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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ to _____
Commission File No. 1-13392
US DIAGNOSTIC INC.
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(Name of Registrant in its charter)
Delaware 11-3164389
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 South Flagler Drive, Suite 1201 East, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 832-0006
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to the
filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 22, 1999 was approximately
$27,321,138 based on the closing price of the Common Stock on March 22, 1999.
As of March 22, 1999, 22,734,233 shares of Common Stock of the registrant were
outstanding.
Documents Incorporated By Reference
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Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
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PART I
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, legal, growth and
integration strategies, collections of accounts receivable, available financing
or available refinancing for existing debt, 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, the Company's inability to carry out it's strategy and other
factors discussed elsewhere in this report and in other documents filed by the
Company with the Securities and Exchange Commission ("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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Item 1. Business.
General
US Diagnostic Inc. (the "Company") is one of the nation's largest independent
operators of outpatient diagnostic imaging and related facilities ("Facilities")
with 84 locations owned, operated or managed nationwide at the date hereof. The
majority of services provided by the Company involve the use of Magnetic
Resonance Imaging ("MRI"), Computed Axial Tomography ("CT" or "CAT"),
mammography, x-ray and ultrasound equipment. The use of the type of imaging and
treatment equipment employed by the Company has grown rapidly in recent years
because it allows physicians to quickly and accurately diagnose and treat a wide
variety of diseases and injuries without exploratory surgery or other invasive
procedures, which are usually more expensive, carry more risk and are more
debilitating for patients.
The Company believes that the range of services provided at its Facilities
(which include anatomical and functional imaging) provides cross-referral
opportunities and increases the Company's ability to serve as a "one-stop"
provider of such services to increasingly important managed care organizations.
The Company was incorporated in Delaware in 1993. The Company's executive
offices are located at 777 S. Flagler Drive, Suite 1201E, West Palm Beach,
Florida 33401, its telephone number is (561) 832-0006/(800) 7-USDLAB and its web
site is at WWW.USDL.COM. Unless the context otherwise requires, all references
to the "Company" include US Diagnostic Inc. and its subsidiaries.
Strategy
During 1995 and 1996, the Company grew primarily through acquisitions of
Facilities from independent owners. In 1997, there was a significant decrease in
acquisition activity by the Company due to constraints on the Company's
financial resources and the need to consolidate prior acquisitions. In late
1997, the Company announced, and throughout 1998 the Company has pursued, a four
part strategy to: (i) reduce operating costs; (ii) divest non-core and
underperforming assets; (iii) reduce and refinance debt; and (iv) develop new
facilities and engage in prudent acquisitions as detailed below.
The Company implemented a cost reduction plan in 1998, including a significant
reduction in nonessential staff in the first quarter of 1998, retention of GE
Business Solutions to conduct a Company-wide efficiency and savings review; an
emphasis on centralized purchasing; consolidation of regional four regional
billing offices and four regional operational offices to three of each,
respectively (effected in the first quarter of 1999); an emphasis on centralized
purchasing; and a review of other consolidation synergies. The Company expects
to benefit from additional savings throughout 1999 as a result of these efforts.
The second part of the Company's corporate strategy was a review and sale of all
non-core assets and underperforming facilities. As a result, the Company
disposed of its mobile imaging operations and its radiation oncology interests
in order to more closely focus on the Company's core business of fixed site MRI
and multi-modality imaging facilities. To accomplish this, in May 1998 the
Company sold its mobile subsidiary, Medical Diagnostics, Inc. ("MDI"), for $35.5
million in cash less debt assumed of approximately $5.9 million. Also in May
1998, the Company sold its 50.1% interest in US Cancer Care, Inc. and its 50%
interest in a radiation oncology partnership (collectively "USCC"). The sale
price consisted of $2.0 million in cash, a promissory note for $750,000, and the
assumption by USCC of certain additional liabilities aggregating approximately
$1.4 million. In addition, as a result of this review process, in November 1998,
the Company disposed of its 100% interest in US Heartcare Management Inc.
("USH"), its underperforming nuclear medicine subsidiary, for $12.0 million in
cash,
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promissory notes and assumption of certain debt. In March 1999, USH prepaid its
outstanding notes to USD. Additionally, in January and February of 1999, in two
separate transactions, the Company sold its interests in certain subsidiaries
located in Texas for an aggregate price of $23.4 million in cash, a promissory
note and assumption of certain liabilities. The proceeds from the sales of both
non-core assets and underperforming facilities were used by the Company to
reduce debt and to bolster the Company's cash reserves. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Due to financial market conditions in 1998, the Company decided to postpone a
refinancing of its long-term debt. However, in addition to the significant debt
reduction described above, in December 1998 and January 1999, the Company
completed the repurchase in the open market of $35.5 million aggregate principal
amount of its 9% Convertible Subordinated Debentures due 2003 for $25.0 million,
resulting in a decrease in long-term debt and related long-term interest
expense.
Because new center development and, to a larger extent, acquisitions were
intended to be dependent upon refinancing long-term debt, which did not occur in
1998, the Company made only one acquisition and a purchased of the remaining
fifty percent equity interest of a center it previously jointly owned, although
three new internally developed facilities were opened in 1998.
As a result of the events of 1998, the Company has been able to reduce its debt
and otherwise improve its balance sheet. The Company believes that although it
operates fewer facilities, it is now significantly stronger financially and has
narrowed its focus to its core business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The Company's
strategy for 1999 will be to continue the cost and debt reduction elements of
its 1998 strategy, divest a few remaining underperforming centers, seek
advantageous refinancing when and as financial market conditions permit, and
pursue its multi-faceted long-term strategy as follows:
PARTNERING WITH HOSPITALS AND RADIOLOGY GROUPS. Currently, the Company has
several joint ventures to provide services at hospitals with large companies
such as Columbia/HCA, Tenet Healthcare and Universal Health Services. Hospitals
are increasingly outsourcing various components of their operations. The Company
believes opportunities exist to enter into agreements with many hospitals to
manage their in-patient radiology departments and intends to intensify its
efforts to improve its partnering with hospitals.
INTERNAL GROWTH. The Company believes that currently the most advantageous way
to build its business is to develop new Facilities because it believes internal
Facility development is more efficient and cost-effective. New Facility
development will be primarily concentrated in the Company's existing geographic
markets. The Company is experienced in the planning, opening and operation of
Facilities on a cost-effective basis and is in the process of developing a
roll-out of several openings by fiscal year-end 1999 as well as a schedule of
additional openings in the following year. Facilities recently opened include
the Queens, New York Facility, the Westlake, California Facility and the Wilkes
Barre, Pennsylvania Facility. Three Facilities in St. Louis, Missouri are
expected to open, two in the first half of 1999 and one by October 1999.
ACHIEVE OPERATING EFFICIENCIES. The Company generally utilizes its management
expertise and systems to operate Facilities which previously lacked professional
management. The Company consolidates certain aspects of operations, such as
accounting, administration, billing, collections, marketing, productivity,
purchasing and materials management. By rendering support and management
functions, the Company seeks to realize significant economies of scale while
enabling the physicians providing
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services at the Facilities to spend more time focusing on patient care and
quality control, which in turn positively impacts the utilization rate of the
Company's diagnostic equipment.
CONTRACT WITH MANAGED CARE PROVIDERS. The Company actively pursues contractual
arrangements with managed care organizations. The Company believes that
third-party payors will increasingly prefer to contract for service on a
national or regional basis, and that the Company's development of a network of
centers will assist it in obtaining such contracts on favorable terms. Senior
management of the Company actively markets the Company's services to
administrators of managed care organizations in regions where the Company
operates Facilities.
ENHANCE MANAGEMENT INFORMATION SYSTEMS. The Company has made a substantial
investment in the development of a state-of-the-art information system designed
to consolidate, on a regional basis, the Company's billing and collection
operations. The new information system allows instant communication and on-line
access to its policies and procedures to Facilities nationwide. The Company
continues to concentrate on its billing and collection system to refine and
improve it.
UPGRADE EXISTING MEDICAL TECHNOLOGIES. The Company offers state-of-the-art
diagnostic imaging and therapeutic technologies at Facilities. The Company
periodically replaces or upgrades the MRI, CT, and other miscellaneous equipment
at its Facilities with the latest available technology, resulting in improved
image quality and increased referring physician satisfaction. The Company also
has installed new high quality "Open MRI" equipment at certain locations to
accommodate a substantial number of patients who would otherwise forego this
procedure due to claustrophobia or obesity. In addition, the Company
periodically adds new modalities and procedures at its Facilities. Most of the
new technologies are designed to enhance the Company's revenue mix and shorten
examination times, resulting in increased capacity and profitability.
EXPAND SERVICE OFFERINGS WITH COMPLEMENTARY MEDICAL PROCEDURES. The Company has
developed medical services that are complementary to its core imaging
operations. These include: (i) pain management which is performed by
anesthesiologists to reduce patients' pain and possibly avoid the need for
surgery; and (ii) bone densitometry which is a specialized x-ray procedure that
precisely quantifies bone density at the spine, femur and other skeletal sites
for diagnosis and treatment of osteoporosis.
PROFESSIONAL MARKETING. In order to expand referral sources, the Company
provides marketing training and materials to Facility personnel to enhance
marketing efforts to area physicians and third-party payors such as managed care
organizations. The Company utilizes a variety of marketing techniques in the
communities where it does business, including meetings between the Facility
administrators or account executives and referring physicians and/or their
staff, mailings of technical case studies and clinical articles.
PROVIDE MANAGEMENT SERVICES TO UNAFFILIATED CENTERS. In addition to providing
management services to its own Facilities, the Company offers its management
services to independent diagnostic centers, private radiology practices and
hospital radiology practices. The Company believes that its expertise may
potentially be useful for practices that have not had the benefit of
professional management. Each client is able to contract for individual or a
full range of services, including accounting, billing, collections, debt
consolidation, management information systems, purchasing and human resources.
The Company prices its services using a number of methods, including
fee-for-services, percentage of revenue or savings, capitation or on a project
basis.
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ACQUIRE ADDITIONAL IMAGING CENTERS. The Company may resume its acquisition
activity if and when financial market conditions allow for the Company to
refinance its debt. In the past, the Company generally acquired Facilities from:
(i) owner/operators which may not have been in compliance with regulations
restricting referring physician ownership; (ii) owner/operators seeking
management expertise, access to managed care contracts and/or other resources;
and (iii) established companies which already owned several Facilities within a
concentrated region. In addition, in the past, the Company has entered into
joint ventures with hospitals or other entities which desire access to
diagnostic imaging technologies but lack sufficient financial or managerial
resources. To date, the Company believes that it has evaluated only a fraction
of the potential acquisition candidates in the industry. The Company intends to
utilize the foregoing strategies if and when it commences acquisition activity
in the future. Although at year-end the Company purchased the remaining 50% of a
center in which it was already a half owner, and currently expects to complete
the acquisition on advantageous terms of a temporarily closed center in Las
Vegas, Nevada, which it expects to be fully operational in April 1999, the
Company does not anticipate engaging in any sustained acquisition activity in
1999.
INDUSTRY OVERVIEW
Total annual spending on diagnostic imaging services in the United States is
estimated to be between $56 billion and $70 billion. While 70% of this spending
is done in hospital settings, a significant share of the market is commanded by
the nation's approximately 2,200 outpatient testing facilities, especially in
relation to the roughly $10 billion subsector of advanced imaging services,
which includes MRI and CAT scans. These approximately 2,200 facilities are
mainly operated individually and represent a fragmented market.
Payment for services comes primarily from third-party payors, such as private
insurers (traditional indemnity and Blue Cross/Blue Shield plans), managed
health plans (HMOs, PPOs), government payors (Medicare, Medicaid), and state-run
worker's compensation programs. Some centers have significant relationships with
attorneys specializing in personal injury litigation. Typically, large
third-party payors, especially managed care programs and Medicare/Medicaid,
demand significant discounts from the list prices paid under direct-bill
circumstances.
The number of non-hospital-affiliated imaging centers has grown due to a number
of factors. First, when Congress reformed Medicare in 1983 by putting strict
controls on inpatient reimbursement, this led to the expansion of all types of
freestanding outpatient services, including outpatient surgery and imaging
centers. Second, the use of MRI, CT and other equipment became more prevalent
due to the quality and quantity of diagnostic information, technological
improvements and increased government and third-party reimbursement. Although
MRI was developed in the late 1970s, it was not approved for Medicare
reimbursement until 1984. Ultrasound and low-dose mammography technology
improved in the late 1980s. New technologies and procedures continue to be
developed, although some, such as positron emission tomography scanners, are
relatively expensive and are not considered cost-effective for most procedures.
Third, the number of hospital and physician joint ventures increased in the
1980s as hospitals were eager to minimize their financial exposure for expensive
equipment and physicians were seeking investments at a time when traditional
tax-sheltered investments were being eliminated or were less economic. Thus,
between 1984 and 1991, the number of outpatient imaging centers in operation in
the U.S. increased from roughly 700 to over 2,000.
The industry suffered setbacks in 1993 as utilization levels generally
stabilized and reimbursement per test declined sharply. Utilization rates
stopped growing primarily for three reasons: (i) the threat of sweeping
government health care reform put expensive procedures under increased scrutiny;
(ii) market
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forces - in the form of managed care which also discouraged providers from
ordering all but absolutely necessary tests; and (iii) the extension in 1993 of
federal laws (the "Stark Laws") prohibiting the referral by physicians of
Medicare and Medicaid patients to entities with which such referring physicians
have a financial relationship (either an ownership interest or compensation
arrangement). See "Regulation and Government Reimbursement". Previously, these
referral prohibitions had been applicable only to Medicare-covered clinical
laboratory services. Since the early 1990s, the total installed base of MRI
systems has remained relatively flat although the total number of procedures has
increased.
In 1996, Medicare reimbursement for MRI procedures increased approximately 1%-2%
over 1995 levels - the first increase in at least four years. In January 1998,
Medicare reimbursement for diagnostic procedures increased an additional 1%-2%.
A recent initiative by Health Care Financing Administration ("HCFA") to impose a
24% reduction in radiology reimbursement over a four year period beginning
January 1999 has been indefinitely postponed due to flaws in the HCFA's imaging
center cost study. See "Regulation and Government Reimbursement". Public HMOs,
which have suffered from declining margins, have indicated that their corrective
actions will more likely take the form of more rational premium pricing than of
further pressure on providers' fee-for-service reimbursement levels. The Company
believes that, as managed care becomes more prevalent, further decreases in the
average reimbursement per test will be mostly attributable to payor mix shifts
to increased managed care business which generally have lower reimbursement
rates than commercial insurance payors. There is also the potential for a
softening pricing environment as companies become more discerning in negotiating
managed care contracts and as the industry continues to consolidate.
Imaging Operations
Diagnostic imaging services are performed on an outpatient basis by experienced
radiological technicians. After the diagnostic procedures are completed, the
images are reviewed by radiologists who have contracted with the Company. The
radiologists prepare reports of the tests and their findings, which are
delivered to the referring physician. Additionally, upon request, a report of
any critical abnormality, or "stat report" is provided by phone as soon as the
test is completed and evaluated.
Each of the Company's Facilities has agreements with radiologists as independent
contractors under long-term agreements to provide all radiology services to the
Facilities. Radiologists' compensation ranges between 8%-21% of net collections
attributable to radiology services performed by the radiologist. The
interpreting physicians are board-certified or board-eligible specialists in
radiology, orthopedics, cardiology or neurology, as appropriate. The Company
currently operates a majority of the Facilities out of three regional billing
offices which bill and collect both for technical services and professional
services of interpreting physicians at the Facilities. A few Facilities bill and
collect independently on individual systems.
Imaging revenues are dependent to a large extent upon the acceptance of
outpatient diagnostic imaging procedures as covered benefits under various
third-party payor programs. In order to receive reimbursement for these
services, payment must be approved by private insurers or the Medicare and
Medicaid reimbursement programs. Although the Company intends to continue its
participation in such reimbursement programs, there can be no assurance that its
imaging procedures will continue to qualify for reimbursement. See "Industry
Overview".
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CLIENTS AND PAYORS
The Company is highly dependent on referrals from physicians who have no
contractual obligation or economic incentive to refer patients to the Company's
Facilities. Most Facilities currently receive referrals from several hundred
physicians. If a sufficiently large number of physicians elected at any time to
stop referring patients to the Company's Facilities, it would have a material
adverse effect on the Company's revenues and results of operations. In
particular, due to the potential for disruption of the physician relationship in
connection with the assumption of control of a Facility, there can be no
assurance that the Company will retain all of the business conducted by that
Facility at the time of its acquisition.
In 1998, revenues from conventional indemnity insurance carriers accounted for
approximately 22% of the Company's revenues, Medicare and Medicaid accounted for
approximately 18% of revenues, managed care accounted for approximately 37% of
revenues and the remainder was derived directly from patients and workers'
compensation cases.
The Company is a party to over 1,000 managed care contracts which require it to
provide services on a fixed fee-for-service basis. All Facilities are attempting
to obtain additional managed care contracts.
During the fourth quarter of 1996, the Company began to consolidate billing and
collections out of four offices utilizing a new computer and software
information system. Substantially all of the centers initially targeted to be
converted onto the new system were completed by December 31, 1997. It was
anticipated that the remaining targeted centers would be completed by mid-1998
upon resolution of operational issues. However, these centers remain
intentionally unconverted while the Company explores system enhancements for
implementation. Some Facilities had experienced what appears to be a temporary
cash collection reduction during the phase-in of the new system due to the
complexity of collecting the accounts receivable on the prior computer systems
while installing the new billing and collection system. In addition, the initial
efficiency of the new centralized system was adversely impacted by various
training and other operationally related problems. This inefficiency has been
rectified as all converted centers are now on schedule with their billing and
collection operations. Aggressive measures have been, and continue to be taken,
to collect accounts receivable from the predecessor billing and collection
systems of various Facilities.
COMPETITION
The market for diagnostic imaging services is highly competitive. The market is
highly fragmented with over 2,200 outpatient diagnostic imaging centers
nationwide and no dominant national imaging services provider. Competition
varies by market and is generally higher in larger metropolitan areas where
there is likely to be more Facilities and more managed care organizations
putting pricing pressure on the market. The Company competes with larger
healthcare providers, such as hospitals, as well as other private clinics and
radiology practices that own diagnostic imaging equipment. Competition often
focuses on physician referrals at the local market level. Successful competition
for referrals is a result of many factors, including participation in healthcare
plans, quality and timeliness of test results, type and quality of equipment,
facility location, convenience of scheduling and availability of patient
appointment times.
REGULATION AND GOVERNMENT REIMBURSEMENT
OVERVIEW. The healthcare industry is highly regulated and is undergoing
significant change as third-party payors, such as Medicare and Medicaid, health
maintenance organizations and other health insurance carriers increase efforts
to control the cost, utilization and delivery of healthcare services.
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Legislation has been proposed or enacted at both the federal and state levels to
regulate healthcare delivery in general and radiology services in particular.
The Company believes that reductions in reimbursement for Medicare and Medicaid
services may be implemented from time to time, which may lead to reductions in
the reimbursement rates of other third party payors as well. The Company cannot
predict the effect healthcare reforms may have on its business, and there can be
no assurance that such reforms will not have a material adverse effect on the
Company's operations. All of the Company's Facilities are subject to
governmental regulation at the federal, state and local levels.
In 1994 Congress passed legislation that required the Health Care Financing
Administration ("HCFA") to develop a methodology for a new resource-based
relative value unit ("RBRVU") system for determining practice expense resource
value units ("PE-RVUs") for each physician service. Subsequently, Congress
passed the Balanced Budget Act of 1997 that extended the implementation date for
the new practice PE-RVU system to January 1999. On June 5, 1998, HCFA published
a Notice of Proposed Rulemaking ("NPRM") in the Federal Register to implement
these provisions of the Balanced Budget Act. The NPRM proposed a reduced
Medicare payment for the facilities, equipment, staff, supplies and other
"technical component" costs of diagnostic imaging by over 24% to be phased in
over four years at approximately 6% per year beginning January 1999. Industry
members were able to convince HCFA that the data used to determine the proposed
reductions may be flawed. Thereafter, on November 2, 1998, HCFA published in the
Federal Register a notice setting forth the new PE-RVUs for 1999 and beyond
which essentially maintain current payment levels for technical component
services. However, the notice reduces the professional component (the physician
fees for interpreting exams) for radiology services by 10% to be phased in over
four years at approximately 2.5% per year beginning January 1999. Because the
Company derives the majority of its revenue from the technical component, the
reduction in the professional component will not have a material effect on the
Company's revenue. However, there can be no assurance that HCFA will not attempt
to reduce the technical component of Medicare payments in the future.
In December 1998, HCFA announced its final implementation date by which all
Independent Physiological Laboratories ("IPL") and other provider types are
required to convert to a status of Independent Diagnostic Testing Facility
("IDTF") in order to continue to receive reimbursement from Medicare. An IDTF is
independent of a hospital or physician's office in which diagnostic tests are
performed by licensed, certified nonphysician personnel under appropriate
physician supervision. All Medicare carriers were required to provide notice to
all affected entities that, beginning March 15, 1999, they will no longer be
able to bill as an IPL. In order to accomplish this conversion for all affected
Company Facilities, HCFA required that the respective Medicare carriers receive
all applications no later than February 1, 1999. This would allow for the 45 day
review provided to the Medicare carriers, with a final implementation date of
March 15, 1999. If the cutoff dates are not met by the entity applying for the
IDTF status change, claims for diagnostic testing services may be rejected. All
applicable Company applications were filed by February 1, 1999. The Company is
currently working with all Medicare carriers nationwide with respect to on-site
inspections, re-issuance of provider numbers and new claims filing procedures.
Although there can be no assurances, the Company does not anticipate any
material problems with this conversion, its time frames or future claim
submissions.
REGULATION OF OUTPATIENT IMAGING SERVICES. The operation of outpatient imaging
centers requires a number of licenses, including licenses for technical
personnel and certain equipment. Licensure requirements may vary somewhat from
state to state. The Company believes that it is in material compliance with
applicable licensure requirements. The Company further believes that diagnostic
testing will continue to be subject to strict regulation at the federal and
state levels and cannot predict the scope and effect thereof.
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Diagnostic imaging centers performing mammography services must meet federal,
and in some jurisdictions, state standards for quality as well as certification
requirements. Under regulations issued by the federal Food and Drug
Administration ("FDA") pursuant to the Mammography Quality Standards Act of 1992
("MQSA"), all mammography Facilities are required to be accredited by an
approved non-profit organization or state agency. Pursuant to the accreditation
process, each Facility providing mammography services must: undergo an annual
mammography facility physics survey; be inspected annually and pay an annual
inspection fee; meet qualification standards for interpreting physicians,
mammography technologists, and medical physicists; meet certification
requirements for adequacy and training and experience of personnel; meet quality
standards for equipment and practices; and meet various requirements governing
record keeping of patient files. Compliance with these standards is required to
obtain payment for Medicare services and to avoid various sanctions, including
monetary penalties, or suspension of certification. Although all of the
Company's Facilities which provide mammography services are currently accredited
by the Mammography Accreditation Program of the American College of Radiology
and the Company anticipates continuing to meet the requirements for
accreditation, the withdrawal of such accreditation could result in the
revocation of certification. Congress has extended Medicare benefits to include
coverage of screening mammography subject to the prescribed quality standards
described above. The regulations apply to diagnostic mammography and image
quality examination as well as screening mammography.
REIMBURSEMENT FOR RADIOLOGY SERVICES. In general, Medicare reimburses radiology
services under a physician fee schedule which covers services provided not only
in a physician's offices, but also in freestanding Facilities, portable x-ray
suppliers, hospitals and other entities. The scheduled amount is based on a
resource-based relative value scale, recognizing three separate components of
the physician's services: professional, technical and malpractice. For radiology
there are separate Medicare scheduled amounts for the professional component of
a service or procedure (i.e., the physician's time) and the technical component
of the service or procedure (i.e., services and supplies necessary to perform
the procedure).
Congress and the U.S. Department of Health and Human Services have taken various
actions over the years to reduce reimbursement rates for radiology services and
proposals to reduce rates further are anticipated. As noted above, there have
been many proposals discussed within the last few years to further modify
reimbursement. The Company is unable to predict which, if any, proposals will be
adopted. Any reductions in Medicare reimbursement for radiology services could
have a material adverse effect on the Company.
REGULATION OF RADIOLOGY OWNERSHIP; FRAUD AND ABUSE. Medicare payment rules
discourage physicians from maintaining an investment interest in radiology
operations. The Omnibus Budget Reconciliation Act of 1989 contains provisions
which prohibit physicians from referring Medicare or Medicaid patients to
clinical laboratories in which the physician has an economic interest. In 1993,
Congress extended the physician self-referral prohibition to entities providing
other designated health care services, including radiology or other diagnostic
services, including MRI, CAT scans and ultrasound services, and radiation
therapy services. Violations of these provisions (collectively known as the
"Stark Laws") may result in denial of payments for the service, an obligation to
refund payment for the service, payment of civil monetary penalties and/or
exclusion from the Medicare, Medicaid and other state healthcare programs.
The Anti-Fraud and Abuse Amendments to the Social Security Act prohibit the
solicitation, payment, receipt or offer, directly or indirectly, of any
remuneration for the referral of Medicare or Medicaid patients or for the
provision of services, items or equipment which may be covered by the Medicare
or
10
<PAGE> 11
other state healthcare programs including Medicaid programs. Violations of these
provisions may result in civil and criminal penalties and exclusion from
participation in the Medicare, Medicaid and other state healthcare programs.
In addition to federal restrictions, which are generally applicable to Medicare,
Medicaid and other state healthcare patients, a number of states in which the
Company operates Facilities have enacted prohibitions against physicians
referring patients to entities with which they have a financial relationship (an
ownership interest or compensation arrangement). Such state laws generally apply
to all patients, not just participants in the Medicare and Medicaid programs.
The Company has structured its acquisitions of physician-owned ventures and
ongoing relationships with physicians in a manner which it believes does not
raise significant issues under federal or state anti-kickback and self-referral
regulations.
CORPORATE PRACTICE OF MEDICINE; FEE SPLITTING. The operation of the Facilities
may be subject to the laws of certain states which prohibit the provision of
certain medical services by non-physicians and/or the splitting of fees between
physicians and non-physicians. The Company believes its operations are conducted
in material compliance with existing applicable laws relating to the corporate
practice of medicine and fee splitting. In response to such laws, in certain
states, the Company may operate Facilities pursuant to a management agreement
with a physician group rather than operating the Facility directly and
contracting with the physicians for professional medical services.
INFECTIOUS WASTES. The Company is also subject to licensing and regulation under
federal and state laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. The sanctions for failure to
comply with these regulations may include denial of the right to conduct
business, significant fines and criminal penalties, any of which, if imposed,
could have a material adverse effect on the Company. The Company believes that
it is in substantial compliance with all applicable laws and regulations
relating to these materials.
INSURANCE
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
costs of defending, any such actions could be substantial. The Company currently
maintains liability insurance that it believes is adequate for its present
operations. There can be no assurance that the Company will be able to continue
or increase such coverage 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. In the event that a claim exceeds available coverage, the Company's
financial condition and results of operations could be adversely and materially
affected.
EMPLOYEES
As of March 15, 1999, the Company had approximately 976 full-time and 151
part-time employees, none of whom is represented under union contracts or other
collective bargaining arrangements. The Company considers its relations with its
employees to be good.
11
<PAGE> 12
ITEM 2. PROPERTIES.
The Company's executive offices, corporate accounting and certain administrative
and other operations are located in West Palm Beach, Florida where the Company
leases an aggregate of approximately 22,300 square feet at two separate
locations. Annual rental payments under the two leases is $306,000 and $359,000
which expire in 2008 and 2009, respectively.
The Company operates imaging centers that range in size from approximately 800
to 21,600 square feet. During 1998, the Company had four regional billing
offices and four regional operational centers. The aggregate lease expense in
1998 for all such facilities was approximately $12.5 million. In January and
February 1999, certain subsidiaries were sold which included certain imaging
centers and one billing office. In connection therewith, a regional operational
center was closed. The Company plans to relocate one of the three remaining
regional billing offices and a regional operational center to corporate
headquarters in mid 1999, and entered into a lease agreement in October 1998 for
approximately 12,400 square feet of additional space. The imaging centers,
billing offices and operational centers have leases expiring between 1999 and
2008.
ITEM 3. LEGAL PROCEEDINGS.
Two suits have been filed against the Company by sellers of diagnostic imaging
centers who received the Company's Common Stock in partial payment of the
purchase price for their centers and who allege that undisclosed facts regarding
the background of Keith Greenberg, a former consultant to the Company, were
material to their decision to sell. In connection with the first of these
actions (Centre Commons MRI Ltd., et al. v. US Diagnostic et al.), in the United
States District Court for the Western District of Pennsylvania, the sellers of
multiple centers in Pennsylvania seek to compel the Company to repurchase
approximately 750,000 shares of its Common Stock at a price of $12.125 per share
and also allege that the Company's failure to register such shares under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a written
contract, diminished their value. Even if registered, the shares were subject to
limited releases from lock-up until July 1997 when they became tradable pursuant
to Rule 144 without the need for registration. Non-binding mediation has been
scheduled by the parties to occur within the next 90 days. In the second such
suit (Sanders et al v. US Diagnostic et al.) in the United States District Court
for the Eastern District of New York, four participants in limited partnerships
which sold the Company three imaging centers in New York seek to recover damages
of up to $2.0 million but have been unable to substantiate this amount. A motion
by the Company to dismiss the action is under submission to the Court. The
Company is vigorously defending both suits but there can be no assurances that
the Company will prevail.
In December 1996, the SEC commenced an investigation into the Company's former
relationship with Coyote Consulting and Keith Greenberg to determine whether the
Company's disclosure concerning that relationship was in compliance with the
federal securities laws. The Company is cooperating fully with the SEC.
In connection with the previously reported case Integrated Health Concepts, Inc.
("IHC") v. US Diagnostic Inc., Mohammed Athari, M.D. and Don Ballard filed in
the Harris County, Texas District Court, in December 1998 the Company and
Ballard entered into an agreement which confirmed the Company's ownership of
Ballard's former 15% stock interest in IHC in exchange for the Company's payment
of $700,000. In connection therewith, the parties exchanged full mutual
releases.
