liabilities of PCL are consolidated with those
of the Company and its other majority-owned subsidiaries in the Company's
consolidated balance sheets. The minority interest in losses of PCL has been
recognized in excess of the minority interest in the equity capital of PCL since
the minority shareholders have advances to PCL in the form of senior secured
notes. The negative minority interest has been recorded as a reduction of
liabilities in the accompanying balance sheets.
During the time which the Company owned a majority interest in PCL, the
Company accounted for its investment in PCL under the consolidation method, and
continued to recognize its 52.6% share of PCL losses, through June 10, 1998. On
June 10, 1998, the Company sold a portion of its share ownership in PCL, and the
Company's ownership percentage in PCL was reduced from 52.6% to 49.9%. As such,
subsequent to June 10, 1998, the Company commenced to account for its remaining
investment in PCL under the equity method of accounting, rather than the
consolidation method. Under the equity method, investments are recorded at cost
reduced by the Company's proportionate share of losses. Any losses in excess of
the investment are not recognized until future profits or additional investments
occur. The Company's share of PCL losses recognized from date of acquisition
through June 10, 1998, exceeded its investment in PCL. In the deconsolidation of
PCL, the Company will adjust its negative investment to zero and record the
remainder as an adjustment to capital in excess of par value.
Under the equity method, the net investment is presented in the balance
sheet, and the share of losses is presented as one amount in the statements of
operations. For the second quarter ending June 30, 1998, the Company will
present its share of losses and net investment on the equity method and the
three months ended March 31, 1998, will be restated to reflect equity method
reporting.
The following unaudited pro forma condensed consolidated statement of
operations present the estimated effects of the sale of PCL stock (Note 3b) and
the subsequent deconsolidation of PCL, the sale of PCL assets to Unilab and
payments received by the Company (Note 3b), and the cessation of business by
NTBM Billing Services, Inc. (Note 1), as if these transactions had occurred on
January 1, 1998. The unaudited pro forma condensed consolidated balance sheet at
March 31, 1998, reflects the estimated effects of the sale of PCL stock (Note
3b) and the subsequent deconsolidation of PCL, the sale of PCL assets to Unilab
and payments received by the Company (Note 3b), and the cessation of business by
NTBM Billing Services, Inc. (Note 1), on a pro forma basis as if these
transactions had occurred on March 31, 1998.
Page 8 of 32
<PAGE> 9
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
PCL NTBM
Historical (A) (B) Adjustments Pro Forma
---------- -------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 15,838 $(15,747) $ (91) $ -- $ --
Operating costs 17,732 (16,607) (131) (665)(D) 329
Other expense 2,003 (2,001) -- -- 2
-------- -------- ----- -------- --------
Net loss before minority (3,897) 2,861 40 665 (331)
Minority interest 1,354 (1,354) -- -- --
-------- -------- ----- -------- --------
Net loss $ (2,543) $ 1,507 $ 40 $ 665 $ (331)
======== ======== ===== ======== ========
</TABLE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
PCL NTBM
Historical (A) (B) Adjustments Pro Forma
---------- -------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
Cash $ 261 $ (13) $ -- $ 4,000 (C) $ 4,248
Other current assets 12,903 (12,727) -- -- 176
Property and equipment 2,514 (2,493) -- -- 21
Other assets 24,501 (24,397) -- -- 104
-------- -------- ----- -------- --------
Total assets $ 40,179 $(39,630) $ -- $ 4,000 $ 4,549
======== ======== ===== ======== ========
Current liabilities $ 68,390 $(66,839) $ -- $ -- $ 1,551
Long-term debt 2,340 (2,340) -- -- --
Minority interest (14,008) 14,008 -- -- --
Common stock and paid-in
capital 39,290 -- -- 15,544 (F) 54,831
Accumulated deficit (55,833) -- -- 4,000 (E) (51,833)
-------- -------- ----- -------- --------
Total liabilities and equity $ 40,179 $(55,171) $ -- $ 19,544 $ 4,549
======== ======== ===== ======== ========
</TABLE>
(A) Eliminates the results of operations of PCL for the three months ended
March 31, 1998 and the assets and liabilities of PCL as of March 31, 1998.
(B) Eliminates the results of operations of NTBM for the three months ended
March 31, 1998. The assets and liabilities of NTBM were not significant as
of March 31, 1998.
(C) Reflects the proceeds on the sale of PCL stock of $750 and the receipt of
$3,250 pursuant to the amended stockholders agreement.
(D) Eliminates United's write-off of goodwill relating to NTBM.
(E) Reflects the estimated gain on sale of PCL stock and income from the
receipt of $3,250.
(F) Reflects the deconsolidation of PCL. Losses recognized in consolidation in
excess of investment are credited to paid in capital.
Page 9 of 32
<PAGE> 10
The unaudited pro forma condensed consolidated financial information is not
necessarily indicative of the results that actually would have occurred had
these transactions occurred on the date indicated or of results of operations
which may be obtained in the future.
Balance of Page Intentionally Left Blank
Page 10 of 32
<PAGE> 11
Condensed financial data for Physicians Clinical Laboratory, Inc. only, is
a follows:
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
March 31
1998
------------
<S> <C>
ASSETS
Total current assets $ 12,740,005
Total long term assets 26,889,586
------------
Total Assets $ 39,629,591
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities $ 66,839,066
Long-term debt 2,340,305
------------
Total liabilities 69,179,371
Total stockholders' deficit (29,549,780)
------------
Total liabilities and stockholders' deficit $ 39,629,591
============
</TABLE>
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31
1998
------------
<S> <C>
Total revenues, net $15,751,753
Total operating costs 16,607,179
-----------
Operating loss (855,426)
Total other expense (2,001,566)
-----------
NET LOSS $(2,856,992)
===========
</TABLE>
Page 11 of 32
<PAGE> 12
3. Acquisitions and Dispositions
a. Medical Science Institute
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California approved the First Amended Plan of Reorganization (the
"MSI Plan") of Medical Science Institute ("MSI") pursuant to which the Company
acquired all of the capital stock of MSI. The acquisition was in the form of a
purchase.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (Note 3b). The
Company sold its interests in MSI to PCL for its original costs aggregating
approximately $7.6 million.
As a result of the above transactions, during the first quarter of 1997,
the Company owned MSI for the 57 day period beginning January 1, 1997 and ending
February 26, 1997.
b. Physicians Clinical Laboratory, Inc.
In 1996, the Company acquired certain debt securities of Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"). United reached an
agreement (the "PCL Plan") with the holders of the Senior Debt, Subordinated
Debt and the management of PCL whereby United would acquire a 52.6% interest in
PCL. The terms of the agreement provided that PCL file a plan to effectuate the
agreement. As required by the aforementioned agreement, the Company purchased
approximately $13,300,000 of Senior Debt for $10,000,000 on November 7, 1996. On
November 8, 1996, PCL and its then subsidiaries filed a petition for relief
under Chapter 11 of the Federal Bankruptcy Laws in the United States Bankruptcy
Court.
