<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 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. 1-13392
US DIAGNOSTIC INC.
(Exact name of registrant specified in its charter)
DELAWARE 11-3164389
- -------------------------------- ---------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
777 S. Flagler Drive
Suite 1201 East
West Palm Beach, Florida 33401
(Address of Principal Executive Offices)
(561) 832-0006
(Issuer's Telephone Number, Including Area Code)
(Not Applicable)
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark 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 past 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 X No
------- -------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 13, 1998:
----- ----------------------------
Common Stock, $ .01 par value 22,911,433 shares
<PAGE> 2
US DIAGNOSTIC, INC.
Except for historical information contained herein, certain matters
discussed herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical facts and may be forward-looking. Forward-looking
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, economic, competitive, regulatory, growth strategies,
available financing and other factors discussed elsewhere in this report and in
the documents filed by the Company with the SEC. Many of these factors are
beyond the Company's control. Actual results could differ materially from the
forward-looking statements made. In light of these risks and uncertainties,
there can be no assurance that the results anticipated in the forward-looking
information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
In thousands, except share data
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,959 $ 17,460
Accounts receivable, net of allowance for bad debts of $18,411
and $17,312, respectively 56,817 51,200
Other receivables 6,583 6,467
Prepaid expenses and other current assets 6,632 7,731
--------- ---------
TOTAL CURRENT ASSETS 80,991 82,858
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $30,401 and $25,330, respectively 96,538 91,567
INTANGIBLE ASSETS, net of accumulated amortization of $15,484 102,304 103,898
and $13,890, respectively
OTHER ASSETS 4,182 4,277
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES 3,903 4,329
--------- ---------
TOTAL ASSETS $ 287,918 $ 286,929
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 22,190 $ 24,055
Shareholder class action settlement payable 5,288 5,288
Current portion of long-term debt 18,686 18,590
Obligations under capital leases - current portion 7,589 9,155
Other current liabilities 7,411 7,350
Purchase price due on companies acquired 2,420 2,485
--------- ---------
TOTAL CURRENT LIABILITIES 63,584 66,923
--------- ---------
Subordinated convertible debentures 56,305 56,246
Long-term debt, net of current portion 123,076 118,999
Obligations under capital leases, net of current portion 10,726 11,573
Other liabilities 5,913 6,022
--------- ---------
TOTAL LIABILITIES 259,604 259,763
--------- ---------
MINORITY INTEREST 1,872 1,826
COMMITMENTS AND CONTINGENCIES (Note 9) -- --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized; 22,911,433 and
22,889,633 shares issued and outstanding, respectively 229 229
Additional paid-in capital 147,850 147,850
Deferred stock-based compensation (1,836) (2,192)
Accumulated deficit (119,801) (120,547)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 26,442 25,340
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 287,918 $ 286,929
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
In thousands, except per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE $ 54,458 $ 51,444
OPERATING EXPENSES
General and administrative 39,933 34,676
Bad debt expense 1,258 1,513
Depreciation 5,130 4,125
Amortization 1,599 2,649
Stock-based compensation 356 439
-------- --------
TOTAL OPERATING EXPENSES 48,276 43,402
-------- --------
INCOME FROM OPERATIONS 6,182 8,042
OTHER INCOME (EXPENSE)
Interest expense (5,452) (3,873)
Interest and other income 1,092 858
Gain on marketable equity securities -- 406
-------- --------
TOTAL OTHER INCOME (EXPENSE) (4,360) (2,609)
-------- --------
Income before minority interest and provision for income taxes 1,822 5,433
Minority interest in income of subsidiaries 740 1,123
Provision for income taxes 336 2,276
-------- --------
NET INCOME $ 746 $ 2,034
======== ========
BASIC EARNINGS PER COMMON SHARE
Net income $ .03 $ .09
======== ========
Average common shares outstanding 22,716 21,580
======== ========
DILUTED EARNINGS PER COMMON SHARE
Net income .03 $ .09
======== ========
Average common and dilutive equivalent shares
outstanding 23,127 23,861
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY
--------- --------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1998 22,890 $ 229 $ 147,850 ($ 2,192) ($120,547) $ 25,340
Restricted stock issued -- -- -- -- -- --
Amortization of deferred
Compensation -- -- -- 356 -- 356
Net income -- -- -- -- 746 746
--------- --------- --------- --------- --------- ---------
BALANCE - MARCH 31, 1998 22,890 $ 229 $ 147,850 ($ 1,836) ($119,801) $ 26,442
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH - OPERATING ACTIVITIES $ 2,297 $ (3,685)
-------- --------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired -- (21,827)
Equipment purchases (9,453) (4,725)
Payment of purchase price due (65) (6,476)
Sale of marketable equity securities -- 7,161
Other 102 271
-------- --------
NET CASH - INVESTING ACTIVITIES (9,416) (25,596)
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 9,678 29,962
Repayments of notes payable and
obligations under capital leases (9,060) (8,917)
Exercises of options and warrants -- 50
-------- --------
NET CASH - FINANCING ACTIVITIES 618 21,095
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,501) (8,186)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,460 18,641
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 10,959 $ 10,455
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,992 $ 4,909
Income taxes paid $ 446 --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The value of restricted stock granted in 1997 was $411,000.
