UNITED DIAGNOSTIC INC, 10QSB, 1999-11-04

UNITED DIAGNOSTIC INC
10QSB, 1999-11-04
MEDICAL LABORATORIES

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<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 September 30, 1998

[ ] 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 November 4, 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>
<S> <C>
PART I FINANCIAL INFORMATION PAGE

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 15

PART II OTHER INFORMATION

Item 1. Legal Proceedings 28

Item 6. Exhibits and Reports on Form 8-K 30

SIGNATURES 32
</TABLE>

Page 2 of 32
<PAGE> 3

United Diagnostic, Inc. and Subsidiaries
Consolidated Balance Sheets

(Unaudited)

<TABLE>
<CAPTION>
September 30 December 31
1998 1997
--------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 318,142 $ 1,524,942
Accounts receivable - (net of allowance for doubtful
accounts of approximately $1,434,900 at
December 31, 1997) -- 11,000,608
Inventory -- 1,139,232
Prepaid expenses and other current assets 61,670 333,254
--------------------------------
Total current assets 379,812 13,998,036

Note receivable 100,000 100,000
Equipment and leasehold improvements, net 5,111 2,758,476
Goodwill (net of accumulated amortization of $90,255
December 31, 1997) -- 664,336
Deposits 4,371 436,287
Reorganization value in excess of other identifiable net assets -- 24,401,605
--------------------------------
Total Assets $ 489,294 $ 42,358,740
================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:

Current portion of long term debt $ 341,969 $ 48,251,081
Current portion of capitalized lease obligations 6,144 520,055
Line of credit -- 4,835,959
Accounts payable 436,722 5,057,184
Accrued expenses 442,703 7,826,434
Contract payable 55,571 55,571
--------------------------------

Total current liabilities 1,283,109 66,546,284

Long-term debt -- 1,904,723
Capitalized lease obligations -- 575,974
Minority Interest -- (12,654,000)
--------------------------------

Total liabilities 1,283,109 56,372,981

Commitments and contingencies -- --

Stockholders' equity (deficit):

Series A convertible preferred stock, $.01 par value; 2,000,000 authorized;
2,826 issued and outstanding at September 30, 1998, and December 31,
1997, (liquidation preference of $2,826,000 at September 30, 1998) 28 28
Common stock, $.01 par value; 50,000,000
shares authorized; 682,622 shares issued and
outstanding at September 30, 1998 and December 31, 1997 6,826 6,826
Capital in excess of par value 55,860,872 39,310,422
Deferred consulting expense -- (41,254)
Accumulated deficit (56,661,541) (53,290,263)
--------------------------------
Total stockholders' equity (793,815) (14,014,241)
--------------------------------

Total liabilities and stockholders' equity (deficit) $ 489,294 $ 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 For the nine months ended
September 30 September 30 September 30 September 30
1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Assay sales, net $ -- $ (2,140) $ -- $ 70,109
Laboratory revenues, net -- -- -- 1,798,361
Medical billing services revenues -- 148,125 113,179 392,666
Contract revenue -- -- -- 5,540
-----------------------------------------------------------
Total revenues, net -- 145,985 113,179 2,266,676

Operating costs:

Laboratory expenses -- 36,249 -- 1,500,914
Medical billing services expenses 22,652 128,368 190,323 366,768
Sales, general and administrative 181,554 465,759 837,267 1,847,962
Research and development -- 16,043 -- 48,940
Provision for bad debts -- -- -- 91,643
Depreciation and amortization 1,258 46,238 22,246 298,662
Write down of intangibles -- -- 645,572 --
-----------------------------------------------------------
Total operating costs 205,464 692,657 1,695,408 4,154,889
-----------------------------------------------------------

Operating loss (205,464) (546,672) (1,582,229) (1,888,213)

Other income (expense):

Investment and interest income -- 6,337 750,000 25,317
Equity loss in subsidiary -- -- (2,511,658) --
Interest expense (13,625) (2,543) (27,391) (535,783)
-----------------------------------------------------------
Total other income (expense) (13,625) 3,794 (1,789,049) (510,466)
-----------------------------------------------------------
NET LOSS (219,089) (542,878) (3,371,278) (2,398,679)
Deemed preferred stock dividends -- -- -- (1,653,432)
-----------------------------------------------------------
Loss attributable to common stockholders $ (219,089) $ (542,878) $(3,371,278) $(4,052,111)
===========================================================