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 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 under-insured 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, management of the Company does not anticipate that the ultimate
disposition of any such proceedings will have a material adverse effect on the
Company.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1998 Annual Meeting of Stockholders held on October 20, 1998,
the stockholders of the Company voted upon and elected the following directors:
(A) DIRECTOR NOMIMEE VOTES CAST FOR VOTES WITHHELD
---------------- -------------- --------------
C. Keith Hartley 19,674,208 1,153,352
Kenneth R. Jennings 20,007,308 820,252
David McIntosh 19,720,159 1,107,401
Michael A. O'Hanlon 20,121,681 705,879
Joseph A. Paul 20,212,931 614,629
Gordon Rausser 20,034,661 792,899
L. E. Richey (1) 19,724,576 1,102,984
(1) Resigned on February 12, 1999 as both Chairman of the Board and as a
director.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has traded under the symbol USDL on the NASDAQ
SmallCap Market since September 22, 1998 and on the NASDAQ National Market
System from October 9, 1995 to September 21, 1998. The following table sets
forth the high and low sales prices for the Company's Common Stock for each
quarter within the two years ended December 31, 1998 as reported by NASDAQ.
These prices do not reflect retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
High Low
---- ---
1997
----
January 1 through March 31, 1997 ............ $ 13 3/8 $ 5 7/8
April 1 through June 30, 1997 ............... 9 1/8 5
July 1 through September 30, 1997 ........... 9 7/8 6 3/8
October 1 through December 31, 1997 ......... 8 3
1998
----
January 1 through March 31, 1998............. $ 5 1/4 $ 3 5/8
April 1 through June 30, 1998................ 4 23/32 3 1/2
July 1 through September 30, 1998............ 3 7/8 1 3/8
October 1 through December 31, 1998.......... 2 1/16 3/4
The number of record holders of the Company's Common Stock as of March 22, 1999
was approximately 312.
The Company has never paid a cash dividend on its Common Stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business and, accordingly, does not anticipate the payment of cash dividends.
The Company has outstanding debt that prohibits the payment of dividends by the
Company without the consent of the lender.
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
15
<PAGE> 16
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.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below summarize certain historical
financial data and should be read in conjunction with the more detailed
consolidated financial statements of the Company and the notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue $ 195,735 $ 216,222 $ 102,061 $ 29,416 $ 5,082
Income (loss) before extraordinary item (512)(1) (116,712)(2) (6,331) 3,025 (640)
Extraordinary item 5,311 (3) -- -- 306 --
Net income (loss) 4,799 (116,712) (6,331) 3,331 (640)
Basic earnings (loss) per common share
Income (loss) before extraordinary item (.02) (5.26) (.48) .70 (.48)
Extraordinary item .23 -- -- .07 --
Net income (loss) .21 (5.26) (.48) .77 (.48)
Diluted earnings (loss) per common share
Income (loss) before extraordinary item (.02) (5.26) (.48) .64 (.48)
Extraordinary item .23 -- -- .06 --
Net income (loss) .21 (5.26) (.48) .70 (.48)
Cash dividends declared per common share -- -- -- -- --
</TABLE>
- --------------
(1) Includes $4.7 million gain on sale of Subsidiaries. See Notes 11 and 22 of
Notes to Consolidated Financial Statements.
(2) Includes asset impairment losses of $92.9 million. See Note 5 of Notes to
Consolidated Financial Statements.
(3) Represents gain on repurchase of Convertible Subordinated Debentures. See
Notes 6, 7 and 17 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
As of December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
- ------------------
Total assets $237,830 $287,999 $339,023 $ 57,279 $ 13,892
Total long-term obligations 147,701 191,547 123,984 21,653 2,929
</TABLE>
17
<PAGE> 18
ITEM 7. 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 AND RECENT DEVELOPMENTS
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, its ability effectively to market its facilities to physicians
requiring imaging services, and various other risks associated with the
acquisition and operation of medical businesses, particularly in the
increasingly competitive and cost conscious managed care environment, including
expenses associated with the integration of the acquired businesses and the
negotiation of favorable contracts with third party payors. If the Company is
unable to manage these risks, 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".
18
<PAGE> 19
During 1995 and 1996, the Company grew primarily through acquisitions of
Facilities from independent owners. In 1997, there was a significant decrease in
acquisition activity by the Company due to constraints on the Company's
financial resources and the need to consolidate prior acquisitions. In late
1997, the Company announced, and throughout 1998 the Company pursued, a four
part strategy to: (i) reduce operating costs; (ii) divest non-core and
underperforming assets; (iii) reduce and refinance debt; and (iv) develop new
facilities and engage in prudent acquisitions.
The Company implemented a cost reduction plan in the first quarter of 1998,
including a significant reduction in nonessential staff, consolidation of four
billing offices and four regional operational offices to three of each,
retention of GE Business Solutions to conduct a Company-wide efficiency and
savings review, an emphasis on centralized purchasing, and other consolidation
synergies. The Company expects to realize additional savings throughout 1999 as
a result of these efforts.
The second part of the Company's corporate strategy was a review and sale of all
non-core assets and underperforming facilities. As a result, the Company
disposed of its mobile imaging operations and its radiation oncology interests
in order to more closely focus on the Company's core business of fixed site MRI
and multi-modality imaging facilities. To accomplish this, in May 1998, the
Company sold its mobile subsidiary, MDI, for $35.5 million in cash less debt
assumed of approximately $5.9 million. Also in May 1998, the Company sold
its interests in USCC for $4.2 million in cash, promissory note and assumption
of certain liabilities.
In addition, as a result of this review process, in November 1998 the Company
disposed of its underperforming nuclear imaging centers by selling its 100%
interest in USH for $12.0 million in cash, promissory notes and assumption of
certain debt. In March 1999, USH prepaid its outstanding notes to the Company.
In January and February of 1999, in two separate transactions, the Company sold
its interest in certain subsidiaries located in Texas, for an aggregate price of
$23.4 million in cash, a promissory note and assumption of certain liabilities.
The proceeds from the sales of both non-core assets and underperforming
facilities were used by the Company to reduce debt and to bolster the Company's
cash reserves.
Due to financial market conditions in 1998, the Company decided to postpone a
refinancing of its long-term debt. However, in addition to the significant debt
reduction realized by the sales described above, in December 1998 and January
1999 the Company completed the repurchase in the open market of $35.5 million
aggregate principal amount of its 9% Convertible Subordinated Debentures due
2003 for $25.0 million, resulting in a decrease in long-term debt and related
interest expense. Three new facilities were opened in 1998. However, because new
center development and, to a large extent acquisitions were intended to be
dependent upon refinancing long-term debt, which did not occur in 1998, the
Company made only one acquisition during 1998.
As a result of the events of 1998, the Company has been able to reduce its debt
and otherwise improve its balance sheet. The Company believes that although it
operates fewer facilities, it is now significantly stronger financially and has
narrowed its focus to its core business. The Company's strategy for 1999 will be
to continue the cost and debt reduction elements of its 1998 strategy, divest a
few remaining underperforming centers, seek advantageous refinancing when and as
market conditions permit, and pursue its multi-faceted long-term strategy as
more fully described in Part I, Item I - Business.
19
<PAGE> 20
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
NET REVENUE 100.0% 100.0% 100.0%
------ ------- ------
OPERATING EXPENSES
General and administrative 75.9 76.6 70.7
Asset impairment losses .3 42.9 .4
Bad debt expense 3.3 8.2 3.9
Depreciation 10.1 8.9 6.5
Amortization 2.6 5.0 4.6
Loss on settlement of lawsuits -- 2.6 2.1
Settlement with Former Chief Executive Officer -- .8 --
Stock-based compensation .6 .6 2.1
Compensation to terminated consultant -- -- 5.5
------ ------- ------
TOTAL OPERATING EXPENSES 92.8 145.6 95.8
------ ------- ------
GAIN (LOSS) ON SALE OF SUBSIDIARIES 2.3 -- (3.0)
------ ------- ------
INCOME (LOSS) FROM OPERATIONS 9.5 (45.6) 1.2
TOTAL OTHER INCOME (EXPENSE) (8.9) (8.1) (6.5)
------ ------- ------
Loss before minority interest, benefit for
income taxes and extraordinary items .6 (53.7) (5.3)
------ ------- ------
Minority interest and income
tax benefit .9 .3 .9
------ ------- ------
LOSS BEFORE EXTRAORDINARY ITEM (.3) (54.0) (6.2)
------ ------- ------
Extraordinary item, net of taxes 2.7 -- --
------ ------- ------
NET INCOME (LOSS) 2.4% (54.0)% (6.2)%
====== ======= ======
</TABLE>
20
<PAGE> 21
As discussed above, during 1998 and in early 1999, the Company sold several
non-core and under-performing facilities. The facilities sold during 1998 (MDI,
USCC, USH) are collectively referred to as the "1998 sold facilities".
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenue decreased to $195.7 million in 1998 from $216.2 million in 1997,
primarily as a result of the sale of the 1998 sold facilities. Excluding the
net revenue generated by the 1998 sold facilities as well as the facilities
sold in early 1999, net revenue would have decreased by 1% to $149.9 million in
1998, from $151.1 million in 1997.
General and Administrative ("G&A") expense decreased to $148.4 million in 1998,
compared to 1997 G&A expense of $165.5 million. To a large extent the decrease
resulted from the sale of the 1998 sold facilities. Additionally, the Company
benefited from reduced professional fees related to litigation matters, reduced
accounting costs and the first quarter 1998 implementation of the cost reduction
plan (see "Overview").
Asset impairment loss was $680,000 in 1998 and $92.9 million in 1997. Such
losses related to those centers for which the sum of the expected future cash
flows does not cover the carrying value of the assets acquired. See Note 5 of
Notes to Consolidated Financial Statements.
Bad debt expense decreased to $6.5 million in 1998, compared to $17.6 million in
1997. The significantly higher bad debt expense in 1997 is attributable both to
the Company's overall rapid growth in revenue in 1997 compared to 1996, and to
an increase in accounts receivable resulting from a failure to fully collect
receivables on the older billing and collection systems during the phase-in of a
new billing and collection system. During 1997 the new system was affected
adversely by training and operational related problems as well as by the
installation complexity. In addition, 1997 collections were negatively affected
by inefficiencies in realizing receivables in respect to patient co-payments and
deductibles.
21
<PAGE> 22
Depreciation expense was $19.9 million in 1998, compared to $19.2 million in
1997. The increase from 1997 to 1998 resulted 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, partially offset by a decrease relating to the sale of the 1998 sold
facilities.
Amortization expense decreased to $5.0 million in 1998, from $10.8 million in
1997. The decrease was due to the effect of the $92.9 million impairment loss
write-down of goodwill and certain other long-term assets during the fourth
quarter of 1997 as well as a decrease relating to the sale of the 1998 sold
facilities.
During 1998, the Company recorded a gain on sale of subsidiaries of $4.7
million. The sale of MDI, which was purchased in 1997, generated a $5.8 million
gain. There was no impairment charge in 1997 or 1998 relating to MDI. The
remaining subsidiaries sold in 1998 and early 1999 generated an aggregate loss
of $1.1 million. See Notes 11 and 22 of Notes to Consolidated Financial
Statements.
Interest expense increased to $20.0 million in 1998, compared to $19.1 million
during 1997, resulting from higher average borrowings outstanding 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,
partially offset by a decrease relating to the 1998 sold facilities.
During 1998, the Company recorded an extraordinary gain net of taxes of $5.3
million related to the repurchase of approximately $22.9 million aggregate
principal amount of its Convertible Subordinated Debentures for amounts less
than the recorded amounts. See Notes 6, 7 and 17 of Notes to Consolidated
Financial Statements.
The Company had basic and diluted earnings per share of $.21 in 1998 compared to
a basic and diluted loss per share of $5.26 in 1997.
22
<PAGE> 23
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenue for 1997 increased over 1996 revenues by approximately 212 percent
reflecting increased scan volumes resulting primarily from the Company's growth
through acquisitions. Despite this increase in revenues, for the year ended
December 31, 1997, the Company incurred a net loss of $116.7 million as compared
to a net loss for the prior year of $6.3 million.
The loss for 1997 is primarily attributable to a $92.9 million charge related to
impairment losses (see Note 5 of Notes to Consolidated Financial Statements).
The 1997 loss also reflects approximately $17.6 million of bad debt expense,
which increased as a percentage of revenues to approximately 8.2 percent in 1997
from 3.9 percent in 1996. This increase in bad debt expense is attributable both
to the Company's overall growth, and to an increase in accounts receivable
resulting from a failure to fully collect receivables on the older billing and
collection systems during the phase-in of a new billing and collection system.
The new system was affected adversely by training and operational related
problems as well as by the installation complexity. In addition, collections
were negatively affected by inefficiencies in realizing receivables in respect
to patient co-payments and deductibles.
General and administrative expenses (G&A expense) for 1997 increased $93.4
million to $165.6 million in 1997, from $72.2 million in 1996. On a percentage
basis G&A expense was 76.6% in 1997 compared to 70.7% in 1996. This percentage
increase is primarily the result of increased legal and professional fees
associated with the various legal and regulatory matters discussed more fully in
Notes 10, 19 and 20 of Notes to Consolidated Financial Statements. In addition,
the Company separately recorded a $5.7 million loss in connection with the
settlement of litigation.
Depreciation and amortization expense as a percentage of revenues increased to
13.9 percent in 1997, from 11.1 percent in 1996. This increase is attributable
to higher levels of property and equipment and goodwill associated with the
acquisition of Medical Diagnostics, Inc. ("MDI").
23
<PAGE> 24
Interest expense also increased significantly as a result of the Company's
higher borrowings incurred to support its growth, capital expenditures related
to the construction and expansion of existing Facilities, as well as the
replacement and enhancement of equipment, and the deficit in operating cash
flow.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $8.3 million,
compared to $14.6 million at December 31, 1997. The decrease from 1997 to 1998
was due to several factors, the more significant of which consist of the
following: (i) a decrease in cash from $17.5 million as of December 31, 1997 to
$9.2 million as of December 31, 1998 for reasons discussed below, and a decrease
in accounts receivable, net of bad debt reserves to $43.4 million as of December
31, 1998 from $56.4 million as of December 31, 1997, resulting primarily from
the sale of the 1998 sold facilities; (ii) offset by a decrease in other current
liabilities, shareholder class action settlement payable and purchase price due
on companies acquired which aggregated $4.5 million as of December 31, 1998
compared to $15.1 million as of December 31, 1997. The Company's primary
short-term liquidity requirements as of December 31, 1998 include the current
portion of long-term debt and capital leases (totaling $27.2 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.
Net cash provided by operating activities in 1998 was $11.9 million, compared to
$7.8 million used in operating activities in 1997. The improved cash flow from
operations in 1998 was primarily a result of the substantial improvement in net
earnings from 1997 to 1998.
Net cash provided by investing activities was $10.1 million in 1998, compared to
net cash used in investing activities of $37.6 million in 1997. In 1998, the
Company received $33.9 million in net cash proceeds from the 1998 sold
facilities. In 1997, the Company used $21.8 million (net of cash acquired) for
an acquisition. Cash expenditures for purchases of equipment and other
improvements totaled $23.5 million in 1998 compared to $18.9 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 $75,000
in 1998 compared to $5.3 million in 1997 (the significant 1997 amount was
incurred in the first quarter resulting from a November 1996 acquisition).
24
<PAGE> 25
Net cash used in financing activities was $30.3 million in 1998 compared to
$44.3 million provided by financing activities in 1997. Proceeds from new
borrowings totaled $42.5 million during 1998 compared to $78.7 million in 1997.
Repayments of notes and capital leases totaled $59.1 million in 1998 compared to
$34.6 million in 1997. As discussed in Notes 6 and 7 of Notes to Consolidated
Financial Statements, the Company borrowed approximately $15.9 million in
December 1998 to repurchase on the open market and retire approximately $22.9
million principal amount of Debentures. As discussed in Notes 11 and 22 of the
Notes to Condensed Consolidated Financial Statements, the Company repaid an
aggregate of $32.2 million under its revolving credit loan with DVIBC from
proceeds received upon the sales of the 1998 sold facilities.
The Company continues to implement its strategy to reduce debt and increase cash
flows as more fully described in "Overview" above. Although there can be no
assurance, based on its current operations and financial condition, the Company
believes that it has or can obtain sufficient financial resources to satisfy its
liquidity and working capital requirements for the foreseeable future. As of
December 31, 1998, the Company has approximately $8.2 million of purchase
commitments for capital expenditures which it either already has or expects to
have financing available to meet such commitments. This forward-looking
statement is subject to a number of uncertainties, including the Company's
ability to collect accounts receivable, to manage expenses, to obtain financing
or refinancing of existing debt on acceptable terms, regulatory changes in
Medicare reimbursement rates, and other factors discussed elsewhere in this
report.
For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Item 1 - Business - Regulation and
Government Reimbursement, Item 3 - Legal Proceedings and Note 20 of Notes to
Consolidated Financial Statements.
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. Systems and
applications that use two digits to store the years might produce unpredictable
results when their digits turn to "double-zero" on January 1, 2000. The issues
are (1) whether such code exists in the 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; and (2) whether certain embedded
applications that control certain medical imaging systems should be upgraded to
ensure Year 2000 compliance and the cost of such upgrades, if any.
25
<PAGE> 26
The Company has established a multi-phased Year 2000 Readiness Program
consisting of an "Assessment Phase", "Planning Phase", "Implementation Phase",
"Testing/Certification Phase" and a "Recovery Plan Phase" and a timetable to
address Year 2000 compliance issues for all of its internal information
technology ("IT") consisting of computer software, hardware, bundled components,
development and support tools. The Company has adopted a rigorous battery of
tests to ensure Year 2000 compliance in its IT. The majority of the PCs in use
throughout the offices and Facilities were purchased within the past two (2)
years. The Company will be using testing products to test the PCs basic input
output system. As a part of the Assessment and Planning Phases, the Company
performed a ground-up review of its software application design and application
code-review processes to ensure Year 2000 compliance from project initialization
to completion.
In the event that any compliance issues are identified during the Implementation
or Testing/Certification Phases, the Company will, through its internal systems
support programs, provide the necessary corrections, upgrades, and software
releases as part of the Recovery Plan Phase to make all software and services
Year 2000 compliant. In the event that there is a Year 2000 failure during the
transition to the next millennium, the Company is prepared through its
comprehensive Recovery Plan Phase. Characteristics of the plan include making
additional hardware, R & D support and client support personnel available.
The Company's primary billing and collection, accounting, word processing,
spreadsheet and small database applications have all been warranted by the
manufacturers to be Year 2000 compliant. The underlying operating systems and
network software are also warranted to be Year 2000 compliant.
The Company's compliance policy requires that new computer applications and/or
hardware equipment acquired by the Company be warranted as Year 2000 compliant
by the manufacturer. To ensure that all purchased business systems (hardware and
software components) will operate reliably into the new millennium, the Company
is verifying that all suppliers of services and products have effective Year
2000 compliance processes.
The Company is reviewing the computer applications of its significant payors,
consisting of Medicare, Medicaid and private insurance carriers, to determine
whether such applications will be upgraded before January 1, 2000. News reports
have indicated that various agencies of the federal government, including HCFA
which administers Medicare, may have difficulty becoming fully Year 2000
compliant before January 1, 2000. The Company is obtaining written confirmation
from each of its private insurance carriers and Medicare that the carrier is
Year 2000 compliant.
26
<PAGE> 27
The Company's Assessment and Planning Phases with respect to IT issues have been
completed at a cost of approximately $25,000; the next phase to be executed is
the Implementation Phase to be followed by the Testing/Certification Phase. The
Company plans to complete its Year 2000 Readiness Program for IT issues by the
end of May 1999. The cost of completing the Company's IT Year 2000 Project is
estimated to be $60,000, all of which is to be expensed in operations. The
Company has completed approximately 50% of its IT Year 2000 project.
The Company anticipates completing its Assessment and Planning Phases for non-IT
imaging systems for Year 2000 issues by the end of the third quarter of 1999.
The Company is testing 100% of the imaging equipment (CT and MRI) in its
Facilities and has completed approximately 60% of its Facility reviews. To date,
the Company has tested at least one of every type of other system owned and has
determined that there are no substantial Year 2000 related issues that need to
be addressed. As part of the Implementation Phase, the Company has completed
conversion on about 40% of its non-compliant equipment, which represents
approximately 10% of the Company's total imaging equipment. All testing and
conversion of critical and non-critical medical imaging systems is scheduled for
completion by the end of the third quarter of 1999.
The majority of the costs associated with replacements or upgrades necessary to
achieve Year 2000 compliance are covered under service contracts providing
minimum financial exposure to the Company. The majority of the upgrades not
covered under service contracts include features enhancements that are
beneficial to the Company's operations. The costs of such upgrades will be
depreciated over the remaining life of the upgraded asset. Although no material
funds have been expended to date, the Company expects to incur expenses of
approximately $45,000 in connection with its review of non-IT medical imaging
systems, which includes all of the testing and repairs required to attain Year
2000 compliance. The Company will include non-IT Year 2000 compliance expenses
in operations in the periods in which they are incurred.
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 payors whose IT is not Year 2000 compliant are unable to submit
payments to the Company. The financial impact of such a disruption could
adversely affect the Company's ability to conduct normal business operations.
However, the Company believes that the majority of its payors could process
payments manually in the event of a computer system failure.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below represents in tabular form contractual balances of the Company's
capitalized lease and long-term debt financial instruments at December 31, 1998.
The expected maturity categories take into consideration actual amortization of
principal and do not take prepayments into consideration. The weighted average
interest rates for the various liabilities presented are as of December 31,
1998.
<TABLE>
<CAPTION>
In thousands
Principal Amount Maturing in:
---------------------------------------------------------------------------
Fair Value
1999 2000 2001 2002 2003 Thereafter Total at 12/31/98
---- ---- ---- ---- ---- ---------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
liablities:
Long-term debt
adjustable-rate
borrowings $ 46 $ 51 $ 16,531 $ 61 $ 67 $ 862 $ 17,618 $ 17,618
Average interest 9.07% 9.07% 9.75% 9.07% 9.07% 9.07% 9.71%
Long-term debt
fixed-rate borrowings 20,936 37,958 29,730 10,585 3,563 1,548 104,320 104,320
Average interest rate 10.07% 10.30% 8.72% 10.28% 8.24% 9.98% 9.72%
Capitalized lease
obligations fixed-rate
borrowings 6,257 3,935 3,102 2,086 1,104 -- 16,484 16,484
Average interest rate 9.84% 10.16% 10.15% 10.23% 9.79% -- 10.06%
-------------------------------------------------------------------------------------------------
$ 27,329 $ 41,944 $ 49,363 $ 12,732 $ 4,734 $ 2,410 $ 138,422 $ 138,422
======== ======== ========= ======== ======= ======= ========= =========
10.02% 10.28% 9.15% 10.27% 8.61% 9.65% 9.76%
======== ======== ========= ======== ======= ======= =========
</TABLE>
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report (1998) ............................................ 29
Report of Independent Certified Public Accountants (1997 and 1996) ............. 30
Consolidated Balance Sheets as of December 31, 1998 and 1997 ................... 31
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1998 .............................................. 32
Consolidated Statements of Stockholders' Equity for each of the three years
in the period ended December 31, 1998 ....................................... 33
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998 .......................................... 36
Notes to Consolidated Financial Statements ..................................... 39
</TABLE>
28
<PAGE> 29
US DIAGNOSTIC INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
US Diagnostic Inc.:
We have audited the accompanying consolidated balance sheet of US
Diagnostic Inc. and subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. Our audit also included the consolidated
financial statement schedule shown as Schedule II. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedule
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of operations and cash flows for the year then ended
in conformity with generally accepted accounting principles. Also, in our
opinion, the consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 23, 1999
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
US Diagnostic Inc.:
We have audited the accompanying consolidated balance sheet of US
Diagnostic Inc. (a Delaware corporation) and its subsidiaries as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of US Diagnostic Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II for each of the two years in
the period ended December 31, 1997 is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
West Palm Beach, Florida,
April 13, 1998.
30
<PAGE> 31
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
In thousands, except share data
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 9,177 $ 17,460
Accounts receivable, net of allowance for bad debts of $8,300
and $17,312 in 1998 and 1997, respectively 43,405 56,380
Other receivables 6,886 5,602
Prepaid expenses and other current assets 5,263 4,486
--------- ---------
Total Current Assets 64,731 83,928
--------- ---------
Property and Equipment, net of accumulated depreciation and amortization
of $39,475 and $25,330 in 1998 and 1997, respectively 91,345 91,567
Intangible Assets, net of accumulated amortization of $11,773
and $8,517 in 1998 and 1997, respectively 75,445 103,898
Other Assets 5,049 4,277
Investment In and Advances to Unconsolidated Subsidiaries 1,260 4,329
--------- ---------
Total Assets $ 237,830 $ 287,999
========= =========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 10,932 $ 8,368
Accrued expenses 13,763 18,050
Shareholder class action settlement payable -- 5,288
Current portion of long-term debt 20,982 18,590
Obligations under capital leases - current portion 6,257 9,155
Other current liabilities 4,226 7,350
Purchase price due on companies acquired 296 2,485
--------- ---------
Total Current Liabilities 56,456 69,286
--------- ---------
Subordinated convertible debentures 33,969 56,246
Long-term debt, net of current portion 100,956 118,999
Obligations under capital leases, net of current portion 10,227 11,573
Other liabilities 2,549 4,729
--------- ---------
Total Liabilities 204,157 260,833
--------- ---------
Minority Interest 2,120 1,826
Commitments and Contingencies (Notes 14 and 20) -- --
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 in 1998 and 1997, respectively 227 229
Additional paid-in capital 148,047 147,850
Deferred stock-based compensation (973) (2,192)
Accumulated deficit (115,748) (120,547)
--------- ---------
Total Stockholders' Equity 31,553 25,340
--------- ---------
Total Liabilities & Stockholders' Equity $ 237,830 $ 287,999
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
<PAGE> 32
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data Years ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Revenue $ 195,735 $ 216,222 $ 102,061
--------- --------- ---------
Operating Expenses
General and administrative 148,433 165,549 72,200
Asset impairment losses 680 92,853 390
Bad debt expense 6,493 17,630 4,016
Depreciation 19,861 19,232 6,595
Amortization 5,012 10,790 4,649
Loss on settlement of lawsuits -- 5,739 2,125
Settlement with Former Chief Executive Officer -- 1,809 --
Stock-based compensation 1,219 1,261 2,168
Compensation to terminated consultant -- -- 5,597
--------- --------- ---------
Total Operating Expenses 181,698 314,863 97,740
--------- --------- ---------
Gain (Loss) on sale of subsidiaries 4,676 -- (3,077)
--------- --------- ---------
Income (Loss) from Operations 18,713 (98,641) (1,244)
--------- --------- ---------
Other Income (Expense)
Interest expense (20,032) (19,114) (8,974)
Interest and other income 2,545 1,225 2,375
Gain on sale of marketable equity securities -- 407 --
--------- --------- ---------
Total Other Income (Expense) (17,487) (17,482) (6,599)
--------- --------- ---------
Income (loss) before minority interest, benefit
for income taxes and extraordinary item 1,226 (116,123) (5,355)
Minority interest in income of subsidiaries 2,423 2,428 1,576
--------- --------- ---------
Loss before benefit for income taxes
and extraordinary item (1,197) (118,551) (6,931)
Benefit for income taxes (685) (1,839) (600)
--------- --------- ---------
Loss Before Extraordinary Item (512) (116,712) (6,331)
Extraordinary item, net of taxes 5,311 -- --
--------- --------- ---------
Net Income (Loss) $ 4,799 $(116,712) $ (6,331)
========= ========= =========
Basic and Diluted Earnings (Loss) per Common Share
Loss before extraordinary item $ (.02) $ (5.26) $ (.48)
Extraordinary item .23 -- --
--------- --------- ---------
Net income (loss) $ .21 $ (5.26) $ (.48)
========= ========= =========
Weighted-average common shares outstanding 22,594 22,182 13,272
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
<PAGE> 33
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Additional Retained Total
Common Common Paid-in Unrealized Deferred Earnings Stockholders'
Shares Stock Capital Gain Compensation (Deficit) Equity
------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 7,033 $ 70 $ 22,954 $ -- $ (1,027) $ 2,496 $ 24,493
Common stock and options
issued for acquisitions 3,046 30 15,346 -- -- -- 15,376
Stock options exercised 211 2 1,074 -- -- -- 1,076
Compensation cost - stock
options granted -- -- 2,780 -- (2,559) -- 221
Warrants exercised 13,129 131 90,362 -- -- -- 90,493
Common stock issued in
settlement of litigation 88 1 778 -- -- -- 779
Restricted stock issued -- -- 4,867 -- (4,867) -- --
Common stock issued to
cancel consulting agreement 93 1 580 -- -- -- 581
Common stock issued for
debt conversion 149 2 761 -- -- -- 763
Fair value of detachable warrants
convertible debentures -- -- 1,672 -- -- -- 1,672
Income tax benefit from options
exercised -- -- 767 -- -- -- 767
Unrealized gain - marketable
equity securities -- -- -- 526 -- -- 526
Amortization of
deferred compensation -- -- -- -- 3,096 -- 3,096
Net loss -- -- -- -- -- (6,331) (6,331)
------ --------- --------- --------- --------- --------- ---------
Balance - December 31, 1996 23,749 $ 237 $ 141,941 $ 526 $ (5,357) $ (3,835) $ 133,512
====== ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
<PAGE> 34
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Additional Retained Total
Common Common Paid-in Unrealized Deferred Earnings Stockholders'
Shares Stock Capital Gain Compensation (Deficit) Equity
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 23,749 $ 237 $ 141,941 $ 526 $ (5,357) $ (3,835) $ 133,512
Release of escrow shares
related to 1996
acquisitions -- -- 4,185 -- -- -- 4,185
Issuance of contingent shares
related to 1996 79 1 528 -- -- -- 529
acquisitions
Cancellation of escrow shares (1,164) (11) 11 -- -- -- --
Sale of marketable equity
securities -- -- -- (526) -- -- (526)
Stock options exercised 17 -- 73 -- -- -- 73
Bridge warrants exercised 7 -- 34 -- -- -- 34
Restricted stock issued 202 2 438 -- (440) -- --
Deferred compensation
component of settlement
with former executive
officer -- -- -- -- 2,344 -- 2,344
Amortization of deferred
compensation -- -- -- -- 1,261 -- 1,261
Adjustment of income tax
benefit from options
exercised -- -- (767) -- -- -- (767)
Warrants issued in connection
with financing agreement -- -- 1,407 -- -- -- 1,407
Net loss -- -- -- -- -- (116,712) (116,712)
--------- --------- --------- --------- --------- --------- ---------
Balance - December 31, 1997 22,890 $ 229 $ 147,850 $ -- $ (2,192) $(120,547) $ 25,340
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
34
<PAGE> 35
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Concluded)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Additional Retained Total
Common Common Paid-in Unrealized Deferred Earnings Stockholders'
Shares Stock Capital Gain Compensation (Deficit) Equity
------ --------- --------- --------- ------------ --------- ------------
<S> <C> <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
stock (206) (2) (1,203) -- -- -- (1,205)
Release of escrow shares
related to a 1996
acquisition -- -- 1,217 -- -- -- 1,217
Amortization of deferred
compensation -- -- -- -- 1,219 -- 1,219
Warrants issued in connection
with financing agreement -- -- 183 -- -- -- 183
Net income -- -- -- -- -- 4,799 4,799
------ --------- --------- ----- --------- --------- ---------
Balance - December 31, 1998 22,712 $ 227 $ 148,047 $ -- $ (973) $(115,748) $ 31,553
====== ========= ========= ===== ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
35
<PAGE> 36
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 4,799 $(116,712) $ (6,331)
Adjustments to reconcile net income (loss)
to net cash provided by (used
in) operating activities:
Asset impairment losses 680 92,853 390
Depreciation and amortization 24,873 30,022 11,244
Bad debt expense 6,493 17,630 4,016
Deferred income tax benefit -- (3,002) (2,814)
Stock-based compensation expense 1,219 1,261 3,317
Amortization of non-cash financing and other costs 1,305 239 544
Minority interest in income of subsidiaries 2,423 2,428 1,576
Gain on sale of marketable securities -- (406) --
Loss on settlement of lawsuits -- 5,739 2,125
Settlement with former CEO -- 1,809 --
Loss on sale of fixed assets -- 225 --
Common stock issued to cancel consulting agreement -- -- 581
Common stock issued for settlement of claims -- -- 779
(Gain) loss on sale of subsidiaries (4,676) -- 3,077
Extraordinary item (8,047) -- --
Changes in Assets and Liabilities
(Increase) decrease in, net of sales
and acquisitions of businesses:
Accounts receivable (5,201) (31,101) (10,808)
Other receivables 3,455 (4,757) (2,618)
Prepaid expenses (1,464) 4,308 (1,950)
Other assets 1,007 1,452 (1,049)
Increase (decrease) in, net of sales
and acquisitions of businesses:
Accounts payable and accrued expenses (5,921) (3,199) 764
Minority interest (partnership distributions) (2,722) (3,470) --
Other liabilities (6,353) (3,158) 3,856
--------- --------- ---------
Total adjustments 7,071 108,873 13,030
--------- --------- ---------
Net Cash - Operating Activities 11,870 (7,839) 6,699
--------- --------- ---------
Investing Activities
Acquisitions, net of cash acquired (457) (21,827) (106,627)
Equipment purchases (23,450) (18,858) (3,807)
Payment of purchase price due on companies acquired (75) (5,258) --
Sale of marketable equity securities -- 7,161 (6,425)
Proceeds from dispositions of property and equipment 222 1,887 --
Investment in and advances to subsidiaries -- (724) (6,732)
Proceeds from the sale of subsidiaries,
net of cash retained by purchasers 33,897 -- 1,800
Pending acquisitions -- -- (160)
--------- --------- ---------
Net Cash-Investing Activities 10,137 (37,619) (121,951)
--------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
36
<PAGE> 37
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Financing Activities
Proceeds from long-term debt 42,482 78,729 3,937
Repayments of long-term debt and
obligations under capital leases (59,135) (34,558) (20,480)
Purchase of subordinated convertible debentures (13,637) -- --
Common stock issued -- 106 91,569
Proceeds from issuance of subordinated convertible
debentures, net -- -- 54,493
--------- --------- ---------
Net Cash-Financing Activities (30,290) 44,277 129,519
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents $ (8,283) $ ( 1,181) $ 14,267
Cash and Cash Equivalents - Beginning of Year 17,460 18,641 4,374
--------- --------- ---------
Cash and Cash Equivalents - End of Year $ 9,177 $ 17,460 $ 18,641
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 19,517 $ 18,469 $ 5,980
Income taxes $ 2,961 $ 911 $ 3,443
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Borrowing under capital leases were $9.0 million, $4.8 million and $9.5 million
in 1998, 1997 and 1996, respectively.
