<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 June 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)
<TABLE>
<CAPTION>
Delaware 11-3164389
- -------------------------------------------------------------- -----------------------------------
<S> <C>
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
</TABLE>
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 August 10, 1998:
- ----------------------------- -------------------------------
Common Stock, $ .01 par value 22,712,433 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 and integration
strategies, collections of accounts receivable, 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
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except share data June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 13,064 $ 17,460
Accounts receivable, net of allowance for bad debts of $15,060
and $17,312, respectively 49,200 51,200
Other receivables 7,137 6,467
Prepaid expenses and other current assets 8,323 7,731
-------- --------
Total Current Assets 77,724 82,858
-------- --------
Property and Equipment, net of accumulated depreciation and amortization
of $30,542 and $25,330, respectively 93,074 91,567
Intangible Assets, net of accumulated amortization of $15,371
and $13,890, respectively 82,210 103,898
Other Assets 3,859 4,277
Investment In and Advances to Unconsolidated Subsidiaries 1,547 4,329
-------- --------
Total Assets $258,414 $286,929
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $22,331 $24,055
Shareholder class action settlement payable -- 5,288
Current portion of long-term debt 19,710 18,590
Obligations under capital leases - current portion 7,220 9,155
Other current liabilities 7,774 7,350
Purchase price due on companies acquired 434 2,485
-------- --------
Total Current Liabilities 57,469 66,923
-------- --------
Subordinated convertible debentures 56,365 56,246
Long-term debt, net of current portion 101,069 118,999
Obligations under capital leases, net of current portion 7,635 11,573
Other liabilities 4,444 6,022
-------- --------
Total Liabilities 226,982 259,763
-------- --------
Minority Interest 1,285 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; 22,705,433
and 23,749,217 shares issued and outstanding, respectively
22,889,633 shares issued and outstanding, respectively 227 229
Additional paid-in capital 147,864 147,850
Deferred stock-based compensation (1,554) (2,192)
Accumulated deficit (116,390) (120,547)
-------- --------
Total Stockholders' Equity 30,147 25,340
-------- --------
Total Liabilities & Stockholders' Equity $258,414 $286,929
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
US DIAGNOSTIC INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $52,459 $ 56,442 $106,917 $107,882
------- -------- -------- --------
Operating Expenses
General and administrative 38,239 44,493 78,172 79,225
Bad debt expense 1,655 2,167 2,913 3,680
Depreciation 4,946 4,730 10,076 8,855
Amortization 1,137 2,759 2,736 5,408
Stock-based compensation 282 299 638 738
Asset impairment losses -- 3,725 -- 3,725
Settlement with former Chief Executive Officer -- 2,809 -- 2,809
Loss on settlement of lawsuits -- 4,875 -- 4,875
------- -------- -------- --------
Total Operating Expenses 46,259 65,857 94,535 109,315
------- -------- -------- --------
Gain on sale of subsidiaries (5,805) -- (5,805) --
------- -------- -------- --------
Income (Loss) from Operations 12,005 (9,415) 18,187 (1,433)
------- -------- -------- --------
Other Income (Expense)
Interest expense (5,160) (4,647) (10,612) (8,519)
Interest and other income 320 936 1,412 1,854
Gain on sale of marketable securities -- -- -- 406
------- -------- -------- --------
Total Other Income (Expense) (4,840) (3,711) (9,200) (6,259)
------- -------- -------- --------
Income (loss) before minority interest and provision (benefit)
for income taxes 7,165 (13,126) 8,987 (7,692)
------- -------- -------- --------
Minority interest in income of subsidiaries 621 1,055 1,361 2,178
Provision (benefit) for income taxes 3,133 (2,277) 3,469 --
------- -------- -------- --------
Net Income (loss) $ 3,411 $(11,904) $ 4,157 $ (9,870)
======= ======== ======== ========
Basic Earnings (Loss) per Common Share
Net income $ .15 $ (.55) $ .18 $ (.46)
======= ======== ======== ========
Average common shares outstanding 22,821 21,642 22,759 21,625
======= ======== ======== ========
Diluted Earnings (Loss) per Common Share
Net income $ .15 $ (.55) $ .18 $ (.46)
======= ======== ======== ========
Average common and dilutive equivalent shares
outstanding 23,117 21,642 23,115 21,625
======= ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 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 21 -- -- -- -- --
