<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 June 30, 2000
[ ] 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 Identification
Incorporation or Organization) Number)
250 S. Australian Avenue
Suite 900
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 AUGUST 11, 2000:
----- -------------------------------
Common stock, $ .01 par value 22,710,033 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, the ability to sell assets at favorable prices and in a
timely manner, economic, competitive, regulatory, legal factors, collections of
accounts receivable, available financing or available refinancing for existing
debt, cash flow and working capital availability, the availability of sufficient
financial resources to implement its restructuring plan that was approved by the
stockholders, as well as the Company's inability to successfully execute the
restructuring plan 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 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,222 $ 5,811
Net assets of discontinued operations (Note 2) 13,147 16,945
Other receivables 52 52
Prepaid expenses and other current assets 629 627
--------- ---------
TOTAL CURRENT ASSETS 19,050 23,435
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $2,318 and $1,926 in 2000 and 1999, respectively 2,736 2,952
OTHER ASSETS 108 99
--------- ---------
TOTAL ASSETS $ 21,894 $ 26,486
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 458 $ 440
Accrued expenses 975 1,110
Current portion of long-term debt 34 33
Obligations under capital leases - current portion 205 190
Other current liabilities 73 102
--------- ---------
TOTAL CURRENT LIABILITIES 1,745 1,875
Long-term debt, net of current portion 93 112
Obligations under capital leases, net of current portion 567 671
--------- ---------
TOTAL LIABILITIES 2,405 2,658
COMMITMENTS AND CONTINGENCIES (Note 7) -- --
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;
22,700,033 and 22,641,033 shares issued and outstanding in 2000
and 1999, respectively 227 226
Additional paid-in capital 147,944 147,945
Deferred stock-based compensation (268) (400)
Accumulated deficit (128,414) (123,943)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 19,489 23,828
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 21,894 $ 26,486
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except per share data
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COSTS AND EXPENSES:
General and administrative $ 3,475 $ 2,992 $ 6,545 $ 5,960
Depreciation 222 187 439 370
Stock-based compensation 47 158 132 353
Interest expense 26 11 53 15
Interest and other income (108) (55) (122) (180)
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 3,662 3,293 7,047 6,518
-------- -------- -------- --------
Loss from continuing operations before
benefit for income taxes and
extraordinary item (3,662) (3,293) (7,047) (6,518)
Benefit for income taxes -- -- -- (1,225)
-------- -------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM (3,662) (3,293) (7,047) (5,293)
-------- -------- -------- --------
Discontinued Operations (Notes 2 and 4):
Income (loss) from discontinued
operations, net of income taxes (390) 1,081 (1,740) 1,654
Net gain on disposition of discontinued
operations, net of income taxes 4,316 -- 4,316 --
-------- -------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 3,926 1,081 2,576 1,654
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 264 (2,212) (4,471) (3,639)
EXTRAORDINARY ITEM, NET OF INCOME TAXES -- -- -- 2,598
-------- -------- -------- --------
NET INCOME (LOSS) $ 264 $ (2,212) $ (4,471) $ (1,041)
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER COMMON
SHARE
Loss from continuing operations before
extraordinary item $ (.16) $ (.15) $ (.31) $ (.23)
Income from discontinued operations .17 .05 .11 .07
-------- -------- -------- --------
Income (loss) before extraordinary
item .01 (.10) (.20) (.16)
Extraordinary item -- -- -- .11
-------- -------- -------- --------
Net income (loss) $ .01 $ (.10) $ (.20) $ (.05)
======== ======== ======== ========
Average common shares outstanding 22,658 22,736 22,661 22,730
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX
MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------ ----- --------- ------------ ----------- -------------
In thousands
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 2000 22,641 $ 226 $ 147,945 $ (400) $(123,943) $ 23,828
Restricted stock issued 59 1 (1) -- -- --
Amortization of deferred
compensation -- -- -- 132 -- 132
Net loss -- -- -- -- (4,471) (4,471)
--------- --------- --------- --------- --------- ---------
BALANCE - JUNE 30, 2000 22,700 $ 227 $ 147,944 $ (268) $(128,414) $ 19,489
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands, except supplemental schedule of non-cash activities
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH - USED IN CONTINUING OPERATIONS $ (6,633) $ (4,589)
