<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-13392
US DIAGNOSTIC INC.
(Exact name of registrant specified in its charter)
Delaware 11-3164389
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
777 S. Flagler Drive
Suite 1201 East
West Palm Beach, Florida 33401
(Address of Principal Executive Offices)
(561) 832-0006
(Registrant's Telephone Number, Including Area Code)
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 reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding at November 10, 1999:
----- ---------------------------------
Common Stock, $.01 par value 22,636,233 shares
<PAGE> 2
US DIAGNOSTIC INC.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical facts and may be forward-looking. Forward-looking
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, economic, competitive, regulatory, legal, growth and
integration factors, collections of accounts receivable, available financing or
available refinancing for existing debt, the ability to sell non-core or
underperforming assets at fair market value, cash flow and working capital
availability, any unanticipated impact of the Year 2000, including delays or
changes in costs of the Company's Year 2000 compliance program, 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 its 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.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US DIAGNOSTIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,622 $ 9,177
Accounts receivable, net of allowance for bad debts of
$7,291 and $8,300 in 1999 and 1998, respectively 42,497 43,405
Other receivables
4,119 6,886
Prepaid expenses and other current assets 4,568 5,263
--------- ---------
TOTAL CURRENT ASSETS 58,806 64,731
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $43,106 and $39,475 in 1999 and 1998, respectively 84,968 91,345
INTANGIBLE ASSETS, net of accumulated amortization of $14,799
and $11,773 in 1999 and 1998, respectively 72,365 75,445
OTHER ASSETS 3,540 5,049
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES 1,056 1,260
--------- ---------
TOTAL ASSETS $ 220,735 $ 237,830
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 28,107 $ 24,695
Current portion of long-term debt 22,232 20,982
Obligations under capital leases - current portion 5,327 6,257
Other current liabilities 2,142 4,522
--------- ---------
TOTAL CURRENT LIABILITIES 57,808 56,456
--------- ---------
Subordinated convertible debentures 21,727 33,969
Long-term debt, net of current portion 94,042 100,956
Obligations under capital leases, net of current portion 12,871 10,227
Other liabilities 2,766 2,549
--------- ---------
TOTAL LIABILITIES 189,214 204,157
--------- ---------
MINORITY INTEREST 3,464 2,120
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 shares authorized; none
issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
22,741,233 and 22,712,433 shares issued and outstanding,
respectively 227 227
Additional paid-in capital 148,047 148,047
Deferred stock-based compensation
(514) (973)
Accumulated deficit (119,703) (115,748)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 28,057 31,553
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 220,735 $ 237,830
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
US DIAGNOSTIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
NET REVENUE $ 38,469 $ 46,289 $ 118,326 $ 153,206
-------- -------- --------- ---------
OPERATING EXPENSES
General and administrative 29,995 35,104 89,496 113,276
Bad debt expense 1,786 1,005 4,487 3,918
Depreciation 4,596 4,921 13,910 14,997
Amortization 1,279 1,115 3,697 3,851
Stock-based compensation 106 276 459 914
-------- -------- --------- ---------
TOTAL OPERATING EXPENSES 37,762 42,421 112,049 136,956
-------- -------- --------- ---------
GAIN ON SALE OF SUBSIDIARIES 1,720 377 1,720 6,182
-------- -------- --------- ---------
INCOME FROM OPERATIONS 2,427 4,245 7,997 22,432
-------- -------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (4,396) (5,215) (13,042) (15,827)
Amortization of lender equity
participation fees (463) -- (1,389) --
Interest and other income 298 575 1,391 1,987
-------- -------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) (4,561) (4,640) (13,040) (13,840)
-------- -------- --------- ---------
Income (loss) before minority interest,
provision (benefit) for income taxes
and extraordinary item (2,134) (395) (5,043) 8,592
Minority interest in income of subsidiaries 816 673 2,388 2,034
-------- -------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and extraordinary item (2,950) (1,068) (7,431) 6,558
Provision (benefit) for income taxes (36) 356 (878) 3,825
-------- -------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM (2,914) (1,424) (6,553) 2,733
EXTRAORDINARY ITEM, NET OF TAXES -- -- 2,598 --
-------- -------- --------- ---------
NET INCOME (LOSS) $ (2,914) $ (1,424) $ (3,955) $ 2,733
======== ======== ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $ (.13) $ (.06) $ (.28) $ .12
Extraordinary item -- -- .11 --
-------- -------- --------- ---------
Net income (loss) $ (.13) $ (.06) $ (.17) $ .12
======== ======== ========= =========
Average common shares outstanding 22,741 22,710 22,734 22,655
======== ======== ========= =========
DILUTED EARNINGS PER COMMON SHARE
Income (loss) before extraordinary item $ (.13) $ (.06) $ (.28) $ .12
Extraordinary item -- -- .11 --
-------- -------- --------- ---------
Net income (loss) $ (.13) $ (.06) $ (.17) $ .12
======== ======== ========= =========
Average common and dilutive
equivalent shares outstanding 22,741 22,710 22,734 22,942
======== ======== ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
US DIAGNOSTIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 (UNAUDITED)
- ------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------ ----- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1999 22,712 $227 $148,047 (973) $(115,748) $ 31,553
Restricted stock issued 29 -- -- -- -- --
Amortization of deferred
compensation -- -- -- 459 -- 459
Net loss -- -- -- -- (3,955) (3,955)
------ ---- -------- ---- --------- --------
BALANCE - SEPTEMBER 30, 1999 22,741 $227 $148,047 $(514) $(119,703) $ 28,057
