<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 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. 1-13392
US DIAGNOSTIC INC.
(Exact name of registrant specified in its charter)
Delaware 11-3164389
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
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 November 13, 1998:
----- ---------------------------------
Common Stock, $ .01 par value 22,712,433 shares
<PAGE> 2
US DIAGNOSTIC INC.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
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 and integration
strategies, collections of accounts receivable, available financing, any
unanticipated impact of the Year 2000, including delays or changes in costs of
the Company's Year 2000 compliance, or the failure of major vendors, payers,
service providers and others with whom the Company does business to resolve
their own Year 2000 issues on a timely basis, 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.
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except share data SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS (UNAUDITED)
Cash and cash equivalents $ 9,781 $ 17,460
Accounts receivable, net of allowance for bad debts of $16,145
and $17,312, respectively 49,637 51,200
Other receivables 7,724 6,467
Prepaid expenses and other current assets 9,005 7,731
--------- ---------
TOTAL CURRENT ASSETS 76,147 82,858
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $34,914 and $25,330, respectively 94,404 91,567
INTANGIBLE ASSETS, net of accumulated amortization of $11,055
and $8,517, respectively 80,598 103,898
OTHER ASSETS 3,972 4,277
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES 2,037 4,329
--------- ---------
TOTAL ASSETS $ 257,158 $ 286,929
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 24,607 $ 24,055
Shareholder class action settlement payable -- 5,288
Current portion of long-term debt 21,037 18,590
Obligations under capital leases - current portion 6,613 9,155
Other current liabilities 7,362 7,350
Purchase price due on companies acquired 434 2,485
--------- ---------
TOTAL CURRENT LIABILITIES 60,053 66,923
--------- ---------
Subordinated convertible debentures 56,425 56,246
Long-term debt, net of current portion 95,769 118,999
Obligations under capital leases, net of current portion 9,894 11,573
Other liabilities 4,448 6,022
--------- ---------
TOTAL LIABILITIES 226,589 259,763
--------- ---------
MINORITY INTEREST 1,570 1,826
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
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;
22,712,433 and 22,889,633 shares issued and outstanding,
respectively 227 229
Additional paid-in capital 147,864 147,850
Deferred stock-based compensation (1,278) (2,192)
Accumulated deficit (117,814) (120,547)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,999 25,340
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 257,158 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE $ 46,289 $ 55,621 $ 153,206 $ 163,421
--------- --------- --------- ---------
OPERATING EXPENSES
General and administrative 35,104 43,768 113,276 122,911
Bad debt expense 1,005 8,878 3,918 12,558
Depreciation 4,921 4,585 14,997 13,440
Amortization 1,115 2,902 3,851 8,310
Stock-based compensation 276 299 914 1,037
Asset impairment losses -- 333 -- 4,058
Settlement with former Chief Executive Officer -- (1,000) -- 1,809
Loss on settlement of lawsuits -- 125 -- 5,000
--------- --------- --------- ---------
TOTAL OPERATING EXPENSES 42,421 59,890 136,956 169,123
GAIN ON SALE OF SUBSIDIARIES 377 -- 6,182 --
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 4,245 (4,269) 22,432 (5,702)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (5,215) (4,777) (15,827) (13,296)
Interest and other income 575 74 1,987 1,928
Gain on sale of marketable securities -- -- -- 406
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) (4,640) (4,703) (13,840) (10,962)
--------- --------- --------- ---------
Income (loss) before minority interest and provision
for income taxes (395) (8,972) 8,592 (16,664)
--------- --------- --------- ---------
Minority interest in income of subsidiaries 673 534 2,034 2,712
Provision for income taxes 356 342 3,825 342
--------- --------- --------- ---------
NET INCOME (LOSS) $ (1,424) $ (9,848) $ 2,733 $ (19,718)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) $ (.06) $ (.44) $ .12 $ (.89)
========= ========= ========= =========
Average common shares outstanding 22,710 22,180 22,655 22,155
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Net income (loss) $ (.06) $ (.44) $ .12 $ (.89)
========= ========= ========= =========
Average common and dilutive equivalent shares
outstanding 22,710 22,180 22,942 22,155
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 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 28 -- -- -- -- --
Purchase and retirement of
treasury stock (206) (2) (1,203) -- -- (1,205)
Release of escrow shares
related to a 1996 acquisition -- -- 1,217 -- -- 1,217
Amortization of deferred
compensation -- -- -- 914 -- 914
Net income -- -- -- -- 2,733 2,733
--------- --------- --------- --------- --------- ---------
BALANCE - SEPTEMBER 30, 1998 22,712 $ 227 $ 147,864 $ (1,278) $(117,814) $ 28,999
========= ========= ========= ========= ========= =========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH - OPERATING ACTIVITIES $ 6,798 $ (332)
-------- --------
INVESTING ACTIVITIES
Acquisitions, (net of cash acquired) -- (21,827)
Purchases of equipment (14,789) (15,357)
Dispositions, net of cash 31,678 --
Sale of marketable equity securities -- 7,161
Payment of purchase price due (73) (6,544)
Other 144 1,887
-------- --------
NET CASH - INVESTING ACTIVITIES 16,960 (34,680)
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 17,356 70,069
Repayments of notes payable and
obligations under capital leases (48,793) (22,867)
Exercises of options and warrants -- 84
-------- --------
NET CASH - FINANCING ACTIVITIES (31,437) 47,286
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,679) 12,274
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,460 18,641
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 9,781 $ 30,915
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,578 $ 14,308
Income taxes paid $ 2,894 $ 3,179
</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 $5.3 million and $5.0 million in 1998
and 1997, respectively.