Borrowings under capitalized leases were $750,000 in 1998.
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
[1] BASIS OF PRESENTATION
Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements as of March 31,
1998, include the accounts of US Diagnostic Inc. and its subsidiaries (the
"Company") and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). All
significant intercompany accounts and transactions have been eliminated. Certain
information related to the Company's organization, significant accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements reflect,
in the opinion of management, all material adjustments (consisting only of
normal and recurring adjustments) necessary to fairly state the financial
position and the results of operations for the periods presented and the
disclosures herein are adequate to make the information presented not
misleading. Operating results for interim periods are not necessarily indicative
of the results that can be expected for a full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The condensed consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with the SEC
for the year ended December 31, 1997.
In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified from the previously reported financial
statements in order to conform with the financial statement presentation of the
current period.
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
an entity to expense all software development costs incurred in the preliminary
project stage, training costs and data conversion costs for fiscal years
beginning after December 15, 1998. The Company believes that this statement will
not have a material effect on the Company's accounting for computer software
acquisitions.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization activities to be
expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999.
Adoption of this Statement will not have a material impact on the Company's
consolidated financial position or results of operations.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during the quarter ended March 31, 1998.
SFAS 130 was issued by the Financial Accounting Standards Board in June 1997 and
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. The objective of SFAS 130
is to report a measure (comprehensive income) of all changes in equity of an
enterprise that result from transactions and other economic events in a period
other than transactions with owners. The adoption of SFAS 130 did not have a
material impact on the Company's consolidated financial statements, as
comprehensive income was equal to net income for all periods presented.
SFAS 131, "Disclosure about Segments of an Enterprise and Related Information",
was issued by the Financial Accounting Standards Board in June 1997. This
statement establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company will
adopt SFAS 131 effective December 31, 1998.
[2] PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
In thousands
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, ESTIMATED
1998 1997 USEFUL LIFE
--------- ------------ ------------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 --
Buildings 7,354 7,131 40 Years
Medical equipment 87,463 83,273 7 Years
Furniture and fixtures 3,549 3,539 7-10 Years
Office, data processing equipment and software 11,369 10,994 3-10 Years
Leasehold improvements 15,336 10,092 10 Years
--------- ---------
Total 126,939 116,897
Less: accumulated depreciation
and amortization (30,401) (25,330)
--------- ---------
Property and equipment, net $ 96,538 $ 91,567
========= =========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $31.7 million and $31.8 million at March 31, 1998 and December 31, 1997,
respectively.
Depreciation expense amounted to $5.1 million and $4.1 million during the three
months ended March 31, 1998 and 1997, respectively, of which $1.1 million and
$800,000 was attributed to the equipment under capital leases.
7
<PAGE> 8
[3] INTANGIBLE ASSETS
A summary of intangible assets is as follows:
In thousands
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, ESTIMATED
1998 1997 USEFUL LIFE
--------- ------------ -----------
<S> <C> <C> <C>
Goodwill $ 111,220 $ 111,220 20 Years
Covenants not to compete 3,142 3,142 3-5 Years
Customer lists 3,189 3,189 10 Years
Other intangibles 237 237 3-5 Years
--------- ---------
Total 117,788 117,788
Less accumulated amortization (15,484) (13,890)
--------- ---------
Intangibles, net $ 102,304 $ 103,898
========= =========
</TABLE>
Goodwill consists of the cost of purchased businesses in excess of the fair
value of net tangible assets acquired. Goodwill is amortized on a straight-line
basis for a period of twenty-years. The Company believes that a twenty year
amortization policy for goodwill is reasonable based upon current and expected
operating results of the businesses acquired. On an ongoing basis, the Company
measures realizability of goodwill by the ability of the acquired business to
generate current and expected future operating income in excess of annual
amortization. If such realizability is in doubt, an adjustment is made to reduce
the carrying value of the goodwill. Customer lists and covenants not to compete
are amortized on a straight-line basis for a period of fifteen years and three
to five years, respectively.
[4] INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated annual
effective income tax rate.