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 -- -- -- 638 -- 638
Net income -- -- -- -- 4,157 4,157
------ ---- -------- ------- --------- -------
Balance - June 30, 1998 22,705 $227 $147,864 $(1,554) $(116,390) $30,147
====== ==== ======== ======= ========= =======
</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>
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities
Net Cash - Operating Activities $ 845 $ (434)
-------- --------
Investing Activities
Acquisitions, (net of cash acquired) -- (21,827)
Purchases of equipment (12,224) (8,121)
Sale of subsidiaries 31,678 --
Sale of marketable equity securities -- 7,161
Payment of purchase price due (73) (6,476)
Other 144 1,887
-------- --------
Net Cash - Investing Activities 19,525 (27,376)
-------- --------
Financing Activities
Proceeds from borrowings 15,162 31,750
Repayments of notes payable and
obligations under capital leases (39,928) (15,219)
Exercises of options and warrants -- 64
-------- --------
Net Cash - Financing Activities (24,766) 16,595
-------- --------
Net Decrease in Cash and Cash Equivalents (4,396) (11,215)
Cash and Cash Equivalents - Beginning of Period 17,460 18,641
-------- --------
Cash and Cash Equivalents - End of Period $ 13,064 $ 7,426
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 11,310 $ 7,996
Income taxes paid $ 2,616 $ 3,136
</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 $1.7 million and $4.3 million in 1998
and 1997, respectively.
The value of shares of common stock used in 1998 relating to prior acquisitions
was $1.3 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.
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 June 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 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
7
<PAGE> 8
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>
June 30, December 31, Estimated
1998 1997 Useful Life
-------- ------------ -----------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 --
Buildings 5,938 7,131 40 Years
Medical equipment 83,013 83,273 7 Years
Furniture and fixtures 3,685 3,539 7-10 Years
Office, data processing equipment and software 14,193 10,689 3-10 Years
Vehicles 645 305 3 Years
Leasehold improvements 14,274 10,092 10 Years
-------- --------
Total 123,616 116,897
Less: accumulated depreciation
and amortization (30,542) (25,330)
-------- --------
Property and equipment, net $ 93,074 $ 91,567
======== ========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $29.5 million and $31.8 million at June 30, 1998 and December 31, 1997,
respectively.
Depreciation expense amounted to $4.9 million and $10.1 million during the three
and six months ended June 30, 1998, respectively, of which $1.0 million and $2.1
million was attributed to equipment under capital leases. Depreciation expense
amounted to $4.7 million and $8.9 million during the three and six months ended
June 30, 1997, respectively, of which $1.0 million and $2.0 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 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>
June 30, December 31, Estimated
1998 1997 Useful life
------- ------------ ------------
<S> <C> <C> <C>
Goodwill $91,013 $111,220 20 Years
Covenants not to compete 3,142 3,142 3-5 Years
Customer lists 3,189 3,189 10 Years
Other 237 237 3-5 Years
------- --------
Total 97,581 117,788
Less accumulated amortization (15,371) (13,890)
------- --------
Intangibles, net $82,210 $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 fiscal 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, intangible assets (primarily goodwill), net of accumulated
amortization, decreased by $19.6 million in connection with the sale of certain
subsidiaries - see Note 9. Additionally, 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 (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 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. In June 1998, the Company borrowed $5 million under the revolving credit
loan. The outstanding balance under the revolving credit loan is $15 million at
June 30, 1998.
9
<PAGE> 10
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 first quarter of 1998. The Company was in
compliance with the original and the modified debt to operating cash flow ratio
during the second quarter of 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 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". As
of June 30, 1998, the Company had deferred compensation totaling $264,000
relating to certain of the stock options
10
<PAGE> 11
canceled in July 1998. The amortization period for such deferred compensation
will be changed on a going-forward basis to reflect the vesting periods of the
applicable new stock options.
