<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>
US DIAGNOSTIC INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
The filing fee was based upon Registrant's good faith estimate of the
maximum aggregate fair market value of the assets to be sold of $199.6
million.
(5) Total fee paid: $39,920.00.
[X] Fee paid previously with preliminary materials:
----------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
US DIAGNOSTIC INC.
777 SOUTH FLAGLER DRIVE, SUITE 1201 EAST
WEST PALM BEACH, FLORIDA 33401
-------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FRIDAY, JULY 21, 2000
-------------------------
To the Stockholders:
The Board of Directors of US Diagnostic Inc. has approved three important
proposals to be voted upon at our Annual Meeting of Stockholders. These
proposals include:
1. To approve the sale by USD of its medical diagnostic imaging
centers;
2. To adopt a Plan of Restructuring substantially in the form attached
as Appendix A to the Proxy Statement included with this letter; and
3. To elect a board of four directors.
These proposals are more fully described in the Proxy Statement.
In addition, at the Annual Meeting we will consider and take action upon
such other matters as may properly come before the meeting or any adjournment or
postponement.
The Annual Meeting will be held on:
Friday, July 21, 2000
10:00 a.m.
Sheraton West Palm Beach Hotel
630 Clearwater Park Road
West Palm Beach, FL 33401
The close of business on June 2, 2000 has been fixed as the record date for
the determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting and any adjournment or postponement.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. YOUR VOTE IS
EXTREMELY IMPORTANT; WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN
PERSON, YOU ARE URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE PROVIDED TO ENSURE YOUR
REPRESENTATION AND THE PRESENCE OF A QUORUM AT THE ANNUAL MEETING. IF YOU SEND
IN YOUR PROXY CARD AND THEN DECIDE TO ATTEND THE ANNUAL MEETING TO VOTE YOUR
SHARES IN PERSON, YOU MAY STILL DO SO. YOUR PROXY IS REVOCABLE IN ACCORDANCE
WITH THE PROCEDURES SET FORTH IN THE PROXY STATEMENT.
By Order of the Board of Directors,
/s/ LEON F. MARAIST
----------------------------------
Secretary
West Palm Beach, Florida
June 23, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary Term Sheet.......................................... 2
Voting Matters.............................................. 5
Additional Information...................................... 6
Forward-Looking Statements -- Safe Harbor................... 7
Background and Reasons for Proposals No. 1 And No. 2........ 8
Business Overview........................................... 8
Selected Financial Data..................................... 10
Impact of Leverage and Strategic Alternatives............... 11
Proposal No. 1. Approval of the Imaging Center Sales........ 12
Proposal No. 2. Adoption of the Restructuring Proposal...... 14
Certain Tax Consequences.................................... 26
Interests of Certain Persons................................ 29
Proposal No. 3. Election of Directors....................... 30
Board of Directors.......................................... 32
Executive Officers.......................................... 33
Report of the Compensation Committee........................ 35
Security Ownership of Certain Beneficial Owners and
Management................................................ 40
Certain Relationships and Related Transactions.............. 41
Section 16(a) Beneficial Ownership Reporting Compliance..... 43
Relationship with the Company's Auditors.................... 43
Other Matters............................................... 44
Stockholder Proposals....................................... 44
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<PAGE> 4
US DIAGNOSTIC INC.
777 SOUTH FLAGLER DRIVE, SUITE 1201 EAST
WEST PALM BEACH, FLORIDA 33401
(561) 832-0006
-------------------------
PROXY STATEMENT
-------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 21, 2000
The Annual Meeting of US Diagnostic Inc. will be held at the Sheraton West
Palm Beach Hotel, 630 Clearwater Park Road, West Palm Beach, Florida 33401, on
July 21, 2000, at 10:00 a.m. local time.
Our Board of Directors is proposing for approval by the stockholders at the
Annual Meeting:
- the sale of our medical diagnostic imaging centers, which we refer to as
the "Imaging Center Sales";
- the adoption of the Plan of Restructuring of USD, substantially in the
form attached as Appendix A to this Proxy Statement, which we refer to as
the "Restructuring Proposal"; and
- the election of four directors.
As described in this Proxy Statement, we are seeking stockholder approval
for the Imaging Center Sales. We are in the process of selling and seeking
buyers for the approximately 64 medical diagnostic imaging centers which we own.
We anticipate that all or substantially all of the imaging centers will be sold
by separate sales of the imaging centers either in groups or individually.
To date, no definitive agreements have been entered into for the sales of
the medical diagnostic imaging centers except for contracts for 4 centers
entered into, and contracts with respect to approximately 20 centers which we
expect to enter into prior to the Annual Meeting, to bolster our capital
resources and not considered a part of Proposal 1 or Proposal 2.
We are seeking stockholder approval to sell the remainder of our medical
diagnostic imaging centers as suitable buyers are identified and definitive
agreements are negotiated with buyers, a process which is currently ongoing.
Each sale's completion would be subject to the approval by the Board of
Directors of the terms of that sale. No further stockholder vote will be
solicited by USD for the sales. Accordingly, stockholders will not have the
opportunity to vote on definitive sale agreements. See "Proposal 1. Approval of
the Imaging Center Sales" below.
In addition, as described in this Proxy Statement, we are seeking
stockholder approval of the Restructuring Proposal. If the Restructuring
Proposal is approved, we intend to seek to reinvest the net proceeds from the
Imaging Center Sales after the payment of liabilities, in a new business or
businesses. Any reinvestment would not be subject to the further vote or
approval of the stockholders. If we are unable, or choose not, to reinvest any
proceeds in a new business or businesses, we will distribute to our stockholders
the available net proceeds of the Imaging Center Sales and any remaining
available assets. See "Proposal 2. Adoption of the Restructuring Proposal"
below.
<PAGE> 5
SUMMARY TERM SHEET
The following presents some commonly asked questions and answers regarding
Proposal 1 and Proposal 2. We urge you to read carefully the remainder of this
Proxy Statement because the information in this term sheet is not complete.
Additional information is contained in the remainder of this Proxy Statement.
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to consider and vote upon three proposals: (1) the sale
of our medical diagnostic imaging centers, which we refer to as the "Imaging
Center Sales", (2) the adoption of a Plan of Restructuring that could result
in either the reinvestment of the net proceeds of the Imaging Center Sales
or the liquidation of USD's remaining assets and (3) the election of
directors of USD.
Q: WHAT ARE THE BOARD'S RECOMMENDATIONS?
A: The Board of Directors unanimously recommends a vote FOR each of the
proposals. The Board believes that proposals (1) and (2) are integral parts
of an overall plan for maximizing stockholder value in USD. The Board of
Directors and management believe that by voting FOR proposals (1) and (2),
our stockholders will receive greater value than would be available to them
through their continued ownership of the Common Stock if both of those
proposals were not approved and implemented.
Q: WHAT IS THE RATIONALE BEHIND THE BOARD'S RECOMMENDATIONS?
A: The decision to sell the imaging centers and to adopt a Restructuring Plan
was the result of careful consideration of the options available to us at
this time. We also considered other factors, including reduced reimbursement
from third party payors and the bankruptcies of other companies in our
industry. Despite efforts to improve operating results and reduce debt,
USD's potential growth and profitability is highly limited by its high
levels of indebtedness and related interest and amortization expense. We
believe that cash flow from operations will not be sufficient to meet our
operating needs, retire debt and fund required capital expenditures. With
little prospect for growth, the Board believes that our stock value would
have minimal upside potential within a reasonable time frame.
Q: WHAT ARE THE ALTERNATIVES TO SELLING THE IMAGING CENTERS?
A: Alternatives that we considered were selling USD, a merger with other
imaging center companies, a leveraged buy-out, seeking an infusion of
private equity or a refinancing of our debt to extend its maturities. A sale
or merger of USD as an entirety was rejected because the Board of Directors
believed that a buyer would require a risk adjusted price that would be
substantially less than the aggregate sale prices of our imaging centers. An
infusion of private equity was rejected as too dilutive given USD's stock
price. A leveraged buy-out or obtaining refinancing was determined not to be
feasible given our high leverage and the weak state of the capital markets
for publicly traded debt securities, particularly with respect to health
care companies. On the other hand, we received expressions of interest from
bona fide buyers interested in one or a number of medical diagnostic imaging
centers. Based upon careful considerations of the alternatives, the fact
that some companies in our industry have
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recently filed for bankruptcy protection and the level of interest in our
medical diagnostic imaging centers, the Board of Directors believes that the
Imaging Center Sales will optimize proceeds to USD.
Q: WHAT DO I NEED TO DO NOW?
A: As a USD stockholder as of June 2, 2000, you are being asked to vote FOR the
proposals. We urge you to read this Proxy Statement. YOU MAY VOTE YOUR
SHARES by following the instructions on the enclosed proxy card. Note, that
to vote in favor of the proposals you must cast a FOR vote. IF YOU ABSTAIN
OR DO NOT RETURN YOUR PROXY CARD, IT WILL COUNT AS A VOTE AGAINST PROPOSAL 1
AND PROPOSAL 2.
Q: IF I HAVE SOLD MY SHARES SINCE JUNE 2, 2000, WHY IS IT IMPORTANT TO VOTE?
A: If you received these materials, you are entitled to vote on these important
matters. We need the full participation of those who were our stockholders
as of June 2, 2000, irrespective of whether they currently own USD stock.
The affirmative vote of a majority of the outstanding shares of Common Stock
is required to approve the Board's recommendations to maximize stockholder
value in USD.
Q: WHAT WILL STOCKHOLDERS RECEIVE AS A RESULT OF THE RESTRUCTURING?
A: If stockholders approve the Imaging Center Sales and adopt the Restructuring
Plan, we will consider reinvesting the proceeds from the Imaging Center
Sales in a new business or businesses. No further stockholder approval would
be required for any such investment. If we do not reinvest in a new
business, the Board of Directors is authorized to liquidate USD. Liquidation
means that stockholders would be entitled to their share of USD's
distributable cash assets, estimated on pages 15-19 in this Proxy Statement
to be approximately $31.4 million to $43.1 million in liquidation value.
Stockholders would receive cash for their shares, which we estimate on pages
15-19 in the Proxy Statement to be between $1.30 and $1.78 per share.
Q: WHEN WILL STOCKHOLDERS RECEIVE PAYMENT IF THE BOARD OF DIRECTORS ELECTS TO
LIQUIDATE USD?
A: According to the Restructuring Plan, if we do not reinvest the proceeds from
the Imaging Center Sales in a new business, the liquidation is expected to
be on or after a date selected by the Board of Directors which we expect
will be after all or a substantial portion of Imaging Center Sales are
completed.
Q: WHY IS THE RESTRUCTURING PLAN STRUCTURED IN A WAY THAT DOES NOT SET A
MANDATORY DATE FOR PAYMENTS TO STOCKHOLDERS?
A: The Board believes it is in the stockholders' best interest for the Board to
have wide flexibility to pursue an orderly sale process to maximize the
value of the medical diagnostic imaging centers and to further consider
using the net proceeds of the Imaging Center Sales (after paying off debt)
to invest in a new business or businesses, if the Board believes that such
an investment would return to stockholders a better value than the
alternative of liquidating USD. Based on investigations to date, the Board
believes that there may be a number of suitable businesses that could
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benefit from the Company's infrastructure, systems and health care industry
reputation and expertise.
If no appropriate investment is identified, the Board will liquidate USD
beginning on a date determined by the Board.