NET CASH - PROVIDED BY DISCONTINUED OPERATIONS 1,955 14,862
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,678) 10,273
INVESTING ACTIVITIES
Purchases of equipment (3,538) (9,456)
Acquisitions, net of cash -- (44)
Payment of purchase price due on companies acquired (22) --
Buy-out of partnership interest (391) --
Proceeds from the disposition of discontinued operations,
net of cash retained by purchasers 18,649 9,098
Proceeds from dispositions of property and equipment 51 --
Contribution of capital by minority partners 205 --
Other -- 124
-------- --------
NET CASH - PROVIDED BY (USED IN) INVESTING ACTIVITIES 14,954 (278)
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 15,110 24,031
Purchase of subordinated convertible debentures -- (7,925)
Repayments of notes payable and obligations under capital
leases (25,975) (26,541)
-------- --------
NET CASH - USED IN FINANCING ACTIVITIES (10,865) (10,435)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (589) (440)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,811 9,177
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 5,222 $ 8,737
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,393 $ 7,958
======== ========
Income taxes $ 14 $ 220
======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Borrowings under capitalized leases were $2.4 million and $3.7 million during
2000 and 1999, respectively.
During 2000, debt and capital lease obligations decreased by $8.4 million as a
result of the disposition of discontinued operations. In addition, $1.9 million
of sale proceeds were used to repay debt not specifically related to the
discontinued operations disposed of. Property and equipment decreased by $10.4
million as a result of the disposition of discontinued operations.
The Company issued 59,000 shares of restricted stock in 2000.
The Company wrote-off net intangibles of $3.9 million, net property and
equipment of $285,000 and accrued expenses of $95,000 relating to the
disposition of discontinued operations in the second quarter 2000.
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
[1] BASIS OF PRESENTATION
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements as of June 30,
2000, 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, 1999.
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.
MANAGEMENT'S PLANS
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. The Company's cash flow from operating
activities has been insufficient to meet the Company's operating needs,
scheduled debt repayment obligations and capital expenditure plans. Moreover,
given continuing adverse financial market conditions relative to healthcare
companies, as well as the highly leveraged nature of the Company's capital
structure, refinancing to extend the maturity of the Company's indebtedness has
not been possible.
7
<PAGE> 8
As a result of these factors, among others, on May 9, 2000, the Company's Board
of Directors approved a restructuring plan which allows for the sale of all or
substantially all of its imaging centers. The stockholders approved the sale of
the imaging centers and the restructuring plan at the annual stockholders'
meeting held on July 21, 2000. Under the restructuring plan, the Company may
reinvest in a new business or businesses the net proceeds from the imaging
center sales. If the Company is unable to or chooses not to reinvest in a new
business, the plan authorizes the Board to liquidate the Company through
distributions to stockholders. The plan allows the Board to seek, at any time,
debt refinancing as an alternative to the sale of the imaging centers.
The Company has sold a total of nine imaging centers since May 2000. Further, on
August 4, 2000, the Company announced that it had signed a contract for the sale
of 14 additional imaging centers located in California and Florida. Consummation
of this transaction is subject to Hart-Scott-Rodino approval and receipt of
various customary contractual consents. The transaction is expected to close by
the end of September 2000. Although the Company has been successful in the past
in selling imaging centers at advantageous prices and in a timely fashion and,
although the Company anticipates entering into additional agreements for the
sale of selected imaging centers in the near future, there can be no assurance
that the Company will be able to sell imaging centers at favorable or acceptable
prices or at all. If the Company were unable to raise sufficient cash from these
sales, or from its primary lender, or otherwise, in a timely manner, the Company
could be materially and adversely affected.
Notwithstanding the above, management believes it will be successful in
implementing the restructuring plan and will be able to sell additional imaging
centers at advantageous prices such that the Company will have sufficient funds
to meet operating needs, fund capital expenditure requirements and repay debt
obligations as they become due.