====== ==== ======== ==== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
US DIAGNOSTIC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH - OPERATING ACTIVITIES $ 13,512 $ 6,798
-------- --------
INVESTING ACTIVITIES
Purchases of equipment (9,723) (14,789)
Acquisitions, net of cash (269) --
Proceeds from the sale of subsidiaries, net of cash retained
by purchasers 12,168 31,678
Other (176) 71
-------- --------
NET CASH - INVESTING ACTIVITIES 2,000 16,960
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 24,560 17,356
Purchase of subordinated convertible debentures (7,925) --
Repayments of notes payable and
obligations under capital leases (33,702) (48,793)
-------- --------
NET CASH - FINANCING ACTIVITIES (17,067) (31,437)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,555) (7,679)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 9,177 17,460
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,622 $ 9,781
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,471 $ 16,110
Income taxes paid $ 464 $ 2,894
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Borrowings under capitalized leases were $5.6 million and $5.3 million during
1999 and 1998, respectively. The value of shares of common stock released from
escrow in 1998 relating to prior acquisitions was $1.2 million. The value of
206,000 shares of common stock repurchased by issuing debt and subsequently
retired in 1998 was $1.9 million.
During 1998, long-term debt and capital lease obligations decreased $10.7
million as a result of the sale of certain subsidiaries, and increased by $6.4
million as a result of the purchase and consolidation of the remaining 50%
interest in a subsidiary.
The long-term debt and certain long-term assets increased by $637,000 and
$500,000 in 1999 and 1998, respectively, resulting from the purchase of the
operating assets of an imaging center.
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
US DIAGNOSTIC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
[1] BASIS OF PRESENTATION
Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements as of September
30, 1999, include the accounts of US Diagnostic Inc., its wholly-owned
subsidiaries and non-wholly-owned but controlled subsidiaries (the "Company"),
and have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). All significant
intercompany accounts and transactions have been eliminated. Certain
information related to the Company's organization, significant accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements
reflect, in the opinion of management, all material adjustments (consisting
only of normal and recurring adjustments) necessary to fairly state the
financial position and the results of operations for the periods presented and
the disclosures herein are adequate to make the information presented not
misleading. Operating results for interim periods are not necessarily
indicative of the results that can be expected for a full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The condensed consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with the SEC
for the year ended December 31, 1998.
In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified from the previously reported financial
statements in order to conform with the financial statement presentation of the
current period.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards 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 years that begin after
June 15, 2000. Management has not determined the effect, if any, of adopting
SFAS No. 133.
7
<PAGE> 8
[2] PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
In thousands
<TABLE>
<CAPTION>
September 30, December 31, Estimated
1999 1998 Useful Life
------------ ------------ -----------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 N/A
Buildings 5,561 5,561 40 Years
Medical equipment 88,333 90,462 7 Years
Furniture and fixtures 3,033 3,451 7-10 Years
Office, data processing equipment and software 10,559 11,351 3-10 Years
Vehicles 572 626 3 Years
Leasehold improvements 18,148 17,501 10 Years
----------------------
Total 128,074 130,820
Less: accumulated depreciation
and amortization (43,106) (39,475)
----------------------
Property and equipment, net $ 84,968 $91,345
======================
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $35.1 million and $28.9 million at September 30, 1999 and December 31,
1998, respectively. Accumulated depreciation for equipment under capital leases
was $11.9 million and $9.1 million as of September 30, 1999 and December 31,
1998, respectively.
Depreciation expense amounted to $4.6 million and $13.9 million during the
three and nine months ended September 30, 1999, respectively, of which $1.0
million and $3.1 million, respectively, was attributed to equipment under
capital leases. Depreciation expense amounted to $4.9 million and $15.0 million
during the three and nine months ended September 30, 1998, respectively, of
which $1.1 million and $3.2 million, respectively, was attributed to equipment
under capital leases.
8
<PAGE> 9
[3] INTANGIBLE ASSETS
A summary of intangible assets is as follows:
In thousands
<TABLE>
<CAPTION>
September 30, December 31, Estimated
1999 1998 Useful Life
-------------- ------------ -----------
<S> <C> <C> <C>
Goodwill $ 80,606 $ 80,660 20 Years
Covenants not to compete 3,192 3,192 3-10 Years
Customer lists 3,189 3,189 15 Years
Other intangibles 177 177 3-5 Years
-------------- ------------
Total 87,164 87,218
Less: accumulated amortization (14,799) (11,773)
-------------- ------------
Intangibles, net $ 72,365 $ 75,445
============== ============
</TABLE>
Goodwill consists of the cost of purchased businesses in excess of the fair
value of net tangible assets acquired. Goodwill is amortized on a straight-line
basis for a period of twenty years. The Company believes that a twenty-year
amortization policy for goodwill is reasonable based upon current and expected
operating results of the businesses acquired. On an ongoing basis, the Company
measures realizability of goodwill. If such realizability is in doubt, an
adjustment is made to reduce the carrying value of the goodwill.