Net loss per common share - basic and diluted $ (0.32) $ (4.18) $ (4.94) $ (55.33)
===========================================================

Weighted average shares outstanding 682,622 129,988 682,622 73,230
===========================================================
</TABLE>

Page 4 of 32
<PAGE> 5

United Diagnostic, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

<TABLE>
<CAPTION>
For the nine months ended
SEPTEMBER 30 September 30
1998 1997
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,371,278) $(2,398,679)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and write down of intangibles 667,818 342,225
Provision for bad debt -- 91,643
Interest expense from issuance of warrants -- 494,000
Equity in loss in subsidiary 2,511,658 --
Changes in operating assets and liabilities:
Accounts receivable, prepaids, inventory
and other current assets 40,090 (377,918)
Accounts payable and accrued expenses 214,255 (502,160)
------------------------------
Net cash provided by (used in) operating activities 62,543 (2,350,889)

INVESTING ACTIVITIES

Capital proceeds (expenditures), net 10,403 (39,174)
Deconsolidation of Physicians Clinical Lab cash (1,462,824) --
Sale proceeds of Medical Science Institute -- 2,512,154
Deferred acquisition costs -- (56,953)
Issuance of note receivable -- (100,000)
------------------------------
Net cash provided by (used in) investing activities (1,452,421) 2,316,027

FINANCING ACTIVITIES

Proceeds from issuance of debt 250,000 --
Repayment of notes payable and lease obligations (66,922) (2,187,754)
Repayment of contract payable -- (10,000)
Proceeds from the sale of common stock -- 889,001
------------------------------
Net cash provided by (used in) financing activities 183,078 (1,308,753)
------------------------------
Net decrease in cash and cash equivalents (1,206,800) (1,343,615)
Cash and cash equivalents at beginning of period 1,524,942 1,690,538
------------------------------
Cash and cash equivalents at end of period $ 318,142 $ 346,923
==============================

Supplemental disclosure of cash flow information:

Interest paid $ 27,391 $ 41,783
==============================
</TABLE>

Page 5 of 32
<PAGE> 6

United Diagnostic, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 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 September 30, 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, Form 10-QSB for the three months ended March 31, 1998, was
filed on October 15, 1999, and Form 10-QSB for the six months ended June 30,
1998, was filed on October 29, 1998. 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 September 30, 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 September 30, 1998, and
the results of operations and cash flows for the nine months ended September 30,
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

Page 6 of 32
<PAGE> 7

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) (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 (inactive since November 1997, Note 3c). NTBM was a
medical billing service business located in Florida (inactive since April 1998,
Note 3d). 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 8b).

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 nine month period ended September 30,
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.

Page 7 of 32
<PAGE> 8

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, the operating results of PCL were consolidated with the
operating results of the Company and its other wholly-owned subsidiaries, and
the assets and liabilities of PCL were 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 sheet at December 31, 1997.

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 adjusted its negative investment to zero and recorded the
remainder as an adjustment to capital in excess of par value.

Under the equity method, any positive 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 third quarter ending September 30, 1998, the
Company's proportionate share of PCL losses for the nine months ended September
30, 1998, are presented on the statement of operations as equity loss in
subsidiary. The three months ended March 31, 1998, have been restated to reflect
the deconsolidation and the nine months ended September 30, 1998, present the
Company's share of PCL losses for the nine months on the equity method.

Balance of Page Intentionally Left Blank

Page 8 of 32
<PAGE> 9

Condensed financial data for Physicians Clinical Laboratory, Inc. only,
is a follows:

Balance Sheet
(Unaudited)

<TABLE>
<CAPTION>
September 30
1998
------------
<S> <C>
ASSETS
Total current assets $ 16,408,000
Total long-term assets 37,032,000
------------
Total Assets $ 53,440,000
============

LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities $ 68,722,000
Long-term debt 9,402,000
------------
Total liabilities 78,124,000
Total stockholders' deficit (24,684,000)
------------
Total liabilities and stockholders' deficit $ 53,440,000
============
</TABLE>

Statement of Operations
(Unaudited)

<TABLE>
<CAPTION>
For the nine months ended
September 30
1998
------------
<S> <C>
Total revenues, net $ 46,554,000
Total operating costs 49,244,000
------------
Operating loss (2,690,000)
Total other expense (5,901,000)

------------
NET LOSS $ (8,591,000)
============
</TABLE>

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.