In connection with a certain 1996 acquisition, the Company guaranteed to
repurchase 206,000 shares of the Company's common stock issued to the seller if,
on the last trading day prior to the second anniversary of the closing date (as
defined), the market price of the Company's common stock was more than $2.00
below a defined price. The Company placed 103,000 of these shares into escrow,
which were released in late 1997 when certain earnings targets were met. The
Company's share price was more than $2.00 below the defined price as of the
specified date, resulting in a liability to repurchase the common shares at a
total price of approximately $1.9 million. As of December 31, 1997, the Company
had recorded $1.2 million ($825,000 in 1996 and $379,000 in 1997) in paid-in
capital to reflect the market price as of the date earned of the 206,000 shares
and recorded a "purchase price due on companies acquired" of approximately
$700,000 (representing the difference between amount to be paid of $1.9 million
and the recorded value of the shares to be repurchased). As a result, goodwill
of $1.9 million related to the required repurchase of the 206,000 shares was
recorded as of December 31, 1997. In June, 1998, the Company reached an
agreement with the seller for the payment of $1.9 million over 36 equal
installments plus interest at 7%, and the 206,000 shares were returned to the
Company and retired. As a result, the Company recorded a liability of $1.9
million, reduced common stock and paid-in-capital by $1.2 million, and reduced
purchase price due on companies acquired by $700,000.
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, and decreased by $1.2 million resulting from a purchase price
adjustment relating to 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. 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 of 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 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.
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.
[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
11
<PAGE> 12
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 six months ended June 30, 1997.
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
In thousands, except per share data
Net income (loss) $ 3,411 $(11,904) $ 4,157 $(9,870)
======= ======== ======= =======
BASIC EPS:
Weighted-average common shares outstanding 22,821 21,642 22,759 21,625
======= ======== ======= =======
EPS - net income (loss) $ .15 $ (.55) $ .18 $ (.46)
======= ======== ======= =======
DILUTED EPS:
Weighted-average common shares outstanding 22,821 21,642 22,759 21,625
Stock options and warrants 2 -- 6 --
Restricted stock grants 114 -- 126 --
Contingent shares 180 -- 224 --
------- ------- ------- -------
Shares applicable to diluted earnings 23,117 21,642 23,115 21,625
======= ======= ======= =======
EPS - net income (loss) $ .15 $ (.55) $ .18 $ (.46)
======= ======= ======= =======
</TABLE>
Unexercised stock options and warrants to purchase 5.8 million and 5.3 million
shares of the Company's common stock as of June 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,
7.8 million and 7.9 million shares of the Company's common stock issuable upon
conversion of convertible debt as of June 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 June 30, 1997, 991,875 shares of the
Company's common stock was held in escrow, to be released to the sellers related
to 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. litigation previously
reported in the Company's Form 10-Q for the quarter ended March 31, 1998, in May
1998 Don Ballard contested the judgment and filed a motion asking the court
instead to award him approximately $8.5 million in damages and $500,000 in
attorneys fees. In June 1998, the court upheld its judgment but awarded Mr.
Ballard $135,000 in attorneys' fees. Upon approval by the court of the form of
final judgment, both sides have the right of appeal. The Company expects to
appeal, although there can be no assurance that the Company will prevail in this
litigation.
In early 1997, six separate class action lawsuits were filed against the Company
and certain officers, directors and other parties alleging failure to make
adequate disclosure regarding the background of Keith Greenberg, who had
provided certain consulting services to the Company through Coyote Consulting.
Four of the lawsuits have been dismissed. Two remaining suits have been heard in
the United States District Court for the Southern District of Florida, and have
been settled in principle pursuant to a Memorandum of Understanding (the
"Memorandum") dated
12
<PAGE> 13
July 31, 1997 and a more detailed Stipulation of Settlement (the "Stipulation")
filed with the court on March 6, 1998. The Memorandum and Stipulation include a
denial of any wrongdoing or liability by both the Company and the individually
named defendants. In accordance with the terms of these documents, the parties
agreed to settle all pending class action claims against the Company (including
additional claims based on alleged misstatements of financial condition) for
$5.9 million, of which $588,000 was payable within ten days after signing, an
additional $1.5 million ten days after court approval of the proposed notice
advising the class of the settlement, and the remaining $3.8 million no later
than 25 days before a final hearing for approval of the settlement. The first
payment was made by the Company as required on August 11, 1997 and the second
and third payments were made in April and May 1998. The payments were deposited
into an interest-bearing account to be held in escrow by plaintiffs' counsel,
pending court approval. The settlement is subject to a court approval process
and in June 1998 the court asked counsel for both the plaintiffs and the
defendants to submit a joint stipulation in support of settlement prior to the
court rendering final approval. The joint stipulation has recently been filed
with the court and a response from the court is expected within several weeks.