Q: WHAT IS THE EARLIEST DATE THAT STOCKHOLDERS COULD RECEIVE A LIQUIDATION
PAYMENT IN THE EVENT THAT THE BOARD DECIDES NOT TO PURSUE INVESTMENT IN
OTHER BUSINESSES?
A: We expect that the Imaging Center Sales will be accomplished by numerous
transactions involving selected groupings of medical imaging diagnostic
centers. As a result, the earliest date for a payment would probably be
March 31, 2001, because it will take time for these sales to occur. As
outlined on pages 15-19 of this Proxy Statement, the liquidation value is
made up of the net proceeds of the Imaging Center Sales, the payment or
assumption of estimated liabilities, the realization of tax benefits and
operating costs during the sale process.
Q: WHAT WILL HAPPEN IF STOCKHOLDERS APPROVE PROPOSAL 1, BUT VOTE AGAINST
PROPOSAL 2?
A: Under its fiduciary responsibility, the Board would reconsider its
alternatives, which would include identifying and presenting a new
investment opportunity to stockholders or recommending liquidating USD. The
Board urges stockholders to approve Proposal 2, which enables USD to pursue
the realization of value from investing in a new business before liquidating
USD.
Q: WHY NOT SELL USD, INSTEAD OF ITS INDIVIDUAL BUSINESSES?
A: We believe that the Imaging Center Sales will yield greater proceeds than
the sale of USD as a whole for the following reasons: First, a potential
buyer would be discouraged from acquiring the whole company by our high
leverage and goodwill amortization characteristics that have prevented us
from pursuing a growth strategy. Second, there are few companies that have
the financial resources to acquire all of USD. Alternatively, there are many
companies financially prepared to acquire smaller groupings of the centers.
Finally, there are few companies interested in all the markets in which we
operate while there are several smaller entities interested in certain
centers, markets or regions.
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VOTING MATTERS
The Board of Directors of US Diagnostic Inc., a Delaware corporation ("USD"
or the "Company"), is distributing this Proxy Statement and soliciting the
accompanying Proxy for use in voting at the Annual Meeting of Stockholders of
the Company (the "Annual Meeting"), and for any adjournment or postponement
thereof, for the purposes set forth in the accompanying Notice of Annual Meeting
of Stockholders.
REVOCABILITY OF PROXY
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is exercised by (i) delivering to the Company
(to the attention of Leon F. Maraist, Secretary of the Company) a written notice
of revocation or a duly executed proxy bearing a later date, or (ii) attending
the Annual Meeting and voting in person.
SOLICITATION AND VOTING PROCEDURES
Shares represented by duly executed Proxies in the enclosed form that have
been properly marked, dated and signed and that are received by the Company
prior to the Meeting will be voted as instructed in the Proxy on each matter
submitted to the vote of stockholders. If any duly executed Proxy is returned
without voting instructions, the persons named as proxies thereon intend to vote
all shares represented by that Proxy (i) FOR approval of the Imaging Center
Sales, (ii) FOR adoption of the Restructuring Proposal and (iii) FOR the
election of the Board's nominees for directors listed in Proposal 3.
The Board of Directors does not know of any other matters that may be
brought before the Meeting. In the event that any other matter should come
before the Meeting, the persons named on the Proxy will have discretionary
authority to vote all Proxies not marked to the contrary with respect to such
matters in accordance with their best judgment.
It is anticipated that this Proxy Statement and the accompanying proxy card
will be mailed to stockholders on or about June 23, 2000. The Company's Annual
Report, including audited financial statements for the year ended December 31,
1999, is being mailed or delivered with this Proxy Statement. The Annual Report
is not to be regarded as proxy soliciting material.
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing and
mailing the proxy materials for the Annual Meeting and reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding these proxy
materials to beneficial owners of the Company's common stock, par value $0.01
per share (the "Common Stock"). The Company may conduct further solicitation
personally, telephonically or by facsimile through its officers, directors and
regular employees, none of whom will receive additional compensation for
assisting with the solicitation. The Company may retain a proxy solicitation
firm to assist in the solicitation of proxies and estimates that such services
would cost approximately $5,000 (plus reasonable out-of-pocket expenses).
The close of business on June 2, 2000 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of the
Company entitled to notice of and to vote at the Annual Meeting. As of the close
of business on the Record
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Date, the Company had 22,658,033 shares of Common Stock outstanding and entitled
to vote at the Annual Meeting. The presence at the Annual Meeting of a majority,
or approximately 11,329,017 shares of Common Stock, either in person or by
proxy, will constitute a quorum for the transaction of business at the Annual
Meeting. Each outstanding share of Common Stock on the Record Date is entitled
to one vote on all matters.
An automated system administered by the Company's transfer agent will
tabulate votes cast by proxy, and an employee of the Company will tabulate votes
cast in person at the Annual Meeting. Abstentions and broker non-votes (shares
represented by a limited proxy but, as to a specific proposal, brokers are
prohibited from exercising discretionary authority) are each included in the
determination of the number of shares present and voting in determining the
existence of a quorum at the Annual Meeting, and each is tabulated separately.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for the approval of the Imaging Center Sales, and
the adoption of the Restructuring Proposal. Abstentions and broker non-votes
will have the same effect as a vote against Proposals 1 and 2. Proposal 3, the
election of directors, requires a plurality of the votes cast. Abstentions and
broker non-votes have no legal effect on the election of directors. As to all
other matters, in determining whether a proposal has been approved, abstentions
are counted as votes against the proposal and broker non-votes have no legal
effect on whether a matter is approved.
Your vote is important. Accordingly, you are urged to sign and return the
accompanying proxy card whether or not you plan to attend the Annual Meeting. If
you do attend, you may vote by ballot at the Annual Meeting, thereby canceling
any proxy previously given.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information concerning the Company may be inspected and copies may be obtained
(at prescribed rates) at public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500
W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
electronically filed documents, including reports, proxy and information
statements and other information regarding the Company, can be obtained from the
Commission's Web site at http://www.sec.gov.
The following documents of the Company, which are on file with the
Commission, are incorporated in this Proxy Statement by reference and made a
part hereof:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1999 ("1999 Form 10-K");
(b) The Company's Current Report on Form 8-K dated May 10, 2000;
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(c) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000;
(d) The description of the Company's capital stock contained in its
Registration Statement on Form 8-A.
The reports described in Items (a), (b) and (c) above are being provided
with this Proxy Statement. In addition, the Company will provide without charge
to each person to whom a copy of this Proxy Statement is delivered a copy of any
or all of the foregoing documents (other than exhibits). Requests for such
documents should be directed to US Diagnostic Inc., 777 South Flagler Drive,
Suite 1201 East, West Palm Beach, Florida 33401, Attention: Leon F. Maraist,
Secretary.
All documents filed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Proxy Statement and prior to the
Meeting shall also be deemed to be incorporated by reference in this Proxy
Statement and to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for the purposes
of this Proxy Statement to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
FORWARD-LOOKING STATEMENTS -- SAFE HARBOR
This Proxy Statement and the documents referred to above contain certain
"forward-looking" statements, including among others the statements regarding
the possibility of finding a buyer or buyers for the Company's medical
diagnostic imaging centers, the ability to consummate the sales of the medical
diagnostic imaging centers, the potential value of the medical diagnostic
imaging centers or any other assets of the Company, the amount and nature of
liabilities of or that may be asserted against the Company, the timing and
amount of any distributions to stockholders pursuant to the Restructuring
Proposal, industry conditions and prospects and the Company's future operating
results. Without limiting the foregoing, words such as "anticipates",
"believes", "expects", "intends", "plans" and similar expressions are intended
to identify "forward-looking" statements.
All of these "forward-looking" statements are inherently uncertain, and
stockholders must recognize that actual events could cause actual results to
differ materially from management's expectations. Key risk factors that could,
in particular, have an adverse impact on the Company's ability to effect the
Restructuring Proposal on a timely basis and on the amount of any distributions
that may be made to stockholders pursuant to the Restructuring Proposal include
the Company's inability to find buyers for the medical diagnostic imaging
centers despite significant efforts to do so, the inability to obtain estimated
prices for the medical diagnostic imaging centers and the ability of the Company
to consummate the sales of the medical diagnostic imaging centers.
As discussed below under "Proposal 2. Adoption of the Restructuring
Proposal -- Liquidation Analysis and Estimates," based on management's present
estimates, the Company expects that there will be net proceeds available from
the Imaging Center Sales and the Restructuring Proposal which may be distributed
to the Company's stockholders.
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NONETHELESS, THERE CAN BE NO ASSURANCE THAT THESE ESTIMATES WILL PROVE TO BE AN
ACCURATE ESTIMATE OF THE ACTUAL NET PROCEEDS REALIZED FROM THE IMAGING CENTER
SALES.
BACKGROUND AND REASONS FOR PROPOSALS NO. 1 AND NO. 2
THE BOARD OF DIRECTORS IS SUBMITTING THE IMAGING CENTER SALES AND THE
RESTRUCTURING PROPOSAL AS TWO SEPARATE MATTERS FOR A STOCKHOLDER VOTE. HOWEVER,
THE BOARD BELIEVES THAT THE TWO PROPOSALS ARE INTEGRAL PARTS OF AN OVERALL PLAN
FOR MAXIMIZING STOCKHOLDER VALUE IN THE COMPANY. THE BOARD OF DIRECTORS AND
MANAGEMENT BELIEVE THAT BY APPROVING BOTH OF THE PROPOSALS, THE COMPANY'S
STOCKHOLDERS WILL RECEIVE GREATER VALUE THAN WOULD BE AVAILABLE TO THEM THROUGH
THEIR CONTINUED OWNERSHIP OF THE COMMON STOCK IF BOTH OF THE PROPOSALS WERE NOT
APPROVED AND IMPLEMENTED.
BUSINESS OVERVIEW
The Company is one of the nation's largest independent operators of
outpatient medical diagnostic imaging and related facilities with imaging
centers in approximately 64 locations owned, and another 14 locations operated
and managed nationwide at the date hereof. The majority of services provided by
the Company involve the use of Magnetic Resonance Imaging ("MRI"), Computed
Axial Tomography, mammography, x-ray and ultrasound equipment.
During 1995 and 1996, the Company grew primarily through acquisitions of
medical diagnostic imaging centers from independent owners. In 1997, there was a
significant decrease in acquisition activity by the Company due to constraints
on the Company's financial resources and the need to consolidate prior
acquisitions. Furthermore, these acquisitions were financed with a significant
amount of debt. In addition, many of these acquisitions were made at valuations
which ultimately could not be supported by the anticipated operating results of
the medical diagnostic imaging centers acquired, resulting in a $92.9 million
asset impairment charge in 1997. The Company has also been required to incur
additional debt to maintain and upgrade the medical and related equipment in its
medical diagnostic imaging centers as a result of technological changes.
In late 1997, the Company announced, and since 1998 the Company has
pursued, a four part strategy to: (i) reduce operating costs; (ii) divest
non-core and underperforming assets; (iii) reduce and refinance debt; and (iv)
develop new imaging centers and engage in prudent acquisitions, as detailed
below:
- REDUCE OPERATING COSTS
The Company began implementation of a cost reduction plan in 1998 that
included a significant reduction in nonessential staff, retention of GE
Business Solutions to conduct a Company-wide efficiency and savings
review; an emphasis on centralized purchasing, consolidation of four
regional billing offices and four regional operational offices to two of
each, and a review of other consolidation synergies. Also, the Company has
reduced its professional and outside consulting fees and reorganized its
data telecommunications systems to further reduce cost.