In 1998, long-term debt and capital lease obligations decreased by $27.5 million
from the sale of subsidiaries, and increased by $6.4 million from the purchase
of a partnership interest from a minority holder.
The value of 271,000 shares of Common Stock released from escrow in 1998
relating to a 1996 acquisition was $1.2 million.
The value of 206,000 shares of Common Stock repurchased for debt and
subsequently retired in 1998 was $1.2 million.
Long-term debt, property and equipment and intangible assets increased by
$500,000 as a result of a 1998 acquisition.
In 1998, the Company acquired the remaining 50% interest in a subsidiary in
exchange for notes payable of $1.3 million.
In 1997, the Company acquired the remaining 20% interest in a subsidiary in
exchange for note payable of $3.1 million.
Warrants issued in connection with financing arrangements were valued at
$183,000 and $1.4 million in 1998 and 1997, respectively.
37
<PAGE> 38
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
- --------------------------------------------------------------------------------
The fair market value of Common Stock and options issued in connection with
acquisitions totaled $4.7 million and $15.4 million in 1997 and 1996,
respectively.
Restricted Common Stock with a value of $440,000 and $4.9 million was issued for
services rendered to the Company in 1997 and 1996, respectively.
Common Stock issued in connection with the conversion of debt totaled $763,000
in 1996.
In 1996, warrants issued with Subordinated Convertible Debentures were valued at
$1.7 million.
Information with regard to the Company's acquisitions, all of which are
accounted for under the purchase method of accounting, is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Fair value of non-cash assets acquired, net of
liabilities $ 1,038 $ 3,492 $ 23,677
Goodwill 3,469 18,335 143,836
Non-cash consideration paid (4,050) -- (60,886)
--------- --------- ---------
Cash, net of cash acquired $ 457 $ 21,827 $ 106,627
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
38
<PAGE> 39
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[1] DESCRIPTION OF THE COMPANY
The accompanying consolidated financial statements include the accounts of US
Diagnostic Inc. (formerly U.S. Diagnostic Labs Inc., the "Company"), its
wholly-owned subsidiaries and non-wholly-owned but controlled subsidiaries.
The Company was incorporated in Delaware on June 17, 1993, and is a medical
services provider specializing in the operation and management of multi-modality
diagnostic imaging centers and related medical facilities. The Company owned,
operated or managed 84 centers located throughout the United States as of the
date hereof. The Company provides a variety of medical diagnostic testing and
evaluation service procedures including magnetic resonance imaging, computerized
tomography scanning, ultrasound, and various radiological services.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and
non-wholly-owned but controlled subsidiaries. Investments in affiliates which
are not majority owned are reported using the equity method. Income recorded
under the equity method is included in other income. Significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets, liabilities,
income and expense and disclosures of contingencies. The most significant
estimates relate to contractual and bad debt allowances on accounts receivable,
useful lives of medical equipment, the realizability of long-lived and
intangible assets and reserves for litigation contingencies. Future events could
alter such estimates in the near term. In addition, healthcare industry reforms
and reimbursement practices will continue to impact the Company's operations and
the determination of contractual and other allowance estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and
certain highly liquid investments with a maturity of three months or less when
purchased. The carrying amount of cash equivalents approximates fair value due
to their short-term nature.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES - Investments in marketable equity
securities are classified as available for sale and reported at fair value.
Unrealized gains and losses, net of tax, are reported as a separate component of
stockholders' equity. These amounts are not significant and therefore no
separate statement of comprehensive income has been presented.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the related assets or the remaining lease term. The equipment used by the
Company is technologically sophisticated and subject to accelerated obsolescence
in the event of significant technological change. Included in property and
equipment are capitalized costs for software and implementation costs paid to
external consultants related to the Company's new billing and general ledger
systems.
INTANGIBLE ASSETS - Goodwill consists of the cost of purchased
39
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
businesses in excess of the fair value of net assets acquired. Goodwill is
amortized on a straight-line basis for a period of twenty years. Customer lists
and covenants not to compete are amortized on a straight line basis for a period
of ten years and three to five years, respectively.
The Company recognizes impairment losses on impaired long-lived assets (property
and equipment and intangible assets) based on the amount by which the carrying
value exceeds the fair value of the long-lived asset. Fair value is determined
by using a current market value modeling approach or by evaluating the current
market value of the acquired business using fundamental analysis.
NET REVENUE - Revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated prospectively determined 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 adjusted in future periods as
final settlements are determined. The Company also has relatively insignificant
amounts of revenue comprised of fees charged by the Company for management
services for the technical component of procedures performed in certain
corporate practice of medicine states provided at non-Company owned imaging
facilities. This revenue also includes fees for management, billing and
collection, and marketing. Additionally, the Company has relatively
insignificant amounts of revenue generated from the sublease of real property
and equipment.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Provision for income taxes is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
EARNINGS (LOSS) PER SHARE Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of Common shares outstanding for the period. Diluted EPS assumes
conversion of convertible debt and the issuance of Common Stock for all other
potentially dilutive shares, unless the effect of issuance would have an
anti-dilutive effect.
STOCK-BASED COMPENSATION PLANS - The Company accounts for stock based
compensation using the intrinsic value method. Accordingly, compensation cost
for stock options issued is measured as the excess, if any, of the fair value of
the Company's Common Stock at the date of grant over the exercise price of the
options. The pro forma net earnings (loss) per common share amounts as if the
fair value method had been used are presented in Note 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Generally accepted accounting principles
requires companies to disclose the fair value of financial instruments.
Management believes that the carrying values of its financial instruments
approximate their fair values and any differences which may exist between the
carrying values and fair values are not significant.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
RECENT ACCOUNTING PRONOUNCEMENTS - Statements of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The components of comprehensive income
which are excluded from net income are not significant individually or in the
aggregate, and therefore no separate statement of comprehensive income has been
presented.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to report financial and descriptive information
about its reportable operating segments including, among other things, a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets, for fiscal years beginning after December 15, 1997. The Company
currently has one reporting segment and therefore the adoption of SFAS No. 131
has no impact on its financial statement presentation.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
reporting every derivative instrument at its fair value on the balance sheet.
This statement also requires recognizing any change in the derivatives' fair
value in earnings for the current period unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal quarters of fiscal years
that begin after June 15, 1999. Management has not determined the effect, if
any, of adopting SFAS No. 133.
RECLASSIFICATIONS - Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[3] PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, is as follows:
In thousands
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 USEFUL LIFE
---- ---- -----------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 --
Buildings 5,561 7,131 40 Years
Medical equipment 90,462 83,273 7 Years
Furniture and fixtures 3,451 3,539 7-10 Years
Office, data processing equipment and software 11,351 10,689 3-10 Years
Vehicles 626 305 3 Years
Leasehold improvements 17,501 10,092 10 Years
--------- ---------
Total 130,820 116,897
Less: accumulated depreciation
and amortization (39,475) (25,330)
--------- ---------
Property and equipment, net $ 91,345 $ 91,567
========= =========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $28.9 million and $31.8 million at December 31, 1998 and 1997, respectively.
Accumulated depreciation for equipment under capital leases was $9.1 million and
$6.9 million as of December 31, 1998 and 1997, respectively.
Depreciation expense amounted to approximately $19.9 million, $19.2 million and
$6.6 million for the years ended December 31, 1998, 1997 and 1996, respectively,
of which $4.6 million, $4.3 million and $1.5 million was attributable to the
equipment under capital leases.
[4] INTANGIBLE ASSETS
A summary of intangible assets at December 31, is as follows:
In thousands
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 USEFUL LIFE
--------- --------- ------------
<S> <C> <C> <C>
Goodwill $ 80,660 $ 105,847 20 Years
Covenants not to compete 3,192 3,142 3-10 Years
Customer lists 3,189 3,189 15 Years
Other intangibles 177 237 3-5 Years
--------- ---------
Total 87,218 112,415
Less accumulated amortization (11,773) (8,517)
--------- ---------
Intangibles, net $ 75,445 $ 103,898
========= =========
</TABLE>
[5] ASSET IMPAIRMENT LOSSES
The majority of acquired businesses and imaging centers which comprise the
Company were purchased in 1996. As a result, 1997 was the first year of
uninterrupted operation for such acquired entities as a part of the Company's
consolidated group. During 1997, management became aware that many of the
acquired centers were not performing as originally projected. At year-end 1997
all acquired businesses
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
were analyzed in depth, in light of the additional
operating data during the period of the Company's ownership, to determine
whether such shortfalls in performance were of a temporary nature and if current
and expected future operating income would be sufficient to cover annual
amortization of intangible and long-lived assets acquired (see Note 2). The
analysis was repeated at the close of 1998. Management has recorded impairment
losses for those centers for which the sum of the expected future cash flows
does not cover the carrying value of the assets acquired. The components of the
impairment losses are as follows:
In thousands
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Intangible assets $ 250 $75,980 $ 390
Investment in unconsolidated subsidiaries accounted for using
the equity method (primarily intangible assets included therein) -- 6,269 --
Property and equipment 430 4,609 --
Acquired receivables -- 4,817 --
Other long-lived assets -- 1,178 --
------- ------- -------
$ 680 $92,853 $ 390
======= ======= =======
</TABLE>
43
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[6] LONG-TERM DEBT
Long-term debt at December 31 consists of the following (also see Note 7):
In thousands
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Revolving credit loan, up to $35.0 million maximum, interest at
prime plus 2% (9.75% at December 31 1998), due February 2000.
Collateralized by accounts receivable. $ 16,475 $ 35,000
Acquisition and equipment line of credit, up to $25.0 million maximum, interest
from 10% to 11%, due in monthly installments
through 2002. Collateralized by equipment. 8,983 12,250
10% to 11% term loans to lending institution, up to $15.0 million
maximum, due through 2002. Collateralized by equipment. 11,982 15,000
Unsecured loan, up to $25.0 million maximum, interest at 10.75%,
due June 2000.
6 1/2% convertible note, discounted to yield 9%, due in June 2001 9,555 9,296
Other convertible notes with stated interest rates ranging from
6% to 7%, discounted to yield 9%, maturing through March 2001. 19 1,364
6% to 14% notes payable to lending institutions, due in monthly
installments through March 2004. Collateralized by medical
equipment. 48,343 42,841
6% to 9.75% notes payable related to acquisitions, due in monthly
installments through August 2000. Collateralized by
substantially all of the assets of the companies acquired. 10,862 21,838
--------- ---------
Total 121,938 137,589
Less: current portion (20,982) (18,590)
--------- ---------
Long-term debt $ 100,956 $ 118,999
========= =========
</TABLE>
44
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
At December 31, 1998, aggregate maturities of long-term debt, not including
subordinated convertible debentures, were as follows:
In thousands
1999 $ 20,982
2000 38,009
2001 46,261
2002 10,646
2003 3,630
Thereafter 2,410
---------
$ 121,938
=========
In February 1997, the Company entered into a financing agreement with DVI
Business Credit Corporation ("DVIBC") to provide two credit facilities of $25.0
million each. Borrowings are subject to certain conditions such as the
availability of unencumbered assets to collateralize advances and maintenance of
at least $5 million in cash during all reporting periods. The first $25.0
million (increased to $35.0 million pursuant to an amendment dated September 29,
1997) is a revolving credit loan from DVIBC secured by accounts receivable and
was initially due on February 28, 1998 (extended to February 28, 1999 pursuant
to an amendment dated September 29, 1997 and further extended to February 28,
2000 pursuant to an amendment dated March 31, 1998), and bears interest, payable
monthly, at prime plus two percent (9.75 % at December 31, 1998). The second
$25.0 million is an acquisition and equipment line of credit from DVI Financial
Services Inc. ("DVIFS") and is collateralized by equipment. Advance of funds
under the acquisition and equipment line of credit is based upon a review by
DVIFS of the entity acquired and/or a review of the assets securing the loan.
Each advance under the acquisition and equipment line of credit is repayable in
sixty monthly installments with interest from 10% to 11% per annum.
The outstanding balance due under the revolving credit loan was $16.4 million
and $35.0 million as of December 31, 1998 and 1997, respectively. The
significant reduction in borrowings outstanding from 1997 to 1998 resulted to a
large extent from the use of $25.0 million of proceeds received in May 1998 from
the sale of MDI (defined below) to pay down the balance (see below and Note 11).
In January and February 1999, the Company further reduced the revolving credit
loan by approximately $1.0 million and $6.2 million, respectively, with the
proceeds received from the sales of certain subsidiaries (see Note 22). The
outstanding balance due under the acquisition and equipment line of credit was
$9.0 million and $12.3 million as of December 31, 1998 and 1997, respectively.
As the Company previously disclosed in its Form 10-K for the year ended December
31, 1997, 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
45
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US DIAGNOSTIC INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
On September 29, 1997, the Company and its wholly-owned subsidiary, Medical
Diagnostics, Inc. ("MDI"), entered into a series of Loan and Security Agreements
with DVIFS pursuant to which DVIFS agreed to provide term loans to MDI, in the
aggregate not to exceed $15 million, the repayment of which was guaranteed by
the Company and secured by all of the outstanding shares of MDI and by liens on
equipment of MDI, principally consisting of MRI machines and computer equipment.
Each advance under the term loans is repayable in 60 equal monthly installments
inclusive of principal and interest at the rate of 10% per annum as to the first
$7.5 million borrowed and 11% per annum as to any additional amounts borrowed.
As further discussed in Note 11, in May 1998, the Company sold MDI. The Company
has retained all of the outstanding borrowings under the loan, which amounted to
$12.0 million and $15.0 million at December 31, 1998 and 1997, respectively, and
DVIFS released the liens it had on MDI's equipment and on the Company's
ownership in MDI Common Stock.
In connection with the term loans and pursuant to the modification of the
revolving credit loan (see above), the Company issued to DVIFS two warrants to
purchase an aggregate of 250,000 shares of Common Stock of the Company at an
exercise price of $7.6875 per share, which was the fair market value of a share
of such Common Stock on the date the warrants were issued. One of the warrants
to purchase 125,000 shares of Common Stock was exercisable immediately, and a
second warrant to purchase 125,000 shares of Common Stock was exercisable
beginning on or after April 30, 1998 but only if the entire indebtedness to
DVIFS and DVIBC has not been reduced by at least $12.5 million (exclusive of
regularly scheduled amortization) prior to the date of exercise. Both of the
warrants were to expire on September 30, 2004. The estimated fair value of the
warrants was $1.4 million as of the date of issuance. This amount is being
amortized to interest expense over the term of the related indebtedness. The
unamortized balance at December 31, 1998 and 1997 was $614,000 and $1.3 million,
respectively, and is offset against long-term debt in the accompanying
consolidated balance sheets. As discussed below, in December 1998, both of the
warrants were canceled and a new warrant was issued to DVIFS in connection with
additional financing from DVIFS. The unamortized balance relating to the
original warrants will continue to be amortized over the life of the revolving
credit loan because the valuation placed on these warrants when originally
issued was deemed to be a cost of the loan.
In December 1998, the Company entered into an unsecured loan agreement with
DVIFS. Advances under the loan agreement were limited to $25.0 million, could
only be made until January 31, 1999, and could only be used to purchase the
Company's Subordinated Convertible Debentures on the open market (see Note 7).
The loan is due June 21, 2000 with interest payable monthly at 10.75%.
Additional terms of the loan agreement require that the Company pay DVIFS an
origination fee of 3% on amounts borrowed, as well as pay an equity
participation fee to DVI Private Capital (an affiliate of DVIFS) equal to a
percentage of in the profit realized by the Company from the purchase of
Subordinated
46
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Convertible Debentures as more fully described in Note 7. The total of such
origination fees and equity participation aggregated $2.3 million as of December
31, 1998 which have been capitalized to other assets in the accompanying balance
sheets and is being amortized over the life of the related indebtedness.
Borrowings outstanding were $15.7 million at December 31, 1998. In connection
with the loan, the Company canceled the two warrants issued to DVIFS in
September 1997 to purchase an aggregate of 250,000 shares of Common Stock of the
Company (see discussion of such warrants above) and issued a new warrant to
purchase an aggregate of 250,000 shares of Common Stock of the Company at an
exercise price of $.938 per share, which was the fair market value of a share of
such Common Stock on the date the warrant was issued. The new warrant expires on
September 30, 2005. The estimated fair value of the new warrant was $183,000 as
of the date of issuance, and is being amortized to interest expense over the
term of the related indebtedness. The unamortized balance at December 31, 1998
was $183,000, and is offset against long-term debt in the accompanying
consolidated balance sheet.
The 6 1/2% Convertible Note (the "Note") was originally issued to HEICO
Corporation ("HEICO") in 1996, and subsequently modified on September 10, 1997,
as partial consideration for the Company's acquisition of all of the outstanding
stock of MediTek Health Corporation from HEICO (see Note 21). The Note matures
on June 30, 2001, and originally was convertible into the Company's Common Stock
at $9.25 per share for an aggregate of 1,081,081 shares (adjusted to $8.50 per
share for an aggregate of 1,176,472 shares as modified on September 10, 1997 as
consideration for deferring the demand feature of the Note). The Note may be
prepaid by the Company, at its $10 million face value, upon 60 days written
notice, after January 1, 1999. The Company granted to the holder of the Note
registration rights to the Common Stock into which the Note is convertible.
Until such time as the shares were registered, the holder could require the
Company to redeem the Note for cash at its face value of $10 million at anytime
after January 1, 1999. Effective December 1998, the Company registered the
shares for resale under the Securities Act. The Company can require the holder
to convert the Note at the conversion price if the last sale price of the Common
Stock averages at least $9.25 per share for the ten trading days immediately
preceding the "required conversion date". The "required conversion date" was any
time commencing on the later of December 31, 1997 (extended to January 1, 1999
as modified on September 10, 1997) or December 8, 1998 (the date that the shares
of Common Stock into which the Note is convertible were registered for resale by
the Company under the Securities Act).
On September 16, 1997, HEICO sold the Note to Forum Capital Markets L.P.
("Forum") and, also on September 16, 1997, Forum resold the Note to eighteen
(18) individual parties in various amounts totaling $10 million, resulting in
the Company re-issuing separate Notes to each of the purchasers for their
respective amounts. Each individual Note contains the same terms and conditions
as the amended Note that HEICO sold to Forum. In November, 1997, the Company
listed a global note for trading on the PORTAL Market; and the Company is giving
holders that qualify as Qualified Institutional Buyers (as defined under Rule
144A of the Securities Act of 1933) the opportunity to exchange their Notes for
an interest in a global note to be held by the Depository Trust Company in
accordance with its book entry system.
The other convertible notes are convertible into shares of Common Stock at an
average conversion price of $6.50 per share or 2,955 shares as of December 31,
1998.
47
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[7] SUBORDINATED CONVERTIBLE DEBENTURES
In 1996, the Company consummated a $57.5 million offering of 9% Subordinated
Convertible Debentures (the "Debentures") due in 2003. Interest is payable
semi-annually in March and September. Holders of the Debentures are entitled to
convert 100% of the principal amount into Common Stock of the Company at a
conversion price of $9.00 per share. The conversion price is subject to
adjustment under certain circumstances as described in the Debenture Indenture
("Indenture"). The Company may not redeem the Debentures, in whole or in part at
any time prior to March 31, 1999. Thereafter, the Debentures are redeemable at
certain redemption prices as set forth in the Indenture. In the event of a
"change of control" as defined in the Indenture, the Company must offer to
repurchase each holder's Debenture at a purchase price equal to 100% of the
principal amount, plus accrued interest.
In December 1998, the Company repurchased approximately $22.9 million of its
Debentures in the open market, and immediately retired the Debentures. The
Company financed the purchase of the Debentures from borrowings under a $25.0
million loan agreement entered into with DVIFS in December 1998 (see Note 6).
The Debentures were purchased at a total price of $15.9 million, consisting of
$13.6 million paid directly to the Debenture holders, $409,000 paid to DVIFS
representing a 3% loan origination fee on amounts borrowed under the loan
agreement, and $1.9 million paid to DVIFS as equity participation for services
rendered by DVI Private Capital (an affiliate of DVIFS). This equity
participation was paid to DVI Private Capital in lieu of normal and customary
investment banking fees and amounted to 20% of the difference between the face
amount of the Debentures repurchased and the amount paid to the Debenture
Holders. The difference between the aggregate carrying value of the Debentures
(as well as pro rata portions of unamortized capitalized financing costs and
unamortized fair value of warrants issued to the underwriter when the Debentures
were originally issued), and the amounts paid to the Debenture Holders, was
recorded as an extraordinary gain after taxes of $5.3 million in the
accompanying consolidated statement of operations (see Note 17). The loan
origination fees and the equity participation amount aggregating $2.3 million
was capitalized to other assets in the accompanying balance sheets and is being
amortized over the life of the related indebtedness. At December 31, 1998, the
balance outstanding under the Debentures was $34.0 million. In January 1999, the
Company made additional open market purchases of its Debentures aggregating
$12.5 million. The total amounts paid to the Debenture Holders as well as
related costs for the 1999 Debenture purchases was $9.1 million, which will
result in an extraordinary gain in 1999 of $2.6 million (net of related costs
and income taxes) - See Note 22.
Warrants to acquire 319,445 shares of the Company's Common Stock at $9.00 per
share were issued in 1996 to the underwriter of the offering of the Debentures.
The estimated fair value of the warrants at the date of the offering was $1.7
million. This amount is being amortized to interest expense over the term of the
related Debentures. In December 1998, $405,000 of the unamortized balance, the
proportionate share, was written off as an offset to extraordinary gain in
connection with the Company's open market purchase and cancellation of a portion
of its Debentures (see Note 17). The unamortized balance at December 31, 1998
and 1997 is $610,000 and $1.2 million, respectively, and is offset against
long-term debt in the accompanying consolidated balance sheets.
Debenture issuance costs of $3.5 million are being amortized as interest expense
over the term of the related Debentures. In December 1998, $831,000 of the
unamortized balance, the proportionate share, was written off as an offset to
extraordinary gain in connection with the Company's open market purchase and
cancellation of a portion of its Debentures (see Note 17). The unamortized
balance at
48
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
December 31, 1998 and 1997 is $1.3 million and $2.6 million,
respectively, and is included in other assets in the accompanying consolidated
balance sheets.
Pursuant to the Indenture, the Company is required to maintain consolidated net
worth of at least $18 million. In the event that the Company's consolidated net
worth at the end of two consecutive fiscal quarters is below $18 million, the
Company must offer to repurchase 12.5% of the aggregate principal amount of
Debentures originally issued (or lesser amount outstanding at the time of the
deficiency). Under certain covenants of the Indenture, the Company is limited in
the amount of debt, as defined, it may incur. The Company and its subsidiaries
may generally incur debt if the ratio of debt to operating cash flow, as
defined, of the Company and its subsidiaries after giving pro forma effect to
such debt is 6.5 to 1 or less.
As the Company previously disclosed in its Report to Stockholders on Form 10-K
for the year ended December 31, 1997, in March 1998, the Company determined that
it was not in compliance with the Indenture's debt to operating cash flow ratio
in the fourth quarter of 1997. The non-compliance was due to the required
treatment of certain items in the ratio calculation relating to significant
non-operating write-offs, reserves and expenses taken by the Company in 1996 and
1997 for various items including the settlement of shareholder class action
claims, the previously disclosed NASDAQ and SEC proceedings and related legal
and accounting professional services fees totaling approximately $10 million.
The Company obtained the consent of a majority of the holders of outstanding
Debentures to waive any non-compliance in the fourth quarter of 1997 and permit
the Company to modify the Indenture to add back $10 million representing the
above noted items to the operating cash flow calculation for each quarter ended
March 31, 1998, June 30, 1998 and September 30, 1998 (the "Consent"). Based upon
the receipt of the Consent, the Company was in compliance with the 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, September 30, 1998 and December 31,
1998.
The Indenture also prohibits the Company from paying any dividends on Common
Stock. In addition, the Indenture requires that the Company and its subsidiaries
engage solely in the acquisition, operation and management of multi-modality
diagnostic imaging centers and other medical service facilities.
49
<PAGE> 50
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[8] OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases are stated on the accompanying consolidated
balance sheets at the present value of future minimum lease payments. Interest
rates on capital leases ranged primarily between 7 1/2% and 13%.
Future minimum lease payments under capital leases, together with the present
value of minimum lease payments subsequent to December 31, 1998, are as follows:
In thousands
Date Amount
---- ------
1999 $ 7,455
2000 4,704
2001 3,548
2002 2,290
2003 1,144
Thereafter --
--------
Total 19,141
Less: amount representing interest (2,657)
--------
Total 16,484
Less: current portion (6,257)
--------
Long-term portion $ 10,227
========
As further discussed in Note 22, in February 1999, the Company sold US Imaging,
Inc. In connection with the sale, approximately $952,000 of the Company's
obligations under capital leases were assumed by the purchaser.
50
<PAGE> 51
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[9] INCOME TAXES
The provision (benefit) for income taxes shown in the consolidated statements of
operations consists of the following:
In thousands
1998 1997 1996
------- ------- -------
Current
Federal $(3,288) $ 115 $ 1,765
State 2,603 1,048 448
------- ------- -------
(685) 1,163 2,213
------- ------- -------
Deferred
Federal -- (2,600) (2,243)
State -- (402) (570)
------- ------- -------
-- (3,002) (2,813)
------- ------- -------
Total $ (685) $(1,839) $ (600)
======= ======= =======
FEDERAL TAX RATE RECONCILIATION
The difference between the effective income tax rate and the federal income tax
rate is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Federal tax rate (34)% (34)% (34)%
Impairment of non-deductible intangible assets 38 17 --
Non-deductible amortization of intangible assets 51 2 10
Increase (decrease) in valuation allowance (242) 12 --
State taxes, net of federal benefit 144 1 4
Non-deductible capitalized costs -- -- 16
Sale of investments (38) -- --
Tax refunds (6) -- --
Debenture gain 11 -- --
Other 7 -- (5)
------ ------ -----
Effective tax rate (57)% (2)% (9)%
====== ====== =====
</TABLE>
For the year ended December 31, 1998, the extraordinary gain of $8.0 million is
shown net of $2.7 million in income taxes.