The value of shares of common stock issued in 1998 relating to prior
acquisitions was $1.2 million.
The value of 206,000 shares of common stock repurchased for debt and
subsequently retired in 1998 was $1.9 million.
Total long-term debt and capitalized lease obligations were reduced by $10.7
million as the result of the sale of certain subsidiaries in 1998, and increased
by $6.4 million as a result of the purchase and consolidation of the remaining
50% interest in DEP.
Total long-term debt and certain long term assets increased by $500,000
resulting from the purchase of the operating assets of an imaging center in
1998.
The purchase of minority shareholder's interests in a subsidiary through debt
issuance in 1997 totaled $3.3 million.
Warrants issued with debt in 1997 were valued at $703,000.
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 September 30,
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 of 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 ("FASB") 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
7
<PAGE> 8
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 FASB 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>
September 30, December 31, Estimated
1998 1997 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Land $1,868 $ 1,868 --
Buildings 5,959 7,131 40 Years
Medical equipment 88,105 83,273 7 Years
Furniture and fixtures 3,660 3,539 7-10 Years
Office, data processing equipment and software 12,032 10,689 3-10 Years
Vehicles 614 305 3 Years
Construction in process 2,528 203 --
Leasehold improvements 14,552 9,889 10 Years
--------- --------
Total 129,318 116,897
Less: accumulated depreciation
and amortization (34,914) (25,330)
--------- --------
Property and equipment, net $ 94,404 $ 91,567
========= ========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $32.7 million and $31.8 million at September 30, 1998 and December 31, 1997,
respectively.
Depreciation expense amounted to $4.9 million and $15.0 million during the three
and nine months ended September 30, 1998, respectively, of which $1.1 million
and $3.2 million was attributed to equipment under capital leases. Depreciation
expense amounted to $4.3 million and $13.1 million during the three and nine
months ended September 30, 1997, respectively, of which $1.0 million and $3.0
million was attributed to equipment under capital leases.
During the second quarter ended June 30, 1998, property and equipment (net of
accumulated depreciation) decreased by $10.4 million in connection with the sale
of certain subsidiaries (see Note 9), and increased by $8.2 million in
connection with the DEP transaction (see Note 9).
8
<PAGE> 9
[3] INTANGIBLE ASSETS
A summary of intangible assets is as follows:
In thousands
<TABLE>
<CAPTION>
September 30, December 31, Estimated
1998 1997 Useful Life
------------- ----------- ------------
<S> <C> <C> <C>
Goodwill $85,094 $105,847 20 Years
Covenants not to compete 3,192 3,142 3-5 Years
Customer lists 3,189 3,189 10 Years
Other 178 237 3-5 Years
------- --------
Total 91,653 112,415
Less accumulated amortization (11,055) (8,517)
------- --------
Intangibles, net $80,598 $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.
In connection with a 1996 acquisition, 671,000 shares of the Company's common
stock was placed into escrow, with 271,000 of such shares to be released to the
seller in 1998 contingent upon achievement of a certain earnings target by the
acquired company (400,000 of such shares were released in 1997). The earnings
target was met by the acquired company, and the shares were released to the
seller during the second quarter ended June 30, 1998, resulting in increases to
goodwill and paid in capital of $1.2 million. During the second quarter ended
June 30, 1998, and during the third quarter ended September 30, 1998, intangible
assets (primarily goodwill), net of accumulated amortization, decreased by $19.6
million and $924,000, respectively, in connection with the sale of certain
subsidiaries - see Note 9. During the second quarter ended June 30, 1998,
goodwill and purchase price due on companies acquired decreased by $1.3 million
relating to adjustments of the allocation of the purchase price of a certain
1996 acquisition.
[4] INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated annual
effective income tax rate.
[5] DEBT
In connection with the sale of certain subsidiaries during the second quarter
ended June 30, 1998 (see Note 9), long term debt and capital leases decreased by
an aggregate of $10.7 million, and increased by $8.1 million in connection with
the DEP transaction (see Note 9).
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
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<PAGE> 10
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.
In August 1998, DVIBC entered into an agreement with the Company whereby DVIBC
agreed that certain nonconforming accounts receivable referenced above
(including existing and future accounts receivable) which previously were
believed by DVIBC not to meet the eligibility requirements under the terms of
the revolving credit loan are now includable in the borrowing base. In light of
this agreement, the above referenced waivers are no longer necessary.
As discussed in Note 9, in May 1998 the Company paid down the revolving credit
loan by $25 million from proceeds received from the sale of Medical Diagnostics,
Inc. The outstanding balance under the revolving credit loan is $16 million as
of September 30, 1998.