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- SALE OF NON-CORE ASSETS AND UNDERPERFORMING IMAGING CENTERS
In 1998, the Company disposed of its mobile medical diagnostic imaging
operations, its radiation oncology interests and its nuclear medicine
subsidiary in order to more closely focus on the Company's core business
of fixed site MRI and multi-modality medical diagnostic imaging
facilities. Additionally, in 1999 the Company sold its interests in
certain subsidiaries located in Texas. The Company also divested itself of
non-core or underperforming assets by selling individual imaging centers
in California and New Mexico in 1999, and by closing of the Las Vegas
imaging center in February 2000. The proceeds from the sales of both
non-core assets and underperforming facilities were used by the Company to
reduce debt, meet operating needs and generally to bolster the Company's
working capital.
- REDUCE AND REFINANCE DEBT
Due to financial market conditions in 1998, the Company decided to
postpone the refinancing of its long-term debt. However, in addition to
the significant debt reduction described above, in December 1998 and
January 1999, the Company completed the repurchase in the open market of
$35.4 million aggregate principal amount of its 9% Subordinated
Convertible Debentures for $25.0 million, resulting in a decrease in
long-term debt and related interest expense.
- NEW IMAGING CENTERS AND ACQUISITIONS
A significant portion of the Company's cash flow is required to amortize
debt. As a result, new medical diagnostic imaging center development and
additional acquisitions have been constrained by the Company's limited
capital resources and the inability of the Company to extend the
maturities of its debt through refinancing. Accordingly, the Company made
only one minor acquisition and opened two new internally developed medical
diagnostic imaging centers in 1999.
Despite these efforts to reduce expenses and improve the Company's capital
structure, the Company remains highly leveraged. The relatively short maturities
of its indebtedness require the Company to devote a significant portion of its
cash flow to the amortization of debt. The Company also has ongoing significant
capital expenditure requirements in order to maintain and modernize its imaging
equipment. In addition, the medical diagnostic imaging industry has been
confronted since the mid-1990's with the efforts of private and governmental
third party payors to reduce, or limit increases in, reimbursement rates.
Although the Company's cash flow from operating activities has been positive for
the years ended December 31, 1999 and 1998, it nevertheless has been and is
projected to be insufficient to meet the Company's scheduled debt repayment
obligations and capital expenditure plans. Moreover, given continuing adverse
capital market conditions relative to healthcare companies, as well as the
highly leveraged nature of the Company's capital structure, a refinancing to
extend the maturity of the Company's indebtedness is not currently anticipated
in the near term. These factors necessitate the incurrence of additional
indebtedness or the meeting of the Company's capital requirements through other
means.
Accordingly, although the Company's primary lending source has made
additional funding available to the Company during the year to date, the Company
began during the first quarter of 2000 a program to sell selected imaging
centers (in addition to the sale of
9
<PAGE> 13
non-core and underperforming centers during 1998 and 1999) in order to raise
cash to meet its operating and debt repayment needs.
SELECTED FINANCIAL DATA
The selected financial data presented below summarize certain historical
financial data and should be read in conjunction with the Company's consolidated
financial statements and the notes thereto set forth in the Company's 1999 Form
10-K and March 31, 2000 Quarterly Report on Form 10-Q accompanying this Proxy
Statement.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------------------------------
2000 1999 1998 1997 1996 1995
------------ -------- -------- --------- -------- -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net revenue............... $38,511 $155,602 $195,735 $ 216,222 $102,061 $29,416
Income (loss) before
extraordinary item...... (4,733) (10,793)(1) (512)(1) (116,712)(2) (6,331) 3,025
Extraordinary item, net of
income taxes............ -- 2,598 (3) 5,311 (3) -- -- 306
Net income (loss)......... (4,733) (8,195) 4,799 (116,712) (6,331) 3,331
Basic earnings (loss) per
common share
Income (loss) before
extraordinary item.... (.21) (.47) (.02) (5.26) (.48) .70
Extraordinary item, net
of income taxes....... -- .11 .23 -- -- .07
Net income (loss)....... (.21) (.36) .21 (5.26) (.48) .77
Diluted earnings.......... --
Income (loss) before
extraordinary item.... (.21) (.47) (.02) (5.26) (.48) .64
Extraordinary item, net
of income taxes....... -- .11 .23 -- -- .06
Net income (loss)....... (.21) (.36) .21 (5.26) (.48) .70
Cash dividends declared
per common share........ -- -- -- -- -- --
</TABLE>
-------------------------
(1) Includes $2.3 and $4.7 million gain on sale of subsidiaries in 1999 and
1998, respectively. See Note 11 of Notes to Consolidated Financial
Statements set forth in the 1999 Form 10-K.
(2) Includes asset impairment losses of $92.9 million. See Note 5 of Notes to
Consolidated Financial Statements set forth in the 1999 Form 10-K.
(3) Represents gain on repurchase of Subordinated Convertible Debentures. See
Notes 6, 7 and 17 of Notes to Consolidated Financial Statements set forth in
the 1999 Form 10-K.
10
<PAGE> 14
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ---------------------------------------------------
2000 1999 1998 1997 1996 1995
----------- -------- -------- -------- -------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets.......... $218,800 $217,742 $237,830 $287,999 $339,023 $57,279
Current portion of
long-term debt and
capital leases...... 31,373 27,705 27,239 27,745 37,627 6,352
Total long-term
obligations...... 121,939 128,640 147,701 191,547 123,984 21,653
</TABLE>
IMPACT OF LEVERAGE AND STRATEGIC ALTERNATIVES
As detailed above, the Company's cash flow from operations has been and is
projected to be insufficient to satisfy its debt obligations and capital
expenditure commitments. This situation characterizes a capital structure that
is highly leveraged. The Company's total debt at March 31, 2000 was $159.0
million consisting of (i) $21.8 million of Subordinated Convertible Debentures
(the "Debentures") maturing on March 31, 2003, (ii) $63.5 million, comprising
principally secured notes used to finance the purchase of equipment (the
"Purchase Money Notes") maturing at various dates through April 2012, (iii) a
$17.9 million revolving credit loan facility maturing on April 1, 2002, (iv)
$22.0 million unsecured loan, due July 2001, (v) $16.4 million in other debt
maturing on various dates through April 2004, and (vi) $17.4 million in
obligations under capital leases maturing through 2004. The Company has $31.4
million of this debt due in less than one year. In addition, the Company
anticipates that it will be required to make interest payments of not less than
$15.7 million and has commitments for capital expenditures of not less than $2.7
million during 2000. Earnings before interest, tax, depreciation and
amortization ("EBITDA") for the year ended December 31, 1999 was $28.4 million
and for the three months ended March 31, 2000 was $6.1 million. EBITDA for the
full year 2000 is unlikely to materially exceed the result for 1999.
The Company's highly leveraged condition led the Board of Directors and
management of the Company to undertake during 1999 a strategic analysis of the
Company's alternatives to maximize stockholder value and to satisfy indebtedness
and other obligations. To assist the Board of Directors and management in
assessing the Company's strategic alternatives, the Company engaged Lehman
Brothers Incorporated ("Lehman Brothers") and River Capital Partners LLC ("River
Capital"). Lehman Brothers and River Capital acted as the Company's financial
advisors to explore a possible merger with another medical diagnostic imaging
center company. In addition, Lehman Brothers and River Capital contacted other
parties to explore the availability of a buyer or a merger partner for the
Company, and provided advice to the Company regarding the potential for a
refinancing. In light of the fact that these efforts failed to yield a
satisfactory potential transaction, during the last quarter of 1999, Lehman
Brothers and River Capital prepared an analysis of the Company's strategic
alternatives which was presented to the Board of Directors in December 1999.
This analysis included an evaluation of the Company remaining independent, a
merger of the Company with other medical diagnostic imaging center companies, a
going private leveraged buy-out by the Company, seeking an infusion of private
equity and a sale of all or substantially all of the Company's assets in
multiple transactions. In January 2000, the Board of Directors met
11
<PAGE> 15
again to consider the Company's liquidity position and strategic alternatives.
At this meeting, the Board of Directors authorized management to pursue a
process to sell selected diagnostic imaging centers in order to raise capital,
reduce debt and bolster the Company's liquidity, in light of the analysis of the
Company's strategic alternatives and the Company's anticipated need for
increased liquidity. As a result, pursuant to an engagement letter dated
February 1, 2000, the Company instructed River Capital to initiate the
solicitation and bidding process described below.
PROPOSAL NO. 1. APPROVAL OF THE IMAGING CENTER SALES
GENERAL
As described above, during December 1999 and January 2000, the Company
determined that it would be necessary to sell certain of its imaging centers in
order to ensure that it would have sufficient cash to fund its operating needs.
In February of 2000, River Capital commenced, on the Company's behalf, a
competitive bidding process among strategic and financial buyers of certain
medical diagnostic imaging centers. No affiliates of the Company or any officers
or directors of the Company were contacted (with the exception of Alan Winakor,
an Executive Vice President, Northeast Region). In February 2000, at the
direction of the Company, River Capital contacted several potential acquirors of
the medical diagnostic imaging centers. After executing confidentiality
agreements, potential buyers received confidential information as well as a
procedure letter requesting initial indications of interest by a specific date.
As a result of this process to date, the Company has already sold several
medical diagnostic imaging centers, and has executed or expects shortly to
execute definitive agreements to sell up to approximately 20 additional medical
diagnostic imaging centers (together with the sold centers, the "Pending Sales")
and subsequently received indications of interest regarding the possible
acquisition of approximately an additional 25 centers. The Company and River
Capital are continuing to evaluate indications of interest and to negotiate
potential sale transactions based on, among other factors, the prices offered,
the ability of the potential buyers to consummate a transaction and the material
terms of the definitive agreement proposed by the potential buyers. The Pending
Sales are not being voted upon under this Proposal 1 because they were or will
be entered into as part of the Company's plan to meet its current cash needs and
to bolster the Company's capital resources as disclosed in the Company's 1999
Form 10-K.
The indications of interest on the remaining centers provided a range of
values that could be expected if these centers were sold and were presented to
the Board of Directors at a meeting held in March 2000 at which the Company's
strategic alternatives were discussed. At a meeting held on May 9, 2000, the
Board of Directors once again reviewed the exploration of strategic alternatives
undertaken to date, the results of the solicitation conducted by River Capital,
the status of the Pending Sales, the market conditions prevailing in the
Company's industry, including the recent bankruptcies of a number of companies
in the Company's industry, and the implied value of the Company's medical
imaging diagnostic centers based upon indications of value received and the
Pending Sales. Based upon this information, the Board of Directors determined
that a sale of the imaging centers and the adoption of the Plan of Restructuring
attached hereto as Appendix A (the "Plan") was in the best interests of the
Company's stockholders.
12
<PAGE> 16
The Company currently estimates that the aggregate sale prices of the
Company's imaging centers, including the centers sold or being sold pursuant to
the Pending Sales, should be not less than $188.8 million, which amount includes
approximately $159.0 million of debt assumed or repaid and the balance of the
purchase price in cash. See "Proposal No. 2 -- Adoption of the Restructuring
Proposal -- Liquidation Analysis and Estimates." Stockholders should be aware
that the Company has neither sought nor received an appraisal of its medical
diagnostic imaging centers and the foregoing estimate involves judgments and
assumptions which are subject to uncertainties and contingencies. Accordingly,
there can be no assurance that these judgments and assumptions will prove to be
accurate or that the Imaging Center Sales will result in the realization of the
estimated amount. The proceeds of the sales would be used to fund the Company's
cash flow requirements, to satisfy the Company's remaining debt obligations and
the costs of liquidating the Company and, if the Board of Directors determines
not to invest in a new business or businesses, to pay stockholders as reflected
in "Proposal 2. Adoption of the Restructuring Proposal -- Liquidation Analysis
and Estimates" below.