On the effective date (October 1997), as required under the PCL Plan, the
debt purchased by United was converted into 35.6% of the common stock of PCL.
United acquired an additional 17% of the common stock in exchange for a
$5,000,000 note received in the MSI sale (Note 3a), resulting in United owning
52.6% of the outstanding common stock of PCL. United accounted for the
acquisition under the purchase method. The Company's acquisition cost consisted
of the $15 million investment above, plus deferred acquisition costs, less the
deferred gain on the sale of MSI (Note 3a). The Company recorded approximately
$2 million in excess cost over the fair market value of net assets acquired
("goodwill").
Minority interest in losses of PCL has been recognized in excess of the
minority interest in the equity capital of PCL since the minority shareholders
have advances to PCL in the form of senior secured notes. Accordingly, the
minority interest excess has been recorded as a reduction of liabilities in the
accompanying balance sheet.
In June, 1998, the Company sold 67,500 shares of PCL common stock to a
senior lender and significant stockholder of PCL for $750,000, in conjunction
with a loan by that stockholder of $4 million to PCL. After the sale, United
owns 49.9% of the issued and outstanding shares of PCL. The transaction also
resulted in amendment of the Stockholder Agreement. The agreement
Page 12 of 32
<PAGE> 13
as amended provides the lender stockholder with the right to elect the majority
of the board and provides United the rights under certain corporate governance
provisions
On April 5, 1999, PCL entered into an Asset Purchase Agreement for the sale
of the business and substantially all assets to Unilab Corp for a total purchase
price of approximately $40 million. The sale closed on May 10, 1999, (Note 6a).
Concurrent with the sale, the Stockholder Agreement was amended to provide
payment to the Company of $3.25 million in cash upon satisfaction of certain
conditions. The Company received this payment in May 1999.
As a result of the agreement, the Company reevaluated the recoverability of
PCL's excess reorganization value based upon an estimated loss on the sale,
including costs of disposal. PCL recorded an additional write-down of $10.6
million, resulting in a total write-down of excess reorganization value of
approximately $45.3 million, as of December 31, 1997.
As a result of the above transactions, the Consolidated Financial
Statements relating to the three months ended March 31, 1997, do not include the
Company's 52.6% majority ownership or subsequent 49.9% minority ownership of
Physicians Clinical Laboratory, Inc.; however, the three months ended March 31,
1998, is presented on the basis of the Company's 52.6% majority ownership of PCL
under the accounting method described in Note 2.
c. Analytical Biosystems Corporation
ABC has ceased processing specimens for the assay and suspended its
laboratory operations in Rhode Island in November, 1997.
4. Debt
In March 1998, the Company obtained a loan in the principal amount of
$250,000. Principal and interest at 10% are due on the earlier of April 1999 or
consummation of a private placement with defined proceeds. The new loan is
secured by a pledge of 125,000 shares of PCL stock. As a condition to making the
loan, the lender required, and the board approved, issuing the lender warrants
to purchase 44,000 shares of common stock stated on a presumed post-reverse
split basis. As a result of the delisting of the stock, the Company is unable to
value the warrants; therefore, no allocation of proceeds to the warrants and
interest expense has been recorded.
5. Adoption of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (FAS 128), which was adopted on December 31, 1997.
FAS 128 requires companies to change the method currently used to compute
earnings per share and to restate all prior periods for comparability. The
adoption of FAS 128 had no impact on the Company's previously reported earnings
per share because common stock equivalents are excluded as their effect is
antidilutive.
Page 13 of 32
<PAGE> 14
6. Subsequent Events
a. Sale of 750,000 PCL shares to Oaktree, Sale of PCL assets to Unilab
In June, 1998, the Company sold 67,500 shares of PCL common stock to a
senior lender and significant stockholder of PCL for $750,000, in conjunction
with a loan by that stockholder of $4 million to PCL (Note 3b). After the sale,
United owns 49.9% of the issued and outstanding shares of PCL. The transaction
also resulted in amendment of the Stockholder Agreement. The agreement as
amended provides the lender stockholder with the right to elect the majority of
the board and provides United the rights under certain corporate governance
provisions
On April 5, 1999, PCL entered into an Asset Purchase Agreement for the sale
of the business and substantially all assets to Unilab Corp for a total purchase
price of approximately $40 million (Note 3b). The sale closed on May 10, 1999.
Concurrent with the sale, the Stockholder Agreement was amended to provide
payment to the Company of $3.25 million in cash upon satisfaction of certain
conditions. The Company received this payment in May 1999.
As a result of the agreement, the Company reevaluated the recoverability of
PCL's excess reorganization value based upon an estimated loss on the sale,
including costs of disposal. PCL recorded an additional write-down of $10.6
million, resulting in a total write-down of excess reorganization value of
approximately $45.3 million, as of December 31, 1997.
b. Delisting from the NASDAQ SmallCap Market
By letter dated April 17, 1998, from The Nasdaq Stock Market, the Company
was advised that Nasdaq had commenced proceedings to delist the Company's Common
Stock from inclusion in the Nasdaq SmallCap Market ("NSCM") by reason of the
inability of the Company to file its Annual Report on Form 10-KSB for the year
ended December 31, 1997. The inability of the Company to file its Annual Report
on Form 10-KSB was occassioned because the audit of the Company's financial
statements for the year ended December 31, 1997, was delayed by reason of a
pending change in the Company's independent auditors. The Company requested a
hearing with respect to the delisting proceedings. On June 1, 1998, the Company
was notified by The Nasdaq Stock Market that the Company's Common Stock would be
delisted from the NSCM, effective as of the close of business on June 1, 1998.
The notification resulted from a determination by a Nasdaq Listing
Qualifications Panel, following a hearing held on May 14, 1998, to reject the
Company's request for continued inclusion on the NSCM. The Company's Common
Stock was quoted on the NSCM through May 15, 1998. The Company believes that the
delisting of the Common Stock has had a depressive effect upon the market price
of the Common Stock and adversely affected the liquidity of the Common Stock
because, subsequent to May 15, 1998, the Common Stock has been quoted in the
"pink sheets" maintained by National Quotation Bureau, Inc., which is not an
established trading market.
c. Change in Certifying Accountant
By letter dated May 5, 1998, the Company was notified by Ernst & Young LLP
("E&Y") that E&Y's relationship as independent auditors for the Company has
ceased. The Company believes that termination of the auditing relationship was
due to the inability of the Company to
Page 14 of 32
<PAGE> 15
pay to that firm fees previously incurred and past due and owing and that such
decision did not result from any disagreement or dispute concerning accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
Subsequently, Grant Thornton LLP agreed to accept the engagement as the
Company's independent auditors. Grant Thornton has audited the Company's
Consolidated Financial Statements for the year ended December 31, 1997, and
released a Report of Independent Certified Public Accountants which was filed
with the Company's Annual Report on Form 10-KSB on September 2, 1999.