The Company is required to maintain a certain debt to operating cash flow ratio
(as defined) pursuant to the Indenture under which its $57.5 million
Subordinated Convertible Debentures (the "Debentures") were issued. As the
Company previously disclosed, in March 1998 the Company received a consent from
the majority of holders of the Debentures to make certain modifications to the
debt to operating cash flow ratio 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 modified debt to
operating cash flow ratio during the quarter ended March 31, 1998, and was in
compliance with the original and the modified debt to operating cash flow ratio
during the quarters ended June 30, 1998 and September 30, 1998.
[6] STOCKHOLDERS' EQUITY
On January 17, 1998, and on July 13, 1998, the Company granted to certain
employees (none of whom is a member of senior management of the Company) options
to purchase 176,000 and 100,000 shares of the Company's common stock at exercise
prices of $4.13 and $3.50, respectively, under the 1995 Long Term Incentive Plan
(the "1995 LTIP"). The exercise prices under both grants represent the closing
price of the Company's stock on the day preceding the respective date of grant.
The options granted on January 17, 1998 vest over 3 years and have a term of 5
years. The options granted on July 13, 1998 vest 25% at date of grant, and 25%
on each anniversary thereafter, and have a term of five years.
On July 13, 1998, the Board of Directors of the Company elected Dr. L.E. Richey,
MD, a then current Co-Chairman of the Board of the Company, to the position of
Chairman of the Board. Concurrently, the Company granted Dr. Richey options to
purchase 370,000 shares of the Company's common stock in recognition of the
extensive amount of time he has devoted to the Company and in anticipation of
his future contributions as Chairman. The options are exercisable at a price of
$3.50, which represents the closing price of the Company's stock on the day
immediately preceding the date of grant, and fully vest one year from date of
grant.
Additionally, on July 13, 1998, options to purchase 1,461,000 shares of the
Company's common stock under its 1995 LTIP were canceled subject to the consent
of the holders thereof. These canceled options were granted at various times in
the past and under various terms and conditions (at exercise prices ranging from
$3.69 to $13.50), with 1,320,000 of such total having been issued to current
directors and executive officers of the Company (including 20,000 granted to Dr.
Richey) and 141,000 having been issued to other employees. Concurrent with the
cancellation of these options, and subject to the consent of the holders
thereof, options (hereinafter defined as "new options") to purchase 1,045,001
shares of the Company's common stock under the 1995 LTIP were granted to current
directors
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<PAGE> 11
and executive officers (exclusive of the options granted to Dr. Richey as
described in the previous paragraph), and new options to purchase 105,000 shares
of common stock were granted to certain other employees. The new options were
issued in order to provide an appropriate incentive to the grantees, especially
those whose previous options were granted at prices substantially above the
current market price of the Company's stock. All such new options are
exercisable at a price of $3.50, which represents the closing price of the
Company's stock on the day immediately preceding the date of grant. New options
issued to non-employee directors fully vest in one year and have a term of five
years. All other new options granted vest 25% at date of grant, and 25% on each
anniversary date thereafter, and have a term of five years.
The Company has elected to continue to account for its stock-based grants to
employees and directors in accordance with the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees".
In connection with a certain 1996 acquisition, the Company was required to
repurchase 206,000 shares of the Company's common stock in June 1998 which were
immediately retired, resulting in a decrease during the second quarter ended
June 30, 1998 in common stock and paid in capital aggregating $1.2 million, a
decrease in purchase price due on companies acquired of $700,000, and the
incurrance of a note payable amounting to $1.9 million due in monthly
installments from June 1998 to May 2001 with interest at 10%.
As further described in Note 3, during the second quarter ended June 30, 1998,
paid-in capital increased by $1.2 million relating to the release of 271,000
shares of the Company's common stock from escrow in connection with a certain
1996 acquisition.
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. The
Company's securities remained listed on the NASDAQ National Market System
pursuant to the waiver.
In February 1998, NASDAQ's new listing standard became effective. 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 trading dates, the Company's common
stock had 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
advised the Company in its April 17, 1998 letter that the Company had a period
of 90 calendar days in which to regain compliance with such standard. If at any
time within 90 calendar days from April 17, 1998, the closing bid price of the
Company's shares of common stock was equal to or greater than $5 for ten
consecutive trading days, the Company would have complied with the minimum bid
price requirement. This criteria was not met during the 90 day period. On July
1, 1998, NASDAQ notified the Company that the Company had been granted an
extension until September 30, 1998 to comply with the standards.
Effective September 22, 1998, upon the Company's request, the Company's common
stock was transferred from the NASDAQ National Market System to the NASDAQ
SmallCap Market, and the common stock now trades on such market.
[7] EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share", 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 and nine months ended September 30, 1997.