In determining the range of anticipated sale prices, the Board of Directors
consulted with management of the Company, reviewed and analyzed the historical
financial results and future prospects of the imaging centers, market and
transactional values of businesses similar to those of the Company to the extent
that information was available from public and private transactions, alternative
offers for the centers, and other relevant and appropriate information,
including the prices already agreed upon pursuant to the Pending Sales. The
Board of Directors and management determined that a transaction value (cash paid
plus debt assumed) expressed as a multiple of the trailing 12 months ("TTM")
EBITDA results was, among other factors, an appropriate measure of
comparability, although other factors peculiar to each center's market,
including competition, pricing, equipment age and other factors were considered.
The Board of Directors believed that TTM EBITDA was an appropriate measure of
comparability for transactions such as the Imaging Center Sales, since potential
buyers traditionally use TTM EBITDA to determine the ability of an acquisition
target to cover the capital costs associated with financing an acquisition.
To date, River Capital Partners has been paid an aggregate fee of $100,000
and is being paid a $25,000 per month retainer for its assistance in the Imaging
Center Sales.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's capital stock in connection
with the transactions contemplated by the Imaging Center Sales, or to any
similar rights under Delaware law.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the Imaging Center
Sales are in the best interests of the Company and its stockholders.
Accordingly, subject to the conditions that the Company's Board of Directors
shall approve the terms of definitive agreements with respect to such sales, the
Board of Directors unanimously approved the plan to effect the Imaging Center
Sales at a meeting held on May 9, 2000. In arriving at this conclusion, the
Board considered a number of factors, including the alternatives to the sales
and the future prospects of the Company.
13
<PAGE> 17
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE IMAGING CENTER SALES.
If either the Imaging Center Sales are not approved by the stockholders or
if the Board of Directors determines that the sale prices are inadequate or
subject to unacceptable conditions met, the Board of Directors will explore the
alternatives then available for the future of the Company.
PROPOSAL NO. 2. ADOPTION OF THE RESTRUCTURING PROPOSAL
GENERAL
The Board of Directors has adopted the Restructuring Proposal, which would
include the Imaging Center Sales and possible reinvestment of the net proceeds
of the Imaging Center Sales in a new business or businesses, or, in the event
such reinvestment doesn't occur, the possible distribution of such net proceeds
and any remaining assets of the Company in accordance with a Plan of
Restructuring of the Company (the "Plan"). The Company's medical diagnostic
imaging centers represent substantially all of the assets (other than cash or
cash equivalents) of the Company. If after the Imaging Center Sales are
completed and the Board of Directors determines not to reinvest the net proceeds
in a new business or businesses, the Company will endeavor to sell or convert
into cash any remaining assets of the Company.
As described below, if the Restructuring Proposal is approved, the Company
intends to seek to reinvest the net proceeds to the Company from the Imaging
Center Sales, after the payment of liabilities, in a new business or businesses.
Approval of the Restructuring Proposal constitutes approval of the investment in
any new business or businesses and such reinvestment would not be subject to
further vote or approval of the stockholders of the Company except to the extent
required by law. If the Company is unable, or chooses not, to reinvest any
proceeds in a new business or businesses, the Company will liquidate commencing
on a date determined by the Board of Directors (the "Liquidation Date").
Approval of the Restructuring Proposal also constitutes approval of such
liquidation.
Under the terms of the Plan and pursuant to Delaware law, the Board of
Directors may amend or abandon the Plan prior to the dissolution of the Company
without stockholder approval. The Board of Directors does not currently intend
to distribute the proceeds of the Imaging Center Sales to the Company's
stockholders, if at all, until after the Liquidation Date. The uses of the
proceeds from the Imaging Center Sales, if consummated, that may be considered
by the Board include the development, acquisition and/or investment in or merger
with new or existing businesses, distributions to the Company's stockholders,
repurchases of the Company's securities and general business purposes. Such
activities could include the acquisition of an entire company or companies, or
divisions thereof, either through a merger or a purchase of assets, as well as
an investment in the securities of a company or companies, investment in the
development of a new line of business, or, alternatively, a combination with
another business in which the Company would not be the surviving corporation.
The Company has not entered into any substantive negotiations concerning such
acquisitions or investments. Consummation of any investments or business
combinations will not be subject to further vote or approval by the stockholders
of the Company. If any investments or business combinations are approved by
14
<PAGE> 18
the Board of Directors of the Company, the liquidation aspects of the Plan will
be terminated.
The Restructuring Proposal may eventually result in the complete
liquidation of all of the Company's assets. If the Restructuring Proposal is
approved, and if no suitable investment or business combination is identified,
the Board of Directors will determine a Liquidation Date and cause the Company
to file a certificate of dissolution with the Secretary of State of the State of
Delaware, wind up the Company's affairs, attempt to convert all Company assets
into cash or cash equivalents, pay or attempt to adequately provide for the
payment of all of the Company's known obligations and liabilities and distribute
pro rata in one or more liquidating distributions to or for the benefit of the
Company's stockholders, as of the applicable record date(s), all of the
Company's assets. If the Company is dissolved, pursuant to Delaware law, the
Company will continue to exist for three years (or such longer period of time as
the Court of Chancery of the State of Delaware shall direct) for the purpose of
prosecuting and defending suits against it or enabling the Company gradually to
close its business, to dispose of its property, to discharge its liabilities and
to distribute the remaining assets to the stockholders of the Company.
If assets of the Company remain undistributed to its stockholders on a date
which is six months after the Liquidation Date (the "Final Distribution Date"),
those assets would be transferred to a liquidating trust (the "Liquidating
Trust") for the pro rata benefit of the stockholders of the Company of record on
the Final Distribution Date. Approval of the Restructuring Proposal will
constitute stockholder approval of the Plan and of the possible appointment by
the Board of Directors of one or more trustees of the Liquidating Trust (the
"Liquidating Trustees") and the execution of a liquidating trust agreement with
the Liquidating Trustees on such terms and conditions as the Board of Directors
shall determine in its absolute discretion. In addition, approval of the
Restructuring Proposal will constitute stockholder approval of any and all sales
of assets of the Company approved by the Board of Directors or, if applicable,
the Liquidating Trustees.
The Restructuring Proposal, including the Plan, was approved by the Board
of Directors, subject to stockholder approval, on May 9, 2000. A copy of the
Plan is attached as Appendix A to this Proxy Statement. The material features of
the Restructuring Proposal, including the Plan, are summarized under "Principal
Provisions of the Plan" below. This summary is not complete and is subject in
all respects to the provisions of the Plan. Stockholders are urged to read the
Plan in its entirety.
LIQUIDATION ANALYSIS AND ESTIMATES
USD does not as a matter of course make public projections as to future
sales, earnings, or other results. However, the Company has prepared the
liquidation estimates set forth below to present the estimated net proceeds
available for distribution to stockholders and per outstanding share of common
stock in the event that the Board of Directors determines not to invest in a new
business and instead liquidate the Company in accordance with the Plan. The
accompanying liquidation estimates were not prepared with a view toward public
disclosure or with a view toward complying with the guidelines established by
the American Institute of Certified Public Accountants with respect to
prospective financial information, but, in the view of the Company's management,
were prepared on a reasonable basis and reflects the best currently available
estimates and
15
<PAGE> 19
judgments with respect to the Imaging Center Sales and the liquidation of the
Company. However, this information is not fact and should not be relied upon as
necessarily indicative of future results, and readers of this Proxy Statement
are cautioned not to place undue reliance on the liquidation estimates.
Neither the Company's independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures with respect
to the liquidation estimates contained herein, nor have they expressed any
opinion or any other form of assurance on such estimates, and assume no
responsibility for, and disclaim any association with, the liquidation
estimates.
The assumptions and estimates underlying the liquidation estimates are
inherently uncertain and, although considered reasonable by the Company as of
the date hereof, are subject to a wide variety of significant business,
economic, and competitive risks and uncertainties that could cause actual
results to differ materially from those contained in the liquidation estimates,
including, among others, risks and uncertainties, including the following: The
Company's ability to effect the Imaging Center Sales at favorable or acceptable
prices or at all, the accuracy of the estimates and assumptions used in
preparing the liquidation estimates, the ultimate outcome of known and unknown
litigation and other contingencies, the accuracy of the assumed tax effects of
the Imaging Center Sales, potential changes in the Company's industry or the
economy as a whole which could affect the value of medical diagnostic imaging
centers, changes in the regulatory environment, the emergence of loss
contingencies not now known and the ability, or cost to the Company, of
retaining necessary personnel during the sale process. Accordingly, there can be
no assurance that the actual results will not differ materially from those
presented in the liquidation estimates. Inclusion of the liquidation estimates
in this Proxy Statement should not be regarded as a representation by any person
that the results contained in the liquidation estimates will be achieved.
MOREOVER, NO ASSURANCE CAN BE GIVEN THAT ANY AMOUNTS TO BE RECEIVED BY THE
COMPANY'S STOCKHOLDERS IN LIQUIDATION WILL EQUAL OR EXCEED THE PRICE OR PRICES
AT WHICH THE COMMON STOCK HAS RECENTLY TRADED OR MAY TRADE IN THE FUTURE.
The Company does not intend to update or otherwise revise the liquidation
estimates to reflect circumstances existing since its preparation or to reflect
the occurrence of unanticipated events, even in the event that any or all of the
underlying assumptions are shown to be in error. Furthermore, the Company does
not intend to update or revise the liquidation estimates to reflect changes in
general economic or industry conditions. See "Risk Factors After Closing of the
Imaging Centers".
Additional information relating to the principal assumptions used in
preparing the liquidation estimates is set forth below.
The Company has estimated the following potential realizable values or
range of values for its assets, estimated liabilities and estimated cost of
liquidation after the Imaging Center Sales, assuming those businesses are sold
by March 31, 2001. The net proceeds from the sales of businesses were estimated
based on proposed purchase prices contained in the indications of interest
received by management of the Company as described in Proposal 1. The Board of
Directors also considered the prices and implied valuations at which the Company
had sold imaging centers during 1998 and 1999. All business dispositions have
been or are assumed to be divestitures of the assets and liabilities of the
imaging centers although some dispositions could actually occur through the sale
of equity interests in entities held by the Company, which entities own the
imaging centers.
16
<PAGE> 20
Therefore, all assets and liabilities of those entities will be realized through
the net proceeds from these sales. The remaining assets and liabilities
reflected in the table below are those assets and liabilities of USD, the parent
company, and have been estimated to be fully realizable, net of valuation
allowances, as reflected in the Company's balance sheet as of March 31, 2000.
The following table also gives effect to other transactions expected to occur as
follows: (i) net proceeds from the exercise of dilutive stock options were
computed based on the assumption that all outstanding options to purchase stock
of the Company at or less than $1.78 per share (the high end of the range of
estimated net proceeds available for distribution per outstanding common share,
giving effect to such stock option exercises) were exercised, and (ii) estimated
liabilities for the settlement of known litigation and severance and contractual
costs, principally facility exit costs, which result from the business
dispositions and liquidation of the Company.