[4] INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated annual
effective income tax rate.
9
<PAGE> 10
[5] DEBT
In connection with consummation of the sale of US Imaging, Inc. and Integrated
Health Concepts, Inc. during the first quarter of 1999, long term debt and
capital leases decreased by an aggregate of $8.8 million.
In January 1999, the Company repurchased approximately $12.5 million of its
Subordinated Convertible Debentures (the "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 DVI Financial Services, Inc. ("DVIFS") in December 1998, which originally
matured on June 21, 2000 and was subsequently extended to July 1, 2001. The
Debentures were purchased at a total price of $9.1 million, consisting of $7.9
million paid directly to the Debenture holders, $238,000 paid to DVIFS
representing a 3% loan origination fee on amounts borrowed under the loan
agreement, and $922,000 paid to DVI Private Capital ("DVIPC"), an affiliate of
DVIFS, as equity participation for services rendered by DVI Private Capital.
This equity participation was paid to DVIPC 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 loan origination fees were capitalized to other assets in the
accompanying Condensed Consolidated Balance Sheets and the amortization of such
amount is included in interest expense. The equity participation fees were
capitalized to other assets in the accompanying Condensed Consolidated Balance
Sheets and the amortization of such amount is classified as amortization of
lender equity participation fees. 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 certain 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 $2.6 million during the first quarter of 1999. As of September
30, 1999, the balances outstanding under the Debentures were $21.7 million, and
$22.0 million was drawn against the loan agreement.
The maturity date of the Company's $35.0 million revolving credit loan from DVI
Business Credit Corporation has been extended to February 28, 2001.
10
<PAGE> 11
[6] EARNINGS PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
In thousands, except per share data
Income (loss) before extraordinary item $ (2,914) $ (1,424) $ (6,553) $ 2,733
Extraordinary item -- -- 2,598 --
-------- -------- ---------- -------
Net income (loss) $ (2,914) $ (1,424) $ (3,955) $ 2,733
======== ======== ========== =======
E
BASIC EPS:
Weighted-average common shares outstanding 22,741 22,710 22,734 22,655
======== ======== ========== =======
EPS - income (loss) before extraordinary item $ (.13) $ (.06) $ (.28) $ .12
EPS - extraordinary item -- -- .11 --
-------- -------- ---------- -------
EPS - net income (loss) $ (.13) $ (.06) $ (.17) $ .12
======== ======== ========== =======
DILUTED EPS:
Weighted-average common shares outstanding 22,741 22,710 22,734 22,655
Stock options and warrants -- -- -- 4
Restricted stock grants -- -- -- 134
Contingent shares -- -- -- 149
-------- -------- ---------- -------
Shares applicable to diluted earnings 22,741 22,710 22,734 22,942
======== ======== ========== =======
EPS - income (loss) before extraordinary item $ (.13) $ (.06) $ (.28) $ .12
EPS - extraordinary item -- -- .11 --
-------- -------- ---------- -------
EPS - net income (loss) $ (.13) $ (.06) $ (.17) $ .12
======== ======== ========== =======
</TABLE>
The Company had a loss before extraordinary item for the three and nine months
ended September 30, 1999, and for the three months ended 1998, and all
potentially dilutive securities were excluded from basic and diluted earnings
per share during such period since the effect would be anti-dilutive.
Additionally, certain potentially dilutive securities were excluded from basic
and diluted earnings per share for the nine months ended September 30, 1998
because their effect would be anti-dilutive. Such potentially dilutive
securities consist of the following: (i) unexercised stock options and warrants
to purchase 5.8 million and 6.3 million shares of the Company's Common Stock as
of September 30, 1999 and 1998, respectively; (ii) 3.6 million and 7.6 million
shares of the Company's Common Stock issuable upon conversion of convertible
debt as of September 30, 1999 and 1998, respectively; and (iii) unexercised
restricted stock amounting to 170,400 shares of the Company's Common Stock as
of September 30, 1999.
11
<PAGE> 12
[7] SALES AND ACQUISITIONS OF BUSINESSES
In September 1999, the Company sold a facility for $2.75 million in cash
resulting in a gain of approximately $1.7 million.
[8] LITIGATION
Two suits were filed in 1997 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 alleged that undisclosed
facts regarding the background of Keith Greenberg, who had provided consulting
services 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 was held in June 1999 and recessed although
settlement discussions continue. Depositions have been scheduled. 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 sought to
recover damages of up to $2.0 million. At non-binding mediation held in August
1999, the matter was settled for a payment by the Company of an immaterial
amount. The Company is vigorously defending the remaining suit but there can be
no assurances that the Company will prevail.
In June 1999, Lisa Brockett, as Trustee for the Reese General Trust, filed suit
against the Company, and certain former officers and directors and other
parties, in the 333rd Judicial District Court of Harris County, Texas,
alleging, among other claims, that (a) undisclosed facts regarding the
background of Keith Greenberg who had provided consulting services to the
Company, were material to the Trust's decision to sell the stock of U.S.