RECENT ACCOUNTING PRONOUNCEMENTS - 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. In June 1999, the FASB issued SFAS
No. 137 which deferred the effective date of adoption of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amended
SFAS No. 133. Management has not determined the effect, if any, of adopting SFAS
No. 133 as amended by SFAS No. 138. The Company will adopt both pronouncements
concurrently effective January 1, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition In Financial Statements," which summarizes the SEC's view
in applying generally accepted accounting principles to revenue recognition in
financial statements. Management has not determined the effect, if any, of
adopting SAB No. 101.
8
<PAGE> 9
[2] DISCONTINUED OPERATIONS
The Company currently estimates that the sales of its imaging centers pursuant
to the restructuring plan, described in the Management's Plans above, should be
substantially completed by March 31, 2001. Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of the
imaging centers have been segregated from those of continuing operations and are
presented in the Company's condensed consolidated financial statements as
discontinued operations. The accompanying condensed consolidated financial
statements have been reclassified to reflect this presentation.
The components of discontinued operations reflected in the balance sheets and
income statements are as follows:
Balance sheet data:
In thousands
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Accounts receivable $ 44,259 $ 41,366
Other receivables 3,529 3,255
Prepaid expenses and other current assets 6,955 9,371
Property and equipment (see detail below) 66,293 80,936
Intangible assets (see detail below) 61,401 68,797
Investment in and advances to unconsolidated
subsidiaries 4,138 4,476
Accounts payable (17,393) (17,346)
Accrued expenses (10,149) (11,869)
Other current liabilities (6,473) (6,311)
Subordinated convertible debentures (21,797) (21,750)
Debt (100,572) (113,533)
Obligations under capital leases (14,097) (17,632)
Minority interest (2,947) (2,815)
--------- ---------
Net assets of discontinued operations (1) $ 13,147 $ 16,945
========= =========
-------------
(1) Included in current assets.
Income statement data:
In thousands
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Net revenue $39,151 $39,929 $77,662 $79,857
======= ======= ======= =======
The income (loss) from discontinued operations is net of the following income
tax amounts:
In thousands
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Income tax provision
applicable to:
Income (loss) from
discontinued operations $ 37 $ 266 $ 171 $ 383
Net gain on disposition of
discontinued operations 685 -- 685 --
----- ----- ----- -----
Total income tax provision $ 722 $ 266 $ 856 $ 383
===== ===== ===== =====
9
<PAGE> 10
PROPERTY AND EQUIPMENT OF DISCONTINUED OPERATIONS
A summary of property and equipment of discontinued operations is as follows:
In thousands
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
Land $ 1,868 $ 1,868
Buildings 3,760 4,581
Medical equipment 78,105 89,442
Furniture and fixtures 1,699 2,027
Office, data processing equipment and software 7,002 7,368
Vehicles 476 572
Leasehold improvements 14,785 18,553
--------- ---------
Total 107,695 124,411
Less: accumulated depreciation and amortization (41,402) (43,475)
--------- ---------
Property and equipment, net $ 66,293 $ 80,936
========= =========
Included in property and equipment of discontinued operations is equipment under
capital leases amounting to $34.4 million and $35.8 million at June 30, 2000 and
December 31, 1999, respectively. Accumulated depreciation for equipment under
capital leases of discontinued operations was $13.7 million and $12.8 million as
of June 30, 2000 and December 31, 1999, respectively.
Depreciation expense of discontinued operations amounted to $4.3 million and
$8.5 million during the three and six months ended June 30, 2000, respectively,
of which $680,000 and $1.6 million, respectively, was attributed to equipment
under capital leases. Depreciation expense of discontinued operations amounted
to $4.4 million and $8.9 million during the three and six months ended June 30,
1999, respectively, of which $980,000 and $1.9 million, respectively, was
attributed to equipment under capital leases.
During the quarter ended June 30, 2000, property and equipment (net of
accumulated depreciation) decreased by $10.6 million in connection with the
disposition of discontinued operations.