Additionally, Grant Thornton has accepted the engagement to audit the Company's
Consolidated Financial Statements for the year ended December 31, 1998, which as
yet has not been completed.
d. Reverse Stock Split and Company Name Change
Pursuant to prior stockholder authorization, the Company filed a
Certificate of Amendment to its Certificate of Incorporation effective December
23, 1998, (i) effecting a seventy to one reverse stock split of its issued and
outstanding Common Stock, resulting in each 70 issued and outstanding shares of
the Common Stock being changed into one share, and (ii) changing the name of the
Company to United Diagnostic, Inc.
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" constitute or may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). United Diagnostic, Inc. (the "Company") desires to avail itself of
certain "safe harbor" provisions of the Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Form 10-QSB or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties, and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward-looking statement.
Such future results are based upon management's best estimates based upon
current conditions and the most recent results of operations. These risks
include, but are not limited to, the ability of the Company to identify and
obtain a viable business and all of the risks (known and unknown) relating to
any new and as yet unidentified business within the timeframe inherent in the
Company's cash limitations. The Company, in the future, will need additional
funds from loans and/or the sale of equity securities. No assurance can be given
that such funds will be available or, if available, will be on commercially
reasonable terms satisfactory to the Company. In addition the report of the
Company's independent auditors on the consolidated financial statements of the
Company for the year ended December 31, 1997, contains an explanatory paragraph
that there are certain conditions that raise substantial doubt about the ability
to continue as a going concern. The Company to date has been materially
dependent upon the efforts of its President and Chief
Page 15 of 32
<PAGE> 16
Executive Officer, Mr. J. Marvin Feigenbaum. The loss of Mr. Feigenbaum's
services may have a materially adverse effect upon the business or operations of
the Company.
Balance of Page Intentionally Left Blank
Page 16 of 32
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTES TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Acquisitions and Dispositions
a. Medical Science Institute, Inc.
On November 18, 1996, the United States Bankruptcy Court of the Central
District of California approved the First Amended Plan of Reorganization (the
"MSI Plan") of Medical Science Institute ("MSI") pursuant to which the Company
acquired all of the capital stock of MSI.
On February 26, 1997, the Company completed the sale of its ownership
interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL") (Note 3b). The
Company sold its interests in MSI to PCL for its original costs aggregating
approximately $7.6 million.
As a result of the above transactions, during the first quarter of 1997,
the Company owned MSI for the 57 day period beginning January 1, 1997 and ending
February 26, 1997. Therefore, Management's Discussion and Analysis of Financial
Condition and Results of Operations relating to the three months ended March 31,
1997, is presented on the basis of the Company's temporary ownership of MSI.
b. Physicians Clinical Laboratory, Inc.
In 1996, the Company acquired certain debt securities of Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"). United reached an
agreement (the "PCL Plan") with the holders of the Senior Debt, Subordinated
Debt and the management of PCL whereby United would acquire a 52.6% interest in
PCL. The terms of the agreement provided that PCL file a plan to effectuate the
agreement. As required by the aforementioned agreement, the Company purchased
approximately $13,300,000 of Senior Debt for $10,000,000 on November 7, 1996. On
November 8, 1996, PCL and its then subsidiaries filed a petition for relief
under Chapter 11 of the Federal Bankruptcy Laws in the United States Bankruptcy
Court.
On the effective date (October 1997), as required under the PCL Plan, the
debt purchased by United was converted into 35.6% of the common stock of PCL.
United acquired an additional 17% of the common stock in exchange for a
$5,000,000 note received in the MSI sale (Note 3a), resulting in United owning
52.6% of the outstanding common stock of PCL. United accounted for the
acquisition under the purchase method. The Company's acquisition cost consisted
of the $15 million investment above, plus deferred acquisition costs, less the
deferred gain on the sale of MSI (Note 3a). The Company recorded approximately
$2 million in excess cost over the fair market value of net assets acquired
("goodwill").
Page 17 of 32
<PAGE> 18
Minority interest in losses of PCL has been recognized in excess of the
minority interest in the equity capital of PCL since the minority shareholders
have advances to PCL in the form of senior secured notes. Accordingly, the
minority interest excess has been recorded as a reduction of liabilities in the
accompanying balance sheet.
In June, 1998, the Company sold 67,500 shares of PCL common stock to a
senior lender and significant stockholder of PCL for $750,000, in conjunction
with a loan by that stockholder of $4 million to PCL. After the sale, United
owns 49.9% of the issued and outstanding shares of PCL. The transaction also
resulted in amendment of the Stockholder Agreement. The agreement as amended
provides the lender stockholder with the right to elect the majority of the
board and provides United the rights under certain corporate governance
provisions
On April 5, 1999, PCL entered into an Asset Purchase Agreement for the sale
of the business and substantially all assets to Unilab Corp for a total purchase
price of approximately $40 million. The sale closed on May 10, 1999, (Note 3b).
Concurrent with the sale, the Stockholder Agreement was amended to provide
payment to the Company of $3.25 million in cash upon satisfaction of certain
conditions. The Company received this payment in May 1999.
As a result of the agreement, the Company reevaluated the recoverability of
PCL's excess reorganization value based upon an estimated loss on the sale,
including costs of disposal. PCL recorded an additional write-down of $10.6
million, resulting in a total write-down of excess reorganization value of
approximately $45.3 million, as of December 31, 1997.
As a result of the above transactions, the Management's Discussion and
Analysis of Financial Condition and Results of Operations relating to the three
months ended March 31, 1997 do not include the Company's 52.6% majority
ownership or subsequent 49.9% minority ownership of Physicians Clinical
Laboratory, Inc.; however, the three months ended March 31, 1998, is presented
on the basis of the Company's 52.6% majority ownership of PCL under the
consolidated accounting method as described in Note 2.
c. Analytical Biosystems Corporation
ABC has ceased processing specimens for the assay and suspended its
laboratory operations in Rhode Island in November, 1997.
As a result, Management's Discussion and Analysis of Financial Condition
and Results of Operations relating to the three months ended March 31, 1997, do
include the operations of ABC; however, the three months ended March 31, 1998,
do not include the operations of ABC.
2. Summary of Significant Accounting Policies
The Company commenced full consolidation of PCL in October 1997 upon its
acquisition of a majority ownership (52.6%) of PCL. Accordingly, for the fourth
quarter of 1997 and the first quarter of 1998, the operating results of PCL are
consolidated with the operating results of the Company and its other
wholly-owned subsidiaries, and the assets and liabilities of PCL are
consolidated with those of the Company and its other majority-owned subsidiaries
in the
Page 18 of 32
<PAGE> 19
Company's consolidated balance sheets. The minority interest in losses of PCL
has been recognized in excess of the minority interest in the equity capital of
PCL since the minority shareholders have advances to PCL in the form of senior
secured notes. The negative minority interest has been recorded as a reduction
of liabilities in the accompanying balance sheets.