51
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
In thousands
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CURRENT
Deferred tax assets:
Allowance for bad debts $ 2,796 $ 3,905
Other allowances and reserves 733 1,648
Deferred tax liabilities:
Cash to accrual differences on acquired entities (459) (929)
Valuation allowance (3,070) (4,624)
-------- --------
Net current deferred tax assets -- --
-------- --------
NON-CURRENT
Deferred tax assets:
Net operating losses 16,353 15,074
Basis differences of intangible assets 11,061 5,091
Compensatory options 430 326
Asset impairment 533 11,135
Other 2,240 2,082
Deferred tax liabilities:
Equipment basis differences (7,025) (7,632)
Cash to accrual differences -- (929)
Unrealized gain on investments -- --
Other (269) (386)
Valuation allowance (23,323) (24,761)
-------- --------
Net non-current deferred tax liability -- --
-------- --------
Net deferred income tax asset $ -- $ --
======== ========
</TABLE>
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
1997, management provided a valuation allowance for the net deferred tax asset
as realization is not more likely than not. During 1998 the valuation allowance
decreased $3.0 million primarily due to the sales of subsidiaries.
The Company has tax operating loss carryforwards of approximately $48.5 million
expiring through the year 2012. Approximately $22.3 million of the operating
loss carryforwards relate to acquired entities. The utilization of the acquired
loss carryforwards is limited to approximately $2.2 million per year.
52
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[10] CAPITAL TRANSACTIONS
In connection with the Company's initial public offering in 1994, all of the
Company's stockholders at that time entered into an escrow agreement pursuant to
which they placed into escrow 1,163,853 shares (the "IPO Escrow Shares") of the
Company's Common Stock owned by them. Because the Company did not meet specified
minimum income goals, all of the IPO Escrow Shares were canceled in early 1997.
The IPO Escrow Shares are included in authorized, issued and outstanding shares
on December 31, 1996. As of December 31, 1996, the Company had 991,785 shares of
its Common Stock in escrow relating to companies acquired, to be released to the
former owners of the companies acquired upon the achievement of certain earnings
in future periods (see Note 13). During 1997, earnings targets were achieved for
certain companies, and 720,785 of such shares were released from escrow.
Additionally, 79,135 shares were issued during 1997 related to such earnings
targets for one of its acquisitions. As of December 31, 1997, 271,000 shares
remained in escrow, pending achievement of specified earnings. During 1998, the
earnings target was met and the remaining 271,000 shares were released from
escrow. As of December 31, 1998, there were no shares held in escrow.
In connection with the Company's public stock offerings in 1994 and 1995, a
total of 4,237,250 Class A Warrants (including 425,000 warrants issued in
connection with a $850,000 bridge financing in 1995) and 3,812,250 Class B
Warrants were issued. The Class A Warrants entitled each registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.25. The Class B Warrants entitled each registered holder to purchase one
share of Common Stock at an exercise price of $8.00. In 1996, in accordance with
the terms of the warrants, the Company called for the redemption of all of the
outstanding Class A and Class B Warrants. As a result, in 1996, substantially
all of the registered holders of Class A and Class B Warrants exercised their
warrants. The Company received $90.5 million in proceeds from the exercise (net
of fees to the IPO underwriter of $2.2 million). There were no Class A or Class
B Warrants outstanding at December 31, 1996.
In December 1996, the Company and Jeffrey Goffman, who was at the time the
Company's Chief Executive Officer, entered into a Settlement Agreement with
Consolidated General Ltd. ("Consolidated"), U.K. Errington Ltd., and certain
other persons (collectively, the "Claimants"). Under the Settlement Agreement,
the Company issued an aggregate of 68,400 shares of its Common Stock, with a
fair market value of $654,000 at the date of issuance, to the Claimants and paid
to the Claimants an aggregate of $1.3 million in cash. In exchange, the
Claimants executed general releases in favor of the Company and Mr. Goffman.
Under the Settlement Agreement, the Claimants settled claims relating to
allegations that they had escrowed too many shares of their Common Stock under
the escrow agreement entered into in connection with the Company's initial
public offering. The Claimants also released their claims relating to promissory
notes in the aggregate principal amount of $850,000 executed by Mr. Goffman in
favor of the Claimants, which promissory notes were collateralized by 150,000
shares of the Company's Common Stock owned by Mr. Goffman. After the execution
of these promissory notes, Mr. Goffman executed an assignment and assumption
agreement on behalf of himself and the Company, under which the Company
purportedly assumed Mr. Goffman's obligations under such promissory notes. These
promissory notes were executed by Mr. Goffman in payment of consideration to the
Claimants under consulting agreements between Mr. Goffman and the Claimants,
which Mr. Goffman asserted were entered into by him for the benefit of the
Company. Under the terms of these consulting agreements, the Claimants were to
provide consulting and advisory services to Mr. Goffman, purportedly on behalf
of the Company, to assist in funding, evaluating and structuring business
opportunities and transactions. The
53
<PAGE> 54
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
fair market value of the shares issued and the cash paid totaled $2 million and
is included in loss on settlement of claims in the accompanying 1996
consolidated statement of operations. Subsequently, the Claimants alleged that
the Company had not registered the aforementioned 68,400 shares of Common Stock
by the date contemplated in the December 1996 Settlement Agreement and made
claims against the Company. The dispute was settled as to Consolidated in
November 1997 and as to Errington in January 1998 by payment by the Company to
the Claimants of a total of approximately $364,000 to settle all additional
claims and the Company was released from any further liability under the
December 1996 Settlement Agreement. The settlement amount was expensed in the
accompanying 1997 consolidated statement of operations.
In 1996, 149,030 shares of the Company's Common Stock were issued upon
conversion of convertible debt securities in accordance with the conversion
terms.
In connection with a settlement agreement dated January 30, 1996, the Company
issued 20,000 shares of Common Stock in consideration for the alleged improper
termination of employment and cancellation of options to purchase 40,000 shares
of the Company's Common Stock. The aggregate market value of these 20,000 shares
of Common Stock was approximately $125,000 and is included in loss on settlement
of claims during 1996 in the accompanying consolidated statement of operations.
A former director of the Company is one of three stockholders of Med LNC, Inc.,
to which the Company was obligated to pay monthly consulting fees of $15,000
through June 1999. This consulting agreement was entered into in conjunction
with an acquisition. In January 1996, the Company issued 93,000 shares of Common
Stock in full payment of the remaining 41 months of the agreement. The aggregate
market value of the stock issued was $581,000 at the date the shares were
issued. This amount is included in general and administrative expense during
1996 in the accompanying consolidated statement of operations.
See Note 12 regarding activity under the Company's stock option plans and
warrants issued by the Company.
Prior to January 1997, the Company granted contractual rights to certain persons
to whom the Company issued securities to register such securities under the
Securities Act of 1933, and state securities registration statutes, and in some
instances the Company agreed to repurchase the stock issued to these persons or
to pay specified liquidated damages if such registration was not effected in a
timely manner. The Company's inadvertent failure to timely file a Form 8-K
report in connection with one of its 1996 acquisitions made it impracticable for
the Company to file registration statements under the Securities Act of 1933
until June 1998. As such, the Company had not registered certain securities in
accordance with provisions of various registration rights agreements. In
November 1997 and January 1998 the Company entered into settlement agreements
with two of the holders of such registration rights who had received a total of
68,400 shares of Common Stock as part of an earlier settlement with the Company
in December 1996. Pursuant to the November 1997 and January 1998 settlements
pertaining to registrations, the Company paid an aggregate of $364,000 in
December 1997 and February 1998 in full and final satisfaction of its
registration and any other obligations. Such amount is included in general and
administrative expense in the accompanying 1997 consolidated statement of
operations. Another individual who asserted an agreement to register securities
has requested and received a commitment to provide piggyback registration rights
for 50,000 shares of the Company's Common Stock, at no cost to
54
<PAGE> 55
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
the Company, in full satisfaction of the Company's registration obligations, if
any. Such Agreement has been delivered to the individual.
The only other parties to assert non-compliance with an agreement to register
the Company's Common Stock is a group of sellers of centers in Pennsylvania and
certain sellers of centers in New York who have brought suit against the Company
as more fully described in Note 20.
The Company's financial condition may also be materially adversely affected to
the extent that persons to whom the Company has issued securities successfully
assert claims against the Company based upon inadequacy of disclosure regarding
the background of Keith Greenberg, as more fully discussed in Note 20. In
addition to the class action lawsuits which have now been settled, two such
suits have been brought to date. Each lawsuit is more specifically described in
Note 20.
At December 31, 1998, the Company had 22,712,433 shares of Common Stock issued
and outstanding.
A summary of Shares of Common Stock reserved for potential future issuance as of
December 31, 1998, is as follows (in thousands of shares):
Subordinated convertible debentures 3,842
Stock option plans 3,556
Underwriter options and warrants 1,645
$10.0 million convertible note 1,176
Warrants issued to lender 250
Warrants outside of stock option plans 625
Other convertible debt 3
1996 restricted stock grants not yet issued 199
------
11,296
======
[11] SALES AND ACQUISITIONS OF BUSINESSES
In May 1998, the Company sold 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 $25.0 million of the cash
proceeds to repay a portion of the outstanding balance under the DVIBC credit
loan (see Note 6). The transaction resulted in a pre-tax gain of $5.8 million
which is included in gain (loss) on sale of subsidiaries in the accompanying
consolidated statement of operations.
Also in May 1998, the Company sold 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.
In November 1998, the Company sold its 100% interest in 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 sale was effective as of October 1, 1998.
55
<PAGE> 56
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The $12.0 million aggregate consideration received consisted of $2.7 million in
cash, notes receivable of $1.0 million ($500,000 of which is due in various
monthly and quarterly installments with interest at 7% per annum, and the
remaining $500,000 due on September 30, 2001 with interest at 7% per annum
payable quarterly), and the assumption and forgiveness of debt by the purchaser
aggregating $8.3 million. Additionally, as part of the transaction, the Company
entered 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. During February and March 1999, the purchaser of US
Heartcare paid the entire $1.0 million of notes receivable to the Company
without penalty. See Note 22 for discussion of the sale of certain subsidiaries
during January and February 1999.
Excluding the $5.8 million gain on the MDI sale, the aggregate loss recorded for
all sales (including those consummated in early 1999--See Note 22) was $1.1
million.
All of the acquisitions made by the Company during each of the three years in
the period ended December 31, 1998, were accounted for under the purchase method
of accounting. The Company allocates the purchase price to net assets acquired
based upon their estimated fair market values. During the initial year after
acquisition the Company may adjust the allocation of the purchase price
subsequent to the initial allocation as more information becomes available.
During 1996, the Company and its subsidiaries acquired at least a majority
interest in 22 multi-modality diagnostic businesses. The combined purchase price
for the businesses was $174.9 million. The purchase price was comprised of
$122.3 million in cash, $37.2 million in debt, and Common Stock and options of
the Company with an aggregate market value of $15.4 million at the respective
valuation dates of the acquisitions. The excess of the purchase price over the
fair value of net assets acquired relating to these acquisitions totaled $143.8
million.
During 1997, the only acquisition made by the Company was Medical Diagnostics,
Inc. in the first fiscal quarter. Total consideration paid was approximately
$22.0 million in cash and assumption of debt of $8.6 million. MDI provides fixed
and mobile diagnostic imaging services to approximately 40 hospitals. As further
discussed above, in May 1998 the Company sold MDI.
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 $2.0 million, of which $1.5 million was paid (without interest) in
July 1998, and the remaining $500,000 was paid 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.
On December 31, 1998, the Company purchased the remaining 50% interest in
Imaging Center of Orlando for $1.3 million. Half of such purchase price is
payable in six equal quarterly installments beginning April 1999 including
interest at 7% per annum, and the other half of such purchase price is payable
at any time at the discretion of the Company for a period of five years from
date of purchase with an option to extend for an additional five years, with
accumulated interest at the federal interest rate under Internal Revenue Code
Section 1274 (d) (4.5% at December 31, 1998).
56
<PAGE> 57
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Certain of the above acquisition agreements provide for contingent consideration
upon the achievement of certain earnings in future periods by the acquired
company. When and if the consideration is paid, goodwill is increased by the
amount of the additional consideration, and is amortized on a prospective basis
over its remaining estimated life, subject to review of impairment. As of
December 31, 1998, there was no contingent consideration outstanding.
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
$694,000 (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 10%, 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.
In connection with the aforementioned acquisitions, the Company entered into
consulting and employment contracts with certain individuals of the acquired
companies. Payments relating to these contracts are charged to operations in the
period in which the related services are provided.
The Company also entered into non-compete agreements with certain individuals of
some of the companies acquired. The cost of these non-compete agreements is
recorded as an intangible asset as of the date of the related acquisition and
amortized over the contractual life of the agreement.
The results of operations of the acquired businesses are included in the
Company's consolidated results of operations from the date of acquisition.
57
<PAGE> 58
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The following summarizes the unaudited pro forma effect of the businesses
acquired in 1996, 1997 and 1998, accounted for under the purchase method as if
the businesses had been acquired as of the beginning of the year immediately
preceding the year of acquisition. This presentation is prepared in accordance
with generally accepted accounting principles and does not reflect estimates for
potential operating efficiencies and other cost savings.
UNAUDITED:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
In thousands
Net revenue as reported $ 195,735 $ 216,222 $ 102,061
Effect of acquisitions 2,473 11,305 116,202
--------- --------- -----------
Pro forma net revenue $ 198,208 $ 227,527 $ 218,263
========= ========= ===========
Loss before extraordinary item as reported $ (512) $(116,712) $ (6,331)
Effect of acquisitions (71) 109 1,567
--------- --------- -----------
Pro Forma loss before extraordinary items $ (583) $(116,603) $ (4,764)
========= ========= ===========
Net income (loss) as reported $ 4,799 $(116,712) $ (6,331)
Effect of acquisitions (71) 109 1,567
--------- --------- -----------
Pro forma net income (loss) $ 4,728 $(116,603) $ (4,764)
========= ========= ===========
Basic and diluted earnings per share
Loss before extraordinary item as reported $ (.02) $ (5.26) $ (.48)
Effect of acquisitions -- -- .12
--------- --------- -----------
Pro forma loss before extraordinary item $ (.02) $ (5.26) $ (.36)
========= ========= ===========
Basic and diluted earnings per share
Net income (loss) as reported $ .21 $ (5.26) $ (.48)
Effect of acquisitions -- -- .12
--------- --------- -----------
Pro forma net income (loss) $ .21 $ (5.26) $ (.36)
========= ========= ===========
</TABLE>
58
<PAGE> 59
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[12] STOCK OPTION PLANS AND WARRANTS
At December 31, 1998, the Company has two stock-based compensation plans. In
accordance with SFAS No. 123 "Accounting for Stock-Based Compensation", ("SFAS
No. 123"), the Company has accounted for all stock-based compensation grants
issued to non-employees subsequent to December 15, 1995 as provided for by SFAS
No. 123. The Company has elected to continue to account for its stock-based
compensation grants to employees and directors in accordance with the provisions
of APB Opinion No. 25 "Accounting for Stock Issued to Employees". However, in
accordance with SFAS No. 123, the pro forma effect of the issuance of such
options is set forth below. The fair value of each option granted subsequent to
December 15, 1995 to non-employees and employees has been estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 5.8 percent
through 7.1 percent for 1996, 5.7 percent to 6.6 percent for 1997, and 4.3
percent to 5.5 percent for 1998; dividend yield of zero percent for all years;
expected lives ranging from 4 to 7 years for 1996, and 3 to 6 years for 1997,
and 2 to 5 years for 1998; and volatility of 73 percent for 1996, 82 percent for
1997 and 87 percent for 1998. Compensation cost charged to operations in
connection with the Company's stock-based compensation plans totaled $3.3
million (including $1.1 million classified as compensation to terminated
consultant) in 1996, $3.6 million (including $2.3 million which is included in
the net Settlement to Former Chief Executive Officer) in 1997, and $1.2 million
in 1998, respectively.
The following represents the pro forma effect had the Company valued all of its
stock-based compensation in accordance with SFAS No. 123 using the option
pricing model assumptions described above.
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- ---------
<S> <C> <C> <C>
In thousands, except per share data
Net income (loss)
As reported $ 4,799 $ (116,712) $ (6,331)
Pro forma $ 2,893 $ (120,758) $ (7,061)
Basic and diluted earnings (loss) per share
As reported $ 0.21 $ (5.26) $ (.48)
Pro forma $ 0.13 $ (5.44) $ (.53)
</TABLE>
The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the issuance
of incentive stock options and non-qualified stock options. Under the terms of
the 1993 Plan, a maximum of 200,000 shares of the Company's Common Stock may be
issued upon the exercise of stock options granted thereunder. The 1993 Plan
provides for administration by the Company's Board of Directors (or a committee
of the Board of Directors) which, subject to the terms of the 1993 Plan,
determines to whom grants are made and the vesting, timing, amounts and other
terms of such grants. Incentive stock options may be granted only to employees
of the Company, while non-qualified stock options may be granted to the
Company's employees, officers, directors, consultants and advisors. The exercise
price of incentive stock options may not be less than the fair market value of
the Company's Common Stock on the date of grant and the term of these options
may not exceed 10 years; however, with respect to incentive stock
59
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
options granted to holders of more than 10% of the Company's Common Stock, the
exercise price may not be less than 110% of the fair market value of the
Company's Common Stock on the date of grant and the term of these options may
not exceed five years. The 1993 Plan has no options available for new grants as
of December 31, 1998.
The Company's 1995 Long-Term Incentive Plan (the "1995 LTIP") provides for the
issuance of incentive stock options and non-qualified stock options. The 1995
LTIP also provides for awards of restricted stock. Under the terms of the 1995
LTIP, as amended, a maximum of 4,000,000 shares of the Company's Common Stock
may be issued upon the exercise of stock options granted thereunder and a
maximum of 700,000 shares of Common Stock are available for restricted stock
awards. The 1995 LTIP provides for administration by the Company's Board of
Directors (or a committee of the Board of Directors) which, subject to the terms
of the 1995 LTIP, determines to whom grants are made and the vesting, timing,
amounts and other terms of such grants. The 1995 LTIP provides that the total
number of shares of Common Stock that may be subject to stock options or
restricted stock awards granted to any person in any calendar year may not
exceed 25% of the maximum number of shares that may be issued and sold under the
Plan. The Company has a policy pursuant to which non-employee directors shall
receive an option to purchase 10,000 shares of Common Stock under the 1995 LTIP
(i) on the date that such director first becomes a director, and (ii) each year,
on the day immediately following the Company's annual stockholders' meeting.
A summary of the status of the Company's two stock option plans at December 31,
1998, 1997 and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- ------------ ----- ------------ ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 3,171 $ 7.97 2,620 $ 8.42 1,107 $ 5.23
Granted:
Exercise price equals
market price 2,410 1.68 695 6.76 1,206 11.29
Exercise price is less
than market price -- -- -- -- 545 7.23
Exercised -- -- (16) (4.44) (195) (5.30)
Forfeited (2,025) (6.72) (128) (11.06) (43) (5.28)
----- ------------ ----- ------------ ----- ----------
Outstanding at end of year 3,556 $ 4.42 3,171 $ 7.97 2,620 $ 8.42
===== ============ ===== ============ ===== ==========
Options exercisable at end of year 1,807 1,975 479
Weighted-average fair value of
options granted during the year:
Exercise price equals
market price $ 1.68 $ 6.76 $ 6.00
Exercise price is less
than market price not applicable not applicable $ 9.70
</TABLE>
60
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The following table summarizes information about stock options outstanding at
December 31, 1998. (Shares in thousands)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------------
Shares Weighted-Average Weighted-Average Shares Weighted-Average
Range of Exercise Outstanding at Remaining Life Exercise Price Exercisable Exercise Price
Price 12/31/98 at 12/31/98
<S> <C> <C> <C> <C> <C>
$ 0.94 - $ 0.94 1,695 4.95 $ 0.94 276 $ 0.94
$ 3.50 - $ 5.47 730 2.33 4.89 582 5.10
$ 5.88 - $10.00 750 3.43 7.76 626 7.85
$12.00 - $13.50 357 2.94 12.30 315 12.20
$13.63 - $13.63 24 4.43 13.63 8 13.63
----- ---- ------ ----- ------
$ 0.94 - $13.63 3,556 3.88 $ 4.42 1,807 $ 6.69
===== ==== ====== ===== ======
</TABLE>
Not issued pursuant to the plans discussed above are a total of 625,000 warrants
outstanding at December 31, 1998, issued during 1995 to individuals to purchase
Common Stock at exercise prices ranging from $5.00 to $5.13. The Company issued
400,000 of the warrants to a current member of the Company's Board of Directors;
50,000 warrants were issued to the Company's former Executive Vice President,
General Counsel and Director of the Company prior to his employment with the
Company; and 175,000 warrants were issued to other individuals.
In connection with the Company's 1994 and 1995 public stock offerings, the
Company issued unit purchase options to the underwriters. The 1994 options allow
the holder to acquire 170,000 shares of Common Stock at $7.25 per share,
170,000 warrants convertible into Common Stock at $6.25 per share and 340,000
warrants convertible into shares of Common Stock at $8.00 per share. The 1995
options allow the holder to acquire 161,500 shares of Common Stock at $7.82 per
share, 161,500 warrants convertible into shares of Common Stock at $6.25 per
share and 323,000 warrants convertible into shares of Common Stock at $8.00
per share. All of the options and related warrants, which are convertible into a
total of 1,326,000 shares, are outstanding at December 31, 1998.
In connection with the 1996 issuance of the Company's Subordinated Convertible
Debentures, warrants to acquire 319,445 shares of the Company's Common Stock at
$9.00 per share were issued to the underwriter. All of these warrants are
outstanding at December 31, 1998.
During 1995 and 1996, the Company granted, respectively, 50,000 and 195,000
shares of restricted Common Stock to the Company's former Chief Executive
Officer under the 1995 LTIP. These restricted stock grants vested over two and
five years, and the Company recorded deferred charges of $175,000 and $2.5
million, respectively, to be amortized over the vesting period of the stock. The
unamortized deferred compensation balance of approximately $2.1 million was
recorded as part of Settlement with Former Chief Executive Officer during the
second quarter ended June 30, 1997 (see Note 19).
During 1995 and 1996, the Company granted 50,000 and 35,000 shares of restricted
Common Stock to the Company's former President under the 1995 LTIP. These
restricted stock grants vested over three and five years, and the Company
recorded deferred charges of $175,000 and $451,000, respectively, to be
amortized over the vesting period of the stock. The unamortized deferred
compensation balance was expensed during 1996 pursuant to the individual's
termination of employment with the Company.
61
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
During 1995 and 1996, the Company granted 50,000 and 55,000 shares of restricted
Common Stock to Coyote Consulting under the 1995 LTIP. These restricted stock
grants vested over two and five years, and the Company recorded deferred charges
of $175,000 and $708,000, respectively, to be amortized over the vesting period
of the stock. The related consulting agreement with Coyote Consulting was
terminated subsequent to December 31, 1996, and the unamortized deferred
compensation was expensed in the fourth quarter of 1996. See Note 19.
The Company granted 94,000, and 51,000 shares of restricted Common Stock to
certain other officers and directors of the Company in 1996 and 1997,
respectively, under the 1995 LTIP. These restricted stock grants have vesting
periods ranging from two to five years. Related deferred charges in 1996 and
1997 amounted to $1.2 million and $440,000, respectively, which are being
amortized to compensation expense over the vesting periods of the restricted
stock. The unamortized deferred compensation balance as of December 31, 1998 and
1997 is $567,000 and $1.1 million, respectively.
In March 1997, the Company granted options to acquire 100,000 shares of the
Company's Common Stock to its then Chairman of the Board and options to acquire
35,000 shares of the Company's Common Stock to each of two directors, all under
the 1995 LTIP. The three Directors comprised the Special Committee appointed by
the Company's Board of Directors to review the Company's prior relationship with
Coyote Consulting and Keith Greenberg (see Note 19). The options vested on
September 30, 1997. The exercise price of the options is $8.625 which was the
market value of the Company's Common Stock at the date of grant.
During 1997, the Company issued to one of its lenders two warrants to purchase
an aggregate of 250,000 shares of Common Stock of the Company at an exercise
price of $7.6875 per share. In connection with additional financing in December
1998 by the same lender, the two warrants were canceled and a new warrant was
issued to purchase 250,000 shares of Common Stock of the Company at an exercise
price of $0.938 per share. See Notes 6 and 7.
On July 13, 1998, the Board of Directors of the Company elected Dr. L.E. Richey,
M.D., then a Co-Chairman of the Board of the Company, to the position of sole
Chairman of the Board. As previously reported, concurrently, the Company granted
Dr. Richey options to purchase 350,000 shares of the Company's Common Stock
under the 1995 LTIP 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 were exercisable at a price of $3.50, which represented
the closing price of the Company's Common Stock on the day immediately preceding
the date of grant, and fully vested one year from the date of grant.
On December 11, 1998, options to purchase 1,966,000 shares of the Company's
Common Stock under its 1995 LTIP were canceled. 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 1,215,000 of such total
having been issued to current directors and executive officers of the Company
(including a former director, Dr. L.E. Richey) and 751,000 having been issued to
other employees. Concurrent with the cancellation of these options, options
(hereinafter defined as "new options") to purchase 1,165,001 shares of the
Company's Common Stock under the 1995 LTIP were granted to current directors and
executive officers, (including a former director, Dr. L.E. Richey), and new
options to purchase 530,000 shares of Common Stock were granted to certain other
employees. This December 1998 cancellation
62
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
and reissuance was consummated in lieu of the July 1998 cancellation and
reissuance previously disclosed which was not consummated. The new options were
issued in order to provide an appropriate incentive to the grantees, especially
those whose previous options were granted with exercise prices substantially
above the current market price of the Company's Common Stock. All such new
options are exercisable at a price of $0.937, which represents the closing
price of the Company's Common Stock on the day immediately preceding the date of
grant. New options issued to non-employee directors fully vest on the first
anniversary of the date of grant and have a term of five years. All other new
options granted vested 25% at date of grant and will vest 25% on each
anniversary date thereafter, and have a term of five years.
[13] EARNINGS PER SHARE
The Company had a loss before extraordinary item in each of the three years in
the period ended December 31, 1998, and all potentially dilutive securities were
excluded from basic and diluted earnings per share in each year since the effect
would be anti-dilutive. Such potentially dilutive securities consist of the
following: (i) unexercised stock options and warrants to purchase 6.1 million,
5.7 million and 4.9 million shares of the Company's Common Stock as of December
31, 1998, 1997 and 1996, respectively; (ii) 5.0 million, 7.8 million, and 5.6
million shares of the Company's Common Stock issuable upon conversion of
convertible debt as of December 31, 1998, 1997 and 1996, respectively; (iii)
unvested restricted stock amounting to 199,000, 228,000 and 379,000 shares of
the Company's Common Stock as of December 31, 1998, 1997 and 1996, respectively;
and (iv) 271,000 and 991,785 shares of the Company's Common Stock held in escrow
as of December 31, 1997 and 1996, respectively, to be released to the sellers
related to certain acquisitions only if certain earnings targets were achieved.
63
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[14] COMMITMENTS
The Company and its subsidiaries have non-cancelable operating leases for use of
their facilities and various equipment. These leases may require payment of
various expenses as additional rent. Certain leases contain renewal options and
escalation clauses. As further discussed in Note 22, on February 12, 1999, the
Company sold a subsidiary. In connection with the transaction, the purchaser
assumed certain non-cancelable operating leases of the Company. The minimum
future rental payment amounts shown below reflect the obligation of the Company
for such operating leases only through February 12, 1999.
Minimum future rental payments for each of the next five years and thereafter
under non-cancelable operating leases having remaining terms in excess of one
year as of December 31, 1998 are:
In thousands:
Date Amount
- ---- ------
1999 $14,155
2000 11,423
2001 9,031
2002 6,643
2003 5,907
Thereafter 20,657
-------
Total $67,816
=======
Rent expense for the years ended December 31, 1998, 1997 and 1996, under various
operating leases amounted to $13.2 million, $10.5 million and $5.6 million,
respectively.
The Company has comprehensive maintenance contracts with its equipment vendors
for its magnetic resonance imaging ("MRI"), computerized tomography ("CT") and
other diagnostic medical equipment. The terms of these contracts are between one
and five years, but may be canceled by the Company under certain circumstances.
In addition, the Company has approximately $8.2 million of purchase commitments
for capital expenditures as of December 31, 1998.
The Company has entered into employment agreements with certain officers. The
employment agreements have original terms of two to five years. All of the
agreements provide for a specific amount of annual base salary. Certain of the
agreements provide for incentive bonuses, stated minimum base salary increases,
and options to acquire the Company's Common Stock. In addition, certain of the
employment agreements provide that in the event of certain changes in control of
the Company, the officers may deem their employment terminated and receive lump
sum payments pursuant to terms provided in each of the applicable employment
agreements. The aggregate amount of compensation under all existing employment
agreements, based upon the base salaries in effect at December 31, 1998, for the
remaining terms of the respective employment agreements, was approximately $3.2
million at December 31, 1998.
Each of the Company's Facilities has agreements with radiologists as independent
contractors under long-term agreements to provide all radiology services to the
Facilities. Radiologist compensation ranges between 8% and 21% of net
collections attributable to radiology services performed by the radiologist.
64
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[15] CONCENTRATION OF CREDIT RISKS
The Company's imaging centers grant credit without collateral to its patients,
most of whom are residents of the areas where the centers are located and are
insured under third-party payor agreements.
The mix of receivables from third-party payors and patients at December 31:
% of Total
1998 1997
----- -----
Medicare & Medicaid 12% 17%
Workers' Compensation and Self Pay 10 12
Commercial 17 14
Managed Care 36 43
Other 25 14
----- -----
Total 100% 100%
===== =====
[16] 401(k) PROFIT SHARING PLAN
Effective in October 1996, the Company amended its 401(k) Pension Plan to a
401(k) Profit Sharing Plan (the "401(k) Plan"). The 401(k) Plan is offered to
full-time employees who have completed six months of service. Eligible employees
may make elective deferrals in any amount up to 15% of their compensation. The
Company contributes 100% of the amount withheld from the Participant's
compensation (up to a maximum of 3%) and may make additional discretionary
contributions. Employer contributions to the 401(k) Plan totaled $486,000,
$526,000 and $180,000 in fiscal 1998, 1997 and 1996, respectively.
[17] EXTRAORDINARY ITEM
During fiscal 1998, the Company purchased approximately $22.9 million aggregate
principal amount of its Convertible Subordinated Debentures for amounts less
than the recorded amounts. The transaction resulted in a net gain of $5.3
million after taxes. See Notes 6 and 7.