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.
[9] Sales and Acquisitions of Businesses
In May 1998, the Company consummated the sale of 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 gain of $5.8 million.
In May 1998, the Company consummated the sale of 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 present value of the sale
price, which approximated the carrying value of the entities, 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.
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
13
<PAGE> 14
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 September 1998 and December 1998. 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.
14
<PAGE> 15
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. 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 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 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).
15
<PAGE> 16
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.
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0 100.0 100.0 100.0
----- ----- ----- -----
Operating Expenses
General and administrative 72.9 78.8 73.1 73.4
Bad debt expense 3.2 3.8 2.7 3.4
Depreciation 9.4 8.4 9.4 8.2
Amortization 2.2 4.9 2.6 5.0
Stock based compensation 0.5 0.5 0.6 0.7
Asset impairment losses -- 6.6 -- 3.5
Settlement with former
Chief Executive Officer -- 5.0 -- 2.6
Loss on settlement of lawsuits -- 8.6 -- 4.5
----- ----- ----- -----
Total Operating Expenses 88.2 116.6 88.4 101.3
----- ----- ----- -----
Gain on sale of subsidiaries (11.1) -- (5.4) --
----- ----- ----- -----
Income (Loss) from Operations 22.9 (16.6) 17.0 (1.3)
----- ----- ----- -----
Other Income (Expense)
Interest expense (9.8) (8.2) (9.9) (7.9)
Interest and other income 0.6 1.7 1.3 1.7
Gain on sale of marketable securities -- -- -- 0.4
----- ----- ----- -----
Total Other Income (Expense) (9.2) (6.5) (8.6) (5.8)
----- ----- ----- -----
Income (loss) before minority interest
provision (benefit) for income taxes 13.7 (23.1) 8.4 (7.1)
----- ----- ----- -----
Minority interest in income
of subsidiaries 1.2 1.9 1.3 2.0
Provision (benefit) for income taxes 6.0 (4.0) 3.2 --
----- ----- ----- -----
Net Income (Loss) 6.5% (21.0)% 3.9% (9.1)%
===== ===== ===== =====
</TABLE>
16
<PAGE> 17
Results Of Operations for the Three Months Ended June 30, 1998 Compared with the
Three Months Ended June 30, 1997
Revenue for the three months ended June 30, 1998 (the "1998 three month period")
decreased by $3.9 million to $52.5 million, from $56.4 million for the three
months ended June 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 related
to MDI and the Oncology Interests from both the 1998 and 1997 periods, revenue
was $47.8 million during the 1998 three month period, compared to $48.8 million
during the 1997 three month period.
General and Administrative ("G&A") expense for the 1998 three month period
decreased by $6.3 million to $38.2 million, from $44.5 million for the 1997
three month period. Excluding G&A expense relating to MDI and the Oncology
Interests from both the 1998 and 1997 periods, G&A expense decreased to $35.4
million during the 1998 three month period, from $39.9 million during the 1997
three 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 $4.7 million 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 $2.8 million 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 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 1998 three month period, the Company recorded a gain on sale of
subsidiaries of $5.8 million as a result of the sale of MDI.
During the 1997 three month period, the Company recorded asset impairment losses
of $3.7 million, settlement with former Chief Executive Officer of $2.8 million
and loss on settlement of lawsuits of $4.9 million.
Interest expense increased to $5.2 million during the 1998 three month period,
compared to $4.7 million during the 1997 three month period, resulting from
higher average borrowings outstanding during the 1998 three month period.
Net income was $3.4 million for the 1998 three month period, compared to a net
loss of $11.9 for the 1997 three month period. The significant reasons for
differences in earnings (loss) during the periods are discussed above. Basic and
diluted earnings per share were $.15 and $.15 for the 1998 three month period,
respectively, compared to a basic and diluted loss per share of $.55 and $.55
for the 1997 three month period, respectively.