During the time which the Company owned a majority interest in PCL, the
Company accounted for its investment in PCL under the consolidation method, and
continued to recognize it's 52.6% share of PCL losses, through June 10, 1998. On
June 10, 1998, the Company sold a portion of its share ownership in PCL, and the
Company's ownership percentage in PCL was reduced from 52.6% to 49.9%. As such,
subsequent to June 10, 1998, the Company commenced to account for its remaining
investment in PCL under the equity method of accounting, rather than the
consolidation method. Under the equity method, investments are recorded at cost
reduced by the Company's proportionate share of losses. Any losses in excess of
the investment are not recognized until future profits or additional investments
occur. The Company's share of PCL losses recognized from date of acquisition
through June 10, 1998, exceeded its investment in PCL. In the deconsolidation of
PCL, the Company will adjust its negative investment to zero and record the
remainder as an adjustment to capital in excess of par value.
Under the equity method, the net investment is presented in the balance
sheet, and the share of losses is presented as one amount in the statements of
operations. For the second quarter ending June 30, 1998, the Company will
present its share of losses and net investment on the equity method and the
three months ended March 31, 1998, will be restated to reflect equity method
reporting.
Three months ended March 31, 1998, compared with three months ended March 31,
1997
Results of Operations
Total revenues for the three months ended March 31, 1998, were $15,838,486
compared to $1,942,832 for the three months ended March 31, 1997. The increase
in total revenues of $13,895,654 is primarily due to the inclusion of Physician
Clinical Laboratory, Inc.'s ("PCL") total revenues for the three months ended
March 31, 1998, of $15,751,753 as compared to the inclusion of Medical Science
Institute's ("MSI") total revenues for the 57 day period beginning January 1,
1997, and ending February 26, 1997, of $1,798,361. Without the inclusion of PCL
and MSI's total revenues, total revenues for the three months ended March 31,
1998, would have been $86,733 as compared to $144,471 for the three months ended
March 31, 1997. The decrease of $57,738 is primarily due to the loss of assay
sales resulting from the closure of Analytical Biosystems Corporation's ("ABC")
laboratory operations in November 1997.
Assay sales, net of billing adjustments, from the processing ABC's assay,
the Fluorescent Cytoprint Assay, were $29,850 for the three months ended March
31, 1997. Due to the closure of ABC's laboratory operations in November 1997,
there were no assay sales for the three months ended March 31, 1998.
Laboratory revenues, net of billing adjustments, were $15,747,736 for the
three months ended March 31, 1998, resulting from the inclusion of PCL's
laboratory revenues during this
Page 19 of 32
<PAGE> 20
period, compared to $1,798,361 for the three months ended March 31, 1997,
resulting from the inclusion of MSI's laboratory revenues during this period.
Medical billing services revenues were $90,750 for the three months ended
March 31, 1998, as compared to $109,081 for the three months ended March 31,
1997.
Total operating costs for the three months ended March 31, 1998, were
$17,732,261 compared to $2,749,068 for the three months ended March 31, 1997.
The increase in total operating costs of $14,983,193 is primarily due to the
inclusion of PCL's total operating costs for the three months ended March 31,
1998, of $16,607,179 as compared to the inclusion of MSI's total operating costs
for the 57 day period beginning January 1, 1997, and ending February 26, 1997,
of $2,092,447. Without the inclusion of PCL and MSI's total operating costs,
total operating costs for the three months ended March 31, 1998, would have been
$1,125,082 as compared to $656,621 for the three months ended March 31, 1997.
The increase in total operating costs of $468,461 is primarily due to a write
down of intangibles of approximately $645,472 recorded in the three months ended
March 31, 1998, offset by decreases in selling, general and administrative
expenses of approximately $160,000 and laboratory expenses of approximately
$43,000 for the three months ended March 31, 1998.
Laboratory expenses for the three months ended March 31, 1998, were
$10,460,777 compared to $1,418,293 for the three months ended March 31, 1997.
The increase in laboratory expenses of $9,042,484 is primarily due to the
inclusion of PCL's laboratory expenses for the three months ended March 31,
1998, of $10,460,777 as compared to the inclusion of MSI's laboratory expenses
for the 57 day period beginning January 1, 1997, and ending February 26, 1997,
of $1,374,422. Without the inclusion of PCL and MSI's laboratory expenses, the
Company would have reported no laboratory expenses for the three months ended
March 31, 1998, as compared to $43,871 for the three months ended March 31,
1997. This decrease is primarily due to the closure of ABC's laboratory
operations in November 1997.
Medical billing services expenses were $129,473 for the three months ended
March 31, 1998, as compared to $123,930 for the three months ended March 31,
1997.
Selling, general and administrative expenses for the three months ended
March 31, 1998, were $4,536,456 compared to $892,243 for the three months ended
March 31, 1997. The increase in selling, general and administrative expenses of
$3,644,213 is primarily due to the inclusion of PCL's selling, general and
administrative expenses for the three months ended March 31, 1998, of $4,206,508
as compared to the inclusion of MSI's selling, general and administrative
expenses for the 57 day period beginning January 1, 1997, and ending February
26, 1997, of $718,025. Without the inclusion of PCL and MSI's selling, general
and administrative expenses, selling, general and administrative expenses for
the three months ended March 31, 1998, would have been $329,948 as compared to
$174,218 for the three months ended March 31, 1997. The decrease of $155,730 is
primarily due to the closure of ABC's operations in November 1997, as well as a
decrease in personnel costs for the Company.
Page 20 of 32
<PAGE> 21
The Company reported no research and development expenses for the three
months ended March 31, 1998, as compared to $16,610 for the three months ended
March 31, 1997. The decrease is primarily due to the closure of ABC's laboratory
operations in November 1997.
Operating loss for the three months ended March 31, 1998, was $1,893,775
compared to $806,236 for the three months ended March 31, 1997. The increase in
operating loss of $1,087,539 is primarily due to the inclusion of PCL's
operating loss for the three months ended March 31, 1998, of $855,426 as
compared to the inclusion of MSI's operating loss for the 57 day period
beginning January 1, 1997, and ending February 26, 1997, of $294,086. Without
the inclusion of PCL and MSI's operating losses, operating losses for the three
months ended March 31, 1998, would have been $1,038,349 as compared to $512,150
for the three months ended March 31, 1997. The increase of $526,199 is primarily
due to an increase in total operating costs of $468,461 due primarily to a write
down of intangibles of approximately $645,472 recorded in the three months ended
March 31, 1998, offset by decreases in selling, general and administrative
expenses of approximately $160,000 and laboratory expenses of approximately
$43,000 for the three months ended March 31, 1998, as well as a decrease in
total revenues of $57,738 due primarily to the loss of assay sales resulting
from the closure of Analytical Biosystems Corporation's ("ABC") laboratory
operations in November 1997.
Investment and interest income for the three months ended March 31, 1998,
was $28,319 compared to $10,265 for the three months ended March 31, 1997. The
increase of $18,054 is primarily due to the inclusion of PCL's investment and
interest income for the three months ended March 31, 1998, of $28,317 as
compared to the Company's investment and interest income of $10,265 for the
three months ended March 31, 1997. Without the inclusion of PCL's investment and
interest income, investment and interest income for the three months ended March
31, 1998, would have been $2 as compared to $10,265 for the three months ended
March 31, 1997. The decrease of $10,263 is primarily due to a decrease in cash
and cash equivalents upon which interest is earned.