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<PAGE> 12
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
In thousands, except per share data
Net income (loss) $(1,424) $ (9,848) $2,733 $(19,718)
======= ======== ====== ========
BASIC EPS:
Weighted-average common shares outstanding 22,710 22,180 22,655 22,155
======= ======== ====== ========
EPS - net income (loss) $ (.06) $ (.44) $ .12 $ (.89)
======= ======== ====== ========
DILUTED EPS:
Weighted-average common shares outstanding 22,710 22,180 22,655 22,155
Stock options and warrants -- -- 4 --
Restricted stock grants -- -- 134 --
Contingent shares -- -- 149 --
------- -------- ------ --------
Shares applicable to diluted earnings 22,710 22,180 22,942 22,155
======= ======== ====== ========
EPS - net income (loss) $ (.06) $ (.44) $ .12 $ (.89)
======= ======== ====== ========
</TABLE>
Unexercised stock options and warrants to purchase 6.3 million and 5.9 million
shares of the Company's common stock as of September 30, 1998 and 1997,
respectively, 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, 7.6 million and 7.9 million shares of the Company's common stock
issuable upon conversion of convertible debt as of September 30, 1998 and 1997,
respectively, were not included in computations of diluted EPS because the net
effect of including such shares would be anti-dilutive. As of September 30,
1997, 474,000 shares of the Company's common stock held in escrow, to be
released to sellers in certain acquisitions only if certain earnings targets
were achieved, were not included in the computation of diluted EPS because their
effect would be anti-dilutive.
[8] LITIGATION
In connection with the Integrated Health Concepts, Inc. ("IHC") litigation
previously reported in the Company's Form 10-Q for the second quarter ended June
30, 1998, in April 1998 the court had entered a final judgment against IHC in an
amount of $868,000 inclusive of attorney's fees, costs, and pre-judgment
interest and ordered Don Ballard to sell his 15% interest in IHC to the Company
for $125,000. IHC has filed an appeal. No other party has yet appealed although
the period for cross-appeals has not yet expired.
In connection with the class action lawsuits filed against the Company in
January 1997, the settlement previously reported in the Company's Form 10-Q for
the second quarter ended June 30, 1998 was approved by the court in September
1998 and the court entered a final judgment in October 1998. No appeals have
been filed and claims administration is underway. The Company has performed all
of its obligations under the settlement.
In January 1997, the Securities and Exchange Commission ("SEC") initiated an
investigation into the Company's former relationship with Coyote Consulting and
Keith Greenberg, and the adequacy of the Company's disclosure concerning that
relationship. The Company continues to fully cooperate with the SEC.
12
<PAGE> 13
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, however, 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.
[9] SALES AND ACQUISITIONS OF BUSINESSES
In May 1998, the Company consummated the previously announced agreement to sell
certain non-core assets consisting of the Company's mobile subsidiary, Medical
Diagnostics, Inc. ("MDI") to Alliance Imaging Inc. for $35.5 million in cash
less debt assumed of $5.9 million. Immediately upon the closing, the Company
used $25 million of the cash proceeds to repay a portion of the outstanding
balance under the DVIBC credit loan (see Note 5). The transaction resulted in a
pre-tax gain of $5.8 million which is included in income (loss) from operations
during the nine month period ended September 30, 1998.
Also in May 1998, the Company consummated the previously announced agreement to
sell its 50.1% interest in United States Cancer Care Inc., a non-core asset, and
its 100% interest in a subsidiary which held a 50% interest in a radiation
oncology partnership, (collectively, the "Oncology Interests"), to USCC
Acquisition Corp. ("USCC"), a Delaware corporation. Upon the closing, USCC
changed its name to U.S. Cancer Care, Inc. The sale price consisted 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. No gain or loss was recorded on the transaction
during the second quarter ended June 30, 1998 because the transaction was
subject to a contingency which was not resolved until October 1998. The
transaction resulted in a pre-tax gain of $377,000 which is included in income
(loss) from operations during the three and nine month period ended September
30, 1998.
Effective April 1, 1998, the Company purchased from Phycor of Jacksonville, Inc.
("Phycor"), a wholly-owned subsidiary of Phycor, Inc., certain accounts
receivable owned by Phycor as well as Phycor's 50% interest in Diagnostic Equity
Partners ("DEP"), a joint venture between the Company and Phycor. The purchase
price was $2 million, of which $1.5 million was paid (without interest) in July
1998, and the remaining $500,000 is payable in two equal installments (without
interest) in October 1998 and January 1999. The Company's interest in DEP has
previously been accounted for under the equity method of accounting. As a result
of the purchase, DEP was dissolved, and the assets and liabilities of DEP have
been recorded by the Company. The Company will continue to operate the centers
previously managed by DEP.
13
<PAGE> 14
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 the integration of the acquired
centers 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.
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. The aggregate reduction of these employee-related
expenses is expected to save several million dollars in payroll expense
annually; (ii) divest non-core assets and focus upon the Company's core
business, and divest core operating assets when deemed warranted. In addition to
the MDI and Oncology Interests transactions described below and in Note 9 of
Notes to Condensed Consolidated Financial Statements, the Company is currently
reviewing other non-core and under performing 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.
In May 1998, the Company consummated the previously announced agreement to sell
certain non-core assets consisting of the Company's mobile subsidiary, Medical
Diagnostics, Inc. ("MDI"), to Alliance Imaging Inc. for $35.5 million in cash
less debt assumed of $5.9 million. Immediately upon the closing, the Company
used $25
14
<PAGE> 15
million of the cash proceeds to repay a portion of the outstanding balance under
the DVIBC revolving credit loan (see Notes 5 and 9 of Notes to Condensed
Consolidated Financial Statements).