[18] INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
In 1997, as the result of losses incurred by Diversified Therapy Corporation
("DTC"), a 1996 unconsolidated investment in a start-up company accounted for
using the equity method of accounting, the Company recorded a loss of $3.6
million in the quarter ended June 30, 1997, representing the Company's entire
recorded investment in DTC. Such loss amount is included in asset impairment
losses in 1997 as discussed in Notes 2 and 5. On December 31, 1998, the Company
sold its interest to DTC for a nominal amount.
Effective July 1, 1996, the Company entered into a 50/50 joint venture with
Phycor of Jacksonville, Inc. ("Phycor"), a wholly-owned subsidiary of Phycor,
Inc., to lease outpatient imaging equipment and facilities to affiliated
providers in South Georgia and North Florida through Diagnostic Equity Partners,
("DEP"), a partnership. At December 31, 1997 the Company's investment in and
advances to DEP was
65
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
$1.3 million. Effective April 1, 1998, the Company purchased from Phycor certain
accounts receivable owned by Phycor as well as Phycor's 50% interest in DEP. The
purchase price was $2.0 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. For the three months ended
March 31, 1998, DEP had total revenues of $3.0 million, total expenses of $3.3
million, and a net loss of $320,000. At December 31, 1997 DEP had current assets
of $444,000 and total assets of $11.0 million, current liabilities of $4.0
million and total liabilities of $9.3 million and total partnership capital of
$1.7 million. During 1997 DEP had total revenues of $11.5 million, total
expenses of $12.5 million, and a net loss of $1.0 million.
The following is a combined financial summary of all unconsolidated subsidiaries
(other than DEP discussed above), which the Company is accounting for under the
equity method. The Company's ownership interests in the partnerships varies
between 18% and 42%. On December 17, 1998, one of the partnership entities was
dissolved and the operations were terminated. The Company has opened a center in
the same city that provides similar as well as expanded services. The Company's
combined investments in and advances to these entities were $1.3 million,
$3.0 million and $3.2 million as of December 31, 1998, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
In thousands
As of December 31,
--------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current Assets $ 5,121 $ 8,180 $ 5,357
Non-Current Assets 3,359 5,551 3,098
------- ------- -------
Total Assets $ 8,480 $13,731 $ 8,455
======= ======= =======
Current Liabilities $ 1,650 $ 3,954 $ 4,213
Non-Current Liabilities 2,921 1,667 1,798
Partnership Capital 3,909 8,110 2,444
------- ------- -------
Total Liabilities and Capital $ 8,480 $13,731 $ 8,455
======= ======= =======
Results of Operations
Net Revenue $12,571 $12,237 $ 2,678
Expenses 7,345 7,224 1,928
------- ------- -------
Net Income $ 5,226 $ 5,013 $ 750
======= ======= =======
</TABLE>
[19] TERMINATION OF EMPLOYMENT AND CONSULTING AGREEMENTS
On February 3, 1997, Jeffrey Goffman, at the time the Company's Chairman and
Chief Executive Officer, was voluntarily placed on administrative leave by the
Company's Board of Directors. During this administrative leave, he was relieved
of all corporate duties and did not participate in any meetings of the Company's
Board of Directors. On March 25, 1997, Mr. Goffman declared his election to
treat himself as having been terminated without cause by the Company under his
employment contract, thus, invoking constructive termination provisions of his
employment agreement. This action followed the recommendation of a Special
Committee of the Board of Directors reviewing the Company's former relationship
with Coyote Consulting and Keith Greenberg, an employee of Coyote who had
provided services to the Company.
66
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
On April 24, 1997, the Company and Mr. Goffman entered into a Letter of Intent
(the "Letter") with respect to the resolution of employment related disputes
between them. Pursuant to the terms of the Letter, Mr. Goffman resigned as an
officer, director and employee of the Company effective as of March 31, 1997,
and received $165,000 upon execution of the Letter. On July 11, 1997, the
Company and Mr. Goffman entered into a Settlement Agreement and General Release
(the "Settlement Agreement"), pursuant to which, among other things, the Company
paid Mr. Goffman an additional $33,000 implementing the terms of the letter and
agreed to pay an additional $267,000 in sixteen equal monthly consecutive
installments of $17,000 beginning in August 1997. Mr. Goffman also agreed to
transfer or vote, as required by the Company, all proxies or other agreements by
which he exercised the right to vote or exercise legal control over the
Company's stock in which others have a beneficial interest. As part of this
settlement, it was agreed that all previously vested restricted stock and stock
options granted to Mr. Goffman would be retained by him and all unvested
restricted stock as of March 31, 1997 (220,000 shares) would become vested and
be placed in an escrow account. In addition, unvested options for 100,000 shares
of Company Common Stock which are exercisable at $5.125 per share were placed in
the escrow account. Notwithstanding Mr. Goffman's resignation, these options
will vest in accordance with the schedule originally established at the time
such options were awarded to Mr. Goffman or, if earlier, upon the sale of the
Company or a change of control on or before March 31, 1999. All other options
which were unvested as of March 31, 1997 (specifically the 100,000 options
granted on June 1, 1996 exercisable at $7.125 and the 250,000 options granted on
October 9, 1996 exercisable at $12.125) will vest only upon the sale of the
Company or a change in control on or before March 31, 1999.
The $165,000 paid to Mr. Goffman upon execution of the Letter, the $33,000 paid
within two days of the execution of the Settlement Agreement, the $267,000 to be
paid over sixteen months and unamortized deferred compensation relating to Mr.
Goffman in the amount of $2.3 million were recorded in Settlement with Former
Chief Executive Officer during the second quarter ended June 30, 1997.
On September 30, 1997 the Company entered into a second settlement with Mr.
Goffman which fully resolved the remaining issues between them including
ownership of the escrow account previously established. Pursuant to this
settlement, Mr. Goffman agreed to contribute $1.0 million to the Company's
settlement of the class actions in the form of $850,000 cash and the forgiveness
of the next nine monthly payments totaling $150,000 which would otherwise be due
to him from the Company under the earlier settlement. Mr. Goffman delivered the
$850,000 to the Company on March 17, 1998. The Company thereafter released its
claim to the remainder of the securities covered by the Escrow and Settlement
Agreement.
During the quarter ended September 30, 1997, a credit of $1.0 million was
recorded in Settlement with Former Chief Executive Officer to reflect the
expected contributions from Mr. Goffman which were subsequently received.
Michael D. Karsch, the Company's former Senior Vice President, General Counsel
and Secretary of the Company, and the Company were parties to a five-year
employment agreement dated June 1, 1996. On February 3, 1997, Mr. Karsch was
placed on administrative leave by the Company's Board of Directors. This action
followed the recommendation of a Special Committee of the Board of Directors
reviewing the Company's former relationship with Coyote Consulting and Keith
Greenberg. During this administrative leave, Mr. Karsch was relieved of all
corporate duties and did not participate in any
67
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
meetings of the Company's Board of Directors. On March 25, 1997, Mr. Karsch
declared his election to treat himself as having been terminated without cause
by the Company under his employment contract, thus invoking constructive
termination provisions of his employment agreement. The Company has treated this
election as a resignation. The Company has not yet agreed to any severance
arrangements with Mr. Karsch. At December 31, 1998, the Company has deferred
compensation totaling $93,000 relating to Mr. Karsch which is included in
Deferred Stock Based Compensation in the accompanying condensed consolidated
balance sheet.
Coyote Consulting and Keith Greenberg (an employee of Coyote) have sued the
Company alleging that they are entitled to receive additional cash, stock and/or
options in an unspecified amount in connection with the Company's December 1996
termination of its consulting relationship with Coyote. The Company has not yet
been required to answer the complaint but intends to vigorously defend the
claims and to assert cross-claims exceeding the amount claimed by Coyote and
Greenberg. Management does not expect the outcome to be material to its
financial position or results of operations.
[20] LITIGATION
Two suits have been filed against the Company by sellers of diagnostic imaging
centers who received shares of the Company's Common Stock in partial payment of
the purchase price for their centers and who allege that undisclosed facts
regarding the background of Keith Greenberg, a former consultant to the Company,
were material to their decision to sell. In connection with the first of these
actions (Centre Commons MRI Ltd., et al. v. US Diagnostic et al.), in the United
States District Court for the Western District of Pennsylvania, the sellers of
multiple centers in Pennsylvania seek to compel the Company to repurchase
approximately 750,000 shares of its Common Stock at a price of $12.125 per share
and also allege that the Company's failure to register such shares under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a written
contract, diminished their value. Even if registered, the shares were subject to
limited releases from lock-up until July 1997 when they became tradable pursuant
to Rule 144 without the need for registration. Non-binding mediation has been
scheduled by the parties to occur within the next 90 days. In the second such
suit (Sanders et al. v. US Diagnostic et al.) in the United States District
Court for the Eastern District of New York, four participants in limited
partnerships which sold the Company three imaging centers in New York seek to
recover damages of up to $2.0 million but have been unable to substantiate this
amount. A motion by the Company to dismiss the action is pending with the Court.
The Company is vigorously defending both suits but there can be no assurances
that the Company will prevail.
In December 1996, the SEC commenced an investigation into the Company's former
relationship with Coyote Consulting and Keith Greenberg to determine whether the
Company's disclosure concerning that relationship was in compliance with the
federal securities laws. The Company is cooperating fully with the SEC.
In connection with the previously reported case Integrated Health Concepts, Inc.
("IHC") v. US Diagnostic Inc., Mohammed Athari, M.D. and Don Ballard filed in
the Harris County, Texas District Court, in December 1998 the Company and
Ballard entered into an agreement which confirmed the Company's ownership of
Ballard's former 15% stock interest in IHC in exchange for the Company's payment
of $700,000. In connection therewith, the parties exchanged full mutual
releases.
68
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US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company could be subject to legal actions arising out of the performance of
its diagnostic imaging services. Damages assessed in connection with, and the
cost of defending, any such actions could be substantial. The Company maintains
liability insurance which it believes is adequate for its present operations.
There can be no assurance that the Company will be able to continue or increase
such coverage or to do so at an acceptable cost, or that the Company will have
other resources sufficient to satisfy any liability or litigation expense
that may result from any uninsured or underinsured claims. The Company also
requires all of its affiliated physicians to maintain malpractice and other
liability coverage.
The Company is also a party to, and has been threatened with, a number of other
legal proceedings in the ordinary course of business. While it is not feasible
to predict or determine the outcome of these matters, and although there can be
no assurances management of the Company does not anticipate that the ultimate
disposition of any such proceedings will have a material adverse effect on the
Company.
[21] RELATED PARTY TRANSACTIONS
As of January 1, 1995, and amended effective September 1995, the Company entered
into a consulting agreement with Gordon Rausser, a member of the Company's Board
of Directors, to retain his services as an economic consultant to the Company.
The compensation under this agreement is (a) $25,000 cash for each quarter
commencing January 1, 1995, through December 31, 1999, for which he offers or
agrees to serve on the Company's Board of Directors and to provide other
consulting services to the Company; and (b) warrants to acquire 400,000 shares
of the Company's Common Stock immediately exercisable at $5.00 per share through
December 31, 1999.
During 1996 the Company paid legal fees of $430,000 to the law firm of Bachner,
Tally, Polevoy & Misher LLP of which Michael Karsch, a former executive officer
and director of the Company, was a partner until July 1996. In connection with
his employment agreement, the Company provided to Mr. Karsch a loan of up to
$100,000 for relocation expenses, of which $51,000 was outstanding as of
December 31, 1998.
A member of the Company's Board of Directors, Keith Hartley, is the managing
partner of Forum Capital Markets L.P. ("Forum"). Forum was the underwriter of
the Company's $57.5 million Subordinated Convertible Debenture Offering
consummated in 1996 (see Note 7), and was paid an underwriting fee of $2.9
million. In addition, the Company sold to Forum, for nominal consideration,
warrants which entitle Forum to purchase 319,445 shares of Common Stock of the
Company at an exercise price of $9.00 per share. Mr. Hartley was elected to the
Board of Directors of the Company on September 19, 1996, subsequent to the
Debenture offering.
In July 1996, the Company consummated the acquisition of all of the outstanding
capital stock of MediTek Health Corporation from HEICO. Laurans A. Mendelson is
the Chief Executive Officer and Chairman of the Board of HEICO. In accordance
with the terms of the acquisition documents, Mr. Mendelson, as designee of
HEICO, was elected by the Shareholders to the Company's Board of Directors on
September 19, 1996. Mr. Mendelson became Chairman of the Board of the Company on
February 2, 1997. On December 1, 1997, Mr. Mendelson resigned from the Board of
Directors.
69
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- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
In connection with the MediTek acquisition, the Company issued a Note to HEICO
for $10.0 million. On September 10, 1997, certain terms of the Note were
amended, and on September 16, 1997, HEICO sold the Note to Forum, which on the
same day resold the note to 18 individual parties.
In June 1996, the Company loaned the Company's former Chief Executive Officer,
Jeffrey Goffman, $360,000 for 30 days in connection with a private transaction.
Such loan bore interest at a rate of 10% per annum and was repaid in July 1996.
The Company entered into an Installation Agreement ("Installation Agreement")
dated February 27, 1997, and a Network Support Agreement ("Support Agreement")
dated July 31, 1997, with CIERRA Solutions, Inc. ("CSI"). A brother of Todd
Smith, who was a Vice President and the Chief Information Officer of the Company
through October 1998, is a substantial minority shareholder of CSI. CSI has been
providing project management services to the Company in connection with the
deployment of a wide area computer network to over 100 of the Company's
locations and other services since February 1996. The Installation Agreement had
a one-year term. The Support Agreement covered a six-month term and was
renewable by mutual consent of the parties for successive periods. The Company
has decided not to renew the Support Agreement with CIERRA after the current
contract lapses on April 30, 1999. Payments made to CSI in the years ended
December 31, 1998, 1997 and 1996 totaled $1.0 million, $1.1 million, and
$334,000, respectively, including reimbursement for expenses and equipment
purchases of $206,000, $268,000 and $64,000, respectively.
In July 1996, the Company purchased from a member of the Company's Board of
Directors the remaining 20% interest in a subsidiary of the Company. The Company
had purchased an 80% interest in 1995. Of this 80% interest, 13.3% was acquired
from the director and the remaining 66.7% was acquired from non-affiliates. The
purchase price for such transaction was $567,000, which was equal to the
pro-rata price for the original purchase in 1995.
The Company has a policy pursuant to which non-employee directors shall receive
an option under the Company's 1995 Long-Term Incentive Plan to purchase 10,000
shares of Common Stock (i) on the date that such director first becomes a
director, and (ii) each year, on the day of the first Board of Directors meeting
immediately following the Company's annual stockholders' meeting. See Note 12.
On January 20, 1998, Michael O'Hanlon, the Chief Executive Officer of DVI, Inc.,
an affiliate of DVIBC and DVIFS, was elected to the Board of Directors of the
Company. DVIFS and DVIBC are lenders to the Company. In December 1998 and
January 1999, the Company paid DVIFS loan fees totaling $647,000 and paid DVI
Private Capital an equity participation totaling $2.8 million, each in
connection with certain new financing. See Notes 6 and 7.
In January 1998, the Company reimbursed Leon Maraist, the Company's Chief
Operating Officer, for $65,000 in relocation costs to facilitate his relocation
to Palm Beach County, Florida.
In August 1998, the Company purchased a condominium from J. Wayne Moor, the
Company's Chief Financial Officer, for $200,000 to facilitate Mr. Moor's
relocation to Palm Beach County, Florida. In February 1999, the Company sold the
condominium for $187,000.
On February 12, 1999, L.E. Richey, M.D., a director and Chairman of the Board of
the Company, resigned in connection with the purchase of US Imaging, Inc. from
the Company by a corporation with which Dr. Richey is affiliated (see Note 22).
70
<PAGE> 71
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[22] SUBSEQUENT EVENTS
As further discussed in Note 7, in January 1999 the Company repurchased
approximately $12.5 million aggregate principal amount of its Subordinated
Convertible Debentures in the open market, which Debentures were immediately
retired. The Company financed the purchase of the Debentures from borrowings
under a $25.0 million loan agreement entered into with DVIFS in December 1998
(see Note 6). The Debentures were purchased at a total price of $9.1 million
including related costs. The Company will recognize an extraordinary gain after
taxes of approximately $2.6 million during the first quarter of fiscal 1999.
On January 22, 1999, the Company sold its interest in Integrated Health
Concepts, Inc. ("IHC") to Dr. Mohammad Athari, M.D., ("Athari") the owner of a
minority interest in IHC. IHC and its subsidiaries own and operate six
diagnostic imaging centers in Houston, Texas. The sales price was $11.7 million,
consisting of cash received of $3.3 million and the assumption by Athari of debt
amounting to $8.4 million. Immediately upon the closing, $1.0 million of the
cash proceeds were used to repay a portion of the outstanding balance under the
DVIBC credit loan (see Note 6).
On February 12, 1999, the Company sold its 100% interest in US Imaging, Inc.,
("USI"), to United Radiology Associates, Inc. ("URA"). USI and its subsidiaries
own and operate eight diagnostic imaging centers in Houston and San Antonio,
Texas. Additionally, on February 12, 1999, the Company sold to URA certain
assets relating to the Company's billing and regional corporate offices located
in Houston, Texas. URA is affiliated with Dr. L.E. Richey, M.D., who was
Chairman of the Board of the Company. Effective February 12, 1999, Dr. Richey
resigned as Chairman of the Board and as a Director of the Company. The Company
obtained a fairness opinion in connection with the transaction. The
consideration received for the stock of USI and for the billing and regional
corporate office assets totaled $11.7 million, consisting of cash received of
$8.6 million, a secured promissory note of $1.9 million, due February 12, 2001,
with interest at 6% payable semi-annually, and debt assumed by URA of $1.2
million. Immediately upon the closing, $6.2 million of the cash proceeds were
used to repay a portion of the outstanding balance under the DVIBC credit loan
(see Note 6), and another $1.4 million was paid to DVI in full payment of an
equipment loan.
71
<PAGE> 72
US DIAGNOSTIC INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[23] SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
In thousands, except per share data
1998 (a)
---------------------------------------------------
Q1 Q2 Q3 Q4
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue $ 54,458 $ 52,459 $ 46,289 $ 42,529
Income (loss) before extraordinary
items 746 3,411 (1,424) (3,245)
Net income (loss) 746 3,411 (1,424) 2,066
Income (loss) before extraordinary
items per common share - basic and diluted .03 .15 (.06) (.14)
Net income (loss) per common share - basic
and diluted .03 .15 (.06) .09
</TABLE>
<TABLE>
<CAPTION>
1997 (a)
---------------------------------------------------
Q1 Q2 Q3 Q4
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenue $ 51,444 $ 56,442 $ 55,621 $ 52,715
Net income (loss) 2,034 (11,904) (9,848) (96,994)
Net income (loss) per common share -
basic and diluted 0.09 (0.55) (0.44) (4.29)
</TABLE>
(a) Certain amounts have been reclassified to be consistent with the
presentation of the financial statements for the years ended December 31,
1998 and 1997. Additionally, revenues shown during the first three
quarters of 1997 have been reduced for certain radiologist fees which had
previously been treated as operating expenses. Net income (loss) during
these periods was not affected for these reclassifications.
72
<PAGE> 73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Previously reported on Form 8-K dated October 30, 1998.
73
<PAGE> 74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is incorporated by
reference to the information contained in the Proxy Statement for the 1999
Annual Meeting of Shareholders of the Company (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the information contained in the Proxy Statement, provided that the
Compensation Committee Report, the Report on Repricing of Stock Options, and the
Performance Graph which are contained in the Proxy Statement shall not be deemed
to be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the information contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the information contained in the Proxy Statement.
74
<PAGE> 75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998
Notes to Consolidated Financial Statements
(2) Schedule II, Valuation and Qualifying Accounts and Reserves, for
each of the three years ended December 31, 1998 is submitted
herewith.
(b) Reports on Form 8-K
A report on Form 8-K dated October 30, 1998 was filed during the
quarter ended December 31, 1998 disclosing an Item 4 event.
(c) Exhibits -- (See Index to Exhibits included elsewhere herein.)
75
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
US DIAGNOSTIC INC.
Date: March 30, 1999 By: /s/ Joseph A. Paul
-----------------------------------
Joseph A. Paul
Chief Executive Officer, President,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Joseph A. Paul Chief Executive Officer, President March 30, 1999
- ----------------------------- and Director (Principal Executive Officer)
Joseph A. Paul
/s/ J. Wayne Moor Executive Vice President, Chief Financial March 30, 1999
- ----------------------------- Officer and Assistant Secretary (Principal
J. Wayne Moor Financial Officer and Principal Accounting
Officer)
/s/ C. Keith Hartley Director March 30, 1999
- -----------------------------
C. Keith Hartley
/s/ Kenneth R. Jennings Director March 30, 1999
- -----------------------------
Kenneth R. Jennings
/s/ David McIntosh Director March 30, 1999
- -----------------------------
David McIntosh
/s/ Michael O'Hanlon Director March 30, 1999
- -----------------------------
Michael O'Hanlon
/s/ Gordon Rausser Director March 30, 1999
- -----------------------------
Gordon Rausser
</TABLE>
76
<PAGE> 77
US Diagnostic Inc.
Schedule II
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
In thousands
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Description Period Expenses Accounts (describe) Period
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DEC. 31, 1998
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $17,312 $ 6,493 $ -- $15,505(a) $ 8,300
Allowance for possible loss on
other receivables $ -- $ -- $ -- $ -- $ --
YEAR ENDED DEC. 31, 1997
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $ 9,670 $15,179 $ 1,822(b) $ 9,359(a) $17,312
Allowance for possible loss on
other receivables $ 923 $ 2,451 $ 3,491(b) $ 6,865(a) $ --
YEAR ENDED DEC. 31, 1996
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $ 5,872 $ 4,016 $ 5,008(b) $ 5,226(a) $ 9,670
Allowance for possible loss on
other receivables $ -- $ -- $ 923(b) $ -- $ 923
</TABLE>
(a) Accounts written off.
(b) Amount represents the allowance for estimated uncollectable portion of
acquired accounts receivable from the various acquisitions.
77
<PAGE> 78
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Restated Bylaws of the Registrant.(2)
4.1 Form of Unit Purchase Option.(1)
4.2 Form of Warrant Agreement.(1)
4.3 Indenture relating to 9% Subordinated Convertible Debentures by the
Company to American Stock Transfer & Trust Company, as Trustee, dated as
of March 29, 1996.(14)
4.4 Registration Rights Agreement.(12)
4.5 Form of Amended and Restated 6 1/2% Convertible Negotiable Note Due June
30, 2001. (15)
4.6 First Supplemental Indenture to Indenture relating to 9% Subordinated
Convertible Debentures dated as of March 24, 1998. (15)
10.1 1993 Stock Option Plan.(1)
10.2 Asset Purchase Agreement among the Company, Columbus Diagnostic Center
Inc. and Physicians Diagnostic Associates of Columbus, L.P. (1)
10.3 Equipment Lease with Ventura Partners.(1)
10.4 Lease between the Company and United Properties Co.(1)
10.5 Stock Purchase Agreement dated as of February 15, 1995 among the Company,
Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(3)
10.6 Employment Agreement dated as of February 15, 1995 among the Company,
Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(3)
10.7 1995 Long Term Incentive Plan.(4)
10.8 Consulting Agreement with Gordon Rausser.(4)
10.9 Consulting Agreement with Coyote Consulting.(4)
10.10 Asset Purchase Agreement dated as of October 10, 1995 among the Company,
Central Alabama Medical Enterprises, Inc. and Advanced Medical Imaging
Center, Inc., a subsidiary of the Company.(5)
10.11 Property Lease dated as of October 10, 1995 among the Company, Central
Alabama Medical Enterprises, Inc. and Advanced Medical Imaging Center,
Inc., a subsidiary of the Company.(5)
10.12 Employment Agreement dated as of August 1, 1995 between the Company and
David Cohen.(5)
10.13 Amendment to Employment Agreement of Jeffrey Goffman.(6)
10.14 Amendment to Coyote Consulting Agreement.(6)
10.15 Asset Purchase Agreement dated as of June 28, 1996 among the Company,
Allegheny Open MRI/CT Group and USDL Pittsburgh Inc., a subsidiary of the
Company.(7)
10.16 Registration and Sale Rights Agreement dated as of June 28, 1996 among
the Company and the Allegheny Open MRI/CT Group.(7)
10.17 Employment Agreement dated as of June 18, 1996 between the Company and
Joseph Paul.(7)
10.18 Employment Agreement dated as of June 1, 1996 between the Company and
Michael Karsch.(7)
10.19 Employment Agreement dated as of July 1, 1996 between the Company and
Andrew Shaw. (7)
10.20 Stock Purchase Agreement dated as of June 20, 1996 among the Company,
MediTek Health Corporation and HEICO Corporation.(8)
10.21 Registration and Sale Rights Agreement dated as of June 20, 1996 between
the Company and HEICO Corporation.(8)
10.22 Termination Agreement dated January 29, 1997 among the Company, Coyote
Consulting & Financial Services LLC and Keith Greenberg.(10)
10.23 Loan and Security Agreement and Secured Promissory Note among US
Diagnostic Inc. and DVI Credit Corporation dated as of February 25,
1997.(13)
10.24 Subscription Agreement between Diversified Therapy Corp. and US
Diagnostic Inc.(13)
10.25 Employment Agreement dated August 31, 1994 between US Diagnostic Labs,
Inc. and Jeffrey A. Goffman.(13)
10.26 Employment Agreement dated June 30, 1995 between the Company and Amos F.
Almand, III.(13)
10.27 Employment Agreement dated October 15, 1996 between the Company and Len
Platt.(13)
10.28 Employment Agreement dated May 1, 1996 between the Company and Alan M.
Winakor.(13)
78
<PAGE> 79
10.29 Employment Agreement dated October 15, 1996 between the Company and
Arthur Quillo.(13)
10.30 Consulting Agreement dated October 1, 1996 between the Company and Robert
Burke, M.D.(13)
10.31 Memorandum of Understanding.(16)
10.32 Settlement Agreement and General Release dated July 11,1997 between the
Company and Jeffrey Goffman. (15)
10.33 Escrow Agreement between the Company, Jeffrey Goffman and Roberto
Martinez. (15)
10.34 Promissory Note between the Company and Jeffrey Goffman. (15)
10.35 Voting Agreement between the Company and Jeffrey Goffman. (15)
10.36 Employment Agreement dated June 18, 1997 between the Company and Wayne
Moor. (15)
10.37 Employment Agreement dated October 20, 1997 between the Company and Leon
Maraist. (16)
10.38 Settlement Agreement and General Release dated September 30, 1997 between
the Company and Jeffrey Goffman. (16)
10.39 Common Stock Purchase Warrant dated September 29, 1997 of the Company
issued to DVI Financial Services Inc. (16)
10.40 Common Stock Purchase Warrant dated September 29, 1997 of the Company
issued to DVI Financial Services Inc. (16)
10.41 Amended and Restated Note between US Diagnostic Inc. and DVI Financial
Services, Inc.
10.42 Amended and Restated Common Stock purchase Warrant Agreement between US
Diagnostic Inc. and DVI Financial Services, Inc.
10.43 Letter of Agreement dated September 29, 1997 between the Company and DVI
Business Credit Corporation confirming amendment of Loan and Security
Agreement dated as of February 25, 1997. (16)
10.44 Stock Purchase Agreement among Alliance Imaging, Inc., US Diagnostic Inc.
and Medical Diagnostics, Inc. dated as of March 30, 1998. (18)
10.45 Stock Purchase Agreement, dated as of February 11, 1999, by and among US
Imaging, Inc., US Diagnostic Inc. and United Radiology Associates, Inc.
(20)
10.46 Secured Promissory Note dated February 12, 1999. (20)
10.47 Guaranty dated as of February 12, 1999. (20)
10.48 Security Agreement dated as of February 12, 1999. (20)
10.49 Stock Purchase Agreement, dated as of January 21, 1999, by and among
Integrated Health Concepts, Inc., US Diagnostic Inc., and Mohammad
Athari, M.D. (20)
10.50 Amendment No. 1 to Stock Purchase Agreement, dated as of January 21,
1999, by and among Integrated Health Concepts, Inc., US Diagnostic Inc.,
and Mohammad Athari, M.D. (20)
10.51 Asset Purchase Agreement, dated as of February 11, 1999, by and among US
Diagnostic Inc. and United Radiology Associates, Inc. (20)
10.52 Stock Redemption and Purchase Agreement dated November 5, 1998 among US
Diagnostic Inc., US Heartcare Management, Inc., Lawrence Lee and Barry
Enholm.
16.1 Letter of Arthur Andersen LLP to the Securities and Exchange Commission
dated October 30, 1998. (19)
21 Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99.1 Press release dated January 29, 1997.(10)
99.2 Complaints filed in the United States District Court of the Southern
District of Florida entitled Lynne M. Golden, Trustee, UAD 1/6/96; Lynne
M. Golden Trust; individually and on behalf of a class of all persons
similarly situated vs. U.S. Diagnostic Inc., Jeffrey A. Goffman, Keith G.
Greenberg, Joseph A. Paul, Robert D. Burke; Amos F. Almand, III and
Coyote Consulting & Financial Services LLC: Muriel Edelstein vs. U.S.
Diagnostic Inc., Jeffrey A. Goffman, Joseph A. Paul, Dr. Robert D. Burke
and Keith G. Greenberg: Steven Shapiro, Plaintiff; vs. U.S. Diagnostic
Inc., et al, Defendants: Sandra Neuman, Plaintiff vs. U.S. Diagnostic
Inc., et al., Defendants.(10)
99.3 Permanent Injunction against Keith Greenberg.(10)
99.4 Information and Guilty Plea by Keith Greenberg.(10)
79
<PAGE> 80
99.5 Press Release of U.S. Diagnostic Inc. dated February 3, 1997.(11)
99.6 Press Release of U.S. Diagnostic Inc. dated July 31, 1997.(14)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (file no. 33- 73414).
(2) Incorporated by reference to the Company's Report on Form 8-K dated
January 11, 1995.
(3) Incorporated by reference to the Company's Report on Form 8-K dated March
20,1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (file no. 33- 93536).
(5) Incorporated by reference to the Company's Report on Form 8-K dated
October 30,1995.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31,1995.
(7) Incorporated by reference to the Company's Report on Form 8-K dated June
28, 1996.
(8) Incorporated by reference to the Company's Report on Form 8-K dated July
24, 1996.
(9) Incorporated by reference to the Company's Report on Form 10-QSB for the
three months ended June 30, 1996.