[5] DEBT
In February 1997 the Company entered into a $25 million revolving credit loan
(increased to $35 million in September 1997) secured by accounts receivable with
DVI Business Credit Corporation ("DVIBC"). At the time the Company entered into
the financing arrangement with DVIBC, DVIBC believed that a portion of the
Company's accounts receivable did not meet certain of the lender's eligibility
criteria under the line of credit. DVIBC granted the Company a waiver with
respect to such criteria but provided in the loan agreement that if the Company
did not satisfy such criteria to DVIBC's satisfaction within 90 days of the
original funding of the loan, DVIBC had the right to declare the nonconforming
accounts ineligible and exclude them from the borrowing base, in which case the
Company would have been obligated to reduce its then existing indebtedness to
DVIBC to the borrowing base level at such time. In March 1998, DVIBC granted the
Company additional waivers of such criteria through December 31, 1998. However,
if DVIBC continues in this belief and if the Company is not able to satisfy such
criteria on or before December 31, 1998 and does not obtain any further waiver
thereof from DVIBC, the Company may be required to pay down its then outstanding
accounts receivable loans from DVIBC to a level not in excess of the Borrowing
Base on such date. There can be no assurance that the Company will be able to
satisfy such eligibility criteria on or before December 31, 1998, and if it is
unable to do so, it may not have funds on hand sufficient to make the required
payment of the DVIBC indebtedness. If the Company fails to make any such
required payment, it could be declared in default under the DVIBC loan
agreement, as well as under certain other debt owed to affiliates of DVIBC and
8
<PAGE> 9
under the Company's Subordinated Convertible Debentures (see below), resulting
in possible debt acceleration from both lenders. If the Company is unable to
draw upon such credit facilities or to replace the same without delay, the
Company's liquidity would be seriously impaired.
As discussed in Note 10, the Company has a definitive agreement to sell Medical
Diagnostics, Inc. ("MDI"). Upon closing of the transaction, which is expected to
occur in May 1998, approximately $25 million of the proceeds will be used to pay
down the revolving credit loan.
In March 1998, the Company determined that it was not in compliance in the
fourth quarter of 1997 with its Debt to Operating Cash Flow financial ratio
covenant required under its $57.5 million Subordinated Convertible Debentures
(the "Debentures"). Pursuant to the Indenture under which the Debentures were
issued (the "Indenture"), the Company and its subsidiaries may generally incur
debt, as defined, if the ratio of Debt (as defined) to Operating Cash Flow (as
defined), of the Company and its subsidiaries after giving pro forma effect to
such debt is 6.5 to 1 or less. The non-compliance was due to the required
treatment of certain items in the ratio calculation relating to significant
non-operating write-offs, reserves and expenses taken by the Company in 1996 and
1997 for various items including the settlement of shareholder class action
claims, the previously disclosed NASDAQ and SEC proceedings and related legal
and accounting professional services fees totaling approximately $10 million.
The Company obtained the consent of a majority of the holders of outstanding
Debentures to waive any non-compliance in the fourth quarter of 1997 and modify
the Indenture to add back $10 million representing the above noted items to the
Operating Cash Flow calculation for each quarter ended March 31, 1998, June 30,
1998 and September 30, 1998 (the "Consent"). Based upon the receipt of the
Consent, the Company was in compliance with the Debt to Operating Cash Flow
Ratio during the first quarter of 1998.
[6] STOCKHOLDERS' EQUITY
During the quarter ended March 31, 1998, the Company granted to certain
employees (none of whom is a member of senior management of the Company) 176,000
non-qualified stock options under its 1995 Long-Term Incentive Plan.
As the Company previously disclosed, on July 3, 1997, a NASDAQ Listing
Qualifications Panel determined that the Company was not in compliance with the
net tangible assets test for continued listing on the NASDAQ National Market
System, but determined after a hearing to grant the Company a waiver. While the
Company did not meet all of the NASDAQ's continued listing criteria, the
Company's securities remained listed on the NASDAQ National Market System
pursuant to the waiver. At the time it granted the waiver, NASDAQ informed the
Company that it would continue to monitor the Company's progress, and that it
reserved the right, in the event there is a material change in the Company's
operational or financial structure or character, to re-examine the
appropriateness of the waiver.
On April 17, 1998, NASDAQ notified the Company that, based on a review of the
Company's price data covering a period of 30 consecutive trade dates, the
Company's common stock has failed to maintain a closing bid price of greater
than or equal to $5 per share as contained in NASDAQ's new alternative listing
standards. NASDAQ has advised the Company that the Company has a period of 90
calendar days in which to regain compliance with such standard. If at anytime
within 90 calendar days from April 17, 1998, the closing bid price of the
Company's shares of common stock is equal to or greater than $5 for ten
consecutive trading days, the Company will have complied with the minimum bid
price requirement.
There can be no assurance that the Company will be able to comply with the
NASDAQ requirement, and the Company is presently considering its alternatives,
including the possibility of effectuating a reverse stock split.