Page 9 of 32
<PAGE> 10

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. 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 at December 31, 1997.

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. As a result of the sale,
United's ownership was reduced to 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 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 8a). 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.

Page 10 of 32
<PAGE> 11

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 nine months ended September 30, 1997, do not include
the Company's 52.6% majority ownership or subsequent 49.9% minority ownership of
Physicians Clinical Laboratory, Inc.; however, the nine months ended September
30, 1998, is presented on the basis of the Company's 49.9% minority ownership of
PCL under the equity method of accounting 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.

d. NTBM Billing Services, Inc. (d/b/a Prompt Medical Billing)

On October 21, 1996, the Company, through a newly formed wholly-owned
subsidiary, NTBM Billing Services, Inc. ("NTBM"), acquired all of the medical
billing service assets of Prompt Medical Billing Services, Inc., a privately
owned Florida corporation engaged in the medical billing service business. The
acquisition was in the form of a purchase. The Company acquired the assets for a
total consideration of $675,000 consisting of $100,000 in cash and 525 shares of
restricted common stock of the Company. The number of shares were subject to
increase in the event the fair market value of the shares at the termination of
the two year period was less than $500,000 or in the event the holders were
unable to sell the shares. All consideration paid by the Company was placed into
escrow for a period of up to two years, to be released upon the attainment of
certain performance levels. In 1998, the cash consideration was released from
escrow.

In connection with this acquisition, the Company recorded $754,591 of
excess cost over the fair market value of net assets acquired ("goodwill")
related to this transaction. Additionally, the Company entered into employment
and consulting agreements with the former owners of Prompt Medical Billing.

In late March 1998, the former owners ceased performing their duties.
NTBM subsequently lost its principal customer and ceased operations during the
second quarter of 1998. The Company has ceased paying the former owners under
the employment and consulting agreements.

Page 11 of 32
<PAGE> 12

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 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.

4. 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 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.

Page 12 of 32
<PAGE> 13

5. 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.

6. 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 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.

7. 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.

8. Subsequent Events

a. Sale of PCL assets to Unilab

On April 5, 1999, Physicians Clinical Laboratory, Inc. ("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.

Page 13 of 32
<PAGE> 14

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.

b. 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 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.

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<PAGE> 15

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.

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 nine months ended September
30, 1997, is presented on the basis of the Company's temporary ownership of MSI.

b. Physicians Clinical Laboratory, Inc.

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").

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<PAGE> 16

As a result of the above transactions, the Management's Discussion and
Analysis of Financial Condition and Results of Operations relating to the three
and nine months ended September 30, 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 and nine months ended September 30, 1998,
is presented on the basis of the Company's 49.9% minority ownership of PCL under
the equity method of accounting 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 and nine months ended September
30, 1997, do include the operations of ABC; however, the three and nine months
ended September 30, 1998, do not include the operations of ABC.

d. NTBM Billing Services, Inc. (d/b/a Prompt Medical Billing)

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<PAGE> 17

medical billing service business. The acquisition was in the form of a purchase.
The Company acquired the assets for a total consideration of $675,000 consisting
of $100,000 in cash and 525 shares of restricted common stock of the Company.
The number of shares were subject to increase in the event the fair market value
of the shares at the termination of the two year period was less than $500,000
or in the event the holders were unable to sell the shares. All consideration
paid by the Company was placed into escrow for a period of up to two years, to
be released upon the attainment of certain performance levels. In 1998, the cash
consideration was released from escrow.

As a result, Management's Discussion and Analysis of Financial Condition
and Results of Operations relating to the three and nine months ended September
30, 1997, and nine months ended September 30, 1998, do include the operations of
NTBM; however, the three months ended September 30, 1998, do not include the
operations of NTBM.

2. Summary of Significant Accounting Policies

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

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<PAGE> 18

in PCL. In the deconsolidation of PCL, the Company adjusted its negative
investment to zero and recorded the remainder as an adjustment to capital in
excess of par value.