The estimated net operating cash flows from March 31, 2000 to March 31,
2001, the date assumed as the beginning of the liquidation period, have been
estimated based on the Company's internal estimates for the quarter ended March
31, 2000 and its routine annual operating plan and budget process for the year
2000 adjusted for the estimated effects of the Imaging Center Sales. The
estimated operating costs during liquidation were also estimated based on the
Company's internal routine annual operating plan and budget process adjusted for
the estimated effects of the Imaging Center Sales. Except for historical
transactions, there can be no assurance, however, that the Company will be able
to dispose of any of the assets below, for or within the indicated values or
ranges (or at all).
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
----------------------
<S> <C> <C>
(i) ESTIMATED REALIZABLE VALUES OF ASSETS OF THE COMPANY
Cash and cash equivalents at March 31, 2000............ $6.3
Proceeds from Pending Sales and Imaging Center Sales... 188.8- 199.6
Net proceeds from exercise of stock options............ 1.4
Notes receivable....................................... 2.3
-----------------
Total estimated assets............................... 198.8- 209.6
-----------------
ii) ESTIMATED LIABILITIES OF THE COMPANY
Purchase Money Notes at March 31, 2000................. $(63.5)
Revolving credit facility borrowings at March 31,
2000................................................... (17.9)
Debentures............................................. (21.8)
Unsecured loan......................................... (22.0)
Obligations under capital leases....................... (17.4)
Other Debt............................................. (16.4)
Litigation settlement costs............................ (1.0)- (2.0)
Severance and facility exit costs...................... (6.3)
-----------------
Total estimated liabilities.......................... (166.3)- (167.3)
-----------------
iii) ESTIMATED NET OPERATING CASH FLOWS FROM MARCH 31, 2000
TO MARCH 31, 2001 (ASSUMED DATE OF COMMENCEMENT OF
LIQUIDATION)........................................... 0- 2.5
-----------------
(iv) ESTIMATED OPERATING COSTS DURING LIQUIDATION
Investment income during liquidation................... .9- 1.8
Payroll and benefits for liquidation personnel......... (.5)- (1.0)
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
----------------------
<S> <C> <C>
Legal, audit and other professional costs.............. (1.0)- (1.5)
Other costs............................................ (.6)- (1.0)
-----------------
Total estimated operating costs...................... (1.1)- (1.7)
-----------------
(v) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS........................................... $31.4- 43.1
=================
(vi) ESTIMATED NET PROCEEDS AVAILABLE FOR DISTRIBUTION PER
OUTSTANDING SHARE OF COMMON STOCK...................... $1.30- 1.78(1)
=================
</TABLE>
-------------------------
(1) Number of shares used in calculating distribution per share is 24.2 million
shares comprising 22.7 million outstanding shares plus 1.5 million dilutive
stock options.
STOCKHOLDERS SHOULD BE AWARE THAT THE COMPANY HAS NEITHER SOUGHT NOR RECEIVED AN
APPRAISAL OF ITS MEDICAL DIAGNOSTIC IMAGING CENTERS AND THE FOREGOING ESTIMATES
INVOLVE JUDGMENTS AND ASSUMPTIONS WHICH ARE SUBJECT TO UNCERTAINTIES AND
CONTINGENCIES.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Company's Board of Directors has concluded that the Restructuring
Proposal is in the best interests of the Company and its stockholders.
Accordingly, the Board of Directors unanimously approved the Restructuring
Proposal at a meeting held on May 9, 2000. In arriving at this conclusion, the
Board considered a number of factors, including the alternatives to the
Restructuring Proposal and the future prospects of the Company.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE RESTRUCTURING PROPOSAL.
If the Restructuring Proposal is not approved by the stockholders, the
Board of Directors will explore the alternatives then available for the future
of the Company.
PRINCIPAL PROVISIONS OF THE PLAN
The Plan provides that the Company will sell all of its medical diagnostic
imaging centers. The net proceeds of the Imaging Center Sales may be used for
the development, acquisition and/or investment in or merger with new or existing
businesses, distributions to the Company's stockholders, repurchases of the
Company's securities and general business purposes as may be approved by the
Board of Directors. The liquidation provisions of the Plan will not be
implemented until the Liquidation Date, if any. The Board of Directors does not
currently intend to implement the liquidation provisions of the Plan and
distribute the proceeds of the sales of the imaging centers to the Company's
stockholders, if at all, until after it has determined not to reinvest the net
proceeds of Imaging Center Sales in a new business or businesses. See "Conduct
of the Company After the Imaging Center Sales -- Use of Proceeds" below.
DISTRIBUTIONS
After the Liquidation Date, the Company or the Liquidating Trust will make
distributions of Available Cash pro rata to stockholders at such time or times
and in such
18
<PAGE> 22
amounts as determined by the Board of Directors or the Liquidating Trustees.
"Available Cash" means the cash held by the Company or the Liquidating Trust
after deduction for the expenses of the operation of the Company or the
Liquidating Trust and a contingency reserve in an amount determined by the Board
of Directors or the Liquidating Trustees to be sufficient to satisfy any
liabilities, expenses and obligations of the Company or the Liquidating Trust
not otherwise paid or provided for and that could be recovered against the
stockholders to the extent of the amounts distributed to them by the Company or
the Liquidating Trust (the "Contingency Reserve").
The Company cannot predict the timing of the distributions from the
Liquidating Trust. It is the present intention of the Board of Directors,
however, that any Available Cash will be distributed to the stockholders
following the Final Record Date (as defined below). Nevertheless, no
distributions will be made until the Board of Directors or Liquidating Trustees
have determined the amount of the Contingency Reserve.
The Board of Directors believes that the Company and the Liquidating Trust
will have sufficient assets to pay the current and future obligations of the
Company and the Liquidating Trust and to make distributions to the stockholders,
but there can be no assurance to that effect. The amount of the distributions
will depend on the accounts payable and other liabilities of the Company
existing on the date of the approval of the Restructuring Proposal, the expenses
of operation of the Company and the Liquidating Trust that accrue following
approval of the Restructuring Proposal, and the amount of any claims that may be
asserted against the Company or the Liquidating Trust. The expenses of operation
of the Company and the Liquidating Trust will include professional fees and
other expenses of liquidation and could be substantial. The Company does not
anticipate that property, other than cash, will be distributed to the
stockholders by the Company or the Liquidating Trust.
THE LIQUIDATING TRUST
The Board of Directors will determine whether and when to transfer assets
of the Company to the Liquidating Trust, but if all of the Company's assets are
not sold or distributed prior to the Final Distribution Date, the Company must
transfer all the remaining assets of the Company (including the Contingency
Reserve) to the Liquidating Trust. The purpose of the Liquidating Trust will be
to liquidate any non-cash assets held by the Liquidating Trust and distribute
all Available Cash to the stockholders of record on the Final Record Date. The
Liquidating Trust will be required to pay the expenses of its operations and all
unsatisfied expenses, liabilities and obligations of the Company. Such expenses,
liabilities and obligations will be paid initially out of the Contingency
Reserve, but if the Contingency Reserve is exhausted, such expenses, liabilities
and obligations will be paid out of the other assets held by the Liquidating
Trust.
If assets are transferred to the Liquidating Trust, each stockholder on the
Final Record Date will receive an interest (an "Interest") in the Liquidating
Trust pro rata to its interest in the outstanding Common Stock on that date. All
distributions from the Liquidating Trust will be made pro rata in accordance
with the Interests. The Interests will not be transferable except by operation
of law or upon death. Because the Interests will not be transferable, it is
anticipated that the Liquidating Trust will not be required to comply with the
periodic reporting and proxy statement requirements of the Exchange Act. The
Liquidating Trustees will, however, maintain books and records of the
Liquidating Trust,
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which will be available for inspection by holders of Interests, to the extent
permitted and in accordance with law.
The Plan authorizes the Board of Directors to appoint one or more
individuals or entities to act as Liquidating Trustees of the Liquidating Trust
and to cause the Company to enter into a liquidating trust agreement with such
Liquidating Trustees on such terms and conditions as may be approved by the
Board of Directors. It is anticipated that the Board of Directors will select
such Liquidating Trustees on the basis of the experience of each such individual
or entity in administering and disposing of assets and discharging liabilities
of the kind to be held by the Liquidating Trust and the ability of each such
individual or entity to serve the best interests of the stockholders of the
Company. Approval of the Restructuring Proposal will constitute the approval by
the stockholders of any such appointment and the execution of a liquidating
trust agreement with the Liquidating Trustees.
The stockholders of the Company will be deemed to have received a
liquidating distribution equal to their pro rata share of the value of the net
assets transferred to the Liquidating Trust. Therefore, the transfer to the
Liquidating Trust of assets could result in immediate tax liability to the
holders of Interests without their readily being able to realize the value of
such Interests to pay such taxes or otherwise. See "Certain Tax Consequences"
below.
The possible transfer of assets to the Liquidating Trust is only a
contingency plan to provide for the possibility that the Company may not be able
to convert all assets into cash or satisfy all liabilities before the Final
Distribution Date. Therefore, the Board of Directors has not finally determined
the detailed terms or structure for the Liquidating Trust, which would be
determined by the Board of Directors at a future date.
CONTINGENCY RESERVE
Under Delaware law, the Company is required, in connection with its
dissolution, to pay or provide for payment of all of its expenses, liabilities
and obligations. These include known liabilities and obligations of the Company
accrued through the date of the approval of the Restructuring Proposal, expenses
to be incurred by the Company following approval of the Restructuring Proposal
in connection with the winding-up and dissolution of the Company, any expenses
to be incurred in connection with the operations of the Liquidating Trust,
claims that have been asserted against the Company but that have not been
settled or reduced to judgment and claims that have not yet been asserted but
may be asserted in the future. Known liabilities and obligations of the Company
include repayment of the Purchase Money Notes, the Debentures and other debt,
severance and other employee-related costs, accounts payable and professional
fees. See "Liquidation Analysis and Estimates" above and "Certain Claims" below.
Following approval of the Restructuring Proposal by the stockholders and
prior to any distribution of Available Cash to stockholders, the Board of
Directors will set aside from all other assets of the Company a Contingency
Reserve to fund all then known liabilities and obligations of the Company and
the expenses expected to be incurred by the Company or the Liquidating Trust in
connection with its winding-up and dissolution, including the anticipated
operational expenses of the Company or the Liquidating Trust and other possible
claims against the Company or the Liquidating Trust. The Company is currently
unable to estimate the amount of the Contingency Reserve, and the estimated
operating costs set forth above under "Liquidation Analysis and Estimates" are
for illustrative
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purposes only. The Contingency Reserve will initially be based upon the
assessment and estimates of the Board of Directors of the Company's known
liabilities and obligations, future operating expenses and possible claims.
After the Contingency Reserve is established, the Board of Directors or the
Liquidating Trustees, as the case may be, may increase or decrease the
Contingency Reserve based on their then current estimate and assessment of the
operating expenses of the Company and/or the Liquidating Trust, the probable
value of any known claims against the Company or the Liquidating Trust and the
possibility of any then unknown claims being asserted against the Company or the
Liquidating Trust. Any increase in the amount of the Contingency Reserve will be
funded from the cash assets of the Company or the Liquidating Trust, as the case
may be, and will reduce the amount available for distribution to the
stockholders. The amount of any decrease in the Contingency Reserve would
increase the assets available for distribution to the stockholders. After all
expenses, liabilities and obligations of the Company and the Liquidating Trust
have been satisfied and the Board of Directors or the Liquidating Trustees, as
the case may be, determine that any future claims against the Company or the
Liquidating Trust are not probable of occurrence, any remaining funds in the
Contingency Reserve will be distributed pro rata to holders of Interests in the
Liquidating Trust.