(10) Incorporated by reference to the Company's Report on Form 8-K dated
January 29, 1997.
(11) Incorporated by reference to the Company's Report on Form 8-K dated
February 3, 1997.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-3 dated June 6, 1996.
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1996.
(14) Incorporated by reference to the Company's Report on Form 8-K dated July
31, 1997.
(15) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1997.
(16) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended September 30, 1997.
(17) Incorporated by reference to the Company's Report on Form 10-K for the
year ended December 31, 1997.
(18) Incorporated by reference to the Company's Report of Form 8-K dated May
19, 1998.
(19) Incorporated by reference to the Company's Report on Form 8-K dated
October 30, 1998.
(20) Incorporated by reference to the Company's Report on Form 8-K dated
January 22, 1999.
80
<PAGE> 1
Exhibit 10.41
AMENDED AND RESTATED NOTE
$24,988,560.00 Doylestown, Pennsylvania
December 21, 1998
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, U.S. DIAGNOSTIC
INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order
of DVI FINANCIAL SERVICES INC. with an office at 500 Hyde Park, Doylestown, PA
18901 ("Lender"), the principal sum of Twenty-Four Million Nine Hundred
Eighty-Eight Thousand Five Hundred Sixty Dollars ($24,988,560.00), together with
interest thereon upon the terms and conditions hereinafter set forth.
1. INTEREST RATE. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the fixed rate of
ten and three-quarters percent (10.75%) per annum. Interest shall be calculated
on the basis of a three hundred sixty (360) day year for the actual number of
days elapsed in such calendar year.
2. DEFAULT RATE. Notwithstanding the foregoing, interest will accrue
and be payable on the outstanding principal amount hereof and all other sums
payable under the Loan Documents, as defined in Section 13 hereof, following the
occurrence of an Event of Default or the final maturity date of this Note, until
paid, at the fixed rate of eighteen percent (18%) (the "Default Rate").
3. POST-JUDGMENT INTEREST. Any judgment obtained for sums due hereunder
or under the Loan Documents will accrue interest at the Default Rate until paid.
4. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Interest accrued under this Note shall be due and payable
on the first (1st) day of each month during the term hereof, commencing on
January 1, 1999.
(b) All principal, accrued and unpaid interest, and costs and
fees due hereunder and under the Loan Documents, shall be paid in full by June
21, 2000.
5. PLACE OF PAYMENT. Principal and interest hereunder shall be payable
at the office of Lender set forth in the heading hereof, or at such other place
as Lender, from time to time, may designate in writing.
6. PREPAYMENT. Borrower may prepay this Note at any time without
penalty or premium.
7. APPLICATION OF PAYMENTS. Any and all payments on account of this
Note shall be applied, at the option of Lender, to accrued and unpaid interest,
outstanding principal and other sums due hereunder or under the Loan Documents,
in such order as Lender, in its reasonable
1
<PAGE> 2
discretion, elects. Borrower agrees that, to the extent Borrower makes a payment
or payments and such payment or payments, or any part thereof, are subsequently
invalidated, declared to be fraudulent or preferential, set aside or are
required to be repaid to a trustee, receiver, or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then to the
extent of such payment or payments, the obligations or part thereof hereunder
intended to be satisfied shall be revived and continued in full force and effect
as if said payment or payments had not been made.
8. LATE CHARGE. In addition to all principal and interest payable on
this Note, in the event that Borrower fails to pay, within ten (10) days of when
due, any principal, interest or other fees or expenses payable hereunder,
Borrower will pay to Lender a late charge equal to five percent (5%) of such
past due payment.
9. FINANCIAL STATEMENTS. Borrower will deliver or cause to be delivered
to Lender each of the following:
(a) ANNUAL STATEMENTS. As soon as available and in any event
within ninety (90) days after the end of each fiscal year of Borrower, the
audited financial statements of Borrower for such fiscal year prepared in
accordance with generally accepted accounting principles consistently applied
("GAAP") by independent certified public accountants of recognized standing
acceptable to Lender in the reasonable exercise of its discretion.
(b) QUARTERLY STATEMENTS. As soon as available and within
forty-five (45) days of the end of each fiscal quarter of Borrower, the
internally prepared quarterly statements of Borrower.
(c) REQUESTED INFORMATION. With reasonable promptness, all
such other data and information in respect of the condition, operation and
affairs of Borrower as Lender may reasonably request from time to time.
10. EVENTS OF DEFAULT. For purposes hereof, each of the following shall
constitute an Event of Default ("Event of Default") hereunder and under each of
the Loan Documents:
(a) The failure of Borrower to pay any amount of principal or
interest on this Note, any fee or other sums payable hereunder on the date on
which such payment is due, whether on demand, at the stated maturity or due date
thereof or by reason of any requirement for the prepayment thereof, by
acceleration or otherwise and such failure continues unremedied for a period of
five (5) days after the date such payment is first due;
(b) The failure of Borrower to duly perform or observe any
obligation, covenant or agreement on its part contained herein (not otherwise
provided for in this Section 10) and such failure continues unremedied for a
period of thirty (30) days after notice from Lender to Borrower of the existence
of such failure;
(c) The failure of Borrower to pay or perform any other
material obligation to Lender under any other agreement or note or otherwise
arising, whether or not related to this Note, after the expiration of any notice
and/or grace periods permitted in such documents;
2
<PAGE> 3
(d) The adjudication of Borrower as a bankrupt or insolvent,
or the entry of an Order for Relief against Borrower or the entry of an order
appointing a receiver or trustee for Borrower of any of its property or
approving a petition seeking reorganization or other similar relief under the
bankruptcy or other similar laws of the United States or any state or any other
competent jurisdiction;
(e) A proceeding under any bankruptcy, reorganization,
arrangement of debt, insolvency, readjustment of debt or receivership law is
filed by or (unless dismissed within ninety (90) days) against Borrower or
Borrower makes an assignment for the benefit of creditors or Borrower takes any
action to authorize any of the foregoing;
(f) The entry of a final judgment for the payment of money
against Borrower which, within thirty (30) days after such entry, shall not have
been discharged or execution thereof stayed pending appeal or shall not have
been discharged within ten (10) days after the expiration of any such stay;
(g) Any representation or warranty of Borrower herein is
discovered to be untrue in any material respect or any statement, certificate or
data furnished by Borrower pursuant hereto is discovered to be untrue in any
material respect as of the date as of which the facts therein set forth are
stated or certified;
(h) Borrower voluntarily or involuntarily dissolves or is
dissolved, terminates or is terminated;
(i) A material and adverse change occurs in Borrower's
financial condition which Lender determines, in the exercise of its reasonable
discretion, will materially impair or materially adversely affect Borrower's
ability to fulfill its obligations hereunder; or
(j) The validity or enforceability of this Note is contested
by the Borrower or any stockholder of Borrower; or Borrower denies that it has
any or any further liability or obligation hereunder or thereunder.
11. REMEDIES. Upon the occurrence of an Event of Default, Lender, at
its option and without notice to Borrower, may declare immediately due and
payable all amounts due hereunder, together with interest accrued thereon at the
applicable rate specified herein to the date of the Event of Default and
thereafter at the Default Rate. Payment thereof may be enforced and recovered in
whole or in part at any time by one or more of the remedies in this Note, or as
may be available to Lender at law or in equity. If Lender employs counsel to
enforce this Note by suit or otherwise, as a result of the occurrence of an
Event of Default, Borrower will reimburse Lender for all costs of suit and other
expenses in connection therewith, whether or not suit is actually instituted,
together with Lender's reasonable attorney's fees incurred for collection
together, to the extent permitted by applicable law, with interest on any
judgment obtained by Lender at the Default Rate, including interest at the
Default Rate from and after the date of execution, judicial or foreclosure sale
until actual payment is made to Lender of the full amount due to Lender.
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12. DELAY OR OMISSION NOT WAIVER. Neither the failure nor any delay on
the part of Lender to exercise any right, remedy, power or privilege hereunder
upon the occurrence of any Event of Default or otherwise shall operate as a
waiver thereof or impair any such right, remedy, power or privilege. No waiver
of any Event of Default shall affect any later Event of Default or shall impair
any rights of Lender. No single, partial or full exercise of any rights,
remedies, powers and privileges by Lender shall preclude further or other
exercise thereof. No course of dealing between Lender and Borrower shall operate
as or be deemed to constitute a waiver of Lender's rights hereunder or affect
the duties or obligations of Borrower.
13. REMEDIES CUMULATIVE. The rights, remedies, powers and privileges
provided for herein shall not be deemed exclusive, but shall be cumulative and
shall be in addition to all other rights, remedies, powers and privileges in
Lender's favor at law or in equity.
14. EXERCISE OF REMEDIES. The exercise by Lender of its rights and
remedies and the entry of any judgment by Lender shall not adversely affect in
any way the interest rates payable hereunder on any amounts due to Lender, but
interest shall continue to accrue on such amounts at the Default Rate specified
herein.
15. SUBMISSION TO JURISDICTION. Borrower hereby consents to the
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and agrees that, subject to Lender's election, any action or
proceeding relating to this Note or the transactions contemplated hereunder may
be litigated in such courts, and Borrower waives any objection which it may have
based on lack of personal jurisdiction, improper venue or forum non conveniens
to the conduct of any proceeding in any such court and waives personal service
of any and all process upon it, and consents that all such service of process be
made by mail or messenger directed to it at the address set forth in Section 17.
Nothing contained in this Section 15 shall affect the right of Lender to serve
legal process in any other manner permitted by law or affect the right of Lender
to bring any action or proceeding against Borrower or its property in the courts
of any other jurisdiction.
16. WAIVERS. In connection with any proceedings hereunder, including
without limitation any action by Lender in replevin, foreclosure or other court
process or in connection with any other action related to this Note, Borrower
hereby waives and releases:
(a) all procedural errors, defects and imperfections in such
proceedings;
(b) all benefits under any present or future laws exempting
any property, real or personal, or any part of any proceeds thereof from
attachment, levy or sale under execution, or providing for any stay of execution
to be issued on any judgment recovered hereunder or in any replevin or
foreclosure proceeding, or otherwise providing for any valuation, appraisal or
exemption;
(c) presentment for payment, demand, notice of demand, notice
of nonpayment or dishonor or acceleration, protest and notice of protest of this
Note, and all other notices in connection with the delivery, acceptance,
performance, default or enforcement of the payment of this Note; and
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<PAGE> 5
(d) any requirement for bonds, security or sureties required
by statute, court rule or otherwise.
17. COMMUNICATIONS AND NOTICES. All notices, requests and other
communications made or given in connection herewith shall be in writing and,
unless receipt is stated herein to be required, shall be deemed to have been
validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, or registered or certified mail, return receipt requested, or
by telecopy with the original forwarded by first-class mail, in all cases, with
charges prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Borrower:
U.S. Diagnostic Inc.
777 South Flagler Drive
Suite 1201 East
West Palm Beach, FL 33401
Attention: Chief Executive Officer
Telecopy Number: __________________
To Lender:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: President
Telecopy Number: 215-230-1845
With a copy to:
DVI, Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Legal Department
Telecopy Number: 215-345-7759
18. SEVERABILITY. The provisions of this Note are deemed to be
severable, and the invalidity or unenforceability of any provision shall not
affect or impair the remaining provisions which shall continue in full force and
effect.
19. LIMITATION OF INTEREST TO MAXIMUM LAWFUL RATE. In no event shall
the rate of interest payable hereunder exceed the maximum rate of interest
permitted to be charged by applicable law (including the choice of law rules)
and any interest paid in excess of the permitted rate shall be refunded to
Borrower. Such refund shall be made by application of the excessive amount of
interest paid against any sums outstanding and shall be applied in such order as
Lender
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may reasonably determine. If the excessive amount of interest paid exceeds the
sums outstanding, the portion exceeding the said sums outstanding shall be
refunded in cash by Lender. Any such crediting or refund shall not cure or waive
any default by Borrower hereunder. Borrower agrees, however, that in determining
whether or not any interest payable under this Note exceeds the highest rate
permitted by law, any non-principal payment, including, without limitation, late
charges, loan fees and expenses are and shall be deemed to the extent permitted
by law to be late charges, loan fees or expenses, as applicable, and not
interest.
20. LAW GOVERNING. This Note has been made, executed and delivered in
the Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the substantive laws of such Commonwealth (without giving effect to
any principles of conflicts of law).
21. NO JOINT VENTURE. Nothing contained herein is intended to permit or
authorize Borrower to make any contract on behalf of Lender nor shall this Note
be construed as creating a partnership or joint venture or making Lender an
investor in Borrower.
22. HEADINGS. The headings of the sections, paragraphs and clauses of
this Note are inserted for convenience only and shall not be deemed to
constitute a part of this Note.
23. CONSTRUCTION. Whenever used, the singular number shall include the
plural, the plural the singular and the use of any gender shall be applicable to
all genders. The words "Lender" and "Borrower" shall be deemed to include the
respective successors and assigns of Lender and Borrower. All exhibits attached
hereto are made a part of this Note.
24. ASSIGNMENT OR SALE BY LENDER. Lender may sell, assign or
participate all or a portion of its interest in this Note solely to the extent
reasonably necessary to permit Lender to finance its obligations hereunder and
in connection therewith may make available to any prospective purchaser,
assignee or participant any information relative to Borrower in its possession.
25. NO ASSIGNMENT BY BORROWER. Borrower may not assign any of its
rights hereunder without the prior written consent of Lender, and Lender shall
not be required to lend hereunder except to Borrower.
26. BINDING EFFECT. This Note and all rights and powers granted hereby
will bind and inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
27. NO THIRD PARTY BENEFICIARIES. The rights and benefits of this Note
shall not inure to the benefit of any third party.
28. MODIFICATIONS. No modification of this Note shall be binding or
enforceable unless in writing and signed by or on behalf of the party against
whom enforcement is sought.
29. COUNTERPARTS. This Note may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto
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may execute this Note by signing any such counterpart.
30. HOLIDAYS. If the day provided herein for the payment of any amount
or the taking of any action falls on a Saturday, Sunday or public holiday at the
place of payment or action, then the due date for such payment or action will be
the next succeeding business day.
31. EFFECT OF AMENDMENT. This Note amends and restates in its entirety
that certain Note dated December 21, 1998, by and between U.S. Diagnostic Inc.
and DVI Financial Services Inc. in the original principal amount of Twenty-Five
Million Dollars ($25,000,000.00) (the "Original Note"). Without any further
action on the part of any party, the entire outstanding principal balance of the
Original Note, together with all accrued and unpaid interest thereon, shall be
deemed to be outstanding pursuant to the provisions of this Note with the same
allocators between principal and interest as under the Original Note. Nothing
herein shall be deemed or construed as any novation, satisfaction or refinancing
of all or any part of the indebtedness evidenced by the Original Note.
32. JURY TRIAL WAIVER. BORROWER AND LENDER WAIVE ANY RIGHT TO TRIAL BY
JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS NOTE
OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF
BORROWER OR LENDER WITH RESPECT TO THIS NOTE OR THE TRANSACTIONS RELATED HERETO,
IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER AND
LENDER AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS NOTE
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF BORROWER AND LENDER TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY. BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO
CONSULT WITH COUNSEL REGARDING THIS SECTION, THAT IT FULLY UNDERSTANDS ITS
TERMS, CONTENT AND EFFECT, AND THAT IT VOLUNTARILY AND KNOWINGLY AGREES TO THE
TERMS OF THIS SECTION.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
U.S. DIAGNOSTIC INC.
By:
----------------------------------
Name:
--------------------------------
Title:
------------------------------
DVI FINANCIAL SERVICES INC.
By:
----------------------------------
Name:
--------------------------------
Title:
------------------------------
7
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Exhibit 10.42
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
AS AMENDED. NO SALE OR DISPOSITION OF THIS WARRANT MAY BE MADE WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN EXEMPTION
THEREUNDER SUCH THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES
ACT OF 1933.
U.S. DIAGNOSTIC INC.
AMENDED AND RESTATED
COMMON STOCK PURCHASE WARRANT
THIS AMENDED AND RESTATED WARRANT to purchase shares of common stock,
$.01 par value, (the "COMMON STOCK") of U.S. DIAGNOSTIC INC., a Delaware
corporation (the "COMPANY") evidences that, for valuable consideration, receipt
of which is hereby acknowledged, DVI FINANCIAL SERVICES INC., a Delaware
corporation ("PURCHASER"), or registered assigns, is entitled to subscribe for
and purchase from the Company, an aggregate of up to Two Hundred Fifty Thousand
(250,000) shares (subject to adjustment as specified in SECTION 4 hereof) of the
fully paid and nonassessable, Common Stock, (the "WARRANT STOCK"), at the price
per share equal to the closing price per share paid for Common Stock of the
Company on December 23, 1998, on the principal national securities exchange on
which the Common Stock is admitted to trading (such price and such other price
as results, from time to time from the adjustments specified in SECTION 4
hereof, is referred to herein as the "EXERCISE PRICE"), subject to the
provisions and upon the terms and conditions set forth herein.
1. CONDITIONS TO EXERCISE. The purchase right represented by this
Warrant is exercisable, in whole or in part, as to the Warrant Stock at any time
after April 30, 1998, and from time to time, on or before September 30, 2005.
This Warrant expires and may not be exercised after September 30, 2005.
2. METHOD OF EXERCISE: PAYMENT. ISSUANCE OF NEW WARRANT. The purchase
right represented by this Warrant may be exercised at any time, and from time to
time, by the surrender of this Warrant (with the Notice of Exercise form
attached hereto duly executed) at the principal office of the Company and by the
payment to the Company by check in an amount equal to the then applicable
Exercise Price per share multiplied by the number of shares of the Warrant Stock
then being purchased. In the event of any exercise of the rights represented by
this Warrant, the Company shall deliver to Purchaser certificates for the shares
of the Warrant Stock so purchased within a reasonable time, but not later than
twenty business days after exercise. This Warrant will be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above and the person entitled to receive the
shares of the Warrant Stock issuable upon such exercise is treated for all
purposes as
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the holder of such shares of record as of the close of business on such date.
Unless this Warrant has been fully exercised or has expired, a new Warrant
representing the number of shares, if any, with respect to which this Warrant
has not then been exercised must also be issued to Purchaser within such
reasonable time.
3. STOCK FULLY PAID: RESERVATION OF SHARES. All Warrant Stock which may
be issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of its fully paid and nonassessable Common Stock to provide for the exercise of
the rights represented by this Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price are subject to adjustment from time to time upon the happening of
the events and in the manner described in this SECTION 4.
4.1 RECLASSIFICATION. CONSOLIDATION OR MERGER. If any capital
reorganization or reclassification of the capital stock of the Company,
consolidation or merger of the Company with another corporation or any other
entity or the sale of all or substantially all of its assets to another entity
is effected, the successor entity (if other than the Company) resulting from
such consolidation or merger or the entity purchasing such assets must assume
this Warrant by written instrument executed and mailed or delivered to
Purchaser, and lawful and adequate provision (in form reasonably satisfactory to
Purchaser) must be made whereby the holder hereof thereafter has the right to
purchase and receive in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such Common Stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place. In any such case, appropriate provision must be
made with respect to the rights and interests of the holder of this Warrant to
assure that the provisions hereof (including without limitation provisions for
adjustment of the Exercise Price and of the number of shares purchasable and
receivable upon the exercise of this Warrant) are thereafter applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof.
4.2 ANTIDILUTION ADJUSTMENTS. In case the Company, subsequent
to September 30, 1997, (a) pays a dividend or make a distribution on its shares
of Common Stock in shares of Common Stock, (b) subdivides or reclassifies its
outstanding Common Stock into a greater number of shares, or (c) combines or
reclassifies its outstanding Common Stock into a smaller number of shares or
otherwise effect a reverse split, then the Exercise Price in effect at the time
of the record date for such dividend or distribution or of the effective date of
such
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subdivision, combination or reclassification must be proportionately adjusted so
that the Holder of this Warrant exercised after such date is entitled to receive
the aggregate number and kind of shares which, if this Warrant had been
exercised immediately prior to such time, the Holder would have owned upon such
exercise and been entitled to receive upon such dividend, subdivision'
combination or reclassification. Such adjustment is made successively whenever
any event listed in this SECTION 4.2 occur.
4.3 ADJUSTMENT FOR DISTRIBUTION OF PROPERTY. In case the
Company, subsequent to the issuance hereof, distributes to all holders of Common
Stock assets (excluding cash dividends or distributions paid out of current
earnings and dividends or distributions referred to in SECTION 4.2 of this
Warrant), then the Exercise Price is adjusted thereafter by multiplying the
Exercise Price in effect immediately prior thereto by a fraction, of which the
numerator is the total number of shares of Common Stock outstanding multiplied
by the Current Market Price (as determined pursuant to SECTION 9.3) per share of
Common Stock, less the fair market value of the assets distributed, and of which
the denominator is the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment must be made successively whenever such a record date is fixed. Such
adjustment must be made whenever any such distribution is made and becomes
effective immediately after the record date for the determination of
stockholders entitled to receive such distribution.
4.4 INTENTIONALLY DELETED.
4.5 OTHER ADJUSTMENTS. In the case any event occurs as to
which the failure to make any adjustment would not fairly protect the purchase
rights represented by this Warrant in accordance with the essential intent and
principles of this Warrant, then, in each such case, the Purchaser may appoint
an independent investment bank or firm of independent public accountants, which
will give its opinion as to the adjustment, if any, on a basis consistent with
the essential intent and principles established in this Warrant, necessary to
preserve the purchase rights represented by this Warrant. Upon receipt of such
opinion, the Company will promptly deliver a copy of such opinion to the
Purchaser and will make the adjustments described in such opinion. The fees and
expenses of such investment bank or independent public accountants will be borne
by the Company.
4.6 ADJUSTMENT IN NUMBER OF SHARES. Whenever the Exercise
Price payable upon exercise of each Warrant is adjusted pursuant to SECTIONS 4.2
OR 4.3, the number of shares of Common Stock purchasable upon exercise of each
Warrant must simultaneously be adjusted by multiplying the number of shares of
Common Stock issuable upon exercise of each Warrant in effect on the date
thereof by the Exercise Price in effect on the date thereof and dividing the
product so obtained by the Exercise Price, as adjusted.
4.7 DE MINIMUM ADJUSTMENT. No adjustment in the Exercise Price
is required unless such adjustment would require an increase or decrease of at
least one-half cent ($0.005) in the price. Any adjustments which by reason of
this SECTION 4.7 are not required to be made are carried forward and taken into
account in any subsequent adjustment. All calculations
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under this SECTION 4 are made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
4.8 RETENTION OF ACCOUNTANTS. The Company may retain a firm of
independent accountants of recognized standing selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this SECTION 4, and a certificate signed by such
firm is presumptive evidence of the correctness of such adjustment.
4.9 APPLICABILITY OF ADJUSTMENTS. In the event that at any
time, as a result of an adjustment made pursuant to SECTION 4.2 of this Warrant,
the holder of any Warrant thereafter becomes entitled to receive any shares of
the Company, other than Common Stock, thereafter the number of such other shares
so receivable upon exercise of any Warrant is subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this SECTION 4.
4.10 NO CHANGE IN LANGUAGE OF WARRANT. Irrespective of any
adjustments in the Exercise Price or the number or kind of shares purchasable
upon exercise of Warrants, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of shares as are stated
in this and similar Warrants initially issued by the Company.
4.11 NOTICE OF SPECIFIC EVENTS. In case at any time:
(a) the Company declares any dividend payable in stock
upon its Common Stock or make any special dividend or other distribution (other
than cash dividends paid at an established annual or quarterly rate) to the
holders of its Common Stock;
(b) the Company offers for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(c) there is a capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of its assets to,
another entity; or
(d) there is a voluntary or involuntary dissolution,
liquidation or winding (other than as a result of a capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of all or substantially all of its assets, to
another entity) then, the Company shall give Purchaser (i) at least one hundred
twenty days prior written notice of the date on which the books of the Company
close or a record is taken for such dividend, distribution or subscription
rights or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
one hundred twenty days prior written notice of the date when the same will take
place. Notice in accordance with the foregoing clause (i) must also specify, in
the case of any dividend, distribution or
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subscription rights, the date on which the holders of Common Stock are entitled
to exchange their Common Stock for securities or other property deliverable upon
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
4.12 NOTICE OF ADJUSTMENTS. Whenever the Exercise Price is
adjusted pursuant to Section 4 hereof, the Company shall promptly as practicable
prepare a certificate signed by its chief financial officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the Exercise
Price after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to Purchaser.
4.13 FRACTIONAL SHARES. Fractional shares of the Warrant Stock
will be issued in connection with any issuance hereunder.
5. TRANSFERS. This Warrant or the Warrant Stock may be transferred in
whole or in part by Purchaser in compliance with applicable law.
6. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
6.1 PIGGY-BACK REGISTRATION RIGHTS. If, at any time during the
period commencing upon the issuance hereof and ending September 30, 2005, the
Company proposes to file a registration statement under the Security Act of
1933, as amended (the "1933 ACT"), covering securities of the Company, whether
for the Company's own account or for the account of selling securities holders,
other than registration statement relating to an acquisition or merger or a
registration statement on Form S-8 or subsequent similar form, it shall advise
the holders of this Warrant or the Warrant Stock (each such person being
referred to herein as a "HOLDER") by written notice at least one hundred twenty
days prior to the filing of such registration statement and will upon the
request of any such holder include in any such registration statement such
information as may be required to permit a public offering of the Warrant Stock.
The Company shall keep such registration statement current for a period of nine
months from the effective date of such registration statement or until such
earlier date as all of the registered Warrant Stock has been sold. In connection
with such registration, the holders shall execute and deliver such customary
underwriting documents as the managing underwriter requests as a condition to
the inclusion of the Warrant Stock in the registration statement.
6.2 INTENTIONALLY DELETED.
6.3 ADDITIONAL PROVISIONS CONCERNING REGISTRATION. The
following provisions of this SECTION 6.3 are also applicable to any registration
statement filed pursuant to SECTION 6.1:
(a) The Company shall bear the entire cost and
expense of any registration of securities initiated under SECTION 6.
Notwithstanding the foregoing, any holder whose Warrant Stock is included in any
such registration statement pursuant to this SECTION 6
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shall, however, bear the fees of its own counsel and accountants and any
transfer taxes or underwriting discounts or commissions applicable to the
Warrant Stock sold by the holder pursuant thereto.
(b) The Company shall indemnify and hold harmless
each such holder and each underwriter, within the meaning of the 1933 Act, who
may purchase from or sell for any such holder any Warrant Stock from and against
any and all losses, claims, damages and liabilities (including fees and expenses
of counsel, which counsel may, if the holders request, be separate from counsel
for the Company) caused by any untrue statement or alleged untrue statement of
material fact contained in the registration statement or any post-effective
amendment thereto or any registration statement under the 1933 Act or any
prospectus included therein required to be filed or furnished by reason of this
SECTION 6 or any application or other filing under any state securities law
caused by any omission or alleged omissions to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading to which such holder or any such underwriter or any of them may
become subject under the 1933 Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or alleged untrue statement or omission or alleged omission based upon
information furnished to the Company by the indemnified holder or underwriter
expressly for use therein, which indemnification includes each person, if any,
who controls any such underwriter within the meaning of each such Act. Any such
holder or underwriter must at the same time indemnify the Company, its
directors, each officer signing the related registration statement, each person,
if any, who controls the Company within the meaning of each such Act and each
other holder or underwriter, from and against any and all losses, claims,
damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or any
prospectus required to be filed or furnished by reason of this SECTION 6 or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, insofar as such losses, claims, damages or liabilities are caused by
any untrue statement or alleged untrue statement or omission based upon
information furnished to the Company by such holder or underwriter expressly for
use therein.
(c) The Company shall qualify the Warrant Stock for
sale in such states as it is otherwise qualifying its Common Stock for sale. The
Company shall also provide the holders with prospectuses upon request from the
holders.
(d) The selling holders shall furnish information
and provide indemnification as set forth in SECTION 6.3(b).
(e) Neither the giving of any notice by any holder
nor the making of any request for prospectuses imposes any upon any holder
making such request any obligation to sell any Warrant Stock or exercise any
Warrant.
(f) The registration rights set forth in SECTION 6.1
are exercisable only by Purchaser and its permitted assigns.
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(g) The Company is not required to include in any
registration statement any Warrant Stock which could, pursuant to the provisions
of Rule 144 of the Securities and Commission under the 1933 Act, be sold during
a period of four months following the date on which registration of such Warrant
Stock was requested.
(h) The Company's agreements with respect to this
Warrant or the Warrant Stock in this SECTION 6 continue in effect regardless of
the exercise and surrender of this Warrant.
7. LISTING RIGHTS. If the Company at any time lists any Common Stock
or other securities of the same class as those issuable on the exercise of this
Warrant on any national securities exchange, the Company will, at its expense,
simultaneously list on that exchange, on official notice of issuance on exercise
of this Warrant, and maintain such listing of, all shares of the Warrant Stock
or other securities from time to time issuable on exercise of this Warrant.
8. NO RIGHTS AS STOCKHOLDERS. Purchaser is not entitled by virtue of
the terms hereof to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof until the Warrant has been exercised.
9. CURRENT MARKET PRICE. The "CURRENT MARKET PRICE" of the Common
Stock at any date is based on the public market for the Common Stock, if any,
and is based on the average of the daily closing prices for a twenty consecutive
trading days commencing thirty trading days before such date. The closing price
for each day is the last sale price reported or, in case no such reported sale
takes place on such day, the average of the reported last bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is admitted to trading or listed or on the NASDAQ System,
or if not listed or admitted to trading on such exchange or such System, the
average of the reported highest bid and reported lowest asked prices as reported
by NASDAQ, or other similar organization if NASDAQ is no longer reporting such
information.
10. GOVERNING LAW. This Warrant must be construed and interpreted in
accordance with and is governed in all respects by the laws of the State of
Delaware applicable to agreements executed and to be performed wholly within
such State.
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11. NOTICES. All notices, demands, requests and other communications
which any party hereto desires or is required to deliver or otherwise give to
any other party hereunder must be in writing and are deemed to have been
delivered, given and received when personally given, delivered by overnight
courier against receipt or transmitted by facsimile if receipt is acknowledged
or transmission is confirmed by mail or on the third day after it is mailed by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows (or to such other address as any of the parties shall
specify by notice in accordance with this provision:
Notices to the Company:
U.S. Diagnostic Inc.
777 South Flagler Drive
West Palm Beach, Florida 33401
Attn.: Joseph A. Paul
Fax: 561-832-1384
Notices to Purchaser:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, Pennsylvania 18901
Attn.: President
Fax: 215-230-1845
With a copy to:
DVI, Inc.