9
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[7] EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), is effective for fiscal years ending after December 15, 1997. This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. Earnings per share have been restated to comply with SFAS 128 for
the three months ended March 31, 1997.
Earnings per common share ("EPS") data were computed as follows:
FOR THE THREE MONTHS ENDED MARCH 31,
1998 1997
------- -------
In thousands, except per share data
Net income $ 746 $ 2,034
======= =======
BASIC EPS:
Weighted-average common shares outstanding 22,716 21,580
======= =======
EPS - net income $ .03 $ .09
======= =======
DILUTED EPS:
Weighted-average common shares outstanding 22,716 21,580
Stock options and warrants 2 1,268
Restricted stock grants 138 21
Contingent shares 271 992
------- -------
Shares applicable to diluted earnings 23,127 23,861
======= =======
EPS - net income $ .03 $ .09
======= =======
Unexercised stock options and warrants to purchase 5.6 million and 535,000
shares of the Company's common stock as of March 31, 1998 and 1997, were not
included in the computations of diluted EPS because the exercise prices were
greater than the average market price of the common shares. In addition, 7.8
million and 8.0 million shares of the Company's common stock issuable upon
conversion of convertible debt as of March 31, 1998 and 1997, respectively, were
not included in computations of diluted EPS because the net effect of including
such shares would be anti-dilutive.
[8] TERMINATION OF EMPLOYMENT AND CONSULTING AGREEMENTS
On September 30, 1997, the Company entered into a second settlement with Jeffrey
Goffman which fully resolved the remaining issues between them including
ownership of the escrow account previously established. Pursuant to this
settlement, Mr. Goffman agreed to contribute $1 million to the Company's
settlement of the class actions in the form of $850,000 cash and the forgiveness
of the next nine monthly payments totaling $150,000 which would otherwise be due
to him from the Company under the earlier settlement. Mr. Goffman delivered the
$850,000 to the Company on March 17, 1998. The Company thereafter released its
claim to the remainder of the securities covered by the Escrow and Settlement
Agreement.
10
<PAGE> 11
[9] LITIGATION
The Company is currently involved in litigation related to its acquisition of
stock in Integrated Health Concepts, Inc. ("IHC") in August 1996. In March 1997,
litigation was commenced in state court in Harris County, Texas to determine the
respective stock interests of the Company, Don Ballard, Dr. Mohammed Athari and
a key man trust which, together, comprise all of IHC's shareholders. In June
1997, the Court issued a ruling upholding the Company's position that it owns
70% of IHC's stock. Subsequently, IHC appointed a new Board of Directors which
terminated Mr. Ballard's employment as President of IHC. Mr. Ballard filed
additional claims against IHC and the Company alleging that they had breached
fiduciary duties owing to him and that they were obligated to pay him more than
$1.0 million based upon termination of his employment, to provide him with
$250,000 of Company Common Stock, and to repurchase his IHC stock (and that of a
key man trust established for his benefit) for its fair market value which Mr.
Ballard contended was approximately $8 million. The Company and IHC have
vigorously contested such claims and have asserted their own claims against Mr.
Ballard aggregating approximately $1.3 million. The matter was tried during
October 1997. In March 1998, Mr. Ballard filed a request for additional trial
proceedings contending that since the original trial in October 1997, the
Company has denied his rights as a minority shareholder of IHC. Instead of
ruling upon Mr. Ballard's motion for additional trial proceedings, on April 14,
1998 the Court notified the parties of its decision in the case and directed
them to prepare a form of judgment consistent with that decision. The Court
ordered Ballard to sell his 15% interest in IHC to the Company for the sum of
$125,000 and ordered IHC to pay him the present value of the remaining term of
his employment contract, which the Company believes to be approximately
$675,000. No other damages were awarded to either party. Ballard is contesting
the judgment and has filed a motion asking the Court instead to award him
approximately $8.5 million in damages and $500,000 in attorneys fees. Upon
approval by the Court of the form of final judgment, both sides have the right
to appeal. Although there can be no assurance that the Company will prevail in
this litigation, the Company believes it has adequate defenses to the employment
contact and expects to appeal that portion of the judgment. The claims asserted
against IHC and the Company by Dr. Mohammed Athari were fully settled and
resolved without additional payments by either IHC or the Company.
The Company could be subject to legal actions arising out of the performance of
its diagnostic imaging services. Damages assessed in connection with, and the
cost of defending, any such actions could be substantial. The Company maintains
liability insurance which it believes is adequate for its present operations.
There can be no assurance that the Company will be able to continue or increase
such coverage or to do so at an acceptable cost, or that the Company will have
other resources sufficient to satisfy any liability or litigation expense that
may result from any uninsured or underinsured claims. The Company also requires
all of its affiliated physicians to maintain malpractice and other liability
coverage.