INTANGIBLE ASSETS OF DISCONTINUED OPERATIONS
A summary of intangible assets of the discontinued operations is as follows:
In thousands
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
Goodwill $ 72,022 $ 78,247
Covenants not to compete 3,192 3,192
Customer lists 3,189 3,189
Other intangibles 124 177
-------- --------
Total 78,527 84,805
Less: accumulated amortization (17,126) (16,008)
-------- --------
Intangible assets, net $ 61,401 $ 68,797
======== ========
10
<PAGE> 11
Goodwill of discontinuing operations consists of the cost of purchased
businesses in excess of the fair value of net tangible assets acquired.
During the quarter ended June 30, 2000, intangible assets (net of accumulated
amortization) decreased by $4.9 million in connection with the disposition of
discontinued operations.
DEBT OF DISCONTINUED OPERATIONS
In connection with the disposition of discontinued operations during the second
quarter of 2000, debt and obligations under capital leases decreased by an
aggregate of $10.3 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 has been subsequently extended to July 1, 2001. On
June 21, 2000, DVIFS re-issued this note to reflect the repayments on this loan
from cash proceeds received from the sales of the imaging centers. The terms of
the note were otherwise unchanged. 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 DVIPC. 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 and equity participation fees were
capitalized and are amortized under a method that approximates the interest
method over an eighteen month period. 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 (see Note 6). As of
June 30, 2000, the balances outstanding under the Debentures was $21.8 million,
and $14.6 million was drawn against the loan agreement.
The Company borrowed $11.8 million from DVIFS and DVI Business Credit
Corporation ("DVIBC") in the first and second quarters of 2000 in order to meet
the Company's normal expenses. Approximately $7.8 million of such borrowings
are collateralized by existing medical equipment, and the balance was borrowed
on the DVIBC revolving credit loan. The Company has repaid $3.0 million of this
loan (including $1.0 million from the proceeds of the disposition of
discontinued operations) as of June 30, 2000. The Company has also repaid $8.0
million on its unsecured credit facility from DVIFS from the proceeds of the
disposition of discontinued operations in the second quarter 2000.
The maturity date of the Company's $35.0 million revolving credit loan from
DVIBC has been contractually extended to April 1, 2002.
11
<PAGE> 12
SALES AND ACQUISITIONS OF BUSINESSES
On May 31, 2000, the Company sold its 60% interest in Wilkes-Barre Imaging
("Wilkes-Barre"), a New York general partnership, to InSight Health Corporation.
The partnership received a total sales price of $17.4 million, consisting of
cash of $11.7 million and the assumption by the purchaser of debt and capital
leases amounting to $5.7 million. The Company's portion of the cash was $8.0
million, of which $5.6 million was used to repay a portion of the outstanding
balance under the DVIFS unsecured note. In addition to the above, the Company
retained net working capital of $1.0 million.
On June 6, 2000, the Company sold the assets of Heights Imaging Center to a
subsidiary of Sonix Medical Resources Inc. ("Sonix"). The sales price was $2.7
million which includes cash received of $.7 million and the assumption by Sonix
of debt and capital leases amounting to $2.0 million. Immediately upon the
closing, $56,000 of the cash proceeds were used to repay a portion of the
outstanding balance under the DVIFS unsecured note.
On June 20, 2000, the Company sold the assets of Tri-County Imaging Center to
Sonix. The sales price was $5.8 million which includes cash received of $3.2
million and the assumption by Sonix of debt and capital leases amounting to $2.6
million. Immediately upon the closing, $2.3 million of the cash proceeds were
used to repay a portion of the outstanding balance under the DVIFS unsecured
note.
Also, in May and June 2000, the Company closed four imaging centers that were
underperforming.
During the second quarter of 1999, the Company acquired an imaging center for
approximately $.9 million and merged its operations with an existing imaging
center, and sold its interest in two imaging centers for approximately $1.3
million (which approximated the net carrying value of the assets sold).
SUBSEQUENT EVENTS
The stockholders approved the sale of the imaging centers and the restructuring
plan at the annual stockholders' meeting held on July 21, 2000. Under the
restructuring plan, the Company may reinvest in a new business or businesses the
net proceeds from the imaging centers sales. If the Company is unable to or
chooses not to reinvest in a new business, the plan authorizes the Board to
liquidate the Company through distributions to stockholders. The plan allows the
Board to seek, at any time, debt refinancing as an alternative to the sale of
the imaging centers.