Imaging, Inc. ("USI") to the Company in June 1996 and to receive 1,671,000
shares of Company Common Stock as partial consideration for the sale; and
(b)the Trust was harmed by the Company's failure to register the shares under
the Securities Act and by the Company's subsequent restatement of its quarterly
report for the quarter ended March 31, 1996. Lisa Brockett is the daughter of
Dr. L.E. Richey, a former director and Chairman of the Board of the Company.
The Plaintiff has not specified the amount of actual damages sought and the
suit is in a very early stage. The Company intends to vigorously defend the
suit, and believes it has substantive defenses and counterclaims but there can
be no assurances that the Company will prevail. In April 1999, the Company sued
United Radiology Associates, Inc. ("URA") in the United States District Court
for the Southern District of Texas for breach of contract and related claims
relating to the sale of the stock of USI to URA by the Company in February
1999, and the Company simultaneously filed a claim in the same court against
Dr. Richey for breach of a personal guaranty in connection therewith. Dr.
Richey is the chief executive officer and a director of URA. URA has filed
counterclaims against the Company. Although there can be no assurances, the
Company intends to prosecute its suits against URA and Dr. Richey vigorously and
believes it has substantive defenses to URA's counterclaims.
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.
12
<PAGE> 13
In June 1997, Shelby Radiology, P.C. ("Shelby Radiology"), filed suit against
the Company in the Circuit Court of Montgomery County, Alabama, alleging breach
of an alleged oral contract to provide radiology services (and subsequently
amended its complaint to include additional related claims). Under its various
claims, Shelby Radiology was seeking compensatory damages in the amount of $1.2
million. In addition, Shelby Radiology sought punitive damages. On May 7, 1999
the jury returned a verdict against the Company in the amount of $1.1 million
as compensatory damages. The jury did not award any punitive damages. The
verdict is not subject to execution during the post trial and appeals process
due to the posting of a bond by the Company. The Company believes the verdict
is unjustifiable and without merit. Customary post-trial motions were filed
with the trial court but were not granted. The Company intends to challenge
the verdict by appeal to the Alabama Supreme Court. A notice of appeal has been
filed. There can be no assurances that the Company will prevail in its efforts.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements and Associated Risks
Certain matters discussed herein are forward-looking statements made pursuant
to the safe harbor provisions of the Private 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 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.
13
<PAGE> 14
Since late 1997, 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, under appropriate
financial circumstances, engage in prudent acquisitions. 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. In January 1999, the Company completed the repurchase in the open
market of $12.5 million aggregate principal amount of its 9% Convertible
Subordinated Debentures due 2003 for $9.1 million, resulting in a decrease in
long-term debt and related interest expense. During the second and third
quarters of 1999, the Company (i) acquired a facility for approximately
$900,000 and merged its operations with an existing facility; (ii) sold its
interest in three facilities for approximately $4.0 million (which resulted in
a gain of approximately 1.7 million) and closed two centers; and (iii) opened
three new centers.
The Company's strategy for the remainder of 1999 will be to continue the cost
and debt reduction efforts, divest a few remaining underperforming centers,
seek advantageous refinancing when and as market conditions permit, and pursue
its long-term strategy set forth in Item 1, Business, in the Company's Form
10-K for the year ended December 31, 1998 ("Form 10-K").
In May 1998, the Company sold certain non-core assets consisting of the
Company's mobile subsidiary, Medical Diagnostics, Inc. During 1998 and the
first quarter of 1999, the Company sold several underperforming facilities
which include United States Cancercare, Inc., US Heartcare Management, Inc.,
Integrated Health Concepts, Inc., and US Imaging, Inc. See "Overview" above and
the Company's Form 10-K for the year ended December 31, 1998 for further
information relating to these dispositions. During the second and third quarter
of 1999, the Company sold its interest in three additional facilities.
Collectively, these non-core assets and facilities are referred to as the "sold
facilities".
14
<PAGE> 15
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months
September 30, Ended September 30,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
----- ----- ----- -----
Operating expenses
General and administrative 78.0 75.8 75.6 73.9
Bad debt expense 4.6 2.2 3.8 2.6
Depreciation 11.9 10.6 11.8 9.8
Amortization 3.3 2.4 3.1 2.5
Stock-based compensation 0.4 0.6 0.4 0.6
----- ----- ----- -----
Total operating expenses 98.2 91.6 94.7 89.4
----- ----- ----- -----
Gain on sale of subsidiaries 4.5 0.8 1.5 4.0
----- ----- ----- -----
Income from operations 6.3 9.2 6.8 14.6
Total other income (expense) (11.9) (10.1) (11.0) (9.0)
----- ----- ----- -----
Income (loss) before minority interest,
provision (benefit) for income taxes
and extraordinary items (5.6) (0.9) (4.2) 5.6
Minority interest and income tax
provision (benefit) 2.0 2.2 1.3 3.8
----- ----- ----- -----
Income (loss) before extraordinary
item (7.6) (3.1) (5.5) 1.8
Extraordinary item, net of taxes
-- -- 2.2 --
----- ----- ----- -----
Net Income (loss) (7.6)% (3.1)% (3.3)% 1.8%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998.