Also in May 1998, the Company consummated the previously announced agreement to
sell its 50.1% interest in United States Cancer Care Inc., a non-core asset, and
its 100% interest in a subsidiary which held a 50% interest in a radiation
oncology partnership, (collectively, the "Oncology Interests"), to USCC
Acquisition Corp. ("USCC"), a Delaware corporation. Upon the closing, USCC
changed its name to U.S. Cancer Care, Inc. The sale price consisted 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 (see Note 9 of Notes to Condensed Consolidated
Financial Statements).
As further discussed in Note 9 of Notes to Condensed Consolidated Financial
Statements, effective April 1, 1998, the Company purchased certain accounts
receivable and the remaining 50% interest in a joint venture for $2 million,
dissolved the joint venture, and will operate the centers previously managed by
the joint venture on a going-forward basis.
15
<PAGE> 16
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE 100.0 % 100.0% 100.0% 100.0%
------- ------ ------ ------
OPERATING EXPENSES
General and administrative 75.8 78.7 73.9 75.2
Bad debt expense 2.2 16.0 2.6 7.7
Depreciation 10.6 8.2 9.8 8.2
Amortization 2.4 5.2 2.5 5.1
Stock based compensation 0.6 0.5 0.6 0.6
Asset impairment losses -- 0.6 -- 2.5
Settlement with former --
Chief Executive Officer (1.8) -- 1.1
Loss on settlement of lawsuits -- 0.2 -- 3.1
------- ------ ------ ------
TOTAL OPERATING EXPENSES 91.6 107.6 89.4 103.5
GAIN ON SALE OF SUBSIDIARIES 0.8 -- 4.0 --
------- ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 9.2 (7.6) 14.6 (3.5)
------- ------ ------ ------
OTHER INCOME (EXPENSE)
Interest expense ( 11.3) (8.6) (10.3) (8.1)
Interest and other income 1.2 0.1 1.3 1.2
Gain on sale of marketable securities -- -- -- 0.2
------- ------ ------ ------
TOTAL OTHER INCOME (EXPENSE) (10.1) (8.5) (9.0) (6.7)
------- ------ ------ ------
Income (loss) before minority interest and
provision for income taxes (0.9) (16.1) 5.6 (10.2)
------- ------ ------ ------
Minority interest in income
of subsidiaries 1.4 1.0 1.3 1.7
Provision for income taxes 0.8 0.6 2.5 0.2
------- ------ ------ ------
NET INCOME (LOSS) (3.1)% (17.7)% 1.8% (12.1)%
======= ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenue for the three months ended September 30, 1998 (the "1998 three month
period") decreased by $9.3 million to $46.3 million, from $55.6 million for the
three months ended September 30, 1997 (the "1997 three month period"). In May
1998 the Company sold MDI and the Oncology Interests as further described in
Note 9 of Notes to Condensed Consolidated Financial Statements. Excluding
revenue from MDI and the Oncology Interests during the 1997 three month period,
revenue was $48.9 million, or $2.6 million higher than the 1998 three month
period. The lower revenue during the three months ended September 30, 1998
resulted primarily from a decrease in scan volumes, some of which was related to
the business interruption in the Southeast region caused by Hurricane Georges.
General and Administrative ("G&A") expense for the 1998 three month period
decreased by $8.7 million to $35.1 million, from $43.8 million for the 1997
three month period. G&A expense was $40.1 million during the 1997 three month
period excluding MDI and the Oncology Interests. The decrease in 1998 resulted
from reduced professional
16
<PAGE> 17
fees related to litigation matters, reduced accounting costs and the first
quarter 1998 implementation of the cost reduction plan (see "Overview").
Depreciation expense increased from $4.6 million (or $3.9 million excluding MDI
and the Oncology Interests) during the 1997 three month period to $4.9 million
during the 1998 three month period, resulting primarily from increases in
property and equipment in connection with medical equipment upgrades,
enhancements of single modality centers to multi-modality centers, ongoing
improvements to facilities, and continued implementation of a new billing
system, offset by decreases resulting from the reduction of $10.4 million in net
property and equipment relating to the sales in May 1998 of MDI and the Oncology
Interests.
Amortization expense decreased from $2.9 million (or $2.6 million excluding MDI
and the Oncology Interests) during the 1997 three month period to $1.1 million
during the 1998 three month period. The decrease was primarily due to the effect
of the $76.0 million impairment loss write-down of goodwill and certain other
long term assets during the fourth quarter of fiscal 1997, as well as a total
decrease of $20.5 million in intangible assets (primarily goodwill) relating to
the sales in May 1998 of MDI and the Oncology Interests.
The Company recorded asset impairment losses of $333,000, a credit to settlement
with former Chief Executive Officer of $1.0 million and loss on settlement of
lawsuits of $125,000 during the 1997 three month period.
During the 1998 three month period, the Company recorded a gain on sale of
subsidiaries of $377,000 as a result of the sale of the Oncology Interests.
Interest expense increased to $5.2 million during the 1998 three month period,
compared to $4.8 million (or $4.5 excluding MDI and the Oncology Interests)
during the 1997 three month period, resulting partly from higher interest rates
on certain debt incurred during the 1998 three month period, as well as interest
expense recorded during the 1998 three month period relating to amortization of
the estimated fair value of 250,000 warrants issued to DVIBC on September 30,
1997.