In the event the Company fails to create an adequate Contingency Reserve
for payment of expenses, liabilities and obligations, or should the Contingency
Reserve and the assets held by the Liquidating Trust be exceeded by the amount
ultimately found payable in respect of the Company's expenses, liabilities and
obligations, each stockholder could be held liable to the Company's creditors
for repayment of the stockholder's pro rata share of such excess, but limited to
the amounts received by the stockholder from the Company or the Liquidating
Trust. In addition, if a court holds at any time that the Company or the
Liquidating Trust has failed to make adequate provision for expenses,
liabilities and obligations, or if the amount ultimately required to be paid in
that respect exceeds the amount available from the Contingency Reserve and the
assets of the Liquidating Trust, a creditor of the Company could seek an
injunction against the making of distributions under the Plan on the grounds
that the amounts to be distributed are needed to provide for the payment of the
Company's expenses, liabilities and obligations. Any such action could delay,
substantially diminish or eliminate the cash distributions to be made to the
stockholders under the Plan.
DISPOSITION OF CERTAIN ASSETS
The Plan gives the Board of Directors of the Company the power to sell (or,
in certain cases, otherwise dispose of) all the assets of the Company on such
terms and in such manner as determined by the Board of Directors and to transfer
remaining assets to the Liquidating Trust, to be sold by the Liquidating
Trustees. The prices at which the Company or the Liquidating Trust may be able
to sell those assets will depend on factors that may be beyond the control of
the Company or the Liquidating Trust and may not be as high as the prices that
could be obtained if the Company were not in liquidation. Approval of the
Restructuring Proposal will constitute approval of any such sales or other
dispositions.
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CERTAIN COMPENSATION ARRANGEMENTS
Pursuant to the Plan, the Company may, in the absolute discretion of the
Board of Directors, pay to the Company's present or former officers, directors,
employees, agents and representatives, or any of them, compensation or
additional compensation above their regular compensation, in money or other
property, in recognition of any extraordinary efforts they, or any of them, may
undertake in connection with the implementation of the Plan. See also "Interests
of Certain Persons" below.
CLOSING OF TRANSFER BOOKS
The Company will close its transfer books on the earliest date (the "Final
Record Date") to occur of (i) the close of business on the record date fixed by
the Board of Directors for the final liquidating distribution to stockholders,
(ii) the close of business on the date of the transfer of the Company's
remaining assets to the Liquidating Trust, and (iii) the date on which the
Company files a Certificate of Dissolution with the Secretary of State of the
State of Delaware under Delaware law. After the Final Record Date, the Company
will not record any further transfers of Common Stock except pursuant to the
provisions of a deceased stockholder's will, intestate succession or operation
of law, and the Company will not issue any new stock certificates, other than
replacement certificates. It is anticipated that no further trading of the
Common Stock will occur after the Final Record Date, and it is possible that
trading will effectively terminate before then. All liquidating distributions
from the Liquidating Trust or the Company on or after the Final Record Date will
be made to the stockholders pro rata according to their holdings of Common Stock
as of the Final Record Date. After the Final Record Date, the Company may
require stockholders to surrender certificates representing their shares of
Common Stock in order to receive distributions. Stockholders should not forward
their stock certificates before receiving instructions to do so. If surrender of
stock certificates is required, all distributions otherwise payable by the
Liquidating Trust or the Company to stockholders who have not surrendered their
stock certificates may be held in trust for such stockholders, without interest,
until the surrender of their certificates (subject to escheat pursuant to the
laws relating to unclaimed property). If a stockholder's certificate evidencing
the Common Stock has been lost, stolen or destroyed, the stockholder may be
required to furnish the Company with satisfactory evidence to that effect and
surety bond or other indemnity in order to receive a distribution. Any interim
liquidating distribution from the Company prior to the Final Distribution Date
will be made as of a prior record date set by the Board of Directors.
INDEMNIFICATION
The Plan requires the Company to indemnify its officers, directors,
employees, agents and representatives for actions taken in connection with the
Plan and the winding up of the affairs of the Company in accordance with the
Company's Certificate of Incorporation and By-Laws. The Company's obligation to
indemnify these persons may also be satisfied out of assets of the Liquidating
Trust. The Liquidating Trust will similarly be authorized to indemnify the
Liquidating Trustees and any employees, agents or representatives of the
Liquidating Trust for actions taken in connection with the operations of the
Liquidating Trust. Any claims arising in respect of such indemnification will be
satisfied out of the assets of the Liquidating Trust.
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DISSOLUTION OF THE COMPANY
If the stockholders approve the Restructuring Proposal, and, if the Board
of Directors of the Company has not identified any suitable investments or
business combinations and the Board of Directors establishes a Liquidation Date,
the Company will file a Certificate of Dissolution with the Secretary of State
of the State of Delaware dissolving the Company (the "Certificate of
Dissolution"). The dissolution of the Company will become effective, in
accordance with Delaware law, upon the filing of the Certificate of Dissolution
with the Secretary of State of the State of Delaware or upon a later date
specified in the Certificate of Dissolution. Under Delaware law, the Company
will continue to exist for three years after the dissolution becomes effective
or for such longer period as the Delaware Court of Chancery directs, for the
purposes of prosecuting and defending suits by or against it, and enabling the
Company gradually to settle and close its business, to dispose of and convey its
property, to discharge its liabilities and to distribute to the stockholders any
remaining assets, but not for the purpose of continuing the business for which
the Company was organized.
Following the filing of the Certificate of Dissolution, the Board of
Directors will cause notices of dissolution to be sent to all known creditors of
the Company, and will publish notice of the Company's dissolution as required by
Delaware law. Except for the requirements of Delaware law and the Exchange Act
in connection with the Meeting of Stockholders to vote on the Restructuring
Proposal, and except for the filing of the Certificate of Dissolution and any
required filings under federal or state tax laws, no federal or state regulatory
requirements must be complied with or approvals obtained in connection with the
dissolution.
UNDER DELAWARE LAW, IN THE EVENT THE COMPANY FAILS TO CREATE AN ADEQUATE
CONTINGENCY RESERVE FOR PAYMENT OF ITS EXPENSES AND LIABILITIES, OR SHOULD THE
CONTINGENCY RESERVE (AND THE ASSETS HELD BY ANY LIQUIDATING TRUST) BE EXCEEDED
BY THE AMOUNT ULTIMATELY FOUND TO BE PAYABLE FOR THE COMPANY'S EXPENSES AND
LIABILITIES, EACH STOCKHOLDER COULD BE HELD LIABLE FOR THE PAYMENT TO THE
COMPANY'S CREDITORS OF THE STOCKHOLDER'S PRO RATA SHARE OF THAT EXCESS, BUT
LIMITED TO THE AMOUNTS RECEIVED BY EACH STOCKHOLDER UNDER THE PLAN FROM THE
COMPANY (AND FROM ANY LIQUIDATING TRUST). ACCORDINGLY, IN THAT EVENT A
STOCKHOLDER COULD BE REQUIRED TO RETURN ALL DISTRIBUTIONS MADE AND THUS WOULD
RECEIVE NOTHING FROM THE COMPANY AS A RESULT OF THE RESTRUCTURING PROPOSAL.
MOREOVER, IF A STOCKHOLDER HAS PAID TAXES ON AMOUNTS RECEIVED, A REPAYMENT OF
ALL OR A PORTION OF THE DISTRIBUTIONS RECEIVED COULD RESULT IN A SITUATION IN
WHICH A STOCKHOLDER MAY INCUR A NET TAX COST IF THE REPAYMENT OF THE AMOUNT
DISTRIBUTED DOES NOT CAUSE A REDUCTION IN TAXES PAYABLE IN AN AMOUNT EQUAL TO
THE AMOUNT OF THE TAXES PAID ON AMOUNTS PREVIOUSLY DISTRIBUTED.
THE ANTICIPATED TAX TREATMENT OF THE LIQUIDATION PROPOSAL IS DESCRIBED
UNDER "CERTAIN TAX CONSEQUENCES" BELOW. NO RULING HAS BEEN REQUESTED FROM THE
INTERNAL REVENUE SERVICE (THE "IRS") REGARDING THE ANTICIPATED TAX TREATMENT OF
THE RESTRUCTURING PROPOSAL, AND THE COMPANY WILL NOT SEEK AN OPINION OF COUNSEL
EITHER. THE FAILURE TO OBTAIN A RULING FROM THE IRS OR AN OPINION OF COUNSEL
RESULTS IN LESS CERTAINTY THAT THE ANTICIPATED TAX TREATMENT SUMMARIZED BELOW
WILL BE OBTAINED. IF ANY OF THE CONCLUSIONS STATED UNDER "CERTAIN TAX
CONSEQUENCES" PROVE TO BE INCORRECT, THE RESULT COULD BE INCREASED TAXATION TO
THE COMPANY AND/OR THE STOCKHOLDERS, THUS REDUCING THE BENEFIT TO THE
STOCKHOLDERS AND THE COMPANY FROM THE LIQUIDATION.
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AMENDMENT AND ABANDONMENT
Under the Plan, if, at any time, the Board of Directors determines that
liquidation and dissolution are not in the best interests of the Company or its
stockholders, the Board of Directors may direct that the Plan be abandoned. The
Company nevertheless may cause the performance, without further stockholder
approval, of any contract for the sale of assets executed before the decision to
abandon the Plan was made if the Board of Directors considers the completion of
any such asset sale to be in the best interests of the Company. The Board of
Directors also may amend or modify the Plan if it determines that action to be
in the best interests of the Company or its stockholders, to the extent
permitted by Delaware law, without the necessity of further stockholder
approval.
CONDUCT OF THE COMPANY AFTER THE CLOSING OF THE IMAGING CENTER SALES
The Company is currently exploring and following the closing of the Imaging
Center Sales, the Company intends to continue to explore alternative investments
or business combinations as described below in "Use of Proceeds." If no suitable
investments or business combinations are identified the Board of Directors will
establish a Liquidation Date and the Company will begin winding-up its affairs,
including the attempted sale or liquidation of all of the Company's remaining
non-cash assets, payment of or provision for its obligations, liabilities and
expenses and compliance with law.
USE OF PROCEEDS
The Company plans to use the cash proceeds from the Imaging Center Sales to
fund cash flow requirements and to repay the indebtedness and other known
liabilities (including transaction expenses relating to the sales) estimated
under "Liquidation Analysis and Estimates" above.
The Board of Directors does not currently intend to distribute the
remaining proceeds of the Imaging Center Sales to the Company's stockholders
unless it has established the Liquidation Date, if at all. The uses of the
proceeds from the Imaging Center Sales, if consummated, that may be considered
by the Board include the development, acquisition and/or investment in or merger
with new or existing businesses, distributions to the Company's stockholders,
repurchases of the Company's securities and general business purposes. These
activities could include acquiring all or a part of a company or companies,
either through a merger or a purchase of assets, as well as an investment in the
securities of a company or companies or, alternatively, a combination with
another business in which the Company would not be the surviving corporation.
The Company has not entered into any substantive negotiations concerning such
acquisitions or investments.