Three months ended September 30, 1998, compared with three months ended
September 30, 1997

Results of Operations

The Company reported no total revenues for the three months ended
September 30, 1998, compared to $145,985 for the three months ended September
30, 1997. The decrease is primarily due to a decrease in medical billing
services revenue resulting from the closure of NTBM in April 1998.

Assay sales, net of billing adjustments, from the processing of ABC's
assay, the Fluorescent Cytoprint Assay, were $(2,140) for the three months ended
September 30, 1997. Due to the closure of ABC's laboratory operations in
November 1997, there were no assay sales for the three months ended September
30, 1998.

The Company reported no medical billing services revenues for the three
months ended September 30, 1998, as compared to $148,125 for the three months
ended September 30, 1997. The decrease is primarily due to the closure of NTBM
in April 1998.

Total operating costs for the three months ended September 30, 1998,
were $205,464 compared to $692,657 for the three months ended September 30,
1997. The decrease in total operating costs of $487,193 is primarily due to
decreases of $36,249 in laboratory expenses, $105,716 in medical billing
services expenses, $284,205 in sales, general and administrative expenses,
$16,043 in research and development expenses, and $44,980 in depreciation and
amortization expenses, primarily resulting from the closures of NTBM and ABC in
April 1998 and November 1997, respectively.

Laboratory expenses were $36,249 for the three months ended September
30, 1997. Due to the closure of ABC's laboratory operations in November 1997,
there were no laboratory expenses for the three months ended September 30, 1998.

Medical billing services expenses were $22,652 for the three months
ended September 30, 1998, as compared to $128,368 for the three months ended
September 30, 1997. The decrease of $105,716 is primarily due to the closure of
NTBM in April 1998.

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<PAGE> 19

Selling, general and administrative expenses for the three months ended
September 30, 1998, were $181,554 compared to $465,759 for the three months
ended September 30, 1997. The decrease of $284,205 is primarily due to decreases
in accounting, legal and financial printing expenses, rent and office-related
expenses due to the closure of the Company's New York offices, NASDAQ listing
and franchise tax expenses, as well as decreases resulting from the closure of
ABC's operations in November 1997.

The Company reported no research and development expenses for the three
months ended September 30, 1998, as compared to $16,043 for the three months
ended September 30, 1997. The decrease is primarily due to the closure of ABC's
laboratory operations in November 1997.

Operating loss for the three months ended September 30, 1998, was
$205,464 compared to $546,672 for the three months ended September 30, 1997. The
decrease of $341,208 is primarily due to a decrease in total operating costs of
$487,193, offset by a decrease in total revenues of $145,985.

The Company reported no investment and interest income for the three
months ended September 30, 1998, compared to $6,337 for the three months ended
September 30, 1997. The decrease is primarily due to a decrease in cash and cash
equivalents upon which interest is earned.

The Company reported no equity loss in subsidiary for the three months
ended September 30, 1998, since losses previously recognized reduced United's
investment to zero.

Interest expense for the three months ended September 30, 1998, was
$13,625 compared to $2,543 for the three months ended September 30, 1997. The
increase of $11,082 is primarily due to the interest recorded in connection with
a loan the Company obtained in March 1998 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.

Net loss for the three months ended September 30, 1998, was $219,089 as
compared to $542,878 for the three months ended September 30, 1997. The decrease
in net loss of $323,789 is primarily due to a decrease in operating loss of
$341,208, offset by a net increase in total other expense of $17,419.

Net loss per share of Common Stock for the three months ended September
30, 1998, was $.32 compared to $4.18 for the three months ended September 30,
1997. The decrease is primarily due to an increase in weighted average common
shares outstanding. Weighted average shares were 682,622 and 129,988 for the
three months ended September 30, 1998, and 1997, respectively.

Page 19 of 32
<PAGE> 20

Nine months ended September 30, 1998, compared with nine months ended September
30, 1997

Results of Operations

Total revenues for the nine months ended September 30, 1998, were
$113,179 compared to $2,266,676 for the nine months ended September 30, 1997,
which includes 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 MSI's total revenues, total revenues for the nine
months ended September 30, 1998, would have been $113,179 as compared to
$468,315 for the nine months ended September 30, 1997. The decrease of $355,136
is primarily due to a decrease in medical billing services revenue of
approximately $279,487 resulting from the closure of NTBM in April 1998, as well
as a decrease in net assay sales and contract revenue of approximately $70,109
resulting from the closure of ABC in November 1997.