17
<PAGE> 18
Results Of Operations for the Six Months Ended June 30, 1998 Compared with the
Six Months Ended June 30, 1997
Revenue for the six months ended June 30, 1998 (the "1998 six month period")
decreased by $1.0 million to $106.9 million, from $107.9 million for the six
months ended June 30, 1997 (the "1997 six 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, revenue
was $94.1 million during the 1998 three month period, compared to $96.5 million
during the 1997 three month period. The 1997 six month period includes revenue
of $1.4 million related to a center sold in May 1997.
General and Administrative ("G&A") expense for the 1998 six month period
decreased by $1.0 million to $78.2 million, from $79.2 million for the 1997 six
month period. Excluding G&A expense relating to MDI and the Oncology Interests
from both the 1998 and 1997 periods, G&A expense decreased to $70.3 million
during the 1998 six month period, from $73.4 million during the 1997 six 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 $8.9 million during the 1997 six month
period to $10.1 million during the 1998 six 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 $5.4 million during the 1997 six month
period to $2.7 million during the 1998 six 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 1998 six month period, the Company recorded a gain on sale of
subsidiaries of $5.8 million as a result of the sale of MDI.
During the 1997 six month period, the Company recorded asset impairment losses
of $3.7 million, settlement with former Chief Executive Officer of $2.8 million
and loss on settlement of lawsuits of $4.9 million.
Interest expense increased to $10.6 million during the 1998 six month period,
compared to $8.5 million during the 1997 six month period, resulting from higher
average borrowings outstanding during the 1998 six month period.
Net income was $4.2 million for the 1998 six month period, compared to a net
loss of $9.9 for the 1997 six month period. The significant reasons for
differences in earnings (loss) during the periods are discussed above. Basic and
diluted earnings per share were $.18 and $.18 for the 1998 six month period,
respectively, compared to a basic and diluted loss per share of $.46 and $.46
for the 1997 six month period, respectively.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $20.2 million compared to
$15.9 million at December 31, 1997. The Company's primary short-term liquidity
requirements as of June 30, 1998 include the current portion of long-term debt
and capital leases (totaling $26.9 million), accounts payable, other current
liabilities and capital expenditures related to the opening of new Facilities,
the replacement and enhancement of existing imaging
18
<PAGE> 19
equipment and Facilities, and continued improvements and enhancements to the
Company's management information systems. The Company had approximately $13.1
million in cash at June 30, 1998.
Net cash provided by operating activities for the six month period ended June
30, 1998 was $845,000 compared to $434,000 used in operating activities during
the six months ended June 30, 1997.
Net cash provided by investing activities was $19.5 million for the first six
months of 1998 compared to $27.4 million used in investing activities during the
comparable period in 1997. In 1998 the Company received $31.7 million in net
proceeds from the sales of MDI ($29.6 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
$12.2 million in 1998 compared to $8.1 million in 1997. In 1997, the Company
received cash of $7.1 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 for financing activities was $24.8 million during the first six
months of 1998 compared to $16.6 million provided by financing activities during
the comparable period in 1997. Proceeds from new borrowings totaled $15.2
million during 1998 compared to $31.2 million in 1997. Repayments of notes and
capital leases totaled $39.9 million in 1998 compared to $15.2 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 $64,000 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
$35 million, of which $14 million is outstanding as of August 13, 1998, leaving
availability of $21 million (subject to availability under the defined borrowing
base). 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 $216.3 million as of March 31, 1998 to $192.0 million as of June 30, 1998.
During the quarter ended June 30, 1998, the Company paid amounts previously
accrued aggregating $5.3 million relating to a class action lawsuit (see Part II
- - Item 1. - Legal Proceedings, and Note 8 of Notes to Condensed Consolidated
Financial Statements).
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 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 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
19
<PAGE> 20
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.