Net revenue for the three months ended September 30, 1999 (the "1999 three
month period") decreased by $7.8 million to $38.5 million from $46.3 million
for the three months ended September 30, 1998 (the "1998 three month period").
The decrease in revenue is due to the fact that the Company has sold or closed
28 centers since September 30, 1998. Excluding the net revenue generated by the
sold facilities, net revenue increased by $1.2 million to $37.8 million during
the 1999 three month period, from $36.6 million during the 1998 three month
period. The increase from 1998 to 1999 was due primarily to three new center
openings as well as providing additional modalities at certain centers. For
centers which were operational during the entire comparable 1998 and 1999
periods, revenue was adversely affected due to the loss of a fee for service
contract in June of 1999 and the renegotiation of reimbursement under a
contractual arrangement with a group of New York centers that resulted in a one
time reduction. These items reduced revenue by $538,000 for the quarter. To
a lesser extent, net revenue was also negatively impacted by a shift in mix of
both payors and modalities.
15
<PAGE> 16
General and Administrative ("G&A") expense decreased to $30.0 million (or 78.0%
of revenue) during the 1999 three month period, compared to G&A expense of
$35.1 (or 75.8% of revenue) million during the 1998 three month period. The
decrease in G&A expense from 1998 to 1999 resulted to a large degree from the
sale of the sold facilities. Excluding the sold facilities, G&A expense was
$29.6 million (or 78.3% of revenue) during the 1999 three month period,
compared to $26.9 million (or 73.5% of revenue) during the 1998 three month
period. As discussed in the paragraph above, the Company has opened three new
centers and added modalities in certain facilities which resulted in additional
G&A costs. New centers traditionally operate at a loss during the first six to
nine months of operation contributing to the increase in G&A expense as a
percentage of revenue. Additionally, certain of the Company's cost reduction
plans are still in the process of being implemented, thus did not have a full
impact on the results for the 1999 three month period and are expected to be
more fully realized throughout the remainder of the year. Further negative
impact to the Company's G&A expense in the 1999 three month period resulted
from the Company recording a $182,000 charge in connection with the
renegotiation of its service costs under its national agreement with General
Electric. Finally, overall, the Company has experienced an increase in its
payroll expenses, which the Company believes is a result of wage inflation
across the country, particularly for technical salaries.
Bad debt expense was $1.8 million (or 4.6% of revenue) during the 1999 three
month period, compared to $1.0 million (or 2.2% of revenue) during the 1998
period. The 1998 amount is net of approximately $400,000 of bad debt recoveries
recoveries recorded in the 1998 three month period for accounts receivable
written off in 1997. Excluding the bad debt recoveries, bad debt expense was
$1.4 million (or 3.0% of revenue) during the 1998 period. Bad debt expense in
the 1999 three month period increased due to additional bad debt expense of
$427,000 recorded for a group of California centers adversely effected by the
bankruptcy of a third party payor.
Depreciation expense was $4.6 million during the 1999 three month period,
compared to $4.9 million during the 1998 three month period. Excluding the sold
facilities, depreciation expense was $4.4 million during the 1999 three month
period, compared to $3.9 million during the 1998 three month period. The
decrease in depreciation expense from 1998 to 1999 resulting from the sale of
the sold facilities was partially offset by increases relating to additions to
property and equipment in connection with medical equipment upgrades,
enhancement of single modality centers to multi-modality centers, ongoing
improvements to facilities, and continued enhancements to the new billing
system.
Amortization expense was consistent for the 1999 and 1998 three month periods.
Interest expense (excluding amortization of lender equity participation fees of
$463,000 for the 1999 three month period) decreased to $4.4 million, during the
1999 three month period, compared to $5.2 million during the 1998 three month
period, resulting from debt reductions in connection with the sale of the sold
facilities and repayments of notes and capital lease obligations in excess of
new borrowings. Total debt including capital leases outstanding amounted to
$156.2 million as of September 30, 1999, compared to $189.7 million as of
September 30, 1998.
As further discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, as well as Note 7 of the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 1998,
during late December 1998 and January 1999, the Company paid an aggregate of
$2.8 million in equity participation fees in connection with financing obtained
for the repurchase of a portion of the Company's Subordinated Convertible
Debentures during such periods. Such aggregate amount was capitalized and is
being amortized over an 18 month period (the original term of the related
indebtedness). The amortization expense during 1999 three month period amounted
to $463,000 and has been classified as amortization of lender equity
participation fees. All such fees will be fully amortized by June 2000.
16
<PAGE> 17
The Company had a basic and diluted loss per share of $.13 during the 1999
three month period compared to basic and diluted earnings per share of $.06
during the 1998 three month period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998.