Net loss was $1.4 million for the 1998 three month period, compared to a net
loss of $9.8 million for the 1997 three month period. The significant reasons
for differences in the decrease in net loss from 1997 to 1998 are discussed
above. Basic and diluted loss per share were $.06 and $.06 for the 1998 three
month period, respectively, compared to a basic and diluted loss per share of
$.44 and $.44 for the 1997 three month period, respectively.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenue for the nine months ended September 30, 1998 (the "1998 nine month
period") decreased by $10.2 million to $153.2 million, from $163.4 million for
the nine months ended September 30, 1997 (the "1997 nine month period"). In May
1998 the Company sold MDI and the Oncology Interests as further described in
Note 9 of Notes to Condensed Consolidated Financial Statements. Excluding
revenue related to MDI and the Oncology Interests from both the 1998 and 1997
periods, and excluding $1.4 million from 1997 revenue relating to a center sold
in May 1997, 1997 revenue was $142.5 million, or $2.1 million higher than 1998
revenue. The lower revenue during the nine month period ended September 30, 1998
resulted primarily from a decrease in scan volumes, some of which was related to
the business interruption during the third quarter of 1998 in the Southeast
region caused by Hurricane Georges.
General and Administrative ("G&A") expense for the 1998 nine month period
decreased by $9.7 million to $113.2 million, from $122.9 million for the 1997
nine month period. Excluding G&A expense relating to MDI and the
17
<PAGE> 18
Oncology Interests from both the 1998 and 1997 periods, G&A expense decreased to
$105.5 million during the 1998 nine month period, from $110.9 million during the
1997 nine month period, primarily as a result of reduced professional fees
related to litigation matters, reduced accounting costs and the first quarter
1998 implementation of the cost reduction plan (see "Overview").
Depreciation expense increased from $13.4 million (or $11.6 excluding MDI and
the Oncology Interests) during the 1997 nine month period to $15.0 million (or
$14.0 excluding MDI and the Oncology Interests) during the 1998 nine month
period, resulting primarily from increases in property and equipment in
connection with medical equipment upgrades, enhancement of single modality
centers to multi-modality centers, ongoing improvements to facilities, and
continued implementation of a new billing system, offset by decreases resulting
from the reduction of $10.4 million in net property and equipment relating to
the sales in May 1998 of MDI and the Oncology Interests.
Amortization expense decreased from $8.3 million (or $7.6 million excluding MDI
and the Oncology Interests) during the 1997 nine month period to $3.9 million
(or $3.4 million excluding MDI and the Oncology Interests) during the 1998 nine
month period. The decrease was primarily due to the effect of the $76.0 million
impairment loss write-down of goodwill and certain other long term assets during
the fourth quarter of fiscal 1997, as well as a decrease of $19.6 million in
intangible assets (primarily goodwill) relating to the sales in May 1998 of MDI
and the Oncology Interests.
During the 1997 nine month period, the Company recorded asset impairment losses
of $4.1 million, settlement with former Chief Executive Officer of $1.8 million
and loss on settlement of lawsuits of $5.0 million.
During the 1998 nine month period, the Company recorded a gain on sale of
subsidiaries of $6.2 million as a result of the sale of MDI and the Oncology
Interests.
Interest expense increased to $15.8 million (or $15.5 excluding MDI and the
Oncology Interests) during the 1998 nine month period, compared to $13.3 million
(or $12.6 million excluding MDI and the Oncology Interests) during the 1997 nine
month period, resulting from higher average borrowings outstanding during the
1998 nine month period, higher interest rates on certain debt incurred during
1998, and interest expense recorded during 1998 relating to amortization of the
estimated fair value of 250,000 warrants issued to DVIBC on September 30, 1997.
Net income was $2.7 million for the 1998 nine month period, compared to a net
loss of $19.7 for the 1997 nine month period. The significant reasons for
differences in earnings (loss) during the periods are discussed above. Basic and
diluted earnings per share were $.12 and $.12 for the 1998 nine month period,
respectively, compared to a basic and diluted loss per share of $.89 and $.89
for the 1997 nine month period, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $16.1 million compared
to $15.9 million at December 31, 1997. The Company's primary short-term
liquidity requirements as of September 30, 1998 include the current portion of
long-term debt and capital leases (totaling $27.7 million), accounts payable,
other current liabilities and capital expenditures related to the opening of new
Facilities, the replacement and enhancement of existing imaging equipment and
Facilities, and continued improvements and enhancements to the Company's
management information systems. The Company had $9.8 million in cash at
September 30, 1998.
Net cash provided by operating activities for the 1998 nine month period was
$6.8 million, compared to $332,000 used in operating activities during the 1997
nine month period. The improved cash flow from operations resulted from the
increased income from operations, which was $22.4 million during the 1998 nine
month period, compared
18
<PAGE> 19
to a loss from operations of $5.7 million during the 1997 nine month period.
Net cash provided by investing activities was $17.0 million for the 1998 nine
month period, compared to net cash used in investing activities of $34.7 during
the 1997 nine month period. In 1998 the Company received $31.7 million in net
proceeds from the sales of MDI ($29.7 million) and the Oncology Interests ($2.0
million) (see Note 9 of Notes to Condensed Consolidated Financial Statements).
In 1997, the Company used $21.8 million (net of cash acquired) to acquire MDI.