The Company is also a party to, and has been threatened with, a number of other
legal proceedings in the ordinary course of business. While it is not feasible
to predict or determine the outcome of these matters, and although there can be
no assurances, the Company does not anticipate that the ultimate disposition of
any such proceedings will have a material adverse effect on the Company.
[10] RECENT DEVELOPMENTS
On March 30, 1998, the Company entered into a definitive agreement to sell
certain non-core assets consisting of the Company's mobile subsidiary MDI to
Alliance Imaging Inc. for $35.6 million in cash less debt to be assumed of
approximately $6.5 million. The transaction has received Hart-Scott-Rodino
clearance, and is expected to close in May 1998. The proceeds of the sale will
be used to reduce the Company's debt (see Note 5) and to bolster the Company's
cash reserves. Mobile imaging operations do not conform with the Company's core
business of fixed site MRI and multimodality imaging centers.
On May 8, 1998, the Company entered into a definitive agreement to sell its
50.1% interest in U.S. Cancer Care Inc., a non-core asset, and its 50% interest
in a radiation oncology partnership, to USCC Acquisition Corp. ("USCC"), a
Delaware corporation, which will, upon closing, change its name to U.S. Cancer
Care, Inc. The sale price consists of
11
<PAGE> 12
$2.0 million in cash, a promissory note for $750,000 due in twenty-four equal
installments from May 1999 through April 2001 with interest at 8% per annum, and
the assumption by USCC of certain additional liabilities aggregating
approximately $1.4 million. The transaction is expected to close in May 1998.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements and Associated Risks
Certain matters discussed herein are forward-looking statements made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, including but not
limited to, economic, competitive, regulatory, growth strategies, available
financing, and other factors discussed elsewhere in this report and the
documents filed by the Company with the SEC. Many of these factors are beyond
the Company's control. Actual results could differ materially from the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur.
OVERVIEW
The Company commenced operations upon the completion of its first acquisition in
October 1993. The Company has historically grown through acquisitions of
diagnostic imaging centers and businesses. The Company's operating performance
is substantially dependent upon its ability to integrate the operations of
acquired facilities into the Company's infrastructure and reduce operating
expenses of acquired entities, its ability to deliver equivalent service to
clients immediately after an acquisition without significant interruption or
inconvenience and various other risks associated with the acquisition of
businesses, including expenses associated with the integration of the acquired
businesses. If the Company is unable to manage growth effectively, the Company's
operating results could be materially adversely affected.
The Company reports revenue at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated contractual adjustments under reimbursement agreements with
third-party payors. These adjustments are accrued on an estimated basis in the
period the related services are rendered and are adjusted in future periods as
final settlements are determined.
The Company's revenues and profitability may be materially adversely affected by
the current trend in the healthcare industry toward cost containment, continuing
governmental budgetary constraints, reductions in reimbursement, rates, changes
in the mix of the Company's patients and other changes in reimbursement for
healthcare services, among other factors, which may put downward pressure on
revenue per scan. See "Business - Clients and Payors" and "Business - Regulation
and Government Reimbursement" included in Item 1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
RECENT DEVELOPMENTS
During the first quarter of 1998, the Company developed a strategy to reduce
debt and increase cash flows consisting of the following: (i) implemented a cost
reduction plan which includes a significant reduction in nonessential staff and
other consolidation synergy, heretofore not applied. The aggregate reduction of
these employee-related expenses is expected to save approximately $5 million
annually; (ii) divest non-core assets and focus upon the Company's core
business. In addition to the MDI and Oncology Interests transactions described
below and in Note 10 of Notes to Condensed Consolidated Financial Statements,
the Company is currently reviewing other non-core assets and will pursue other
such sales as warranted; (iii) seek to refinance the Company's long term debt;
and (iv) once the first three steps have been accomplished, institute a
sustained strategy of prudent acquisitions and new center development.
On March 30, 1998, the Company entered into a definitive agreement to sell
certain non-core assets consisting of the Company's mobile subsidiary MDI to
Alliance Imaging Inc. for $35.6 million in cash less debt to be assumed of
approximately $6.5 million. The transaction has received Hart-Scott-Rodino
clearance, and is expected to close in May 1998. The proceeds of the sale will
be used to reduce the Company's debt (see Note 5 of Notes to Condensed
13
<PAGE> 14
Consolidated Financial Statements) and to bolster the Company's cash reserves.
Mobile imaging operations do not conform with the Company's core business of
fixed site MRI and multimodality imaging centers.