Net revenue for the nine months ended September 30, 1999 (the "1999 nine month
period") decreased to $118.3 million from $153.2 million for the nine months
ended September 30, 1998 (the "1998 nine month period"). The decrease is due to
the Company selling or closing 28 centers since September 30, 1998, as well as
the fact that the Company sold or closed 13 centers in the first nine months of
1998, most of which were part of the Company's very profitable mobile imaging
division. Excluding the net revenue generated by the sold facilities, net
revenue increased by $4.6 million to $115.7 million during the 1999 nine month
period from $111.1 million during the 1998 nine month period. The increase from
1998 to 1999 was due primarily to certain new center openings as well as adding
modalities at certain centers. For centers opened during the entire comparable
1998 and 1999 periods, revenue was approximately equal.
General and Administrative ("G&A") expense decreased to $89.5 million (or 75.6%
of revenue) during the 1999 nine month period, compared to G&A expense of
$113.3 million (or 73.9% of revenue) during the 1998 nine month period. The
decrease from 1998 to 1999 resulted primarily from the sale of the sold
facilities. Excluding the sold facilities, G&A expense was $86.9 million (or
75.1% of revenue) during the 1999 three month period, compared to $81.9 million
(or 73.7% of revenue) during the 1998 three month period. G&A expense for the
1999 nine month period was affected by the same factors discussed above with
respect to the 1999 three month period.
Bad debt expense was $4.5 million (or 3.8% of revenue) during the 1999 nine
month period, compared to $3.9 million (or 2.6% of revenue) during the 1998
period. The 1998 amount is net of approximately $1.3 million of bad debt
recoveries of accounts receivable written off in 1997 in conjunction with the
conversion of the billing system during that period. Excluding the bad debt
recoveries, bad debt expense was $5.2 million (or 3.4% of revenue) during the
1998 nine month period. Excluding the effect of both the sold facilities and
bad debt recoveries, bad debt expense was $4.4 million (or 3.8% of revenue)
during the 1999 nine month period, compared to $3.8 million (or 3.4% of
revenue) during the similar 1998 nine month period. Bad debt expense for the
1999 nine month period was affected by the same factors discussed above with
respect to the 1999 three month period.
Depreciation expense was $13.9 million during the 1999 nine month period,
compared to $15.0 million during the 1998 nine month period. Excluding the sold
facilities, depreciation expense was $13.6 million and 11.5 million during the
1999 and 1998 nine month periods, respectively. Depreciation expense for the
1999 nine month period was affected by the same factors discussed above with
respect to the 1999 three month period.
Amortization expense was $3.7 million during the 1999 nine month period
compared to $3.9 million during the 1998 nine month period.
Interest expense (excluding amortization of lender equity participation fees of
$1.4 million in the 1999 nine month period) decreased to $13.0 million during
the 1999 nine month period, compared to $15.9 million during the 1998 nine
month period. The reduction in interest expense from 1998 to 1999 resulted from
debt reductions in connection with the sale of the sold facilities and
repayments of notes and capital lease obligations in excess of new borrowing,
as well as debt reduction relating to the Debenture repurchases described
above. Total debt including capital leases outstanding amounted to $156.2
million as of September 30, 1999, compared to $189.7 million as of September
30, 1998.
17
<PAGE> 18
As further discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, the Company recorded an extraordinary gain net of taxes of $2.6
million during the 1999 nine month period related to the repurchase of
approximately $12.5 million aggregate principal amount of its Subordinated
Convertible Debentures for amounts less than the recorded amounts.
Additionally, during late December 1998 and January 1999, the Company paid an
aggregate of $2.8 million in equity participation fees in connection with
financing obtained for the repurchase of the Debentures during such periods.
Such aggregate amount was capitalized and is being amortized over an eighteen
month period (the original term of the related indebtedness). The amortization
expense during the 1999 nine month period amounted to $1.4 million and has been
classified as amortization of lender equity participation fees. All such fees
will be fully amortized by June 2000.
On a basic and diluted per share basis, the Company had a loss before
extraordinary item of $.28, an extraordinary gain of $.11, and a net loss of
$.17 during the 1999 nine month period. The Company had basic and diluted
earnings per share of $.12 during the 1998 nine month period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $1.0 million,
compared to $8.3 million at December 31, 1998. The decrease in working capital
resulted primarily from a decrease in accounts receivable and certain other
current assets relating to the facilities sold during the first quarter of
1999. The Company's primary short-term liquidity requirements as of September
30, 1999 include the current portion of long-term debt and capital leases
(totaling $27.6 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 during the 1999 nine month period was
$13.5 million, compared to $6.8 million provided by operating activities during
the 1998 nine month period. During the 1998 nine month period, the Company paid
$5.3 million in shareholder class action settlement payables. Excluding changes
in accounts receivable relating to the sold facilities, during the 1998 nine
month period, accounts receivable and other receivables increased by $9.4
million, compared to an increase of $5.7 million during the 1999 nine month
period. The reduced increase in accounts receivable and other receivables from
1998 to 1999 resulted from improved collection efforts during the 1999 nine
month period. While collections of accounts receivable for the 1999 nine month
period were improved as compared to the 1998 nine month period, receivable
balances grew in the 1999 third quarter by $3.3 million from balances as of the
end of the second quarter of 1999. This 1999 three month period accounts
receivable growth was primarily due to the Company experiencing a temporary
disruption in outside technical support of its normal billing and collection
activities resulting in approximately $3.0 million in third quarter 1999
billings not being submitted to payors for payment until October of 1999. The
Company's sole provider of network communication services experienced a
nationwide circuit failure lasting six business days. As a direct result of the
circuit failure, the Company's billing and collection system was incapacitated
for three additional business days subsequent to the communication provider's
six business day outage. The Company was able to bring all billing activities to
a current status by mid October, and is currently experiencing unusually high
levels of cash collections as a result of the third quarter billing problem. The
increase in accounts payable in the 1999 three month period is primarily due to
the impairment of the Company's cash collections for the reasons discussed
above.