The Company borrowed $.5 million from DVIBC under a revolving credit loan in
July 2000. The borrowing was incurred in order to meet the Company's normal
expenses.
The Company sold two imaging centers in July 2000 for a sales price of $3.0
million which included cash of $.9 million and the assumption by the purchaser
of debt and capital leases amounting to $2.1 million.
12
<PAGE> 13
The Company sold four imaging centers in August for a sales price of $6.9
million, consisting of $2.4 million cash and the assumption by the purchaser of
debt and other obligations amounting to $4.2 million and the surrender of $.3
million of the Company's common stock. In addition, the Company retained $2.2
million of net working capital.
On August 4, 2000, the Company announced that it signed a contract for the sale
of 14 imaging centers located in California and Florida. Consummation of this
transaction is subject to Hart-Scott-Rodino approval and receipt of various
customary contractual consents. The transaction is expected to close by the end
of September 2000.
[3] PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
In thousands
JUNE 30, DECEMBER 31,
2000 1999
------- -------
Furniture and fixtures $ 1,186 $ 1,028
Office, data processing equipment and software 3,708 3,690
Leasehold improvements 160 160
------- -------
Total 5,054 4,878
Less: accumulated depreciation and amortization (2,318) (1,926)
------- -------
Property and equipment, net $ 2,736 $ 2,952
======= =======
Included in property and equipment is equipment under capital leases amounting
to $770,000 and $860,000 at June 30, 2000 and December 31, 1999, respectively.
Accumulated depreciation for equipment under capital leases was $70,000 and
$100,000 as of June 30, 2000 and December 31, 1999, respectively.
Depreciation expense amounted to $222,000 and $439,000 during the three and six
months ended June 30, 2000, respectively, of which $20,000 and $60,000,
respectively, was attributed to equipment under capital leases. Depreciation
expense amounted to $187,000 and $370,000 during the three and six months ended
June 30, 1999, respectively, of which $20,000 and $80,000, respectively, was
attributed to equipment under capital leases.
[4] INCOME TAXES
Income taxes have been provided for based upon the Company's anticipated annual
effective income tax rate.
[5] EARNINGS PER SHARE
The Company had a loss from continuing operations before extraordinary item for
the three and six months ended June 30, 2000 and June 30, 1999, and all
potentially dilutive securities were excluded from the computations of basic and
diluted earnings per share during such periods since the effect would be
anti-dilutive. Such potentially dilutive securities consist of the following:
(i) unexercised stock options and warrants to purchase 3.2 million and 5.9
million shares of the Company's common stock as of June 30, 2000
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and 1999, respectively; (ii) 3.6 million and 3.6 million shares of the Company's
common stock issuable upon conversion of convertible debt as of June 30, 2000
and 1999, respectively; (iii) and unexercised restricted stock amounting to
106,600 and 170,400 shares of the Company's common stock as of June 30, 2000 and
1999, respectively.
[6] EXTRAORDINARY ITEM
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 2). The Debentures were purchased at a
total price of $9.1 million including related costs. The Company recognized an
extraordinary gain after taxes of approximately $2.6 million during the quarter
ended March 31, 1999.
[7] LITIGATION
US DIAGNOSTIC INC. VS. UNITED RADIOLOGY ASSOCIATES, INC. AND L.E. RICHEY; LISA
BROCKETT, AS TRUSTEE FOR REESE GENERAL TRUST VS. US DIAGNOSTIC INC., JEFFREY A.