Cash expenditures for purchases of equipment and other improvements totaled
$14.8 million in 1998 compared to $15.3 million in 1997. In 1997, the Company
received cash of $7.2 million from the sale of marketable securities. Payments
of purchase price due on companies acquired totaled $73,000 in 1998 compared to
$6.5 million in 1997 (the significant 1997 amount was incurred in the first
quarter resulting from a November 1996 acquisition). The Company realized
$144,000 from other investing activities in 1998 compared to $1.9 million in
1997.
Net cash used in financing activities was $31.4 million during the 1998 nine
month period compared to $47.3 million provided by financing activities during
the 1997 nine month period. Proceeds from new borrowings totaled $17.4 million
during 1998 compared to $70.1 million in 1997. Repayments of notes and capital
leases totaled $48.8 million in 1998 compared to $22.3 million in 1997. As
discussed in Notes 5 and 9 of the Notes to Condensed Consolidated Financial
Statements, the Company used $25.0 million of the net proceeds received from the
sale of MDI to repay a portion of the DVIBC revolving credit loan. Exercises of
options and warrants provided $84,000 in 1997.
As further discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, in August 1998, DVIBC entered into an agreement with the Company
whereby DVIBC agreed that certain nonconforming accounts receivable (including
existing and future accounts receivable) which previously were believed by DVIBC
not to meet the eligibility requirements under the terms of the revolving credit
loan are now includable in the borrowing base. The revolving credit line is for
up to $35 million (subject to the amount of accounts receivable determined, from
time to time, as eligible collateral under the defined borrowing base
calculation). Borrowings outstanding as of November 12, 1998 were $16 million.
Primarily as a result of the sales of MDI and the Oncology Interests, total
long-term debt and capital lease obligations (including current portions) has
reduced from $214.6 million as of December 31, 1997 to $189.8 million as of
September 30, 1998. As further discussed in Part II - Other Information, Item
5., the Company has entered into a definitive agreement to sell a subsidiary
which will result in the receipt of $3.7 million in cash and notes receivable
and further reduce debt by $8.8 million. Closing of the transaction is expected
to occur during the fourth quarter of fiscal 1998.
The Company continues to implement its strategy to reduce debt and increase cash
flows as enumerated in "Overview" above, although there can be no assurances of
success. If the Company's continuing efforts are not sufficient, or if operating
cash flow cannot otherwise be improved to the extent necessary, the Company's
liquidity and financial condition could be materially and adversely affected.
For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Notes 6 and 8 of the Notes to Condensed
Consolidated Financial Statements.
COMPUTER TECHNOLOGIES AND YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming and embedded
code that may exist in computer systems as of January 1, 2000. Many existing
computer programs use only two digits to identify a year in the date field of
software applications and may recognize 2000 as 1900. The issue is whether such
code exists in the
19
<PAGE> 20
Company's mission critical applications and/or computer hardware and if that
code will produce accurate date-sensitive calculations on or after January 1,
2000.
The Company has established a multi-phase plan and timetable consisting of a
review phase, a testing phase and an implementation phase for all Year 2000
compliance issues. The review phase for all issues is approximately 80%
complete. The testing phase for the various plans is approximately 60%
complete. The implementation phase is approximately 40% complete.
The Company has conducted a thorough review of its material internal computer
applications. In 1996, the Company began installing a new state-of-the-art
billing and collection system as well as a new accounting system. The
installation was completed in the first quarter of 1998. The Company has
received written confirmation from its vendors that their computer
applications are currently Year 2000 compliant or will be made Year 2000
compliant before the end of the fourth quarter of 1998.
The Company is reviewing information obtained from a survey conducted by
General Electric Company ("GE") to determine whether certain embedded
applications, which control certain medical and related equipment, should be
upgraded to ensure Year 2000 compliance and the cost of such upgrades, if any.
The Company expects to complete the review in the fourth quarter of 1998. The
Company has incurred no additional costs as a result of GE's review of the
Company's embedded applications, which was performed as part of the Company's
national service agreement with GE.
The Company is reviewing the computer applications of its significant payers,
which consist of Medicare and private insurance carriers, to determine whether
such applications will be upgraded before January 1, 2000. Medicare is
becoming Year 2000 compliant as part of the federal government's upgrade of
its computer technologies. The Company is obtaining written confirmation from
each of its insurance carriers that the carrier is Year 2000 compliant. As a
result, the Company does not expect any adverse impact on its cash flows from
the non-compliance of its payers' computer technologies.
The Company's compliance policy requires that new computer applications and/or
hardware equipment to be acquired that perform significant date-sensitive
calculations by the Company shall be warranted to be Year 2000 compliant by
the manufacturer.
Testing of all the Company's internal computer applications will be completed
in the fourth quarter of 1998. All testing will be done internally in the
ordinary course of the Company's business, and, as a result, the Company is
not expecting to incur extraordinary costs for such testing. Testing of
embedded applications will also be performed in the fourth quarter of 1998.
The cost to finalize the upgrade of Year 2000 issues pertaining to the
Company's internal computer applications is estimated to be $30,000 and will
be incurred in the fourth quarter of 1998. The Company expects to have
completed the implementation phase by the end of the fourth quarter of 1998.