Assay sales, net of billing adjustments, from the processing of ABC's
assay, the Fluorescent Cytoprint Assay, were $70,109 for the nine months ended
September 30, 1997. Due to the closure of ABC's laboratory operations in
November 1997, there were no assay sales for the nine months ended September 30,
1998.

Contract revenue was $5,540 for the nine months ended September 30,
1997. Due to the closure of ABC's laboratory operations in November 1997, there
was no contract revenue for the nine months ended September 30, 1998.

Laboratory revenues, net of billing adjustments, were $1,798,361 for the
nine months ended September 30, 1997, resulting from the inclusion of MSI's
laboratory revenues for the 57 day period beginning January 1, 1997, and ending
February 26, 1997.

Medical billing services revenues were $113,179 for the nine months
ended September 30, 1998, as compared to $392,666 for the nine months ended
September 30, 1997. The decrease of $279,487 is primarily due to the closure of
NTBM in April 1998.

Total operating costs for the nine months ended September 30, 1998, were
$1,695,408 compared to $4,154,889 for the nine months ended September 30, 1997,
which includes 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 MSI's total operating costs, total operating costs for the nine
months ended September 30, 1998, would have been $1,695,408 as compared to
$2,062,442 for the nine months ended September 30, 1997. The decrease in total
operating costs of $367,034 is primarily due to decreases in selling, general
and administrative expenses of approximately $437,670, laboratory and research
and development expenses of approximately $175,432, medical billing services
expenses of approximately $176,445 and depreciation and amortization expense of
approximately $276,416, offset by the write down of intangibles of approximately
$645,472 recorded in the nine months ended September 30, 1998.

The Company recorded no laboratory expenses for the nine months ended
September 30, 1998, a result of the closure of ABC's laboratory operations in
November 1997. Laboratory

Page 20 of 32
<PAGE> 21

expenses for the nine months ended September 30, 1997, were $1,500,914 resulting
from the inclusion of MSI's laboratory revenues for the 57 day period beginning
January 1, 1997, and ending February 26, 1997, of $1,374,422. Without the
inclusion of MSI's laboratory expenses, laboratory expenses for the nine months
ended September 30, 1997, would have been $126,492.

Medical billing services expenses were $190,323 for the nine months
ended September 30, 1998, as compared to $366,768 for the nine months ended
September 30, 1997. The decrease of $176,445 is primarily due to the closure of
NTBM in April 1998.

Selling, general and administrative expenses for the nine months ended
September 30, 1998, were $837,267 compared to $1,847,962 for the nine months
ended September 30, 1997, which includes MSI's selling, general and
administrative expenses for the 57 day period beginning January 1, 1997, and
ending February 26, 1997, of $573,025. Without the inclusion of MSI's selling,
general and administrative expenses, selling, general and administrative
expenses for the nine months ended September 30, 1998, would have been $837,267
as compared to $1,274,937 for the nine months ended September 30, 1997. The
decrease of $437,670 is primarily due to decreases in accounting, legal and
financial printing expenses, rent and office-related expenses due to the closure
of the Company's New York offices, SEC filing, NASDAQ listing and franchise tax
expenses, as well as decreases resulting from the closure of ABC's operations in
November 1997.

The Company reported no research and development expenses for nine
months ended September 30, 1998, as compared to $48,940 for the nine months
ended September 30, 1997. The decrease is primarily due to the closure of ABC's
laboratory operations in November 1997.

Operating loss for the nine months ended September 30, 1998, was
$1,582,229 compared to $1,888,213 for the nine months ended September 30, 1997,
which includes 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 MSI's
operating losses, operating losses for the nine months ended September 30, 1998,
would have been $1,582,229 as compared to $1,594,127 for the nine months ended
September 30, 1997. The decrease of $11,898 is due to a decrease in total
operating costs of $367,034, offset by a decrease in total revenues of $355,136.