Interest expense for the three months ended March 31, 1998, was $2,032,177
compared to $529,010 for the three months ended March 31, 1997. The increase in
interest expense of $1,503,167 is primarily due to the inclusion of PCL's
interest expense for the three months ended March 31, 1998, of $2,029,883 as
compared to the Company's interest expense of $529,010 for the three months
ended March 31, 1997. Without the inclusion of PCL's interest expense, interest
expense for the three months ended March 31, 1998, would have been $2,294 as
compared to $529,010 for the three months ended March 31, 1997. The decrease of
$526,716 is primarily due to the interest recorded for the fair value of
warrants issued in connection with debt in 1997 and interest related to a loan
in the principal amount of $2,000,000 obtained by the Company to repay the
outstanding balance on a loan in the principal amount of $2,500,000.
Net loss for the three months ended March 31, 1998, was $2,543,419 as
compared to $1,324,981 for the three months ended March 31, 1997. The increase
in net loss of $1,218,438 is primarily due to the inclusion of PCL's net loss
for the three months ended March 31, 1998, of $2,856,992 less the minority
interest of $1,354,214 as compared to the inclusion of MSI's net loss for the 57
day period beginning January 1, 1997, and ending February 26, 1997, of $290,823.
Without the inclusion of PCL and MSI's net losses, net losses for the three
months
Page 21 of 32
<PAGE> 22
ended March 31, 1998, would have been $1,040,641 as compared to $1,034,158 for
the three months ended March 31, 1997.
Net loss per share of Common Stock for the three months ended March 31,
1998, was $3.73 compared to $95.08 for the three months ended March 31, 1997.
This decrease is primarily due to an increase in weighted average common shares
outstanding. Weighted average shares were 682,622 and 31,324 for the three
months ended March 31, 1998, and 1997, respectively.
Liquidity and Capital Resources
The Company had approximately $260,975 in cash and cash equivalents at
March 31, 1998.
Total current assets at March 31, 1998, and December 31, 1997, were
$13,163,998 and $13,998,036, respectively. This decrease of $834,038 is
primarily due to the inclusion of PCL's total current assets at March 31, 1998,
of $12,740,005 as compared to the inclusion of PCL's total current assets at
December 31, 1997, of $13,848,942. Without the inclusion of PCL's total current
assets, total current assets at March 31, 1998, would have been $423,993 as
compared to $149,094 at December 31, 1997. The increase of $274,889 is primarily
due to a new loan the Company obtained in March 1998 in the principal amount of
$250,000, offset by the use of these loan proceeds during the period to support
operating activities and the payment and reduction of current liabilities.
Accounts receivable, net of allowances for doubtful accounts, at March 31,
1998, and December 31, 1997, were $11,234,000 and $11,000,608, respectively.
This increase of $233,392 is primarily due to the inclusion of PCL's accounts
receivable, net of allowances for doubtful accounts at March 31, 1998, of
$11,216,747 as compared to the inclusion of PCL's accounts receivable, net of
allowances for doubtful accounts at December 31, 1997, of $10,948,508. Without
the inclusion of PCL's net accounts receivable, accounts receivable, at March
31, 1998, would have been $17,253 as compared to $52,100 at December 31, 1997.
The decrease of $34,847 is primarily due to a reduction in medical billing
services net accounts receivable as well as the write down of the remaining net
accounts receivable for ABC.
Inventory at March 31, 1998, and December 31, 1997, were $1,093,333 and
$1,139,232, respectively. This decrease of $45,899 is primarily due to the
inclusion of PCL's inventory at March 31, 1998, of $1,093,033 as compared to the
inclusion of PCL's inventory at December 31, 1997, of $1,138,932. Without the
inclusion of PCL's inventory, inventory at March 31, 1998, and December 31,
1997, would have been $300.
A note receivable of $100,000 was outstanding at March 31, 1998, and
December 31, 1997. On February 10, 1997, a $100,000 loan was issued to the
former sole stockholder and president of MSI, as part of the employment
agreement between the Company and the stockholder. The loan is secured by the
shares of Common Stock issued to the stockholder under the MSI Plan.
Page 22 of 32
<PAGE> 23
Equipment and leasehold improvements, net of accumulated depreciation and
amortization, at March 31, 1998, and December 31, 1997, were $2,513,980 and
$2,758,476, respectively. This decrease of $244,496 is primarily due to the
inclusion of PCL's equipment and leasehold improvements, net of accumulated
depreciation and amortization at March 31, 1998, of $2,493,340 as compared to
the inclusion of PCL's equipment and leasehold improvements, net of accumulated
depreciation and amortization at December 31, 1997, of $2,739,484. Without the
inclusion of PCL's equipment and leasehold improvements, net of accumulated
depreciation and amortization, equipment and leasehold improvements, net of
accumulated depreciation and amortization at March 31, 1998, would have been
$20,640 and $18,992 at December 31, 1997.
The Company did not report any goodwill, net of accumulated amortization,
at March 31, 1998, as compared to $664,336 at December 31, 1997. This decrease
is due to the write down of remaining goodwill from the purchase of NTBM Billing
Services, Inc. of approximately $646,000.
Total assets at March 31, 1998, and December 31, 1997, were $40,178,595 and
$42,358,470, respectively. This decrease of $2,179,875 is primarily due to the
inclusion of PCL's total assets at March 31, 1998, of $39,629,591 as compared to
the inclusion of PCL's total assets at December 31, 1997, of $41,407,163.
Without the inclusion of PCL's total assets, total assets at March 31, 1998,
would have been $549,004 as compared to $951,307 at December 31, 1997. The
decrease of $402,303 is primarily due to the write down of remaining goodwill
from the purchase of NTBM Billing Services, Inc. of approximately $646,000,
offset by a new loan obtained by the Company in March 1998 in the principal
amount of $250,000.
Current liabilities at March 31, 1998, and December 31, 1997, were
$68,390,417 and $66,546,284, respectively. This increase of $1,844,133 is
primarily due to the inclusion of PCL's current liabilities at March 31, 1998,
of $66,839,066 as compared to the inclusion of PCL's current liabilities at
December 31, 1997, of $65,619,254. Without the inclusion of PCL's current
liabilities, current liabilities at March 31, 1998, would have been $1,551,351
as compared to $1,168,182 at December 31, 1997. The increase of $383,169 is
primarily due to a new loan obtained by the Company in March 1998 in the
principal amount of $250,000, as well as an increase in accounts payable of
approximately $72,000 and accrued expenses of $84,000.