20
<PAGE> 21
Part II - Other Information
Item 1. Legal Proceedings
In connection with the Integrated Health Concepts, Inc. litigation previously
reported in the Company's Form 10-Q for the quarter ended March 31, 1998, in May
1998 Don Ballard contested the judgment and filed a motion asking the court
instead to award him approximately $8.5 million in damages and $500,000 in
attorneys fees. In June 1998, the court upheld its judgment but awarded Mr.
Ballard $135,000 in attorneys' fees. Upon approval by the court of the form of
final judgment, both sides have the right of appeal. The Company expects to
appeal, although there can be no assurance that the Company will prevail in this
litigation.
In early 1997, six separate class action lawsuits were filed against the Company
and certain officers, directors and other parties alleging failure to make
adequate disclosure regarding the background of Keith Greenberg, who had
provided certain consulting services to the Company through Coyote Consulting.
Four of the lawsuits have been dismissed. Two remaining suits have been heard in
the United States District Court for the Southern District of Florida, and have
been settled in principle pursuant to a Memorandum of Understanding (the
"Memorandum") dated July 31, 1997 and a more detailed Stipulation of Settlement
(the "Stipulation") filed with the court on March 6, 1998. The Memorandum and
Stipulation include a denial of any wrongdoing or liability by both the Company
and the individually named defendants. In accordance with the terms of these
documents, the parties agreed to settle all pending class action claims against
the Company (including additional claims based on alleged misstatements of
financial condition) for $5.9 million, of which $588,000 was payable within ten
days after signing, an additional $1.5 million ten days after court approval of
the proposed notice advising the class of the settlement, and the remaining $3.8
million no later than 25 days before a final hearing for approval of the
settlement. The first payment was made by the Company as required on August 11,
1997 and the second and third payments were made in April and May 1998. The
payments were deposited into an interest-bearing account to be held in escrow by
plaintiffs' counsel, pending court approval. The settlement is subject to a
court approval process and in June 1998 the court asked counsel for both the
plaintiffs and the defendants to submit a joint stipulation in support of
settlement prior to the court rendering final approval. The joint stipulation
has recently been filed with the court and a response from the court is expected
within several weeks.
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.
21
<PAGE> 22
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.
As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements,
on May 19, 1998, the Company closed the previously announced sale of the stock
of its mobile subsidiary, Medical Diagnostics, Inc., a non-core asset, to
Alliance Imaging Inc. for $35.5 million in cash less debt to be assumed of
approximately $5.9 million. Immediately upon the closing, the Company used $25.0
million of the cash proceeds to repay a portion of the outstanding balance under
the DVIBC revolving credit loan (see Note 5 of notes to Condensed Consolidated
Financial Statements).
As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements,
on May 22, 1998, the Company closed the previously announced sale of its 50.1%
interest in United States Cancer Care Inc. and its 100% interest in a subsidiary
which held a 50% interest in a radiation oncology partnership, both non-core
assets, to USCC Acquisition Corp. ("USCC"), a Delaware corporation, which
changed its name to US Cancer Care, Inc. upon closing. The sale price was $2.0
million in cash, a promissory note for $750,000 due in 24 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.
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.
22
<PAGE> 23
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 March 30, 1998 was filed during the
quarter ended June 30, 1998 disclosing an Item 5. event.
A report on Form 8-K dated May 19, 1998 was filed during the
quarter ended June 30, 1998 disclosing an Item 2., and an Item 7. event
containing Pro Forma Financial Information.
23
<PAGE> 24
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: August 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
24
<PAGE> 25
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,064
<SECURITIES> 0
<RECEIVABLES> 64,260
<ALLOWANCES> 15,060
<INVENTORY> 0
<CURRENT-ASSETS> 77,724
<PP&E> 123,616
<DEPRECIATION> 30,542
<TOTAL-ASSETS> 258,414
<CURRENT-LIABILITIES> 57,469
<BONDS> 191,999
0
0
<COMMON> 227
<OTHER-SE> 30,147
<TOTAL-LIABILITY-AND-EQUITY> 258,414
<SALES> 0
<TOTAL-REVENUES> 106,917
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 85,817
<LOSS-PROVISION> 2,913
<INTEREST-EXPENSE> 10,612
<INCOME-PRETAX> 8,987
<INCOME-TAX> 3,469
<INCOME-CONTINUING> 4,157
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,157
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