500 Hyde Park
Doylestown, Pennsylvania 18901
Attn.: Legal Department
Fax: 215-345-7759
12. REGISTERED HOLDER. The Company may deem and treat the person whose
name appears on its warrant register as the holder of this Warrant as the
absolute owner hereof for all purposes, and the Company is not affected by any
notice to the contrary.
13. EFFECT OF AMENDMENT. This Amended and Restated Warrant amends,
replaces and supersedes those certain Common Stock Purchase Warrants dated
September 30, 1997, given by the Company to Purchaser, which warrants are hereby
deemed cancelled.
IN WITNESS WHEREOF, the Company has caused this Amended and Restated
Warrant to be executed by its officers duly authorized as of December 22, 1998.
U.S. DIAGNOSTIC INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
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NOTICE OF EXERCISE
TO: U.S. DIAGNOSTIC, INC.
1. The undersigned hereby elects to purchase __________ shares of
Common Stock of U.S. Diagnostic Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any, in the amount of $________________.
2. Please issue a certificate or certificates representing the shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
-------------------------------------
(Name)
-------------------------------------
-------------------------------------
3. The undersigned represents that the aforesaid shares of Common
Stock are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution thereof
and that the undersigned has no present intention of distributing or reselling
such shares.
----------------------------------
----------------------------------
- -----------------------------
Date
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Exhibit 10.52
STOCK REDEMPTION AND PURCHASE AGREEMENT
STOCK REDEMPTION AND PURCHASE AGREEMENT, dated November 5, 1998 among
US Diagnostic Inc., a Delaware corporation ("USD"), US Heartcare Management,
Inc., a New York corporation (the "Company") and Lawrence Lee ("Lee") and Barry
Enholm ("Enholm") (collectively, the "Noteholders"), but effective as of 11:59
P.M. September 30, 1998 (the "Effective Date").
WITNESSETH:
WHEREAS, the Company, a wholly owned subsidiary of USD, is in the
business of providing management and administrative services to physicians
practicing cardio-diagnostic medicine, including nuclear cardiology (the
"Business"); and
WHEREAS, the Noteholders, among others, formerly owned the Company and
sold all of the issued and outstanding stock of the Company (the "Stock") in two
transactions in 1996 and 1997 to USD (the "Prior Stock Sale"); and
WHEREAS, disputes have arisen between Lee and Enholm and USD relating
to the Prior Stock Sale which have given rise to claims by Lee and Enholm
against USD and claims by USD against Lee and Enholm; and
WHEREAS, USD has determined that it is in its best interests to divest
itself of its ownership of the Company and the Company has agreed to redeem
certain shares of Stock and Lee and Enholm have agreed to purchase the remaining
shares of Stock from USD; and
WHEREAS, USD and Lee and Enholm desire to fully settle any claims each
may have against the other arising from the Prior Stock Sale; and
WHEREAS, subject to the limitations and exclusions contained in this
Agreement and on the terms and conditions hereinafter set forth, USD desires to
sell and the Noteholders and the Company desire to purchase and redeem,
respectively, the Stock;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements herein contained, the
parties hereto do hereby agree as follows:
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ARTICLE I
PURCHASE AND SALE OF STOCK
1.01. AGREEMENT TO PURCHASE. At the Closing, the Noteholders shall
purchase four (4) shares of the outstanding Stock owned by USD ( three and six
tenths (3.6) shares by Lee and four tenths (.4) by Enholm) and the Company shall
redeem one hundred ninty-six (196) shares of the issued and outstanding Stock
owned by USD, such two hundred (200) shares of Stock being all of the issued and
outstanding Stock of the Company, all at a price of $38,787.85 per share of
Stock, upon and subject to the terms and conditions of this Agreement, in
exchange for the Purchase Price as defined in Section 1.02 hereof.
1.02. PURCHASE. Subject to the terms and conditions of this Agreement,
in reliance on the representations, warranties and agreements of USD contained
herein, and in full and complete consideration of the sale, assignment, transfer
and delivery of the Stock, the following payments and actions shall be
undertaken:
(a) The Company and the Noteholders shall pay to USD cash in
the amount of $2,700,000, $155,151.40 of which shall be paid by the Noteholders
and $2,544,848.60 of which shall be paid by the Company, payable by wire
transfer of immediately available funds at the Closing (the "Closing Payment");
(b) The Company shall issue at the Closing to USD promissory
notes in the principal amounts of $300,000 and $500,000 (the "Payment Notes") in
the forms attached hereto as Exhibits "A1" and "A2", respectively. The $300,000
Payment Note shall provide that it shall accelerate and become due and payable
in the event that the Noteholders shall sell more than 50% of their Stock in the
Company or if the Company shall merge into another entity whereby the
Noteholders become stockholders of the combined company and own less than 50% of
the stock of the combined company or if the Company shall sell all or
substantially all of its assets. The Company and the Noteholders agree that upon
the sale of the more than 50% of the Stock of the Company owned by the
Noteholders, or the merger of the Company into another entity whereby the
Noteholders become stockholders of the combined company and own less than 50% of
the stock of the combined company or if the Company shall sell all or
substantially all of its assets, the $500,000 Payment Note shall become due and
payable upon the closing of such transaction unless the acquiring entity shall
guaranty in writing, and deliver same to USD, the payment of the $500,000
Payment Note or, if there is an asset sale, the purchasing entity shall issue a
substitute note of like tenor and amount in its name to USD and, if such
acquiring entity is a subsidiary of another entity, such parent entity shall
guaranty the $500,000 Payment Note in writing, and deliver same to USD; and
(c) Pursuant to the Assignment and Assumption Agreement in the
form attached hereto as Exhibit "B", (i) USD shall assign and the Company shall
assume the promissory notes
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payable to the individuals listed in Schedule I attached thereto in the amounts
listed after their names in Schedule I aggregating $4,039,136.40 in principal
amount (the "Assumed Notes"), which Assumed Notes are guaranteed (the
"Guaranty") by the Company under the Prior Stock Sale and (i) the Company, as
guarantor under the Guaranty, shall agree to pay all amounts as they become due
and payable, including interest and principal, pursuant to certain promissory
notes payable to Jerome Grossman as listed on Schedule II attached to the
Assignment and Assumption Agreement in the aggregate principal amount of
$218,434.89 (the "Grossman Notes") under the terms of promissory notes payable
to USD by the Company in identical principal amounts and containing similar
terms as the Grossman Notes (the "Back-up Grossman Notes") in the forms as
attached hereto as Exhibits "C1" and "C2".
1.03. SETTLEMENT AGREEMENT AND MUTUAL RELEASE. At the closing, the
Noteholders and USD shall execute and deliver a Settlement Agreement and Mutual
Release in the form attached hereto as Exhibit "D" pursuant to which (i) the
Noteholders shall agree to the cancellation of certain notes issued to the
Noteholders by USD in connection with the Prior Stock Sale in the aggregate
principal amount of $3,023,590.71 and as set forth in Schedule A attached
thereto (the "Canceled Notes"), (ii) certain unpaid interest due in respect of
the Canceled Notes and the Assumed Notes owned by Lee and Enholm will be assumed
and paid by the Company and (iii) Lee and Enholm, on the one hand, and USD, on
the other hand, shall mutually release each other relating to any and all claims
arising from the Prior Stock Sale.
1.04. CONSULTING AGREEMENT. At the Closing, the Company and USD shall
execute and deliver the Consulting Agreement in the form attached hereto as
Exhibit "E" pursuant to which USD shall provide consulting services to the
Company for an annual consulting fee of $500,000, payable in four (4) equal
quarterly payments of $125,000 on each December 31, March 31, June 30 and
September 30 during each year, for a period of three (3) years from the
Effective Date, commencing December 31, 1998.
1.05 OTHER PAYMENTS BY THE COMPANY.
(a) At Closing, the Company shall issue an interest bearing
promissory note to USD in the amount of $200,000 in the form as attached hereto
as Exhibit "F" (the "Dividend Note") representing the parties' agreement of the
amount due as the net income of the Company and other inter-company expenses not
previously paid or distributed to USD by the Company for the period November 1,
1996 through the Closing Date. The issuance of the Dividend Note shall represent
the only amount due to USD by the Company in respect of dividends due to or
expenses incurred by USD from or on behalf of the Company from November 1, 1996
through the Closing Date and USD shall have no further claims against the
Company in respect of any costs, expenses, dividends or otherwise incurred by or
due to USD in connection with the operations of the Company as a subsidiary of
USD. The Dividend Note shall provide that it shall accelerate and become due and
payable in the event that the Noteholders shall sell more than 50% of their
Stock in the Company
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or if the Company shall merge into another entity whereby the Noteholders become
stockholders of the combined company and own less than 50% of the stock of the
combined company or if the Company shall sell all or substantially all of its
assets.
(b) The Company shall pay all costs incurred other than the
legal fees of Epstein Becker & Green, P.C., payment for which shall be the sole
responsibility of USD, in connection with the negotiation and settlement of
certain claims by Raytel Medical Corp. against the Company relating to the
Company's termination and removal of certain nuclear cariodiagnostic operations
at Raytel's managed diagnostic imaging facility located in Forest Hills, New
York.
1.06 SECURITY AGREEMENT. The Company shall execute and deliver to USD
the Security Agreement in the form as attached hereto as Exhibit "G" (the
"Security Agreement") pursuant to which the Company shall provide the collateral
referred to therein as security for payment of the Payment Notes and the
Dividend Note.
1.07. CLOSING. The Closing of the transactions contemplated by this
Agreement will take place at the offices of Jacobson, Mermelstein and Squire
LLP, 52 Vanderbilt Avenue, New York, New York 10017 no later than November 13,
1998 at 10:00 A.M., or by telecopy, wire transfer and overnight delivery, or at
such other place, date and time as the parties may agree in writing. The date of
the Closing is herein referred to as the "Closing Date."
1.08. FURTHER ASSURANCES. After the Closing, USD shall from time to
time, at the request of the Noteholders or the Company and without further cost
or expense to USD, execute and deliver such other instruments of conveyance and
transfer and take such other actions as the Noteholders or the Company may
reasonably request, in order to confirm the consummation of the transactions
contemplated hereby and to vest in the Noteholders and the Company good and
marketable title to the Stock being transferred hereunder.
1.09. FUTURE ACTIONS OF THE NOTEHOLDERS. USD agrees and acknowledges
that the Noteholders have advised that they intend to resell all or portion of
their interest in the Company as soon as practical after the Closing Date for
such price and upon such terms and conditions as they can negotiate, which price
may be for a greater amount than being paid by the Noteholders and the Company
hereunder. USD agrees that it shall have no claim against the Company and/or Lee
and Enholm in respect of such sale or the proceeds therefrom and that the
Company, Lee and/or Enholm shall have no obligation to inform USD of any
information relating to any such sale nor to share in any manner the proceeds
therefrom with USD. USD agrees to indemnify and hold harmless the Company and
the Noteholders in respect of any and all costs arising from any claims relating
to the above mentioned resale by any third party seeking payment of all or a
portion of such proceeds on behalf of USD directly or derivatively.
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ARTICLE II
CONFIDENTIALITY
2.01. CONFIDENTIALITY. Each party hereto will hold, and will cause its
consultants and advisors to hold, in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all documents and information concerning
any of the other parties furnished to it by such other parties or their
respective representatives in connection with the transactions contemplated by
this Agreement (except to the extent that such information can be shown to have
been (i) previously known by the party to which it was furnished, or (ii) later
lawfully acquired from other sources by the party to which it was furnished),
and no party will release or disclose such information to any other individual,
corporation, partnership, joint venture, association, organization, limited
liability company or other entity (each, a "Person"), except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors to
such party in connection with this Agreement. If the transactions contemplated
by this Agreement are not consummated, such confidentiality shall be maintained
except to the extent such information comes into the public domain through no
fault of the party required to hold it in confidence, and such information shall
not be used to the detriment of; or in relation to any investment in, any other
party and all such documents (including copies thereof) shall be returned to
such other party immediately upon the written request of such other party. Each
party shall be deemed to have satisfied its obligation to hold confidential
information concerning or supplied by the other party if it exercises the same
care as it takes to preserve the confidentiality of its own similar information.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF USD
USD hereby represents and warrants to the Company and the Noteholders
as follows:
3.01. ORGANIZATION: GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has full corporate power and authority to carry on its business as
it is now being conducted and to own the properties and assets it now owns.
3.02. CAPITALIZATION: SUBSIDIARIES.
(a) The authorized and outstanding capital stock of the
Company is a set forth on Schedule 3.02. All issued and outstanding shares of
capital stock of the Company are duly and validly authorized, issued, fully paid
and nonassessable. There are no outstanding (a) securities convertible into or
exchangeable for the Company's capital stock; (b) options, warrants or other
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<PAGE> 6
rights to purchase or subscribe to capital stock of the Company or securities
convertible into or exchangeable for capital stock of the Company; or (c)
contracts, commitments, agreements, understandings or arrangements of any kind
relating to the issuance of any capital stock of the Company, any such
convertible or exchangeable securities or any such options, warrants or rights.
(b) The Company does not own any capital stock or other equity
securities of any corporation, partnership, or other entity or any rights to
acquire any equity or ownership interest in any business other than the
companies listed on Schedule 3.02 (the "Subsidiaries").
3.03. AUTHORIZATION. ETC. USD has full corporate power and authority to
enter into this Agreement and to carry out the transactions contemplated hereby.
USD has taken all action required by law, its charter documents, or otherwise to
be taken by it to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and this Agreement is a
valid and binding agreement of USD enforceable in accordance with its terms.
3.04. NO VIOLATION. Except as set forth on Schedule 3.04, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will violate any provision of the charter
documents or bylaws of USD, or be in conflict with, or constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or cause the acceleration of the maturity of any debt or obligation
pursuant to, or result in the creation or imposition of, any security interest,
lien or other encumbrance upon any property or assets of the Company under any
agreement or commitment to which USD or the Company is a party or by which USD
or the Company is bound, or to which the property of the Company is subject, or,
to the knowledge of USD, violate any statute or law of any judgment, decree,
order, regulation or rule of any court or governmental authority, except where
such violation, conflict, breach, default, acceleration, termination,
modification, cancellation or imposition would not have a material adverse
effect on the business, financial condition or operations of the Company or on
the ability of USD to consummate the transactions contemplated hereby.
3.05. FINANCIAL STATEMENTS. The Noteholders have been provided
unaudited balance sheets and related statements of operations of the Company as
of and for the year ended December 31, 1997 and as of and for the nine months
ended September 30, 1998, all without footnotes (the "Financial Statements").
Such Financial Statements fairly present in all material respects the assets,
liabilities, financial condition and results of operations of the Company as at
the respective dates thereof, all in accordance with GAAP consistently applied
throughout the periods involved, subject to normal year-end adjustments for the
September 30, 1998 Financial Statements, except that no notes to the Financial
Statements have been prepared.
3.06. NO UNDISCLOSED LIABILITIES: ETC. Except as listed on Schedule
3.06, the Company has no material liabilities or obligations of any nature
(absolute, accrued, contingent or otherwise) which
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were not fully reflected or reserved against in the Financial Statements as of
September 30, 1998 in accordance with GAAP, except for liabilities and
obligations disclosed on any of the Schedules to this Agreement and/or incurred
in the ordinary course of business and consistent with past practice since the
date thereof.
3.07. ABSENCE OF CERTAIN CHANGES. Except as and to the extent set forth
in Schedule 3.07, since September 30, 1998, neither USD nor the Company has
taken or agreed to take any of the following actions:
(a) Permitted or allowed any of the Company's property or
assets (real, personal or mixed, tangible or intangible) to be subjected to any
mortgage, pledge, lien, security interest, encumbrance, restriction or charge of
any kind, except for liens for current taxes not yet due or which may thereafter
be paid without penalty or interest or which are being contested in good faith;
(b) Canceled any material debts or waived any material claims
or rights relating to the Company;
(c) Sold, transferred, or otherwise disposed of any of the
Company's properties or assets (real, personal or mixed, tangible or
intangible), except in the ordinary course of business and consistent with past
practice;
(d) Declared, paid or set aside for payment any dividend or
other distribution in respect of the Company's capital stock or redeemed,
purchased or otherwise acquired, directly or indirectly, any capital stock or
other securities of the Company except as permitted by Section 1.05; or
(e) Made any material change in any method of accounting or
accounting practice.
3.08. LITIGATION. Except as set forth in Schedule 3.08, there is no
pending or, to the knowledge of USD, threatened action, suit, inquiry,
proceeding or investigation against or involving the Company, or which questions
or challenges the validity of this Agreement or any action taken or to be taken
by USD or the Company pursuant to this Agreement or in connection with the
transactions contemplated hereby.
3.09. TITLE TO PROPERTIES; ENCUMBRANCES; GUARANTEES. The Company has
good, valid and marketable title to all the properties and assets which it
purports to own (real, personal and mixed, tangible and intangible), free and
clear of all liens, mortgages, security interests, pledges, charges and
encumbrances ("Encumbrances") created by the Company (except as may be described
in Schedule 3.09 or in any other schedule to this Agreement or disclosed in the
Financial Statements). The Company has entered into no guarantees ("Guarantees")
of any obligations of USD or any of
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its subsidiaries or affiliates (except as may be described in Schedule 3.09 or
in any other schedule to this Agreement).
3.10. CONTRACTS AND COMMITMENTS. Except as set forth in Schedule 3.10
or in any other schedule to this Agreement, USD unilaterally has not taken any
action without the approval or ratification of the Board of Directors of the
Company and pursuant to which the Company:
(a) is a party to any agreements, contracts, commitments or
restrictions which are material to its business, operations or prospects or
which require the making of any charitable contribution other than those entered
into in the ordinary course of business consistent with past practices; and
(b) has any power of attorney outstanding or any obligations
or liabilities (whether absolute, accrued, contingent or otherwise), as
guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in
respect to the obligation of any Person, corporation, partnership, joint
venture, association, organization or other entity.
3.11. TAX MATTERS.
(a) The Company has duly filed all income tax returns (which
shall mean any return, declaration, report, or information return or statement
relating to the reporting of income of the Company other than for claims for
refunds, including any schedule or attachment thereto, and including any
amendment thereof, whether denominated as an income, franchise or similar tax
return) required to be filed by it since November 1, 1996 ("Income Tax
Returns"). All such Income Tax Returns were correct and complete in all material
respects. All income taxes (which shall mean any federal, state or local income
tax, including any interest, penalty or addition thereto, whether disputed or
not) ("Income Taxes") owed by the Company have been paid or adequately provided
for. The Company is not currently a beneficiary of any extension of time within
which to file any Income Tax Return. The Company has withheld or collected and
paid or deposited all taxes required to have been withheld or collected and paid
or deposited in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder, or other third party.
(b) There is no material dispute or claim concerning any
liability for Income Taxes with respect to the Company either (A) claimed or
raised by any governmental authority in writing or (B) as to which USD has
knowledge based upon contact with any agent of such authority.
(c) Schedule 3.11 lists all Income Tax Returns filed with
respect to the Company for taxable periods from and after November 1, 1996,
including any Income Tax Returns of USD in which the Company is included as part
of an Affiliated Group (as that term is defined in Section 1504 of the Internal
Revenue Code). USD has delivered to the Noteholders correct and complete copies
of such Income Tax Returns. The Company has not waived any statue of limitations
in
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respect of Income Taxes or agreed to any extension of time with respect to an
Income Tax assessment or deficiency.
(d) Since November 1, 1996, the Company has not been a member
of an Affiliated Group filing a consolidated federal Income Tax Return other
than a group the common parent of which is USD.
(e) The Company is not party to any tax sharing or allocation
agreement except with USD.
(f) Each Affiliated Group has filed all Income Tax Returns
that it was required to file for each taxable period during which the Company
was a member of the group and has paid all Income Taxes shown thereon as owing,
except where a failure to file or pay any Income Taxes would not have a material
adverse effect on the financial condition of the Company. All such Income Tax
Returns were correct and complete in all material respects in so far as they
relate to the Company.
(g) There is no material dispute or claim concerning any
liability for Income Taxes for the Affiliated Group for any taxable period
during which the Company was a member of the group either (A) claimed or raised
by any authority in writing or (B) as to which USD has knowledge based upon
contact with any agent of such authority. No Affiliated Group has waived any
statute of limitations in respect of any material Income Taxes or agreed to any
extension of time with respect to an Income Tax assessment or deficiency for any
taxable period during which the Company was a member of the group.
(h) Since November 1, 1996, the Company has no liability for
Income Taxes of any Person other than the Company (A) under Regulation 1.1502-6
of the Internal Revenue Code (or any other similar provision of state or local
law), (B) as a transferee or successor, (C) by contract or (D) otherwise.
3.12. EMPLOYEE BENEFIT PLANS. Schedule 3.12 sets forth a complete and
accurate list of all bonus, deferred compensation, pension, profit sharing,
retirement, insurance, stock purchase, stock option or any other fringe benefit
plans, arrangement or practice, and all other employee benefit plans, as defined
in section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), whether formal or informal (collectively, the "Plans")
currently in effect with respect to current or former employees of the Company.
Schedule 3.12 sets forth the annual contributions and premiums with respect to
providing benefits pursuant to each of the Plans with respect to Company
employees. USD has performed and complied in all material respects with all of
its obligations under or with respect to such Plans and such Plans have operated
substantially in accordance with their terms, except where any failure to so
perform, comply or operate would not have a material adverse effect on the
results of operations or financial condition of the Company.
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The Company has no commitment, whether formal or informal and whether legally
binding or not, to create any additional Plan.
3.13. CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES AND OTHERS.
Except with respect to equipment leases or equipment lease financing or real
estate leases and as disclosed in Schedule 3.13 to this Agreement, no consent of
any other Person is necessary to the consummation of the transactions
contemplated hereby.
3.14. PERSONNEL. Schedule 3.14 sets forth a true and complete list of
all group insurance programs in effect for employees of the Company.
3.15. DISCLOSURE. No representations or warranties made by USD in this
Agreement and no statement contained in any document (including, without
limitation, the Financial Statements and the Schedules), certificate, or other
writing furnished or to be furnished by USD to The Noteholders or any of their
representatives pursuant to the provisions hereof or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was made, in order to make the
statements herein or therein not misleading.
3.16 OWNERSHIP OF STOCK; AUTHORITY TO TRANSFER. Except as set forth in
Schedule 3.16, the Stock to be sold to the Noteholders and redeemed by the
Company is not encumbered and is freely transferrable by USD. Except as set
forth in Schedule 3.16, USD holds good and marketable title to the Stock to be
sold or redeemed hereby and no third party can claim any right thereto or make
any claim thereon. Except as set forth in Schedule 3.16 and except for
securities law restrictions, the transfer by USD of the Stock to the Noteholders
and the Company pursuant to this Agreement will vest in the Noteholders and the
Company full title to the Stock, free and clear of all liens, claims, equities,
options, calls, voting trust, agreements, commitments and encumbrances
whatsoever. Any exceptions set forth in Schedule 3.16 will be eliminated on or
before the Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE NOTEHOLDERS AND THE COMPANY
The Noteholders and the Company represent and warrant to USD as
follows:
4.01. AUTHORIZATION, ETC. The Company has full corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby as they relate to the redemption of the shares of Stock
being redeemed by the Company, the assumption of the Assumed Notes and the
execution and delivery of the Consulting Agreement. The Company has taken all
action required by law, its Certificate of Incorporation, bylaws or otherwise to
authorize the
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execution and delivery of this Agreement and the transactions contemplated
hereby, and this Agreement, the Payment Note, the Assignment and Assumption
Agreement and the Consulting Agreement are each a valid and binding agreement of
the Company enforceable against it in accordance with its terms.
4.02. NO VIOLATION. Except as set forth in Schedule 3.04, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will violate any provisions of the Certificate
of Incorporation of the Company or violate, or be in conflict with, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination of or accelerate
the performance required by or cause the acceleration of the maturity of any
debt or obligation pursuant to or result in the creation or imposition of any
security interest, lien or other similar encumbrance upon the property or assets
of the Company under, any agreement or commitment to which the Company is a
party or by which the Company is bound, or, to the knowledge of the Company and
the Noteholders, violate any statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority, except where such
violation would not have a material adverse effect on the business, financial
condition or operations of the Company or on the ability of the Company and the
Noteholders to consummate the transactions contemplated hereby.
4.03. LITIGATION. Except as set forth in Schedule 3.08, there is no
pending or, to the knowledge of the Noteholders, threatened action, suit,
inquiry, proceeding or investigation by or before any court or governmental or
other regulatory or administrative agency or commission pending or threatened
against or involving the Company or which questions or challenges the validity
of this Agreement or any action taken or to be taken by the Noteholders or the
Company pursuant to this Agreement or in connection with the transactions
contemplated hereby.
4.04. CONSENTS AND APPROVALS OF GOVERNMENTAL AUTHORITIES AND OTHERS. No
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority is required in connection with
the execution, delivery and performance of this Agreement by the Noteholders or
the consummation by the Noteholders of the transactions contemplated hereby.
4.05. INVESTMENT INTENT OF THE NOTEHOLDERS. The Noteholders acknowledge
that the Stock which they are acquiring pursuant to the terms of this Agreement
is not being registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption from such registration
requirement afforded by Section 4(1) of the Securities Act for transaction by
any Person other than an issuer, underwriter or dealer. The shares of Stock
being acquired by the Noteholders are being acquired for investment purposes
only, and not with a view to the distribution thereof.
4.06. DISCLOSURE. No representations or warranties made by the
Noteholders in this Agreement and no statement contained in any document,
certificate, or other writing furnished or
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to be furnished hereunder by the Noteholders or any of their representatives
pursuant to the provisions hereof or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of material
fact of omits or will omit to state any material fact necessary, in light of the
circumstances under which it was made, in order to make the statements herein or
therein not misleading.
4.07. FUNDING. The Company and the Noteholders have adequate and
sufficient means to pay the Closing Payment as and when such Closing Payment is
to be delivered to USD hereunder.
ARTICLE V
COVENANTS AND AGREEMENTS
5.01. UPDATING OF REPRESENTATIONS AND WARRANTIES.
(a) Between the date of this Agreement and the Closing Date,
USD shall give notice to The Noteholders promptly upon their becoming aware of
(a) any inaccuracy of a representation or warranty set forth in Section 3 or in
the Schedules hereto as given by USD or (b) any event or state of facts that, if
it had occurred or existed on or prior to the date of this Agreement, would have
caused any such representation or warranty to be materially inaccurate, any such
notice to describe such inaccuracy, event or state of facts in reasonable
detail.
(b) Between the date of this Agreement and the Closing Date,
the Noteholders shall give notice to USD promptly upon their becoming aware of
(a) any inaccuracy of a representation and warranty set forth in Section 4 or in
the Schedules hereto as given by the Noteholders or the Company or (b) any event
or state of facts, that, if it had occurred or existed on or prior to the date
of this Agreement, would have caused any such representation or warranty to be
materially inaccurate, any such notice to describe such inaccuracy, event or
state of facts in reasonable detail.
5.02. NO SOLICITATION. Following the execution of this Agreement,
neither USD, nor any of its directors, officers, agents or representatives will
directly or indirectly, (a) solicit or encourage any inquiries, discussions or
proposals for, (b) continue, propose or enter into negotiations or discussions
with respect to, or (c) enter into any agreement or understanding providing for,
any acquisition of the capital stock, assets or business of the Company, nor
shall any such Persons provide any information to any Person (other than the
Noteholders and their representatives) for the purpose of evaluating or
determining whether to make or pursue any inquiries or proposal with respect to
any such transaction.
5.03. OPERATION IN ORDINARY COURSE. Between the date of this Agreement
and the Closing Date, USD will allow the Company to (a) conduct its business
only in the ordinary course and consistent with past practice, (b) use or
operate its assets only in a normal business manner, (c)
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maintain all its assets and properties in good working order and condition,
ordinary wear and tear excepted, (d) maintain in full force and effect all fire,
liability and other insurance policies and (e) continue all current activities
relating to its business, operations and affairs.
5.04. BUSINESS ORGANIZATION. Between the date of this Agreement and the
Closing Date, USD will allow the Company to (a) preserve substantially intact
its business organization and keep available the services of its present
officers and employees, (b) preserve in all material respects its present
business relationships, financing arrangements and goodwill, (c) maintain its
books, accounts and records in a manner consistent with past practice, except as
otherwise required by any statute, rule or regulation, (d) maintain in full
force and effect all its licenses and comply, in all material respects, with all
laws, statutes, ordinances, rules, regulations, orders, writs, injunctions,
decrees, awards or other requirements of any court or other governmental body
applicable to it or the conduct of its business, and (e) perform all of its
material obligations under all material contracts, agreements, licenses,
permits, instruments, or undertakings without default.
5.05. CORPORATE ORGANIZATION. Between the date of this Agreement and
the Closing Date, USD shall not allow the Company to (a) amend its Articles of
Incorporation, (b) issue, sell or otherwise dispose of any debentures, notes,
stock or other securities issued by it or create, sell or otherwise dispose of
any options, rights, conversion rights or other agreements or commitments of any
kind relating to the issuance, sale or disposition of any of such securities or
modify or amend any right of the holder of any such security or create or suffer
to be created any lien or encumbrance thereon; (c) declare or pay any dividends
in cash, securities or other property, make any other distribution with respect
to its capital stock or acquire, directly or indirectly, by redemption or
otherwise, any of its capital stock other than as permitted by Section 1.05
hereof; (d) make any other payment (however characterized) to USD or any
affiliate of USD other than as permitted by Section 1.05; (e) reclassify, split
up or otherwise change any of its capital stock; (f) be party to any merger,
consolidation or other business combination; (g) organize any new subsidiary or
acquire any equity securities of any Person or any equity or ownership interest
in any business; or (g) agree or otherwise commit, whether in writing or
otherwise, to do any of the foregoing.