Total liabilities at March 31, 1998, and December 31, 1997, were
$56,722,508 and $56,372,981, respectively. The increase of $349,527 is primarily
due to the inclusion of PCL's total liabilities at March 31, 1998, of
$69,179,371 as compared to the inclusion of PCL's total liabilities at December
31, 1997, of $68,099,951, offset by the increase in negative minority interest
applicable to first quarter loss. Without the inclusion of PCL's total
liabilities, total liabilities at March 31, 1998, would have been $1,551,351 as
compared to $1,168,182 at December 31, 1997. The increase of $383,169 is
primarily due to a new loan obtained by the Company in March 1998 in the
principal amount of $250,000, as well as an increase in accounts payable of
approximately $72,000 and accrued expenses of $84,000.
Page 23 of 32
<PAGE> 24
Year 2000 Compliance
The Company has no existing products and no material internal systems which
may be impacted by the Company's failure to effect Year 2000 ("Y2K") compliance.
The Company believes that no material expenditures will be required to address
Y2K compliance of the Company's internal computer systems. In the event the
Company acquires any assets or commences any operations which would require it
to address Y2K compliance, it will do so at such time. At this time, the Company
has not encountered any Y2K issues which would have a material adverse effect on
its business.
Plan of Operations and Requirement for Additional Funds
The consolidated financial statements of the Company have been prepared on
the basis that the Company will continue as a going concern. These conditions
have raised substantial doubt about the Company's ability to continue as a going
concern. Through March 31, 1998, the Company has expended cash in excess of cash
generated from operations and has not achieved sufficient revenues to support
future operations. During 1997, the Company generated net cash from financing
activities of approximately $628,094, which was principally utilized by the
Company for general working capital purposes, including cash used from
operations of the Company and its then principal subsidiary, NTBM Billing
Services, Inc. ("NTBM"). The Company's remaining cash and cash equivalents at
March 31, 1998, and December 31, 1997, were approximately $260,000 and
$1,500,000, respectively. The Company obtained a new loan in March 1998 for
$250,000, which matures in 1999, and management anticipates obtaining additional
equity financing. In June, 1998, the Company sold 67,500 shares of PCL common
stock to a senior lender and significant stockholder of PCL for $750,000. In
addition, in connection with the sale of assets by PCL, the Company received a
payment of $3.25 million from certain holders of PCL's secured indebtedness
(Note 3b). However, no assurances can be given that these actions will result in
achieving profitability or positive cash flows. The ability of the Company to
obtain additional financing or to achieve an adequate level of revenues is
dependent upon future events, the outcome of which is presently not
determinable. While the Company will seek to raise additional funds through debt
or equity financing, no assurance may be given that the Company will be able to
do so or, if that such financing is available, that same will be on terms
acceptable to the Company.
Effects of Inflation
The Company does not view the effects of inflation to have a material
effect upon its business.
Historical Losses and Accumulated Deficit of United; Going Concern
Qualification of Independent Auditors' Report
Through the third quarter ended September 30, 1996, the Company was
classified as a development-stage company for financial accounting purposes by
reason of the fact that it had not generated significant revenues from
operations prior to such date. As a result of the acquisition of Prompt Medical
Billing and its subsequent operations under NTBM Billing
Page 24 of 32
<PAGE> 25
Services, Inc., and the ownership, at that time, of MSI, the Company ceased to
be classified as a development-stage company as of December 31, 1996. Since
1990, the Company's principal business has been conducted through its
wholly-owned subsidiary, ABC. Prior to 1990, the Company, through other
subsidiary corporations, had engaged in other unrelated businesses which have
been discontinued. Since inception (February 1, 1982) through March 31, 1998,
the Company has incurred an accumulated deficit of approximately $55,834,000.
For the fiscal years ended December 31, 1997, 1996 and 1995, and the three
months ended March 31, 1998, the Company incurred net losses of approximately
$31,626,000, $7,788,000, $2,089,000, and $2,543,000, respectively. The amount of
stockholders deficit at March 31, 1998 was approximately ($16,544,000). The
amount of its working capital at March 31, 1998 was approximately ($55,226,000).
There can be no assurance that the Company will be able to ultimately identify
or acquire any new business or the Company will have adequate financial
resources with which to consummate potential transactions that may become
available to the Company. In addition, the report of the Company's independent
auditors on the consolidated financial statements of the Company for the year
ended December 31, 1997, in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1997, contains an explanatory paragraph that there are
certain conditions that raise substantial doubt about the ability to continue as
a going concern.
OTHER RISKS
Pledge of Principal Assets to Secure Existing Loans from the State of Rhode
Island
In connection with a series of loans obtained during 1993 and 1994 by the
Company from the State of Rhode Island Economic Development Small Business Loan
Fund Corporation ("SBLFC") in the principal aggregate amount of $791,000, the
Company executed two patent security agreements granting the SBLFC a security
interest in ABC's patents to secure $541,000 of the $791,000 of SBLFC loans (the
principal balance of which, as of March 31, 1998, was approximately $128,000).
All of the SBLFC loans, including those which are subject to the patent security
interest, are further secured by a security interest in the Company's accounts
receivable, inventory and equipment. Each of these loans were for a term of five
years from its respective loan date, bear interest at the rate of 5.4% and, as
to each loan, after the first year is amortized monthly as to principal and
interest. In March 1998, the terms of these loans were modified to 9.5% interest
with principal due on demand. The aggregate amount of monthly interest payments
is approximately $1,000 per month. In the event that the Company, for whatever
reason, is unable to continue to meet its loan repayment obligations, the assets
which are pledged will be subject to the rights of the SBLFC as a secured party.
Further, until the SBLFC loans are repaid, it is unlikely that the Company or
ABC will be able to obtain additional secured financing utilizing this
collateral.
Dependence Upon Key Personnel
The Company is dependent upon the executive abilities of its Chairman, J.
Marvin Feigenbaum, to implement its present and anticipated future plans and
programs. Mr. Feigenbaum has no background or training as a scientist, nor is
Mr. Feigenbaum a physician. The Company has entered into an employment agreement
with Mr. Feigenbaum for a term
Page 25 of 32
<PAGE> 26
ending April 30, 2002. The loss of Mr. Feigenbaum's services may have a
materially adverse effect on the business or prospects of the Company.
Classified Board of Directors
At the Annual Meeting of Stockholders held in June, 1997, Messrs.
Feigenbaum and Fagenson were elected Class 1 Directors to serve until the 2000
Annual Meeting of Stockholders. At the Annual Meeting of Stockholders held on
August 27, 1996, Mr. Sterling was elected Class 2 Director until the 1999 Annual
Meeting of Stockholders, which meeting has not been held to date. Due to the
financial position of the Company, the Company has been unable to attract and
retain any directors other than Messrs. Feigenbaum, Sterling and Fagenson.
Conversion of Series A Convertible Preferred Stock, Increase of Authorized
Capital, Delisting from the NASDAQ SmallCap Market and Reverse Stock Split
As of December 19, 1997, the Company had 47,783,554 pre-reverse split
shares of its Common Stock issued and outstanding (including 45,099,336
pre-reverse split shares of Common Stock previously issued upon conversion of
11,174 shares of Preferred Stock). Consequently, the Company did not have a
sufficient number of unreserved shares of Common Stock to accommodate any
additional conversions of the Preferred Stock and suspended the acceptance of
future conversions.