CONSUMMATION OF ANY INVESTMENTS OR BUSINESS COMBINATIONS WILL NOT BE
SUBJECT TO VOTE OR APPROVAL BY THE STOCKHOLDERS UNLESS REQUIRED BY LAW.
Pending their use, the remaining net proceeds will be invested in
government securities and other investments that do not subject the Company to
regulation under the Investment Company Act of 1940 (the "1940 Act").
RISK FACTORS AFTER THE CLOSING OF THE IMAGING CENTER SALES
REGULATION. After the closing of the Imaging Center Sales, the Company
will continue to be subject to regulation under the Securities Act of 1933, as
amended and the
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Exchange Act. In addition, if the Company invests the net proceeds of the
Imaging Center Sales in investment securities, the Company may be subject to
regulation under the 1940 Act. If the Company is deemed to be an investment
company under the 1940 Act, the Company must register as an investment company
under the 1940 Act. As a registered investment company, the Company would be
subject to the further regulatory oversight of the Division of Investment
Management of the Commission, and its activities would be subject to substantial
regulation under the 1940 Act. In addition, no more than 60% of the Company's
Board of Directors could be "interested persons" of the Company, within the
meaning under the 1940 Act. The Company would seek to hire an investment adviser
registered under the Investment Advisers Act of 1940 to manage its assets, and
the investment adviser would be entitled to management fees. The Company would
also require the services of a custodian to maintain its securities, who would
be entitled to custodial fees. In addition to registering with the Commission,
the Company would need to file annual and semi-annual reports with the
Commission, and to distribute these reports to its stockholders.
Although the Company does not intend to become an investment company and
intends to limit the investments of the Company's assets to government
securities and other investments that do not subject the Company to regulation
under the 1940 Act, if the Company were deemed to have invested in investment
securities and did not register under the 1940 Act, it would be in violation of
the 1940 Act and would be prohibited from engaging in business or selling its
securities and could be subject to civil and criminal actions for doing so. In
addition, the Company's contracts would be voidable and a court could appoint a
receiver to take control of the Company and liquidate it. Therefore, the
Company's classification as an investment company could materially adversely
affect the Company's business, results of operations and financial condition.
POSSIBLE INDENTURE DEFAULT. The Indenture under which the Debentures were
issued contains several covenants as to which the Indenture Trustee or Debenture
holders might have a right to assert a default as a result of the implementation
of Proposal 1 or Proposal 2. In such event, repayment of the outstanding
principal amount and accrued interest of the Debentures could be accelerated. If
the Company did not have sufficient resources to meet such accelerated
repayment, and if it could not obtain a waiver of such default, the Indenture
Trustee or the Debenture holders could initiate bankruptcy proceedings or the
Company could be required to voluntarily seek bankruptcy protection.
CERTAIN CLAIMS
The Company has certain known liabilities and contingent liabilities, for
which it is or may be liable in the future. To the extent liabilities are known
and estimable, the Company has included its current estimate in its summary of
estimated liabilities and operating costs included in "Liquidation Analysis and
Estimates" above. In addition, the Company is subject to legal proceedings and
claims that arise in the ordinary course of its business.
TRADING OF THE COMMON STOCK
The Company will close its transfer books on the Final Record Date (as
described above) and at that time will cease recording stock transfers and
issuing stock certificates (other than replacement certificates). Accordingly,
it is expected that trading in the shares will cease on or shortly after such
date, and trading may effectively terminate before then.
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To the extent the Company makes interim liquidating distributions to
stockholders prior to the Final Record Date, the Common Stock will continue to
trade, but the market price of the Common Stock will likely decline as a result
of those distributions.
ABSENCE OF APPRAISAL RIGHTS
Under Delaware law, the stockholders of the Company are not entitled to
appraisal rights for their shares of the Company's Common Stock in connection
with the transactions contemplated by the Restructuring Proposal, or to any
similar rights under Delaware law.
CERTAIN TAX CONSEQUENCES
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal
income tax consequences of the Imaging Center Sales and the Restructuring
Proposal, including the Plan, to the Company and its stockholders, but does not
purport to be a complete analysis of all the potential tax effects. The
discussion addresses neither the tax consequences that may be relevant to
particular categories of stockholders subject to special treatment under certain
federal income tax laws (such as dealers in securities, banks, insurance
companies, tax-exempt organizations, and foreign individuals and entities) nor
any tax consequences arising under the laws of any state, local or foreign
jurisdiction.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, administrative rulings and judicial
decisions now in effect, all of which are subject to change at any time, either
prospectively or retrospectively, by legislative, administrative or judicial
action. The following discussion has no binding effect on the IRS or the courts.
No ruling has been requested from the IRS with respect to the anticipated tax
treatment of the Restructuring Proposal and the Plan, and the Company will not
seek an opinion of counsel with respect to the anticipated tax treatment
summarized herein. There can be no assurance that the Liquidating Trust will be
treated as a liquidating trust for federal income tax purposes or that the
distributions made pursuant to the Plan, if any, will be treated as liquidating
distributions. If any of the conclusions stated herein proves to be incorrect,
the result could be increased taxation for the Company and/or for the
stockholders, thus reducing the benefit to the stockholders and the Company from
the liquidation.
CONSEQUENCES TO THE COMPANY. The Company expects to recognize a gain or
loss on the sales of imaging centers and other assets sold pursuant to the Plan,
generally on an asset-by-asset basis. The Company expects that the gains with
respect to the sale or distribution of certain imaging centers will be fully
absorbed by losses recognized on the sales of other imaging centers, and other
assets and by net operating loss ("NOL") carryforwards and capital loss
carryforwards available to the Company, except to the extent that the Company is
subject to the alternative minimum tax ("AMT"). NOL carryforwards may only be
used to offset 90% of income which is subject to the AMT. It cannot be
determined if the Company will be subject to AMT in any year. Accordingly, no
current federal income tax is expected to be due as a result of the sale of the
imaging centers or the sales of other assets pursuant to the Plan.
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The Company expects that any NOL and capital loss carryforwards following
the sales of the Company's assets will remain available for use by the Company
in the event that the Company develops, acquires, invests in or merges with a
new business. In general, such NOL and capital loss carryforwards, if any, would
be available to offset future taxable income of the Company. However, capital
loss carryforwards can be used to offset only future capital gains. In addition,
there are a number of potential restrictions under various provisions of the
Code, including the time periods during which NOL carryforwards and capital loss
carryforwards may be used, that may apply to limit the Company's (or any Company
successor's) future utilization of the NOL carryforwards and capital loss
carryforwards, even absent a change in control of the Company. In addition,
under certain provisions of the Code, the Company's ability to offset future
income with its NOL or capital loss carryforwards would be restricted or
eliminated by a change in control of the Company.
If the Company adopts a plan of liquidation, the Company will continue to
be subject to tax on its taxable income until the liquidation is complete. The
Company will recognize gain or loss upon any liquidating distribution of
property (other than cash) to stockholders or to the Liquidating Trust as if
such property were sold to the stockholders or Liquidating Trust. The amount of
such gain or loss will equal the difference between the Company's adjusted tax
basis for each asset and the asset's fair market value on the date of
distribution.
CONSEQUENCES TO STOCKHOLDERS. The stockholders will not recognize any gain
or loss as a result of the sale by the Company of its assets.
If the Company liquidates, a stockholder will recognize gain or loss equal
to the difference between (i) the sum of the amount of cash and the fair market
value of property (other than cash) distributed to such stockholder directly or
to the Liquidating Trust on the stockholder's behalf, and (ii) such
stockholder's tax basis in his shares of Common Stock. A stockholder's tax basis
in his shares will generally equal the stockholder's cost for his shares of
Common Stock. The gain or loss will be a capital gain or loss, assuming the
Common Stock is held as a capital asset and will be a long term capital gain or
loss if the Common Stock has been held for more than one year. Long-term capital
gains realized by a stockholder that is an individual, estate or trust is
generally subject to a 20% maximum tax rate. Long-term capital losses can
generally be used to offset capital gains and, for individuals, estates or
trusts, up to $3,000 of ordinary income. The tax basis of any property other
than cash received by each stockholder upon the complete liquidation of the
Company will be the fair market value of the property at the time of the
distribution.
If the Company liquidates, stockholders may receive one or more liquidating
distributions, including a deemed distribution of cash and property transferred
to the Liquidating Trust. The amount of any distribution should be applied first
to reduce a stockholder's tax basis in his shares of Common Stock, but not below
zero. If a stockholder owns more than one block of shares of Common Stock, the
amount of any distribution must be allocated among the several blocks of shares
owned by the stockholder in the proportion that the number of shares in a
particular block bears to the total number of shares owned by the stockholder.
The amount of the distributions in excess of a stockholder's basis in his Common
Stock will be gain, and should be recognized in the year the distribution is
received (or transferred to the Liquidating Trust). If the amount of the
distributions is less than the stockholder's basis in his shares of Common
Stock, the stockholder will generally recognize a loss in the year the final
distribution is received.
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If the Company liquidates, the Company will provide stockholders and the
IRS with a statement of the amount of cash and the fair market value of any
property distributed to the stockholders (or transferred to the Liquidating
Trust) during that year as determined by the Company, at such time and in such
manner as required by the Treasury Regulations.
THE LIQUIDATING TRUST. The Company believes the Liquidating Trust will not
be treated as an association taxable as a corporation based upon the anticipated
activities of the Liquidating Trust and the advice of the Company's tax counsel.
Accordingly, the Liquidating Trust itself should not be subject to income tax.
If the Company transfers assets to the Liquidating Trust, stockholders will
be treated for tax purposes as having received a distribution at the time of
transfer of their pro rata share of money and the fair market value of property
other than money transferred to the Liquidating Trust, reduced by the amount of
known liabilities assumed by the Liquidating Trust or to which the property
transferred is subject. The distribution will be treated as a distribution in
liquidation of the stockholder's Common Stock. The effect of the distribution on
a stockholder's tax basis in his shares of Common Stock is discussed above in
"Consequences to Stockholders."
Stockholders must take into account for federal income tax purposes their
pro rata portion of all income, deductions, gain or loss recognized by the
Liquidating Trust. The income, expense, gain or loss recognized by the
Liquidating Trust will not effect the stockholder's basis in his Common Stock.
As a result of the transfer of property to the Liquidating Trust and the
ongoing activities of the Liquidating Trust, stockholders should be aware that
they will be subject to tax on any income or gain of the Liquidating Trust
whether or not they have received any actual distributions from the Liquidating
Trust with which to pay such tax.
As indicated above, the Company has not obtained any IRS ruling as to the
tax status of the Liquidating Trust, and there can be no assurance that the IRS
will agree with the Company's conclusion that the Liquidating Trust should be
treated as a liquidating trust for federal income tax purposes. If it were
determined that the Liquidating Trust should be classified for federal income
tax purposes as an association taxable as a corporation (as a result of a change
in law, changes in the IRS ruling guidelines or administrative positions, a
change in facts or otherwise), income and losses of the Liquidating Trust would
be reflected on the tax return of the Liquidating Trust rather than being passed
through to the stockholders and the Liquidating Trust would be required to pay
federal income taxes at corporate tax rates. Furthermore, much of the above
discussion with respect to the taxation of stockholders would no longer be
accurate. For instance, all or a portion of any distribution made to the
stockholders from the Company or the Liquidating Trust could be treated as a
dividend subject to tax at ordinary income tax rates.