GOFFMAN, KEITH GREENBERG AND ROBERT D. BURKE; US DIAGNOSTIC INC. VS. UNITED
RADIOLOGY ASSOCIATES, INC. ET AL. - 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 U.S. Imaging Inc. ("USI") to URA by the Company in
February 1999, and the Company simultaneously filed a claim in the same court
against Dr. L.E. Richey, a former director and chairman of the Board of the
Company, 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. The Company intends to vigorously prosecute
its suit against URA and Dr. Richey and believes it has substantive defenses to
URA's counterclaims, although there can be no assurances. In June 1999, Lisa
Brockett, as Trustee for the Reese General Trust, filed suit against the
Company, among others, 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 provided consulting services to the Company,
were material to the Trust's decision to receive 1,671,000 shares of Company
common stock as partial consideration for the sale by the Trust of the stock of
USI to the Company in June 1996; and (b) the value of the shares was diminished
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. Richey. The Plaintiff
has not specified the amount of actual damages sought and the suit remains in an
early stage. The Company intends to vigorously defend the suit, and it believes
it has substantive defenses and counterclaims but there can be no assurances
that the Company will prevail. Both cases were stayed by agreement of the
parties through late August 2000 pending settlement discussions.
In connection with the sale of USI, the Company received a secured promissory
note of $1.9 million, due February 12, 2001, with interest at 6% payable
semi-annually (the "Note") as part of the total consideration in selling its
interest in USI to URA. URA and Dr. Richey have acknowledged the existence of
the Note and Dr. Richey has further acknowledged his personal guaranty of that
Note. The Company sued URA for, among other things, a declaratory judgment,
specific performance and breach of contract, which breach accelerated the due
date of the Note. Dr. Richey filed counterclaims in response to the Company's
lawsuit and, to this date, has not paid anything in connection with the Note.
Although there can be no assurance, the Company intends to vigorously pursue
this matter as part of the overall litigation described above and expects
ultimately to receive full payment of the Note.
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SHELBY RADIOLOGY, P.C. V. US DIAGNOSTIC INC. ET AL. - In June 1997, the
plaintiff, Shelby Radiology, P.C. ("Shelby Radiology"), filed suit in Alabama
Circuit Court against US Diagnostic Inc. alleging breach of a contract to
provide radiology services and, specifically, improper termination of an alleged
oral contract. In January 1998, Shelby Radiology amended its complaint to
include allegations of promissory fraud, misrepresentation and suppression.
Under both its fraud and breach of contract claims, Shelby Radiology was seeking
compensatory damages in the amount of $1.2 million as amounts it would have been
paid under the alleged oral agreement. In addition, Shelby Radiology sought
punitive damages pursuant to its fraud claims. The jury returned a verdict
against the Company in the amount of $1.1 million as compensatory damages on
plaintiff's fraud claim. The jury did not award any punitive damages. Based on
the advice of counsel, the Company believes that it has meritorious grounds for
appeal (although there can be no assurances of success). The Company has filed
its appeal. A ruling is expected by the end of 2000.
INVESTIGATION BY SECURITIES AND EXCHANGE COMMISSION - In December 1996, the
Securities and Exchange Commission ("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.
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 the outcome of these matters, and although there can be no
assurances, the Company does not anticipate that the ultimate disposition of any
such proceedings will have a material adverse effect on the Company.
[8] SUBSEQUENT EVENTS
Effective August 16, 2000, the Company's common stock moved to the OTC Bulletin
Board ("OTC"). This was the result of the Company's ineligibility to remain
listed on the NASDAQ SmallCap Market due to its non-compliance with the minimum
one-dollar bid price under the NASDAQ SmallCap Market rules. The Company will
continue to trade under the symbol USDL. While there can be no assurance that
the Company's common stock will trade on the OTC, the Company believes that
market makers will continue to make a market in its shares of common stock on
the OTC.
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
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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
On May 9, 2000, the Company's Board of Directors approved a restructuring plan
which allows for the sale of all or substantially all of its imaging centers.
The stockholders approved the sale of the imaging centers and the restructuring
plan at the annual stockholders' meeting held on July 21, 2000. Under the
restructuring plan, the Company may reinvest in a new business or businesses the
net proceeds from the imaging center sales. If the Company is unable to or
chooses not to reinvest in a new business, the plan authorizes the Board to
liquidate the Company through distributions to stockholders. The plan allows the
Board to seek, at any time, debt refinancing as an alternative to the sale of
the imaging centers.