By letter dated April 17, 1998, from The Nasdaq Stock Market, the Company
was advised that Nasdaq had commenced proceedings to delist the Company's Common
Stock from inclusion in the Nasdaq SmallCap Market ("NSCM") by reason of the
inability of the Company to file its Annual Report on Form 10-KSB for the year
ended December 31, 1997. The inability of the Company to file its Annual Report
on Form 10-KSB was occasioned because the audit of the Company's financial
statements for the year ended December 31, 1997 was delayed by reason of a
pending change in the Company's independent auditors. The Company requested a
hearing with respect to the delisting proceedings. On June 1, 1998, the Company
was notified by The Nasdaq Stock Market that the Company's Common Stock would be
delisted from the NSCM, effective as of the close of business on June 1, 1998.
The notification resulted from a determination by a Nasdaq Listing
Qualifications Panel, following a hearing held on May 14, 1998, to reject the
Company's request for continued inclusion on the NSCM. The Company's Common
Stock was quoted on the NSCM through May 15, 1998. The Company believes that the
delisting of the Common Stock has had a depressive effect upon the market price
of the Common Stock and adversely affected the liquidity of the Common Stock
because, subsequent to May 15, 1998, the Common Stock has been quoted in the
"pink sheets" maintained by National Quotation Bureau, Inc., which is not an
established trading market.
The Company's Series A Convertible Preferred Stock is convertible into such
number of shares of common stock as shall equal $1,000 divided by a conversion
rate equal to the lesser of (i) 75% of the average closing price of the common
stock for the 5 days immediately preceding the date of the holder's notice of
conversion or (ii) $1,225.00, subject to certain adjustments. Since the
conversion price of the preferred stock is related to the Nasdaq bid price for
the
Page 26 of 32
<PAGE> 27
common stock, a conversion price is presently indeterminable; consequently, the
Company has suspended the acceptance of future conversions.
Pursuant to prior stockholder authorization, the Company filed a
Certificate of Amendment to its Certificate of Incorporation effective December
23, 1998, (i) effecting a 1-for-70 reverse stock split of its issued and
outstanding Common Stock, resulting in each 70 issued and outstanding shares of
the Common Stock being changed into one share, and (ii) changing the name of the
Company to United Diagnostic, Inc.
No Dividends and None Anticipated
United has never declared nor paid a dividend on any shares of its capital
stock and the Board of Directors intends to continue this policy for the
foreseeable future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company had heretofore filed, and withdrew, a registration statement
relating to the shares of its Common Stock to be issued upon conversion of the
Company's 14,000 shares of Series A Convertible Preferred Stock ("Preferred
Stock"). At the time of such filing, the Company believed that it had not
received valid written demand by a majority of the holders of the Preferred
Stock to require it to proceed with such registration statement. The Company
further believes that, at the time such registration statement was withdrawn, it
did not receive a written demand by the holders of a majority of Preferred Stock
to file a registration statement. Subsequently, the Company did file a
Registration Statement relating to the shares of its Common Stock to be issued
upon conversion of the Company's 14,000 shares of Preferred Stock with the
Securities and Exchange Commission on July 21, 1997.
On February 4, 1998, a complaint was filed against the Company and others
in an action in the United States District Court for the Southern District of
New York captioned Gorra Holding and Barras Investment v. Nu-Tech Bio-Med, Inc.,
J. Marvin Feigenbaum and Robert B. Fagenson (Docket No. 98 Civ. 764 (JMP)). The
complaint alleged that the Company and the other defendants violated Section
10(b) and Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act")
and Rule 10b-5 promulgated thereunder. The complaint also alleged common law
fraud, conversion and breach of contract. These claims against the Company were
purportedly based on allegations that the Company participated in a scheme to
deprive its Series A Convertible Preferred Shareholders of their conversion and
registration rights. The complaint sought compensatory damages of at least $1.25
million and punitive damages of at least $3 million or, in the alternative, an
order for the Company to allow the plaintiffs to exercise certain conversion and
registration rights, together with reasonable costs and attorneys' fees. On
March 3, 1999, following dismissal of all claims other than breach of contract,
plaintiffs stipulated to a dismissal of the action without prejudice.
In a Current Report on Form 8-K, dated May 29, 1997, the Company reported a
complaint against the Company captioned Mordechai Gurary v. Isaac Winehouse,
Isaac
Page 27 of 32
<PAGE> 28
Winehouse d/b/a Wall & Broad Equities and Nu-Tech Bio-Med, Inc. (Docket No. 97
Civ. 3803 (LBS)) filed on May 23, 1997 in the United States District Court for
the Southern District of New York. The complaint alleged that the Company and
the other defendants violated Section 10(b) of the Securities Exchange Act of
1934 (the "Exchange Act") and Section 349 of the General Business Law of the
State of New York (the "GBL"). The claims against the Company under the Exchange
Act and the GBL were purportedly based on allegations that the Company knew of
and failed to disclose, among other things, unlawful trading activity in the
Company's securities by the other defendants named in the action. The complaint
sought compensatory damages in an unstated amount, sought to enjoin the Company
from registering certain Series A Convertible Preferred Stock until the
determination of the action, and sought reasonable attorneys' and expert fees as
well as treble and punitive damages. On February 9, 1998, the court dismissed
with prejudice the federal claims of violations of Section 10(b) of the Exchange
Act for failure to state a claim and dismissed the state claims of violations of
Section 349 of the GBL. The dismissal of this action was appealed by the
plaintiff. On August 24, 1999, the United States Court of Appeals for the Second
Circuit issued its opinion affirming the district court's granting of summary
judgment dismissing the complaint.
On July 6, 1999, an action was commenced in the Superior Court of the State
of Delaware in and for New Castle County entitled J & B Associates Profit
Sharing Plan & Trust v. United Diagnostic, Inc., although it was not served upon
the defendant until July 20, 1999. The plaintiff, which purports to be an
Illinois corporation, alleges that it purchased 300 shares of Series A
Convertible Preferred Stock from the Company for $300,000 pursuant to a
Preferred Stock Securities Purchase Agreement dated November 19, 1996 (the
"Agreement"). While the plaintiff converted a portion of the Preferred Stock it
held into Common Stock, it alleges that it was unable to convert additional
shares of Preferred Stock because the Company's Common Stock was delisted from
the Nasdaq SmallCap Market ("NSCM"). The complaint alleges that in the
Agreement, the Company warranted that the Common Stock would remain listed on
the NSCM and, therefore, that it breached the terms of the Agreement. The
complaint alleges claims for breach of contract and unjust enrichment against
the Company, and seeks $200,000 in compensatory damages plus attorneys' fees and
costs. The Company has moved to dismiss the complaint.
On July 8, 1998 an arbitration was commenced before the AAA in Miami,
Florida entitled Judith Prussin and Health Systems Development Corporation
against NTBM Billing Services, Inc and Nu-Tech Bio Med, Inc. (Case No. 32 160
00219 98). The case concerned employment and consulting agreements between the
Company and claimants, which agreements were executed in conjunction with the
purchase by the Company of the claimants' business, Prompt Medical Billing, Inc.