5.06. OTHER RESTRICTIONS. Between the date of this Agreement and the
Closing Date, USD shall not allow or authorize the Company to:
(a) borrow any funds or otherwise become liable for, whether
directly or by way of guarantee or otherwise, any indebtedness for borrowed
money; provided, nothing herein shall be deemed to prohibit the Noteholders and
the Company from making all necessary arrangements to consummate the Credit
Facility, such transaction only to be consummated simultaneous to the Closing;
(b) create or suffer to be created any lien or encumbrance on
any of its properties or assets except at contemplated by subsection (a) above;
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(c) enter into or modify any employment agreement or
commitment or increase in any manner the compensation of any officer, director
or employee;
(d) create or modify any bonus, deferred compensation,
pension, profit-sharing, retirement, insurance, stock purchase, stock option, or
other fringe benefit plan, arrangement or practice or any other employee benefit
plan (as defined in section 3(3) of ERISA), whether formal or informal;
(e) incur or assume, whether directly or by way of guarantee
or otherwise, any obligation or liability (absolute or contingent), except
obligations and liabilities incurred in the ordinary course of business and
consistent with past practice;
(f) enter into or modify, or engage in any negotiations with
respect to, any collective bargaining or union agreement or commitment;
(g) make any capital expenditure;
(h) except as permitted by Lee, enter into any agreement or
commitment or engage in any activity or transaction other than agreements,
commitments and transactions in the ordinary course of business and consistent
with past practice;
(i) pay, discharge or satisfy any claim, liability or
obligation, absolute, accrued, contingent or otherwise, other than the payment,
discharge or satisfaction in the ordinary course of business and consistent with
past practice of liabilities or obligations reflected in its September 30, 1998
balance sheet or incurred in the ordinary course of business and consistent with
past practice since September 30, 1998; provided, no such payment shall be made
to USD and or any of its affiliates or subsidiaries except as permitted by
Section 1.05 hereof.
(j) cancel any debts owed to it or waive any of its claims or
rights or do any act or omit to do any act, which causes a breach of any of its
material contracts, commitments or obligations;
(k) enter into (other than the renewal of agreements on terms
no less favorable to it than the agreements in effect on the date hereof),
terminate or modify any of its agreements, understandings or commitments;
(l) enter into any contract, agreement, commitment,
understanding or transaction with an affiliate;
(m) sell, transfer or otherwise dispose of any of its assets,
other than in the ordinary course of business; or
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(n) agree or otherwise commit, whether in writing or
otherwise, to do any of the foregoing.
ARTICLE VI
CONDITIONS TO THE USD'S OBLIGATIONS
Each and every obligation of USD under this Agreement to be performed
on or before the Closing shall be subject to the satisfaction, on or before the
Closing, of each of the following conditions, unless waived in writing by USD:
6.01. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Noteholders and the Company contained herein shall be true and
accurate in all material respects as of the date when made and at and as of the
Closing, as though such representations and warranties were made at and as of
such date, except for changes expressly permitted or contemplated by the terms
of this Agreement.
6.02. PERFORMANCE. The Company and the Noteholders shall have performed
and complied in all material respects with all agreements, obligations and
conditions required by this Agreement to be performed or complied with by them
on or prior to the Closing.
6.03. NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
Person or legal or administrative proceeding shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated hereby.
6.04. NO INJUNCTION. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
USD, its sole discretion, deems unacceptable.
6.05. TERMINATION OF CERTAIN AGREEMENTS. The Employment Agreement,
dated November 1, 1996 and as amended effective July 1, 1997, between Lee, USD
and the Company (the "Lee Employment Agreement"), the Indemnity Agreement, dated
November 1, 1996, between USD, Lee and Enholm and the Employment Agreement,
dated November 1, 1996, between Enholm and the Company shall be terminated and
be of no further force and effect, and there shall be no further payment
obligations of USD thereunder, including, without limitation, any amounts due
under Section 3(b)(ii) of the Lee Employment Agreement.
6.06. CONSENTS. Unless waived, any consents and waivers required to
complete the
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transaction contemplated hereby shall have been obtained on terms reasonably
satisfactory to USD and shall be in full force and effect.
6.07. MISCELLANEOUS CLOSING DOCUMENTS. At the Closing, the Company and
the Noteholders shall deliver or cause to be delivered to USD:
(a) The Payment Notes and Dividend Note;
(b) Evidence of the wiring of the Closing Payment;
(c) The Assignment and Assumption Agreement, executed by the
Company and all holders of the Assumed Notes;
(d) The Settlement Agreement and Mutual Release, executed by
the Noteholders, and the Canceled Notes endorsed and to be marked "Canceled";
(e) A Certificate of the President of the Company and of the
Noteholders that the representations and warranties contained in Article IV of
this Agreement are true and correct and that the Company and the Noteholders
have complied with all conditions set forth in Section VI in all material
respects at and as of the Closing Date;
(f) The Consulting Agreement signed by the Company; and
(g) The Security Agreement signed by the Company.
ARTICLE VII
CONDITIONS TO THE COMPANY'S AND NOTEHOLDERS' OBLIGATIONS
Each and every obligation of the Company and the Noteholders under this
Agreement to be performed on or before the Closing shall be subject to the
satisfaction, on or before the Closing, of each of the following conditions,
unless waived in writing by the Company and the Noteholders:
7.01. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties contained in Article III hereof and the other documents delivered and
to be delivered by USD pursuant hereto or in connection with the transactions
contemplated hereby shall be true and accurate in all material respects as of
the date when made and at and as of the Closing Date as though such
representations and warranties were made at and as of such date, except for
changes expressly permitted or contemplated by the terms of this Agreement.
7.02. PERFORMANCE. USD shall have performed and complied in all
material respects with
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all agreements, obligations and conditions required by this Agreement to be
performed or complied with by them on or prior to the Closing.
7.03. NO GOVERNMENT PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
Person or legal or administrative proceeding shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated hereby.
7.04. NO INJUNCTION. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
the Noteholders, in their sole discretion, deem unacceptable.
7.05. MATERIAL CHANGE. From September 30, 1998 to the Closing Date, the
Company shall not have suffered any material adverse change (whether or not such
change is referred to or described in any supplement to the Schedules) in its
business, financial condition, working capital, assets, liabilities (absolute,
accrued, contingent or otherwise), reserves or operations.
7.06. CONSENTS OBTAINED. Unless waived, any consents and waivers
referred to herein as are required to complete the transactions contemplated by
this Agreement shall have been obtained on terms reasonably satisfactory to the
Noteholders and shall be in full force and effect and signed copies thereof
shall have been delivered to the Noteholders.
7.07. TERMINATION OF CERTAIN AGREEMENTS AND ACCOUNTS. At or prior to
Closing:
(a) Any tax allocation or sharing agreement, including any
Income Tax sharing agreement, between the Company and USD shall have been
terminated as of the Closing Date and will have no further force and effect for
any taxable year (whether for the current year, a future year or for a past
year.)
(b) After the application of Section 1.05(a) hereof, all
intercompany accounts between the Company and USD reflected on the September 30,
1998 balance sheet of the Company contained in the Financial Statements or
created since such date through the Closing Date shall be canceled and be of no
further force and effect.
7.08. MISCELLANEOUS CLOSING DOCUMENTS. At the Closing, USD shall
deliver to The Noteholders:
(a) Certificate(s) representing the Stock accompanied by a
stock power(s) duly endorsed in blank;
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(b) Certificate of USD that the representations and warranties
contained in Article III of this Agreement are true and correct and that USD has
complied with all conditions set forth in Article VII in all material respects
at and as of the Closing Date;
(c) The Assignment and Assumption Agreement, executed by USD;
(d) The Settlement Agreement and Mutual Release, executed by
USD;
(e) The Consulting Agreement signed by USD;
(f) A five year sub-lease relating to the use of space by
Forest Hills Nuclear, P.C., in an affiliate of USD's managed radiology facility
located on Austin Street, Queens, New York, substantially in the form attached
hereto as Exhibit "H";
(g) The resignations as officers and directors of the Company
of such Persons as the Noteholders shall direct; and
(h) The written confirmation of DVI Business Credit
Corporation ("DVI"), in form reasonably satisfactory to the Company, to
unconditionally release all security interests and liens of DVI as are listed in
Schedule 3.09 hereto and to unconditionally terminate the Guaranty of the
Company to DVI listed on Schedule 3.10 hereto as of the Closing or as soon
thereafter as practical.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.01. SURVIVAL. All representations, warranties and agreements
contained in this Agreement or in any exhibit, schedule or certificate delivered
pursuant to this Agreement shall survive the Closing through January 3, 2000;
provided, any representation and warranties of USD relating to Income Tax
obligations of the Company shall survive until the statute of limitations
relating thereto shall have lapsed in accordance with applicable law.
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ARTICLE IX
TERMINATION AND ABANDONMENT
9.01. METHODS OF TERMINATION. The transactions contemplated hereby may
be terminated and/or abandoned at any time but not later than the Closing:
(a) by mutual and joint consent of USD and the Noteholders;
(b) by the Noteholders (A) at any time if any of the
representations and warranties of USD contained in Article III hereof was
incorrect in any material respect when made or at any time thereafter, or (B)
upon written notice to USD if one or more of the conditions precedent to the
obligations of the Noteholders and the Company set forth in this Agreement is
not satisfied at the time at which the Closing would otherwise occur or if
satisfaction of such a condition is or becomes impossible on or prior to the
Closing Date;
(c) by USD (A) at any time if any of the representations and
warranties of the Noteholders or the Company contained in Article IV hereof was
incorrect in any material respect when made or at any time thereafter, or (B)
upon written notice to the Noteholders if one or more of the conditions
precedent to the obligations of USD set forth in this Agreement is not satisfied
at the time at which the Closing would otherwise occur or if satisfaction of
such a condition is or becomes impossible on or prior to the Closing Date;
(d) by either USD or the Noteholders if the Closing has not
occurred on or prior to November 13, 1998.
9.02. PROCEDURE UPON TERMINATION. In the event of termination and
pursuant to Section 9.01 hereof, notice thereof shall forthwith be given to the
other parties and the transactions contemplated by this Agreement shall be
terminated and/or abandoned, without further action by USD or the Noteholders.
If the transactions contemplated by this Agreement are terminated and/or
abandoned as provided herein:
(a) each party will redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same without retaining copies thereof; and
(b) all confidential information received by any party hereto
with respect to the business of any other party shall be treated in accordance
with Section 2.01 hereof.
9.03. EFFECT OF TERMINATION. In the event that this Agreement is
terminated pursuant to Section 9.01, this Agreement shall terminate without any
liability or further obligation of any party to another, except for Sections
2.01, 10.01 and 10.02, which shall survive termination.
ARTICLE X
INDEMNIFICATION
10.01. INDEMNIFICATION BY USD. In the event that the transactions
contemplated by this
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Agreement are consummated, USD shall indemnify the Company and the Noteholders
and hold the Company and the Noteholders harmless from, against and in respect
of and shall on demand reimburse the Noteholders and the Company for all their
losses, liabilities, damages, costs and expenses and any and all actions, suits,
proceedings, demands, assessments, judgments, costs and expenses, including
without limitation, reasonable legal fees and expenses, incident to any of the
foregoing or incurred in investigating or attempting to avoid same or to oppose
the imposition thereof, or in enforcing this indemnity (collectively, "Losses")
arising from any misrepresentation or breach of any representation, warranty,
covenant or agreement on the part of USD under this Agreement or in respect of
any obligations of USD pursuant to Section 11.3 hereof. Notwithstanding the
foregoing in the event that a court of competent jurisdiction having final
adjudicative authority and from which no appeal is available shall determine
that the Noteholders or the Company is not entitled to indemnification then the
Noteholders and/or the Company shall not be entitled to recover their legal
fees, costs or expenses with respect to such claim.
10.02. INDEMNIFICATION BY THE COMPANY AND THE NOTEHOLDERS. The Company
and the Noteholders, jointly and severally, shall indemnify and hold harmless
USD, and shall reimburse it for, any Losses arising from or in connection with
(i) any misrepresentation, breach or inaccuracy in any of the representations,
warranties, covenants or agreements of the Noteholders and the Company under
this Agreement and (ii) any failure by the Noteholders or the Company to perform
or comply with any agreement made by them in this Agreement, including
obligations arising under Section 11.13 hereof. Notwithstanding the foregoing in
the event that a court of competent jurisdiction having final adjudicative
authority and from which no appeal is available shall determine that USD is not
entitled to indemnification then USD shall not be entitled to recover their
legal fees with respect to such claim.
10.03. PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by an
indemnified party under Sections 10.01 or 10.02 of notice of the commencement of
any action for which indemnification is available under Section 10.01 or 10.02,
such indemnified party shall, if a claim in respect thereof is to be made
against an indemnifying party under such section, give notice to the
indemnifying party of the commencement thereof, but the failure so to notify the
indemnifying party shall not relieve it of any liability that it may have to any
indemnified party except to the extent the indemnifying party demonstrates that
the defense of such action is prejudiced thereby. In case any such action shall
be brought against an indemnified party and it shall give notice to the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified
party and, after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party under such section for any fees of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party in connection with the defense thereof, other than reasonable
costs of investigation and costs and expenses of legal counsel if the
indemnified party and the indemnifying party are both parties to the action and
the indemnified party has been
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advised by counsel to the indemnifying party that a conflict of interest exists
as a result of the representation of both parties. If an indemnifying party
assumes the defense of such an action, (a) no compromise or settlement thereof
may be effected by the indemnifying party without the indemnified party's
consent (which shall not be unreasonably withheld) unless (i) there is no
finding or admission of any violation of law or any violation of the rights of
any Person and no effect on any other claims that may be made against the
indemnified party and (ii) the sole relief provided is monetary damages that are
paid in full by the indemnifying party and (b) the indemnifying party shall have
no liability with respect to any compromise or settlement thereof effected
without its consent. If notice is given to an indemnifying party of the
commencement of any action and it does not, within ten (10) business days after
the indemnified party's notice is given, give notice to the indemnified party of
its election to assume the defense thereof, the indemnifying party shall be
bound by any determination made in such action or any compromise or settlement
thereof effected by the indemnified party. Notwithstanding the foregoing, if an
indemnified party determines in good faith that there is a reasonable
probability that an action may adversely affect it or its affiliates other than
as a result of monetary damages, such indemnified party may, by notice to the
indemnifying party, assume the exclusive right to defend, compromise or settle
such action, but the indemnifying party shall not be bound by any determination
of an action so defended or any compromise or settlement thereof effected
without its consent (which shall not be unreasonably withheld).
10.04. SATISFACTION OF INDEMNIFICATION CLAIMS.
(a) USD shall not be required to indemnify the Noteholders
and/or the Company under Section 10.01 or otherwise unless and only to the
extent that the amount of any Loss for which the Noteholders and/or the Company
seeks indemnification under Section 10.01, when aggregated with all other such
Losses, exceeds $150,000 (the "Basket"), to a maximum aggregate indemnification
of $1,000,000 (the "Maximum Liability") under Section 10.01 or otherwise;
provided, however, the Basket and the Maximum Liability shall not apply in
respect of any Losses arising from any breach of a representation or warranty by
USD relating to Income Taxes or obligations for Income Taxes as set forth in
Section 11.13 hereof. For purposes of calculating Losses under this Section
10.04(a), there shall be an offset against such Losses of an amount equal to the
sum of (i) the value of any net tax benefit actually realized or to be realized
by the Noteholders or the Company (by reason of a tax deduction, basis
reduction, credits or otherwise) and (ii) the amount of any cash payment
actually received by the Noteholders or the Company with respect to any Losses
covered by insurance or other source of indemnification. All indemnification
claims pursuant to this Agreement shall be made prior to January 3, 2000, except
that any claims for breaches of representations and warranties relating to
Income Taxes may be made until the applicable statute of limitations relating
thereto shall have lapsed in accordance with the law applicable thereto. The
foregoing indemnification rights shall be the exclusive remedy for the
Noteholders or the Company arising from any breach of representations and
warranties by USD under Article III.
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(b) In the event USD is required to indemnify the Company
pursuant to Section 10.01 hereof, the Company may offset any payment due USD
hereunder other than pursuant to the Dividend Note by the amount which USD is
required to indemnify the Company pursuant to Section 10.01 hereof. In order to
offset payments pursuant to this Section 10.04, the Company shall send to USD in
the manner provided in Section 11.04 hereof, a written calculation of the amount
of the indemnity for which USD is responsible pursuant to Section 10.01 hereof.
In the event the USD does not object to the Company's calculation within ten
(10) business days after the receipt of the notice, as provided in Section 11.04
hereof, USD shall be deemed to have accepted and agreed to such calculation and
the Company shall be entitled to offset any payment solely on the Payment Notes
and/or all or portion of the fee due under the Consulting Agreement by the
amount of such indemnity. If USD shall dispute the indemnity demand in any
manner and such dispute is not settled by the date the $500,000 Payment Note is
to be paid by its terms, the disputed amount shall be retained by the Company in
trust and not paid to USD until the claim and its validity are finally settled.
All indemnification obligations pursuant to this Article X shall be paid within
a reasonable period of time after a claim for indemnification has been made and
its validity finally determined. Notwithstanding the foregoing, the right of
offset granted above shall be subject to the obligation of the Company (i) to
continue to pay interest due in respect of the $500,000 Payment Note in
accordance with its terms until there has been an agreed upon or judicially
determined offset amount established and applied to the principal amount of the
$500,000 Payment Note and (ii) to accrue and pay interest at the rate of seven
percent (7%) per annum in respect of any amount offset against the amounts due
under the $300,000 Payment Note and/or the fees due under Consulting Agreement
which are subsequently and finally determined not to have been subject to such
right of offset.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.01. AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by written agreement of
the Company and the Noteholders and USD at any time prior to the Closing with
respect to any of the terms contained herein.
11.02. WAIVER OF COMPLIANCE. Any failure of the USD, on the one hand,
or the Company and the Noteholders, on the other, to comply with any obligation,
covenant, agreement or condition herein may be expressly waived in writing by
the President of USD or Lee on behalf of the Noteholders and the Company,
respectively, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
11.03. EXPENSES; TRANSFER TAXES, ETC. Whether or not the transactions
contemplated by this Agreement shall be consummated, USD agrees that all fees
and expenses incurred by it in
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connection with this Agreement shall be borne by it and the Noteholders agrees
that all fees and expenses incurred by them in connection with this Agreement
shall be borne by them, including, without limitation, all fees of counsel and
accountants. The Company shall pay all sales, use, transfer, stamp, conveyance,
value added or similar taxes, duties, excise or governmental charges imposed by
any taxing jurisdiction and all recording or filing fees, notarial fees and
other similar costs ("Transfer Taxes and Fees") with respect to the sale and
redemption of the Stock or otherwise on account of this Agreement or the
transactions contemplated herein. The Noteholders and the Company shall
indemnify and hold harmless USD with respect to all Transfer Taxes and Fees.
11.04. NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or if mailed, certified or registered mail,
return receipt requested, with postage prepaid or if delivered to an overnight
courier that guarantees next-day delivery:
(a) If to The Noteholders or the Company:
US Heartcare Management, Inc.
350 Theodore Fremd Avenue
Rye, New York 10580
Attention: Lawrence Lee
Fax: (914) 967-9290
with a copy to:
Jacobson, Mermelstein and Squire, LLP
52 Vanderbilt Avenue
New York, New York 10017
Attention: Lee Mermelstein, Esq.
Fax: (212) 697-1427
(b) If to USD, to:
US Diagnostic Inc.
777 South Flagler Drive
West Tower Suite 1006
West Palm Beach, Florida 33401
Fax: (561) 833-8391
Attention: Mr. Joseph Paul, President
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with copy to:
Steel Hector & Davis LLP
200 South Biscayne Boulevard
Miami, Florida 33131
Attention: Brian Heller, Esq.
Fax: (305) 577-7001
11.05. ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Notwithstanding the foregoing,
neither USD, on the one hand, nor the Company or the Noteholders, on the other
hand, may assign any of their rights or delegate any of their obligations under
this Agreement without the prior written consent of the other party.
11.06. PUBLICITY. Neither the Company and the Noteholders nor USD shall
make or issue, or cause to be made or issued, any announcement or written
statement concerning this Agreement or the transactions contemplated hereby for
dissemination to the general public without the prior written consent of the
other party. This provision shall not apply, however, to any announcement or
written statement required to be made by law or the regulations of any federal
or state governmental agency or any stock exchange, except that the party
required to make such announcement shall, whenever practicable, consult with the
other party concerning the timing and content of such announcement before such
announcement is made.
11.07. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely within such State.
11.08. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
11.09. HEADINGS. The headings of the Sections and Articles of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
11.10. ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules hereto, and the other documents and certificates delivered pursuant to
the terms hereof set forth the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein, and supersede all
prior agreements, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto.
24
<PAGE> 25
11.11. THIRD PARTIES. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any Person other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
11.13. OBLIGATIONS WITH RESPECT TO INCOME TAXES AND INCOME TAX RETURNS
RELATING TO THE COMPANY. The following provisions shall be applicable between
the parties with respect to their rights, duties and obligations relating to
Income Taxes and Income Tax Returns relating to the Company for the period from
November 1, 1996 through the Effective Date (the "Income Tax Period"):
(a) USD's obligations of indemnification under Article X shall
include Losses of the Company arising from, arising out of, relating to, in the
nature of, or caused by any liability of the Company for the unpaid income taxes
of any Person (other than the Company) under Treasury Regulation Section
1.1502-6 (or any similar provision of state or local law) as a transferee or
successor, by contract, or otherwise that relate to the Income Tax Period.
(b) USD will include all of the income of the Company,
including income arising as a result of the transactions contemplated hereby, on
USD's consolidated Federal Income Tax Returns for all periods ending on the
Effective Date and pay any and all federal Income Taxes attributable to such
income. USD, at its own cost and expense, will timely prepare or cause to be
prepared and file or cause to be filed and, if required to do so by applicable
law, deliver to the Company for signing as soon as practical after the Closing
Date, New York state and local Income Tax Returns for the Company for the period
January 1, 1998 through the Effective Date. USD will reimburse the Company or
pay any and all state or local Income Taxes attributable to income of the
Company for such period. The Company will furnish tax information to USD, at the
Company's expense, for inclusion in USD's or the Company's Income Tax Returns
for the period which includes the Effective Date in accordance with the
Company's past custom and practice. USD will take no position on such Income Tax
Returns that relate to the Company that is contrary to USD's or the Company's
past custom and practice and that would adversely affect the Company after the
Effective Date (unless such position would be reasonable in the case of a Person
that owned the Company both before and after the Effective Date). The income of
the Company will be apportioned to the period up to and including the Effective
Date by closing the books of the Company as of the end of the Effective Date.
The Company shall at its expense timely prepare and file all Income Tax Returns
for the Company for all periods after the Effective Date and shall pay all
Income Taxes due with respect to such Income Tax returns, including all taxes
imposed with respect to the income of the Company from October 1, 1998 through
December 31, 1998.
(c) USD will allow the Company and its counsel to participate
(at the Company's own expense) in any audits of USD's Income Tax Returns to the
extent that such audit and returns relate to the Company. USD will not settle
any issues in such audit that relate predominately to the
25
<PAGE> 26
Company in a manner which would adversely affect the Company after the Effective
Date without the prior written consent of the Company, which consent shall not
be unreasonably withheld. The Company will allow USD, at its sole cost and
expense, and its counsel to control the conduct of any audits of and litigation
relating to the Company's Income Tax Returns to the extent that they relate to
periods ending on or before the Closing.
(d) The Noteholders, the Company and USD shall cooperate
fully, as and to the extent reasonably requested by the other party, in
connection with the filing of Income Tax Returns pursuant to this Section and
any audit, litigation or other proceeding with respect to Income Taxes. Such
cooperation shall include, without limitation, the retention, and the provisions
of records and information that are relevant to any such audit, litigation or
other proceeding and making employees available to provide additional
information and explanation of any material provided hereunder. The Company and
the Noteholders agree to retain all books and records with respect to taxes
pertinent to the Company that relate to any taxable period beginning before the
Effective Date until the expiration of the applicable statutes of limitations.
(e) The Company shall pay to USD, within ten (10) days after
receipt of such amount any payments or credits in respect of Income Taxes
(including, without limitation, New York State or City income or franchise
taxes) and any interest thereon of the Company that are attributable solely to
the Income Tax Period.
11.14. CLOSING BALANCE SHEET. USD, the Noteholders and the Company
shall on or prior to the Closing Date confirm and agree to a closing balance
sheet for the Company as of the Effective Date which shall reflect the terms of
this Agreement.
[Signatures on Next Page.]
26
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
US DIAGNOSTIC INC. US HEARTCARE MANAGEMENT, INC.
By /s/ Joseph Paul By /s/ Lawrence Lee
--------------------------- ---------------------------
Joseph Paul, President Lawrence Lee, President
NOTEHOLDERS:
/s/ Lawrence Lee /s/ Barry Enholm
--------------------------- ---------------------------
Lawrence Lee Barry Enholm
27
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF CORPORATE
NAME INCORPORATION % OWNED
- ---- ------------------ -------
<S> <C>
Advanced Medical Imaging Center, Inc. Delaware 100.00%
Affiliated Medical Imaging Network, Inc. California 100.00%
AH Imaging Center, Inc. Delaware 100.00%
Columbus Diagnostic Center Inc. Delaware 100.00%
Community Radiology of Virginia Inc. Virginia 100.00%
Computerized Medical Imaging Center Inc. Delaware 56.90%
DI Imaging Center Inc. Delaware 100.00%
Eastside Imaging, Inc. Texas 100.00%
Fannin Street Imaging, Inc. Texas 100.00%
FCA of Van Nuys, Inc. Delaware 100.00%
Finance Funding Corp. Florida 100.00%
First Choice Networks, Inc. Florida 100.00%
Fort Bend Imaging, Inc. Texas 100.00%
Future Care Affiliates, Inc. Delaware 100.00%
Gulf Coast Imaging Services, Inc. Texas 100.00%
Heights Imaging Center Inc. Delaware 100.00%
Imaging Management Services Inc. Delaware 100.00%
Kaley Imaging, Inc. Florida 100.00%
Laborde Diagnostic Inc. Louisiana 80.00%
LB Imaging Center, Inc. Delaware 100.00%
Medical Marketing Development, Inc. New York 100.00%
Medical Imaging Centers of America, Inc. California 100.00%
Medical Imaging Equipment Leasing, Inc. Florida 100.00%
MediTek-Broward, Inc. Florida 100.00%
MediTek-Chatham Industries, Inc. Florida 100.00%
MediTek-Greystone, Inc. Florida 100.00%
MediTek-HE, Inc. Florida 100.00%
MediTek-ICOT, Inc. Florida 100.00%
MediTek-Newark, Inc. Florida 100.00%
MediTek-Palm Beach Gardens, Inc. Florida 100.00%
MediTek-Palms, Inc. Florida 100.00%
MediTek-PBGMRI, Inc. Florida 100.00%
MediTek-Premier North, Inc. Florida 100.00%
MediTek-Premier, Inc. Florida 100.00%
MediTek-Sun Coast, Inc. Florida 100.00%
MediTek Anesthesia, Inc. Florida 100.00%
MediTek Capital Corp. Florida 100.00%
MediTek Gwinnet, Inc. Florida 100.00%
MediTek Health Care Management, Inc. Florida 100.00%
MediTek Health Corporation Florida 100.00%
MediTek Industries, Inc. Florida 100.00%
MediTek Therapy, Inc. Florida 100.00%
MICA CAL II, Inc. California 100.00%
MICA CAL X, Inc. California 100.00%
MICA FLO I, Inc. California 100.00%
MICA Imaging, Inc. Illinois 100.00%
MICA OR I, Inc. California 100.00%
MICA Pacific, Inc. California 100.00%
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF CORPORATE
NAME INCORPORATION % OWNED
- ---- ------------------ -------
<S> <C>
Modesto Imaging Center Inc. Delaware 100.00%
Owner Diagnostics, Inc. California 67.53%
San Antonio Diagnostic Imaging, Inc. (f/k/a Hamilton
Wolfe Imaging, Inc.) Texas 100.00%
San Francisco Magnetic Resonance Center, Inc. Delaware 100.00%
Santa Fe Imaging Center Inc. Delaware 100.00%
South Coast Radiologists, A Corporation Oregon 100.00%
Steeplechase Diagnostic Center, Inc. Texas 100.00%
Townley Group, Inc. California 50.10%
US Imaging, Inc. Texas 100.00%
USD Dayton Inc. Delaware 100.00%
MICA CAL III, Inc. California 100.00%
MICA CAL IV, Inc. California 100.00%
MICA CAL I, Inc. California 100.00%
MediTek-Wellington Corp. Florida 100.00%
MICA CAL VII, Inc. California 100.00%
MediTek-Winter Park, Inc. Florida 100.00%
Orange Park Diagnostic Center, Inc. Delaware 100.00%
LINC Medical Imaging, Inc. Delaware 100.00%
Fremont Imaging Center, Inc. (f/k/a FCA Management,
Inc.) Delaware 100.00%
USDL Pittsburgh, Inc. Delaware 100.00%
US Heartcare Management, Inc. (f/k/a Lee Imaging Group) New York 100.00%
Chatham MRI, Inc. New Jersey 100.00%
Salisbury Imaging Inc. Florida 100.00%
USD Wilkes Barre, Inc. Delaware 100.00%
Town & Country MRI & Diagnostic Center, Inc. Texas 100.00%
Westlake Diagnostic Center, Inc. California 100.00%
Bridgeton MRI Center, Inc. Missouri 100.00%
Chesterfield MRI Center, Inc. Missouri 100.00%
Kirkwood MRI Center, Inc. Missouri 100.00%
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the inclusion
in this Form 10-K of US Diagnostic Inc. for the year ended December 31, 1998 of
our report dated April 13, 1998. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1997 or performed
any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
West Palm Beach, Florida
March 29, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-45879, 333-13033, 333-13035, and 333-16901 of US Diagnostic Inc. on Form S-8
and Registration Statement Nos. 333-05395 and 333-67959 of US Diagnostic Inc. on
Form S-3 of our report dated March 23, 1999, appearing in this Annual Report on
Form 10-K of US Diagnostic Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Miami, Florida
March 23, 1999
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,177
<SECURITIES> 0
<RECEIVABLES> 51,705
<ALLOWANCES> 8,300
<INVENTORY> 0
<CURRENT-ASSETS> 64,371
<PP&E> 130,820
<DEPRECIATION> 39,475
<TOTAL-ASSETS> 237,830
<CURRENT-LIABILITIES> 56,456
<BONDS> 145,152
0
0
<COMMON> 227
<OTHER-SE> 31,326
<TOTAL-LIABILITY-AND-EQUITY> 237,830
<SALES> 0
<TOTAL-REVENUES> 195,735
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 175,205
<LOSS-PROVISION> 6,493
<INTEREST-EXPENSE> 20,032
<INCOME-PRETAX> (1,197)
<INCOME-TAX> (685)
<INCOME-CONTINUING> (512)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,311
<CHANGES> 0
<NET-INCOME> 4,799
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