On May 8, 1998, the Company entered into a definitive agreement to sell its
50.1% interest in U.S. Cancer Care Inc., a non-core asset, and its 50% interest
in a radiation oncology partnership (collectively, the "Oncology Interests"), to
USCC Acquisition Corp. ("USCC"), a Delaware corporation, which will, upon
closing, change its name to U.S. Cancer Care, Inc. The sale price consists of
$2.0 million in cash, a promissory note for $750,000 due in twenty-four equal
installments from May 1999 through April 2001 with interest at 8% per annum, and
the assumption by USCC of certain additional liabilities aggregating
approximately $1.4 million. The transaction is expected to close in May 1998.
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- -------
<S> <C> <C>
REVENUE 100.0 100.0
------- -------
OPERATING EXPENSES
General and administrative 73.3 67.4
Bad debt expense 2.3 2.9
Depreciation 9.4 8.0
Amortization 2.9 5.1
Stock based compensation .7 0.9
------- -------
TOTAL OPERATING EXPENSES 88.6 84.3
------- -------
INCOME FROM OPERATIONS 11.4 15.7
OTHER INCOME (EXPENSE)
Interest expense (10.0) (7.5)
Interest and other income (expense) 2.0 1.7
Gain on marketable equity securities -- .8
------- -------
TOTAL OTHER INCOME (EXPENSE) (8.0) (5.0)
------- -------
Income before minority interest and provision
for income taxes 3.4 10.7
Minority interest in income of subsidiaries 1.4 2.2
Provision for income taxes .6 4.4
------- -------
NET INCOME 1.4% 4.1%
======= =======
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1997
Revenue for the three months ended March 31, 1998 increased $3.0 million from
$51.4 million in 1997 to $54.4 million in 1998, partially as a result of the
acquisition of MDI. Revenue related to MDI was $6.1 million during 1998 compared
to $1.9 million during 1997, as MDI wasn't acquired by the Company until late
February 1997. Net income for the three months ended March 31, 1998 was $746,000
compared to $2.0 million during 1997. Basic and
14
<PAGE> 15
diluted earnings per share for the three months ended March 31, 1998 were $.03
and $.03 compared to $.09 and $.09 for the three months ended March 31, 1997.
General and Administrative ("G&A") expense was $39.9 million for the three
months ended March 31, 1998 compared to $34.7 million for the three months ended
March 31, 1997. This increase of $5.3 million is primarily due to increased
payroll and overhead costs incurred in assimilating and supporting the
acquisitions that have occurred over the past two fiscal years, including
increased non-capitalizable costs relating to implementing a new billing system.
Additionally, G&A related to MDI was $3.5 million during 1998 compared to $1.1
million during 1997, as MDI wasn't acquired by the Company until late February
1997. As discussed above under Recent Developments, the Company has begun a cost
reduction program which it anticipates will result in a future reduction of
costs. Depreciation expense increased from $4.1 million in 1997 to $5.1 million
in 1998, resulting primarily from an increase in property and equipment in
connection with medical equipment upgrades, as well as the implementation of a
new billing system. Amortization expense decreased from $2.6 million in 1997 to
$1.6 million in 1998. The decrease in amortization is primarily due to a $76.0
million write-down of goodwill and certain other long term assets during the
fourth quarter of fiscal year ended December 31, 1997 resulting from impairment
losses.
Stock Based Compensation decreased by $83,000 from $439,000 in the three months
ended March 31, 1997 to $356,000 in the three months ended March 31, 1998.
Interest Expense increased $1.5 million from $3.8 million in the three months
ended March 31, 1997 to $5.4 million in the three months ended March 31, 1998.
The increase in interest expense is a result of the Company's higher borrowings
incurred to support its growth, capital expenditures related to the construction
and expansion of existing Facilities, as well as the replacement and enhancement
of medical equipment and computer systems, and the deficit in operating cash
flow.
Results of operations for the three months ended March 31, 1997 includes a
$406,000 realized gain on the sale of marketable equity securities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1996
Revenue for the three months ended March 31, 1997 increased $38.8 million from
$12.6 million in 1996 to $51.4 million in 1997. This increase is primarily the
result of acquisitions. Net income for the three months ended March 31, 1997
increased by $1.0 million from $1.0 million in 1996 to $2.0 million in 1997.
Basic and diluted earnings per share was $.09 and $.09 in 1997 compared to $.17
and $.14 in 1996, respectively.
General and Administrative expense was $34.7 million for the three months ended
March 31, 1997 compared to $7.1 million for the three months ended March 31,
1996. This increase of $27.6 million is primarily due to an increase in
corporate overhead as the Company consolidated or commenced consolidation of
most administrative functions at its headquarters and increases in legal,
accounting and other general expenses due to acquisitions, litigation and
regulatory issues. General and administrative expenses were 67% of revenue in
1997 compared to 57% of revenue in 1996. Depreciation expense increased from
$1.3 million in 1996 to $4.1 million in 1997, and amortization expense increased
from $558,000 in 1996 to $2.6 million in 1997. Such increases in depreciation
and amortization is due to an increase in intangible assets and property and
equipment primarily as a result of acquisitions.