During the first quarter of 2000, the Company began a program to sell selected
imaging centers (in addition to the sale of non-core and underperforming centers
during 1998 and 1999) in order to raise cash to meet its operating and debt
repayment needs. The Company has sold a total of nine imaging centers since May
2000. Further, on August 4, 2000, the Company announced that it had signed a
contract for the sale of 14 additional imaging centers located in California and
Florida. Consummation of this transaction is subject to Hart-Scott-Rodino
approval and receipt of various customary contractual consents. The transaction
is expected to close by the end of September 2000. Although the Company has been
successful in the past in selling imaging centers at advantageous prices and in
a timely fashion, there can be no assurance that the Company will be able to
sell additional imaging centers at favorable or acceptable prices or at all.
The Company currently estimates that the sales of its imaging centers pursuant
to the restructuring plan should be substantially completed by March 31, 2001.
Accordingly, for financial statement purposes, the assets, liabilities, results
of operations and cash flows of the imaging centers have been segregated from
those of continuing operations and are presented in the Company's condensed
consolidated financial statements as discontinued operations. The accompanying
condensed consolidated financial statements have been reclassified to reflect
this presentation.
Further, the Company engaged David McIntosh (a current director) to direct the
review of potential opportunities to re-deploy the sale proceeds in other
ventures including internet and non-internet companies.
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations, net of income taxes decreased by
$1.5 million from income for the three months ended June 30, 1999 of $1.1
million to a loss of $.4 million for the comparable 2000 period. This decrease
primarily was the result of a decrease in net revenues due to the sale of
imaging centers, and an increase in bad debt expense related to the conversion
of the billing and collection system in one of the Company's regions in January
2000.
For the six month period, income (loss) from discontinued operations net of
income taxes decreased by $3.4 million from income for the six months ended
June 30, 1999 of $1.7 million to a loss of $1.7 million for the comparable 2000
period. This decrease primarily was the result of a decrease in net revenues
and an increase in bad debt expense as noted above.
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RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1999.
Costs and expenses of continuing operations for the three months ended June 30,
2000 (the "2000 three month period") increased to $3.7 million from $3.3 million
for the three months ended June 30, 1999 (the "1999 three month period").
Operating expenses from continuing operations primarily consist of general and
administrative ("G&A") expenses related to the day-to-day development and
operating activities of the Company which increased to $3.5 million for the 2000
three month period from $3.0 million for the 1999 three month period. The
increase in the 2000 three month period over the 1999 three month period is
mainly due to the employee retention bonuses that were paid in June 2000 in
connection with the plan to sell the imaging centers. The costs and expenses
also include charges for stock-based compensation of $47,000 for the 2000 three
month period and $158,000 for the 1999 three month period.
RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED
WITH THE SIX MONTHS ENDED JUNE 30, 1999.
Costs and expenses of continuing operations for the six months ended June 30,
2000 (the "2000 six month period") increased to $7.0 million from $6.5 million
for the six months ended June 30, 1999 (the "1999 six month period"). Operating
expenses from continuing operations primarily consist of general and
administrative ("G&A") expenses related to the day-to-day development and
operating activities of the Company which increased to $6.5 million for the 2000
six month period from $6.0 million for the 1999 six month period. The increase
in the 2000 six month period over the 1999 six month period is mainly due to the
employee retention bonuses that were paid in June 2000 in connection with the
plan to sell the imaging centers. The costs and expenses also include charges
for stock-based compensation of $132,000 for the 2000 six month period and
$353,000 for the 1999 six month period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $17.3 million, which
includes net assets of discontinued operations of $13.1 million, compared to
working capital of $21.6 million at December 31, 1999, which includes net assets
of discontinued operations of $16.9 million. The decrease in the working capital
from 1999 to 2000 is primarily due to a decrease in the net assets of
discontinued operations by $3.8 million. The Company's primary short-term
liquidity requirements as of June 30, 2000 include the obligations under debt
and capital leases, accounts payable, other current liabilities and capital
expenditures related to the replacement and enhancement of existing imaging
equipment and imaging centers.