("PMBI"), in October of 1996. Specifically in dispute were the amounts owed to
claimants in light of the cessation of PMBI's business operations. Claimants
sought damages in the amount of $44,187.28 along with interest, costs and
attorneys fees associated with the arbitration. The matter was settled by
confidential agreement of the parties, dated on or about May 28, 1999 and
formally dismissed on June 17, 1999. The settlement provided, among other items,
that the Company pay $35,000 to claimants and the claimants assign the right to
collect an outstanding account payable to PMBI in the amount of $70,000. The
first $10,000 collected from the outstanding account is to be paid to the
Company, with any additional amounts collected to be split 50/50 amongst
claimants and the Company. The right to
Page 28 of 32
<PAGE> 29
collect the $70,000 reverts to the Company if at least $10,000 has not been
collected by November 1, 1999 and a payment plan for the remainder is not in
place.
On July 22, 1998 an arbitration was commenced before the AAA in New York,
New York entitled Nu-Tech Bio Med, Inc. and NTBM Billing Services, Inc v. Judith
Prussin, Jeffrey Prussin and Prompt Medical Billing, Inc. (Case No. 13 180 00703
98). The case arose from the purchase by the Company of the respondents'
business, PMBI, in October of 1996. Subsequent to the purchase, the business
lost its principal customer and ceased operations. In the arbitration, the
Company sought from the former owners of PMBI, inter alia, a judgment which
constituted the return of the purchase price of PMBI (i.e., the return of
approximately $100,000 in cash and the right to certain stock held in escrow
pursuant to the Purchase Agreement). In an Award originally dated April 9, 1999
(and affirmed by the arbitrator on May 27, 1999), the arbitrator denied the
relief sought by the Company and refused to grant the relief sought by
respondents. On April 19, 1999, the Company initiated a Special Proceeding in
the Supreme Court of the State of New York, County of New York captioned In re
the Arbitration of Certain Controversies between Nu-Tech Bio Med, Inc. and NTBM
Billing Services, Inc v. Judith Prussin, Jeffrey Prussin and Prompt Medical
Billing, Inc. (Index No. 108158/99) to affirm the Award. The Special Proceeding
is currently at the initial pleadings stage.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1* Amended and Restated Certificate of Incorporation filed with
the Secretary of State of Delaware on November 16, 1996
(Exhibit 3.1.5 to Amendment No. 1 to Registration Statement
on Form SB-2, file No. 33- 84622)
3.2* Amended and Restated By-Laws effective November 16, 1996
(Exhibit 3.2.2 to Registration Statement on Form SB-2, File
No. 33-846221)
3.3* Amended and Restated Certificate of Incorporation filed with
the Secretary of State of Delaware on October 21, 1997
(Exhibit 3 on Form 8-K, file No. 001-13900)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the following reports on Form 8-K
were filed by the Registrant:
Page 29 of 32
<PAGE> 30
<TABLE>
<CAPTION>
Date of the Report Item Reported Description of Item
- ------------------ ------------- -------------------
<S> <C> <C>
January 22, 1998 Item 5. Other Events Question of Company
Compliance with NASDAQ
Listing Requirements
February 23, 1998 Item 5. Other Events Gorra Holding and Barras
Investment Complaint Filing
Item 7. Financial Statements Summons and Complaint in
and Exhibits the action "Gorra Holding
and Barras Investment v.
Nu-Tech Bio-Med, Inc.,
J. Marvin Feigenbaum and
Robert B. Fagenson"
March 5, 1998 Item 5. Other Events Notification NASDAQ will
Commence Delisting
Proceedings of Company's
Common Stock
March 24, 1998 Item 5. Other Events $250,000 Loan from
Erica Jesselson
</TABLE>
Subsequent to the quarter ended March 31, 1998, the following reports on
Form 8-K and 8-K/A were filed by the Registrant:
<TABLE>
<S> <C> <C>
April 20, 1998 Item 5. Other Events NASDAQ Commences
Delisting Proceedings of
Company's Common Stock
May 8, 1998 Item 5. Changes in Registrant's Notification that Ernst &
Certifying Accountant Young LLP ceased
Performance as Company's
Independent Auditors
Item 7. Exhibit Letter from Ernst &
Young LLP
May 15, 1998 Item 4. Changes in Registrant's Amendment No. 1 to
Certifying Accountant 8-K dated May 8, 1998
To correct Item No.
Item 7. Exhibit Letter from Ernst &
Young LLP
</TABLE>
Page 30 of 32
<PAGE> 31
<TABLE>
<CAPTION>
Date of the Report Item Reported Description of Item
- ------------------ ------------- -------------------
<S> <C> <C>
June 5, 1998 Item 5. Other Events Notification from NASDAQ
Company's Common Stock
Delisted as of the close of
June 1, 1998
June 22, 1998 Item 5. Other Events Sale of 67,500 shares of
Physicians Clinical
Laboratory, Inc. to Oaktree
Capital Management, Inc.
For $750,000
December 29, 1998 Item 5. Other Events Company name change from
Nu-Tech Bio-Med, Inc. to
United Diagnostic, Inc. and
Effect a seventy to one
Reverse stock split
March 12, 1999 Item 5. Other Events Resignation from Chriss
Street as Director
May 20, 1999 Item 5. Other Events Sale of Physicians Clinical
Laboratory, Inc.'s assets to
Unilab Corporation
June 23, 1999 Item 5. Other Events J. Marvin Feigenbaum's
Amended and Restated
Employment Agreement
Dated May 19, 1999
</TABLE>
Balance of Page Intentionally Left Blank
Page 31 of 32
<PAGE> 32
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED DIAGNOSTIC, INC.
Dated: October 15, 1999 by: /s/ J. Marvin Feigenbaum
-----------------------------------
J. Marvin Feigenbaum
President, Chief Executive
and Chief Financial Officer
Page 32 of 32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH
</LEGEND>
<CIK> 0000716778
<NAME> UNITED DIAGNOSTIC, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 260,975
<SECURITIES> 0
<RECEIVABLES> 11,234,000
<ALLOWANCES> 2,200,000
<INVENTORY> 1,093,333
<CURRENT-ASSETS> 13,163,998
<PP&E> 2,513,980
<DEPRECIATION> 353,957
<TOTAL-ASSETS> 40,178,595
<CURRENT-LIABILITIES> 68,390,417
<BONDS> 2,340,305
28
0
<COMMON> 6,826
<OTHER-SE> (16,550,764)
<TOTAL-LIABILITY-AND-EQUITY> 40,178,595
<SALES> 15,838,486
<TOTAL-REVENUES> 15,838,486
<CGS> 0
<TOTAL-COSTS> 17,732,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,202,576
<INTEREST-EXPENSE> 2,032,177
<INCOME-PRETAX> (2,543,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,543,419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,543,419)
<EPS-BASIC> (3.73)
<EPS-DILUTED> (3.73)
</TABLE>