The most reasonably likely worst case scenario of the impact of Year 2000
issues on the Company's operations is that the Company's collection of cash
could be disrupted if payers are unable to submit payments to the Company
because of their Year 2000 compliance issues. The financial impact of such a
disruption could adversely affect the Company's ability to conduct normal
business operations. The Company is currently working on contingency plans to
handle the most reasonably likely worst case scenarios. Such contingency plans
will be disclosed in the Company's Form 10-K for the fiscal year ending
December 31, 1998.
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<PAGE> 21
Because of the nature of the uncertainty surrounding Year 2000 issues, there can
be no assurance that the Company's assessment will be correct nor that a failure
resulting from the impact of Year 2000 issues on the Company's operations will
not have a material adverse effect on its financial condition.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Integrated Health Concepts, Inc. ("IHC") litigation
previously reported in the Company's Form 10-Q for the quarter ended June 30,
1998, in April 1998 the court had entered a final judgment against IHC in an
amount of $868,000 inclusive of attorney's fees, costs, and pre-judgment
interest and ordered Don Ballard to sell his 15% interest in IHC to the Company
for $125,000. IHC has filed an appeal. No other party has yet appealed although
the period for cross-appeals has not yet expired.
In connection with the class action lawsuits filed against the Company in
January 1997, the settlement previously reported in the Company's Form 10-Q for
the quarter ended June 30, 1998 was approved by the court in September 1998 and
the court entered a final judgment in October 1998. No appeals have been filed
and claims administration is underway. The Company has performed all of its
obligations under the settlement.
In January 1997, the Securities and Exchange Commission ("SEC") initiated an
investigation into the Company's former relationship with Coyote Consulting and
Keith Greenberg, and the adequacy of the Company's disclosure concerning that
relationship. The Company continues to fully cooperate with the SEC.
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, however, 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.
22
<PAGE> 23
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 9 of Notes to Condensed Consolidated Financial Statements.
On November 5, 1998, the Company entered into a definitive agreement to sell US
Heartcare Management, Inc. ("US Heartcare"). US Heartcare provides management
services to several third party nuclear medicine and diagnostic imaging centers
in the New York City metropolitan area. The $12.5 million aggregate
consideration received will consist of $3.7 million in cash and notes receivable
and the assumption and forgiveness of debt of $8.8 million. Additionally, as
part of the transaction, the Company will enter into an agreement for the
provision of general consulting services to US Heartcare for an annual fee of
$500,000, payable quarterly in arrears, for a period of three years. The sale is
expected to be consummated in the fourth quarter of fiscal 1998.
On July 13, 1998, the Board of Directors of the Company elected L.E. Richey,
M.D., to the position of Chairman of the Board of the Company. Dr. Richey was
previously Co-Chairman of the Board, having been elected to that position in
December 1997. C. Keith Hartley, the Company's other Co-Chairman of the Board,
who was also elected to that position in December 1997, will continue as a
director of the Company.
Also on July 13, 1998, the Board of Directors of the Company granted Dr. Richey
options to purchase 370,000 shares of the Company's common stock in recognition
of the extensive amount of time he has devoted to the Company and in
anticipation of his future contributions as Chairman. For further information,
see Note 6 of Notes to Condensed Consolidated Financial Statements.
On July 13, 1998, in order to provide an appropriate incentive to certain
members of management and other senior employees whose stock option exercise
prices were then substantially above the current market price of the Company's
stock, the Company canceled certain options and granted new options to such
persons. These cancellations and grants are subject to the consent of the option
holders. In most cases, a lesser amount of options were issued to each
individual at a price, pursuant to the Company's 1995 Long Term Incentive Plan,
equal to the then fair market value of a share of the Company's stock on the day
immediately preceding the date of grant. For further information, see Note 6 of
Notes to Condensed Consolidated Financial Statements.
The Company held its annual stockholders meeting on October 20, 1998, at which
stockholders of the Company voted upon and elected C. Keith Hartley, Kenneth R.
Jennings, David McIntosh, Michael A. O'Hanlon, Joseph A. Paul, Gordon C. Rausser
and L.E. Richey as Directors.
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27 Financial Data Schedule.
(b) A report on Form 8-K dated September 21, 1998 was filed during the
quarter ended September 30, 1998 disclosing an Item 5. Event.
24
<PAGE> 25
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: November 13, 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
25
<PAGE> 26
EXHIBIT INDEX
27 Financial Data Schedule
26
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,781
<SECURITIES> 0
<RECEIVABLES> 65,782
<ALLOWANCES> 16,145
<INVENTORY> 0
<CURRENT-ASSETS> 76,147
<PP&E> 129,318
<DEPRECIATION> 34,914
<TOTAL-ASSETS> 257,158
<CURRENT-LIABILITIES> 60,053
<BONDS> 189,738
0
0
<COMMON> 227
<OTHER-SE> 28,772
<TOTAL-LIABILITY-AND-EQUITY> 257,158
<SALES> 0
<TOTAL-REVENUES> 153,206
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 121,896
<LOSS-PROVISION> 8,878
<INTEREST-EXPENSE> 15,827
<INCOME-PRETAX> 8,592
<INCOME-TAX> 3,825
<INCOME-CONTINUING> 2,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,733
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
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