Investment and interest income for the nine months ended September 30,
1998, was $750,000 compared to $25,317 for the nine months ended September 30,
1997. In September 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

Equity in loss in subsidiary for the nine months ended September 30,
1998, was $2,511,658. 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. For the nine months ended
September 30, 1998, the Company's proportionate share of PCL losses for the nine
months ended September 30, 1998, are presented on the statement of operations as

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<PAGE> 22

equity loss in subsidiary. The three months ended March 31, 1998, have been
restated to reflect the deconsolidation and the nine months ended September 30,
1998, present the Company's share of PCL losses for the nine months on the
equity method.

Interest expense for the nine months ended September 30, 1998, was
$27,391 compared to $535,783 for the nine months ended September 30, 1997. The
decrease in interest expense of $508,392 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. Additionally, the Company obtained a loan in March 1998 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.

Net loss for the nine months ended September 30, 1998, was $3,371,278 as
compared to $2,398,679 for the nine months ended September 30, 1997, which
includes 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 MSI's net
losses, net losses for the nine months ended September 30, 1998, would have been
$3,371,278 as compared to $2,107,856 for the nine months ended September 30,
1997. The increase in net loss of $1,263,422 is primarily due the equity in loss
in subsidiary of $2,511,658, offset by the sale of 67,500 shares of PCL common
stock to a senior lender and significant stockholder of PCL for $750,000 and a
decrease in interest expense of approximately $524,000.

Net loss per share of Common Stock for the nine months ended September
30, 1998, was $4.94 compared to $55.33 for the nine months ended September 30,
1997. This decrease is primarily due to an increase in weighted average common
shares outstanding. Weighted average shares were 682,622 and 73,230 for the nine
months ended September 30, 1998, and 1997, respectively.

Liquidity and Capital Resources

The Company had approximately $318,142 in cash and cash equivalents at
September 30, 1998.

Total current assets were $379,812 at September 30, 1998, as compared to
$13,998,036 at December 31, 1997, which includes 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 September 30, 1998, would have been $379,812 as
compared to $149,094 at December 31, 1997. The increase of $230,718 is primarily
due to the sale of 67,500 shares of PCL common stock to a senior lender and
significant stockholder of PCL for $750,000 as well as a new loan the Company
obtained in March 1998 in the principal amount of $250,000, offset by the use of
these proceeds during the period to support operating activities and the payment
and reduction of current liabilities.

The Company did not have accounts receivable, net of allowances for
doubtful accounts, at September 30, 1998. At December 31, 1997, accounts
receivable, net of allowances for

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<PAGE> 23

doubtful accounts were $11,000,608, which includes 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, net accounts receivable
at December 31, 1997, would have been $52,100. The decrease 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.

The Company did not have inventory at September 30, 1998. At December
31, 1997, inventory was $1,139,232, which includes PCL's inventory at December
31, 1997, of $1,138,932. Without the inclusion of PCL's inventory, inventory at
December 31, 1997, would have been $300.

Prepaid expenses and other current assets were $61,670 at September 30,
1998, as compared to $333,254 at December 31, 1997, which includes PCL's prepaid
expenses and other current assets at December 31, 1997, of $298,678. Without the
inclusion of PCL's prepaid expenses and other current assets, prepaid expenses
and other current assets at September 30, 1998, would have been $61,670 as
compared to $34,576 at December 31, 1997.

A note receivable of $100,000 was outstanding at September 30, 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.

Equipment and leasehold improvements, net of accumulated depreciation
and amortization, was $5,111 at September 30, 1998, compared to $2,758,476 at
December 31, 1997, which includes 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 net equipment and leasehold
improvements, net equipment and leasehold improvements at September 30, 1998,
would have been $5,111 and $18,992 at December 31, 1997. The decrease of $13,881
is primarily due to the closure of NTBM in April 1998.

The Company did not report any goodwill, net of accumulated
amortization, at September 30, 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 $645,000.

Deposits were $4,371 at September 30, 1998, as compared to $436,287,
which includes PCL's deposits at December 31, 1997, of $417,132. Without the
inclusion of deposits, deposits at September 30, 1998, would have been $4,371 as
compared to $19,155 at December 31, 1997. The decrease of $14,784 is primarily
due to the closure of the Company's New York offices.