Net cash used in operating activities during the 2000 six month period was $4.7
million, compared to $10.3 million provided by operating activities during the
1999 six month period. The negative cash flow from continuing operations in 2000
was primarily a result of the loss from continuing operations. The Company
experienced a disruption in its billing and collection activities in late
December 1999 and January 2000 as a direct result of converting to a Year 2000
compliant version of its billing and collecting software. While all of the
system problems associated with the conversion have been resolved, the Company's
collections did not return to levels experienced before the software conversion
until April 2000. The Company has not identified any other material impact
arising from the Year 2000 issue and does not expect to experience any further
significant Year 2000 problems or interruptions.
Net cash provided by investing activities was $15.0 million during the 2000 six
month period, compared to net cash used in investing activities of $278,000
during the 1999 six month period. During the 2000 six month period, the Company
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received $18.6 million in net cash proceeds from the disposition of discontinued
operations, compared to $9.1 million received from the disposition of
discontinued operations during the 1999 six month period. Equipment purchases
were $3.5 million during the 2000 six month period, compared to $9.5 million
during the 1999 six month period.
Net cash used in financing activities was $10.9 million during the 2000 six
month period, compared to $10.4 million used in financing activities during the
1999 six month period. Proceeds from new borrowings totaled $15.1 million during
the 2000 six month period, compared to $24.0 million during the 1999 six month
period. Repayments of notes and capital leases totaled $26.0 million during the
2000 six month period, compared to $26.5 million during the 1999 six month
period. As discussed in Note 2 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. As discussed in Note 2 of the Notes to Condensed
Consolidated Financial Statements, the Company repaid an aggregate of $8.0
million under its revolving credit loan with DVIFS from proceeds received upon
the disposition of discontinued operations during the 2000 six month period.
As of June 30, 2000, the Company has approximately $3.4 million of purchase
commitments for capital expenditures related to discontinued operations for
which it either already has or expects to have financing available. 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.
The Company has sold a total of nine imaging centers since May 2000. Further, on
August 4, 2000, the Company announced that it had signed a contract for the sale
of 14 additional imaging centers located in California and Florida. Consummation
of this transaction is subject to Hart-Scott-Rodino approval and receipt of
various customary contractual consents. The transaction is expected to close by
the end of September 2000.
Although the Company has been successful in the past in selling imaging centers
at advantageous prices and in a timely fashion and, although the Company
anticipates entering into agreements for the sale of additional imaging centers
in the near future, there can be no assurance that the Company will be able to
sell imaging centers at favorable or acceptable prices or at all. If the Company
were unable to raise sufficient cash from these sales, or from its primary
lender, or otherwise, in a timely manner, the Company could be materially and
adversely affected.
Until the Company completes the sale of its imaging centers, the degree to which
the Company continues to be leveraged is likely to affect its ability to service
its indebtedness, make capital expenditures, respond to market conditions and
extraordinary capital needs, take advantage of business opportunities or obtain
additional financing. If the Company fails to successfully implement its
restructuring plan and sell its imaging centers at favorable prices, its ability
to meet its future obligations, invest in a new business or businesses or make
distributions to stockholders could be materially and adversely affected.
For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Note 7 of Notes to Condensed Consolidated
Financial Statements.
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ITEM 3. QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK
The information for the Company's capitalized lease and long-term debt
financial instruments as it relates to the continuing and discontinued
operations has not changed materially since December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7 of Notes to Condensed Consolidated Financial Statements which is
incorporated herein by reference.
ITEM 5. OTHER INFORMATION
See Note 8 of Notes to Condensed Consolidated Financial Statements which is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 Second Amended and Restated Note between the Company and
DVI Financial Services Inc. dated June 21, 2000 to the
Amended and Restated Note dated December 21, 1998.
10.2 Plan of Restructuring of US Diagnostic Inc. Incorporated
by reference to Appendix A to the Company's Proxy
Statement filed with the SEC June 22, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K dated May 10, 2000 was filed during the quarter ended June
30, 2000 disclosing an Item 5 event.
Items 2, 3 and 4 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
US DIAGNOSTIC INC.
Dated: August 18, 2000 By: /s/ JOSEPH A. PAUL
-------------------------------------
Joseph A. Paul
President and Chief Executive
Officer
By: /s/ P. ANDREW SHAW
-------------------------------------
P. Andrew Shaw
Executive Vice President and Chief
Financial Officer
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