Stock Based Compensation increased by $126,000 from $313,000 in the three months
ended March 31, 1996 to $439,000 in the three months ended March 31, 1997.
Results of operations for the three months ended March 31, 1997 includes a
$406,000 realized gain on the sale of marketable equity securities.
15
<PAGE> 16
Interest Expense increased $3.1 million from $693,000 in the three months ended
March 31, 1996 to $3,873,000 in the three months ended March 31, 1997. The
increase is primarily attributable to debt incurred to finance acquisitions and
the purchase of property and equipment.
LIQUIDITY
At March 31, 1998, the Company had working capital of $17.4 million, compared to
$15.9 million at December 31, 1997. The Company's primary short term liquidity
requirements include the current portion of long term debt and capital leases
(totaling $26.3 million), other current liabilities, including $5.3 million
payable in connection with the settlement of certain shareholder litigation, and
capital expenditures related to the opening of new Facilities, the replacement
and enhancement of existing imaging equipment and improvements in the Company's
management information systems. The Company had approximately $11.0 million in
cash at March 31, 1998.
Net cash provided by operating activities was $2.3 million during the three
months ended March 31, 1998 compared to $3.7 used in operating activities during
the three months ended March 31, 1997. During 1997 the Company acquired MDI for
cash, and recorded a significant increase in accounts receivable and other
current assets from the acquisition.
Net cash used in investing activities was $9.4 million for 1998 compared to
$25.6 million in 1997. Cash used in investing activities primarily relates to
acquisitions and equipment purchases. During 1997 the Company acquired MDI for
approximately $21.8 million.
Net cash provided by financing activities was $618,000 during 1998 compared to
$21.1 million in 1997. The 1998 amount includes proceeds from borrowings
totaling $9.7 million less repayment of capital lease and debt obligations
totaling $9.1 million. During 1997 proceeds from borrowings totaled $30.0
million (approximately $25 million of which was used to acquire MDI) and
repayment of capital lease and debt obligations totaled $8.9 million.
The Company's cash position has continued to decline during the three months
ended March 31, 1998, which has been primarily due to a growth in accounts
receivable resulting from a failure to fully collect receivables from third
party payors, in part as a function of the Company's conversion to a new
centralized billing and collection system, and in part, as a function of
inefficiencies in realizing on the collection of patient co-payments and
deductible payments. The Company has devoted additional resources to the
collection of accounts receivable and implemented intense remedial efforts with
respect thereto. The Company has also identified the strategy described above,
including the sale of MDI and the Oncology Interests (which will result in the
repayment of approximately $25 million of the Company's revolving credit
loan--see Note 5 of Notes to Condensed Consolidated Financial Statements); as
well as the potential sale of other non-core assets. If the Company's strategy
is not sufficient or if collections cannot be improved to the extent necessary,
the Company's liquidity and financial condition could be materially and
adversely affected. In addition, if the uncertainties with respect to the
Company's credit facilities described in Note 5 of Notes to Condensed
Consolidated Financial Statements cannot be satisfactorily resolved, the Company
may be required to pay down or refinance all or a portion of such credit
facilities. In any of such events the Company would likely need to seek new
financing, either through equity offering, additional borrowings or asset sales.
There can be no assurance that the Company would be able to obtain such new
financing or effect such asset sales in a timely fashion or upon acceptable
terms, or if at all.
For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Notes 6 and 9 of Notes to Condensed
Consolidated Financial Statements.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Many existing computer
programs use only two digits to identify a year in the date field. The issue is
whether such code exists in the Company's mission-critical applications and if
that code will produce
16
<PAGE> 17
accurate information with relation to date-sensitive calculations after the turn
of the century.
The Company has completed a thorough review of its material computer
applications. In 1996, the Company began installing a new $9.5 million
state-of-the-art billing and collection system as well as a new accounting
system. These new systems are Year 2000 compliant. There are many facility
systems acquired by the Company as a result of its acquisitions which may not be
Year 2000 compliant. However, the Company anticipates that all such systems will
be replaced by its new systems before the year 2000. The Company has received
written confirmation from its vendors that its new systems are currently Year
2000 compliant or will be made Year 2000 compliant before year 2000. The cost to
be incurred by the Company relating to the Year 2000 compliance for these
systems is currently not expected to be material.
The Company has initiated a program to determine whether the computer
applications of its significant payors and suppliers will be upgraded in a
timely manner. The Company has also initiated a program to determine whether
embedded applications which control certain medical and other equipment will be
affected. The Company has not yet completed these reviews. The nature of the
Company's business is such that any failure to these types of applications may
have a material adverse effect on its business.