The Company did not report any reorganization value in excess of other
identifiable net assets at September 30, 1998. At December 31, 1997,
reorganization value in excess of other identifiable net assets was $24,401,605,
due to the inclusion of PCL at December 31, 1997.

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<PAGE> 24

Total assets at September 30, 1998, were $489,294 as compared to
$42,358,740 at December 31, 1997, which includes PCL's total assets at December
31, 1997, of $41,407,163. Without the inclusion of PCL's total assets, total
assets at September 30, 1998, would have been $489,294 as compared to $951,307
at December 31, 1997. The increase of $462,013 is primarily due to the sale of
67,500 shares of PCL common stock to a senior lender and significant stockholder
of PCL for $750,000, as well as a new loan the Company obtained in March 1998 in
the principal amount of $250,000, offset by the write down of remaining goodwill
from the purchase of NTBM Billing Services, Inc. of approximately $645,000 and
the use of proceeds during the period to support operating activities and the
payment and reduction of current liabilities.

Current liabilities at September 30, 1998, were $1,283,109 as compared
to $66,546,284 at December 31, 1997, which includes PCL's current liabilities at
December 31, 1997, of $65,619,254. Without the inclusion of PCL's current
liabilities, current liabilities at September 30, 1998, would have been
$1,283,109 as compared to $1,168,182 at December 31, 1997. The increase of
$114,927 is primarily due to a new loan obtained by the Company in March 1998 in
the principal amount of $250,000, offset by a decrease in capitalized lease
obligations as well as principal payments to SBLFC.

Total liabilities at September 30, 1998, were $1,283,109 as compared to
$56,372,981 at December 31, 1997, which includes PCL's total liabilities at
December 31, 1997, of $68,099,951, offset by the increase in negative minority
interest. Without the inclusion of PCL's total liabilities, total liabilities at
September 30, 1998, would have been $1,283,109 as compared to $1,168,182 at
December 31, 1997. The increase of $114,927 is primarily due to a new loan
obtained by the Company in March 1998 in the principal amount of $250,000,
offset by a decrease in capitalized lease obligations as well as principal
payments to SBLFC.

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 September 30, 1998, the Company has generated only a small
amount of cash from operations and has not achieved sufficient revenues to
support future operations. During the twelve months ended December 31, 1997, the
Company generated net cash from financing activities of approximately

Page 24 of 32
<PAGE> 25

$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 September 30, 1998, and December 31,
1997, were approximately $318,000 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 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 September 30, 1998, the Company has incurred an
accumulated deficit of approximately $56,662,000. For the fiscal years ended
December 31, 1997, 1996 and 1995, and the nine months ended September 30, 1998,
the Company incurred net losses of approximately $31,626,000, $7,788,000,
$2,089,000, and $3,371,000, respectively. The amount of stockholders' deficit at
September 30, 1998 was approximately $794,000. The amount of its working capital
at September 30, 1998, was approximately ($903,000). 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

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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 September 30, 1998, was
approximately $92,000). 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 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.

Page 26 of 32
<PAGE> 27

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 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.

Page 27 of 32
<PAGE> 28

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 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

Page 28 of 32
<PAGE> 29

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 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.

Page 29 of 32
<PAGE> 30

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

Exhibit No. Description

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

(b) Reports on Form 8-K

During the quarter ended September 30, 1998, there were no
reports filed on Form 8-K by the Registrant:

<TABLE>
<CAPTION>
Date of the Report Item Reported Description of Item
- ------------------ ------------- -------------------
<S> <C> <C>
Subsequent to the quarter ended September 30, 1998, the
following reports on Form 8-K were filed by the Registrant:

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
</TABLE>

Page 30 of 32
<PAGE> 31

<TABLE>
<S> <C> <C>
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: November 4, 1999 by: /s/ J. Marvin Feigenbaum
---------------------------------
J. Marvin Feigenbaum
President, Chief Executive
and Chief Financial Officer

Page 32 of 32

<ARTICLE> 5

<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 318,142
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<PP&E> 5,111
<DEPRECIATION> 4,495
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<CURRENT-LIABILITIES> 1,283,109
<BONDS> 0
28
0
<COMMON> 6,826
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<TOTAL-LIABILITY-AND-EQUITY> 489,294
<SALES> 113,179
<TOTAL-REVENUES> 113,179
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