18
<PAGE> 19
Net cash provided by investing activities was $2.0 million during the 1999 nine
month period, compared to net cash provided by investing activities of $17.0
million during the 1998 nine month period. During the 1999 nine month period,
the Company received $12.2 million in net cash proceeds from the sale of
certain facilities, compared to $31.7 million received from the sale of certain
facilities during the 1998 nine month period. Equipment purchases were $9.7
million during the 1999 nine month period, compared to $14.8 million during the
1998 nine month period.
Net cash used in financing activities was $17.1 million during the 1999 nine
month period, compared to $31.4 million used in financing activities during the
1998 nine month period. Proceeds from new borrowings totaled $24.6 million
during the 1999 nine month period, compared to $17.4 million during the 1998
nine month period. Repayments of notes and capital leases totaled $33.7 million
during the 1999 nine month period, compared to $48.8 million during the 1998
nine month period. As discussed in Note 5 of Notes to Condensed Consolidated
Financial Statements, the Company borrowed approximately $9.1 million in
January 1999 to repurchase on the open market and retire approximately $12.5
million principal amount of Debentures.
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
September 30, 1999, the Company has approximately $5.9 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, to sell non-core or
underperforming assets at fair market value, cash flow and working capital
availability, 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 Part II - Item 1 - Legal Proceedings and
Note 8 of Notes to Condensed 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.
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 and Medical Equipment. The Company 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 years. The Company used 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.
19
<PAGE> 20
The Company's Assessment and Planning Phases with respect to IT issues have been
completed at a cost of approximately $30,000; the next phase to be executed is
the Implementation Phase to be followed by the Testing/Certification Phase.
During the month of September, the Company's billing and collecting software
provider notified the Company that its billing and collecting application, which
was certified Year 2000 compliant earlier in the year, is no longer Year 2000
compliant. The software provider has provided the software to the Company, and
the Company expects to complete the Year 2000 upgrade by the end of November
1999. To date the Company has spent $75,000 on its IT Year 2000 Compliance and
Readiness Program, all of which has been expensed to operations. IT Year 2000
issue compliance is projected to be completed by the end of November 1999.
The Company completed its Assessment and Planning Phases for non-IT imaging
systems for Year 2000 issues during the month of October 1999. The Company
tested 100% of the imaging equipment (CT and MRI) in its facilities during
non-business hours and has completed 100% 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 of about 99.96% of its Medical Equipment. Of the total 367 Medical
Equipment devices, thirteen devices need to be upgraded. All remaining upgrades
will be completed by December 15, 1999.
The majority of the costs associated with replacements or upgrades necessary to
achieve Year 2000 compliance for the Company's non-IT imaging systems are
covered under service contracts with the Company's vendors, 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
$590,615 in connection with its review of non-IT medical imaging systems, which
includes all of the testing, and, in certain cases, equipment replacement
required to attain Year 2000 compliance. In the case of equipment replacements,
these funds constitute the total of lease payments to be made in the future. The
Company will include non-IT Year 2000 compliance expenses in operations in the
periods in which they are incurred.
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 has verified that 100% of its 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 the
Health Care Financing Administration, which administers Medicare, may have
difficulty becoming fully Year 2000 compliant before January 1, 2000. During the
nine months ended September 30, 1999 revenue generated under Medicare billings
amounted to approximately 17.2% of gross billings for such period. The Company
has requested written confirmation from each of its private insurance carriers
and Medicare of their Year 2000 compliance status. The Company expects to
receive written responses from Medicare and its private insurance carriers by
the end of November 1999.
The Company's 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.
20
<PAGE> 21
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 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 or that a
failure resulting from the impact of Year 2000 issues on the Company's
operations will not have a material adverse effect on its financial condition.
21
<PAGE> 22
ITEM 3. QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK
The table below represents in tabular form contractual balances of the
Company's capitalized lease and long-term debt financial instruments at
September 30, 1999. 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 September 30, 1999.