Because of the many uncertainties associated with Year 2000 compliance issues,
and because the Company's assessment is necessarily based on information from
third party-vendors, payors and suppliers, there can be no assurance that the
Company's assessment is correct or as to the materiality or effect of any
failure of such assessment to be correct.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently involved in litigation related to its acquisition of
stock in Integrated Health Concepts, Inc. ("IHC") in August 1996. In March 1997,
litigation was commenced in state court in Harris County, Texas to determine the
respective stock interests of the Company, Don Ballard, Dr. Mohammed Athari and
a key man trust which, together, comprise all of IHC's shareholders. In June
1997, the Court issued a ruling upholding the Company's position that it owns
70% of IHC's stock. Subsequently, IHC appointed a new Board of Directors which
terminated Mr. Ballard's employment as President of IHC. Mr. Ballard filed
additional claims against IHC and the Company alleging that they had breached
fiduciary duties owing to him and that they were obligated to pay him more than
$1.0 million based upon termination of his employment, to provide him with
$250,000 of Company Common Stock, and to repurchase his IHC stock (and that of a
key man trust established for his benefit) for its fair market value which Mr.
Ballard contended was approximately $8 million. The Company and IHC have
vigorously contested such claims and have asserted their own claims against Mr.
Ballard aggregating approximately $1.3 million. The matter was tried during
October 1997. In March 1998, Mr. Ballard filed a request for additional trial
proceedings contending that since the original trial in October 1997, the
Company has denied his rights as a minority shareholder of IHC. Instead of
ruling upon Mr. Ballard's motion for additional trial proceedings, on April 14,
1998 the Court notified the parties of its decision in the case and directed
them to prepare a form of judgment consistent with that decision. The Court
ordered Ballard to sell his 15% interest in IHC to the Company for the sum of
$125,000 and ordered IHC to pay him the present value of the remaining term of
his employment contract, which the Company believes to be approximately
$675,000. No other damages were awarded to either party. Ballard is contesting
the judgment and has filed a motion asking the Court instead to award him
approximately $8.5 million in damages and $500,000 in attorneys fees. Upon
approval by the Court of the form of final judgment, both sides have the right
to appeal. Although there can be no assurance that the Company will prevail in
this litigation, the Company believes it has adequate defenses to the employment
contract and expects to appeal that portion of the judgment. The claims asserted
against IHC and the Company by Dr. Mohammed Athari were fully settled and
resolved without additional payments by either IHC or the Company.
The Company could be subject to legal actions arising out of the performance of
its diagnostic imaging services. Damages assessed in connection with, and the
cost of defending, any such actions could be substantial. The Company maintains
liability insurance which it believes is adequate for its present operations.
There can be no assurance that the Company will be able to continue or increase
such coverage or to do so at an acceptable cost, or that the Company will have
other resources sufficient to satisfy any liability or litigation expense that
may result from any uninsured or underinsured claims. The Company also requires
all of its affiliated physicians to maintain malpractice and other liability
coverage.
The Company is also a party to, and has been threatened with, a number of other
legal proceedings in the ordinary course of business. While it is not feasible
to predict or determine the outcome of these matters, and although there can be
no assurances, the Company does not anticipate that the ultimate disposition of
any such proceedings will have a material adverse effect on the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See discussion of Debentures under Note 5 of Notes to Condensed Consolidated
Financial Statements.
ITEM 5. OTHER INFORMATION
See discussion of NASDAQ Listing Requirements under Note 6 of Notes to Condensed
Consolidated Financial Statements and discussion of recent developments under
Note 10 of Notes to Condensed Consolidated Financial Statements.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
US DIAGNOSTIC INC.
Dated: May 14 , 1998 By: /s/ Joseph A. Paul
--------------------------------------
Joseph A. Paul
President and Chief Executive Officer
By: /s/ Wayne Moor
--------------------------------------
Wayne Moor
Executive Vice President and
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,959
<SECURITIES> 0
<RECEIVABLES> 75,228
<ALLOWANCES> 18,411
<INVENTORY> 0
<CURRENT-ASSETS> 80,991
<PP&E> 126,939
<DEPRECIATION> 30,401
<TOTAL-ASSETS> 287,918
<CURRENT-LIABILITIES> 63,584
<BONDS> 216,382
0
0
<COMMON> 229
<OTHER-SE> 26,213
<TOTAL-LIABILITY-AND-EQUITY> 287,918
<SALES> 0
<TOTAL-REVENUES> 54,458
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 47,018
<LOSS-PROVISION> 1,258
<INTEREST-EXPENSE> 5,452
<INCOME-PRETAX> 1,822
<INCOME-TAX> 336
<INCOME-CONTINUING> 746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