In thousands
<TABLE>
<CAPTION>
Principal Amount Maturing on September 30:
-------------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Sensitive
Liabilities:
Long-term debt
adjustable-rate
borrowings $ 50 $ 13,862 $ 59 $ 65 $ 71
Average interest
rate 9.07% 10.25% 9.07% 9.07% 9.07%
Long-term debt
fixed-rate 22,258 52,565 15,144 26,793 3,310
borrowings
Average interest
rate 10.08% 9.62% 10.20% 9.21% 9.10%
Capitalized lease
obligations fixed-rate
borrowings 5,102 4,782 4,082 3,168 1,064
Average interest
rate 10.40% 10.42% 10.63% 10.52% 10.47%
---------- ---------- ---------- ---------- ---------
Total long-term debt and
obligations under
capital leases $ 27,410 $ 71,209 $ 19,285 $ 30,026 $ 4,445
========== ========== ========== ========== =========
Total weighted average
interest rate of all debt
and capital leases 10.15% 9.80% 10.29% 9.35% 9.43%
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Principal Amount Maturing on September 30:
--------------------------------------------------
Fair Value
Thereafter Total at 9/30/99
---------- ----- ----------
<S> <C> <C> <C>
Interest Sensitive
Liabilities:
Long-term debt
adjustable-rate
borrowings $ 808 $ 14,915 $ 14,915
Average interest
rate 9.07% 10.16%
Long-term debt
fixed-rate 3,017 123,087 123,087
borrowings
Average interest
rate 9.35% 9.67%
Capitalized lease
obligations fixed-rate
borrowings -- 18,198 18,198
Average interest
rate 0.00% 10.48%
--------- ---------- -------
Total long-term debt and
obligations under
capital leases $ 3,825 $ $156,200 $156,200
========= ========== ========
Total weighted average
interest rate of all debt
and capital leases 9.29% 9.81%
========= ==========
</TABLE>
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The previously reported Sanders et al. v. US Diagnostic et al. case in the
United States District Court for the Eastern District of New York in which four
participants in limited partnerships which sold the Company three imaging
centers in New York in 1996 sought to recover damages of approximately
$2,000,000 was settled for a payment by the Company of an immaterial amount.
In June 1997, Shelby Radiology, P.C. ("Shelby Radiology"), filed suit against
the Company in the Circuit Court of Montgomery County, Alabama, alleging breach
of an alleged oral contract to provide radiology services (and subsequently
amended its complaint to include additional related claims). Under its various
claims, Shelby Radiology was seeking compensatory damages in the amount of $1.2
million. In addition, Shelby Radiology sought punitive damages. On May 7, 1999
the jury returned a verdict against the Company in the amount of $1.1 million
as compensatory damages. The jury did not award any punitive damages. The
verdict is not subject to execution during the post trial and appeals process
due to the posting of a bond by the Company. The Company believes the verdict
is unjustifiable and without merit. Customary post-trial motions were filed
with the trial court but were not granted. The Company intends to vigorously
challenge the verdict by appeal to the Alabama Supreme Court. A notice of such
appeal has been filed. There can be no assurances that the Company will prevail
in its efforts.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Board of Directors has approved a new non-employee director compensation
plan which consists of (a) an annual cash retainer of ten thousand dollars
($10,000) to each non-employee director, (b) one thousand dollars ($1,000) for
each board meeting attended by a non-employee director and five hundred dollars
($500) for a board committee meeting attended by a non-employee director, and
(c) a grant to each non-employee director of one hundred thousand (100,000)
options to purchase the Company's Common Stock. The options granted to current
non-employee directors were granted at a price equal to $.906 per share, the
closing price of the Company's stock on August 27, 1999. The options vest
immediately and have a five (5) year term. The Board approved the new plan in
order to enable the Company to attract and retain board members of a high
caliber and in light of studies which showed the Company's existing director
compensation plan to be lagging behind the non-employee director compensation
plans of other health care companies and companies in general.
In August 1999, the Board of Directors approved the repurchase of up to 10% of
the Company's outstanding Common Stock from time to time on the open market. As
of September 30, 1999, no shares had been repurchased. In October 1999, 105,000
shares were purchased and retired by the Company.
23
<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
27 Financial Data Schedule.
(b) A report on Form 8-K dated August 31, 1999 was filed during the quarter
ended September 30, 1999 disclosing an Item 5 event.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
US DIAGNOSTIC INC.
Dated: November 12, 1999 By: /s/ Joseph A. Paul
---------------------------------------
Joseph A. Paul
President and Chief Executive Officer
By: /s/ J. Wayne Moor
---------------------------------------
J. Wayne Moor
Executive Vice President and Chief
Financial Officer
25
<PAGE> 26
EXHIBIT INDEX
27 Financial Data Schedule
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,622
<SECURITIES> 0
<RECEIVABLES> 46,616
<ALLOWANCES> 7,291
<INVENTORY> 0
<CURRENT-ASSETS> 58,806
<PP&E> 128,074
<DEPRECIATION> 43,106
<TOTAL-ASSETS> 220,735
<CURRENT-LIABILITIES> 57,808
<BONDS> 128,640
0
0
<COMMON> 227
<OTHER-SE> 27,830
<TOTAL-LIABILITY-AND-EQUITY> 220,735
<SALES> 0
<TOTAL-REVENUES> 118,326
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 107,562
<LOSS-PROVISION> 4,487
<INTEREST-EXPENSE> 14,431
<INCOME-PRETAX> (7,431)
<INCOME-TAX> (878)
<INCOME-CONTINUING> (6,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,598
<CHANGES> 0
<NET-INCOME> (3,955)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