TAXATION OF NON-UNITED STATES STOCKHOLDERS. Foreign corporations or
persons who are not citizens or residents of the United States should consult
their tax advisors with respect to the U.S. and non-U.S. tax consequences of the
Plan.
STATE AND LOCAL INCOME TAX CONSEQUENCES
The Company may be subject to liability for state and local taxes with
respect to the sale of assets. The state income tax impact is not anticipated to
be material. Stockholders may also be subject to liability for state and local
taxes with respect to the receipt of
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liquidating distributions and their interests in the Liquidating Trust. State
and local tax laws may differ in various respects from federal income tax law.
Stockholders should consult their tax advisors with respect to the state and
local tax consequences of the Plan.
THE FOREGOING SUMMARY OF CERTAIN INCOME TAX CONSEQUENCES IS INCLUDED FOR
GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE TO ANY
STOCKHOLDER. THE TAX CONSEQUENCES OF THE PLAN MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF THE STOCKHOLDER. THE COMPANY RECOMMENDS THAT EACH
STOCKHOLDER CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF
THE PLAN.
INTERESTS OF CERTAIN PERSONS
The Company's employment agreements with Joseph A. Paul, Leon F. Maraist
and P. Andrew Shaw each provide that in the event of a merger, consolidation,
reorganization or liquidation of the Company (a "Change in Control"), see
"Proposal 3 Election of Directors - Employment Agreements," the officer, by
written notice to the Company, may elect to deem his employment to have been
terminated by the Company without cause, in which event the officer shall
receive lump sum compensation equal to 2.9 times, in the case of Mr. Paul, and
2.0 times, in the case of Mr. Maraist and Mr. Shaw, his respective annual salary
and incentive or bonus payments, if any, as shall have been paid to that officer
during the Company's most recent fiscal year and in the case of Mr. Paul and Mr.
Maraist, all unvested stock options and Restricted Stock, if any, will vest. The
agreements provide that if the total amount of compensation under this provision
were to exceed three (3) times the officer's "base amount", the Company and the
officer may agree to reduce the lump sum compensation to be received by the
officer in order to avoid the imposition of the "golden parachute" tax. The
"base amount" is determined by taking the average annual taxable compensation of
the officer for the five (5) years preceding the year in which the Change in
Control occurs. Alternatively, in the event of a Change in Control, the officer,
by written notice to the Company, may elect to refuse all further compensation
and benefit obligations of the Company under the agreement in the event that the
Company releases the officer from the noncompetition and nonsolicitation
covenants contained in the agreement.
In addition, in order to assure the continued employment of the executive
officers during the Imaging Center Sales process, the Board of Directors of the
Company has approved a retention bonus program which would increase the
foregoing Change in Control payments (the "Base Payments") by 50%, payable
proportionately as sales of the medical imaging diagnostic centers are completed
and would defer the Base Payments until December 31, 2000.
The executive officers' options were issued under the Company's 1995
Long-Term Incentive Plan, as amended (the "1995 Plan"). See Proposal 3, Election
of Directors -- Executive Officers, "Stock Options" and "Security Ownership of
Certain Beneficial Owners and Management" below. Under the terms of the 1995
Plan, all outstanding options become fully exercisable for a period of sixty
(60) days (whether or not such options are then exercisable) following the date
of approval by the stockholders of the Company of an agreement providing for the
sale or other disposition of all or substantially all the assets of the Company.
As a result of the employment agreements described above or the terms of
the 1995 Plan, if the stockholders approve Proposal 2, an aggregate of 255,000
options held by
29
<PAGE> 33
Mr. Paul and Mr. Maraist would become fully vested and 30,000 options held by
Mr. Shaw would become immediately exercisable for a period of sixty days after
stockholder approval, at a weighted average exercise price of $.94. In addition,
the restrictions on 10,000 shares of restricted stock held by Mr. Paul will
lapse after stockholder approval.
The Company has also implemented an employee retention plan bonus to ensure
that certain key employees would have incentive to stay through the period of
liquidation. Eligible employees are entitled to a retention bonus amount equal
to a set number of weeks of their regular salary, such number of weeks ranging
from four to fifty-two weeks. The eligible employees must remain with the
Company through April 30, 2001 to earn the entire retention bonus amount. If
their services are no longer needed as deemed by the Company because of business
conditions prior to April 30, 2001, the employee will have earned the entire
retention bonus amount. The total retention bonus pool is estimated to be
approximately $2.5 million.
The Company has also enacted a bonus plan for the Company's non-employee
directors whereby they would share equally in .25 percent of the proceeds from
the Imaging Center Sales.
In addition, the Plan authorizes the Board of Directors to pay additional
compensation to the Company's employees, officers, directors and agents in order
to implement and assure completion of the Plan.
PROPOSAL NO. 3. ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and By-Laws, as amended (the
"By-Laws"), provide that the number of directors shall be not more than nine
directors and shall be fixed from time to time by the Board of Directors. The
Board of Directors is currently fixed at four members. Directors are elected by
the Company's stockholders at each annual meeting or, in the case of a vacancy,
are appointed by the directors then in office, to serve until the next annual
meeting or until their successors are elected and qualified, or until his death,
resignation, or removal.
The nominees for election as directors at the Annual Meeting are Messrs. C.
Keith Hartley, David McIntosh, Michael A. O'Hanlon and Joseph A. Paul. All of
the nominees are currently members of the Board of Directors of the Company. The
Board of Directors recommends that all of the nominees be elected as directors
of the Company, and it is intended that the accompanying proxy will be voted FOR
the election of the four nominees as directors, unless the proxy contains
contrary instructions.
The Company has no reason to believe that any of the nominees will not be a
candidate or will be unable to serve as a director. However, in the event that
any of the nominees should become unable or unwilling to serve as a director,
the persons named in the proxy have advised that they will vote FOR the election
of such person or persons as shall be nominated by the Board of Directors.
The By-Laws set forth procedures by which stockholders of the Company who
are stockholders of record as of the Record Date entitled to vote in the
election of directors may nominate persons for election to the Board of
Directors. Such nominations shall be
30
<PAGE> 34
considered timely, in the case of an annual meeting, if received by the Company
not less than 90 days nor more than 120 days prior to the meeting; provided,
however, that in the event that the date of the annual meeting is changed by
more than 30 days from such anniversary date, notice by the stockholder to be
timely must be received not later than the close of business on the 10th day
following the day on which public notice of the meeting was made, which was May
10, 2000 for the Annual Meeting. The stockholder's nomination must include: (a)
all information required to be disclosed in the solicitation of a proxy pursuant
to Regulation 14A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including the nominee's written consent to serve as a director
if elected); (b) the nominating stockholder's name and address as they appear on
the Company's books; and (c) the number of shares of Common Stock of the Company
beneficially owned by such nominating stockholder.
GENERAL INFORMATION ABOUT THE NOMINEES
The following sets forth the names and ages of the four nominees for
election to the Board of Directors, their respective principal occupations or
employment histories and the period during which each has served as a director
of the Company.
C. KEITH HARTLEY, age 57, has been a member of the Board of Directors of
the Company since September 1996 and served as Co-Chairman of the Board from
December 1, 1997 to July 1998. Since August 1995 until his retirement in May
2000, Mr. Hartley was Managing Partner, Corporate Finance, of Forum Capital
Markets LLC, an investment banking firm. From May 1991 to August 1995, Mr.
Hartley was an independent financial consultant, and from February 1990 to May
1991, he was a Managing Director of Peers & Co., a merchant banking firm. From
1973 to 1989, Mr. Hartley was a Managing Director of Drexel Burnham Lambert
Incorporated. Mr. Hartley also is a director of Comdisco, Inc. and Swisher
International Group, Inc.
DAVID MCINTOSH, age 53, has been a member of the Board of Directors of the
Company since October 1998. Since June 1998, Mr. McIntosh has been the Chief
Executive Officer of Barricade International, Inc., a developer and distributor
of a fire-blocking gel. He is also Chairman of MitBank USA, Inc., a wetlands
mitigation banking company. From 1984 through April 1998, Mr. McIntosh was the
Chief Executive Officer of Gunster, Yoakley, Valdes-Fauli and Stewart, P.A., a
prominent Florida-based international law firm. Prior to 1984, Mr. McIntosh was
a partner with Coopers & Lybrand, a public accounting firm. He is a director,
officer and active member of numerous local, state and national foundations,
committees, task forces, associations and charitable organizations. Mr. McIntosh
also is a director of Florida Banks, Inc., which operates a community banking
system in Florida through its wholly-owned banking subsidiary, Florida Bank,
N.A.
MICHAEL A. O'HANLON, age 53, has served as a director of the Company since
January 1998. Since November 1995, Mr. O'Hanlon has served as the President and
Chief Executive Officer of DVI, Inc. ("DVI"), the largest independent financier
to the health care market in the United States. Mr. O'Hanlon was President and
Chief Operating Officer of DVI from September 1994 to November 1995, and
previously served as Executive Vice President of DVI. For nine years prior to
joining DVI, Mr. O'Hanlon served as President and Chief Executive Officer of
Concord Leasing, Inc., a provider of medical, aircraft, shipping, industrial and
medical imaging equipment financing. Mr. O'Hanlon also is a director of DVI.
31
<PAGE> 35
JOSEPH A. PAUL, age 42, has been a member of the Company's Board of
Directors and its President since July 1, 1996, its Chief Operating Officer from
July 1, 1996 through October 31, 1997, its interim Chief Executive Officer
effective February 1, 1997 and became the Company's Chief Executive Officer in
March 1997. From May 1994 to June 30, 1996, he was President of MediTek Health
Corporation ("MediTek"), a corporation acquired by the Company from HEICO
Corporation ("HEICO") in July 1996. Mr. Paul joined HEICO in 1991 as a Vice
President and was responsible for forming MediTek. From 1981 until June 1997,
Mr. Paul was a Vice President of Ambassador Square, Inc., a real estate
development and management company, and from 1988 until June 1997, served as a
Vice President of Columbia Ventures, Inc., a private investment company. Mr.
Paul is a member of the American Institute of Certified Public Accountants and
the Florida Institute of Certified Public Accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES NAMED ABOVE.
BOARD OF DIRECTORS
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company held seven meetings during the year
ended December 31, 1999. During 1999, each director attended at least 75% of the
meetings of the Board of Directors and any committee on which such director
served. The Board currently has two committees: the Audit Committee and the
Compensation Committee.
During 1999, the Audit Committee consisted of three non-employee directors,
Messrs. Hartley, McIntosh and O'Hanlon. The Audit Committee formally met three
times in 1999. The Audit Committee, among other things, oversees and reviews the
effectiveness of the Company's financial and accounting functions, organization
and operations. The Audit Committee is also authorized by the Board of Directors
to review, with the Company's independent accountants, the annual financial
statements of the Company; to review the work of, and approve non-audit services
performed by, such independent accountants; and to make annual recommendations
to the Board of Directors for the appointment of independent public accountants
for the ensuing year.
During 1999, the Compensation Committee consisted of two non-employee
directors, Messrs. McIntosh and Jennings. Mr. Jennings resigned from the Board
of Directors of the Company effective March 15, 2000. The Compensation Committee
did not formally meet in 1999. The Compensation Committee reviews and recommends
to the Board of Directors the compensation and benefits of all officers of the
Company, reviews general policy matters relating to compensation and benefits of
employees of the Company, administers the 1995 Plan and the issuance of stock
options to the Company's officers, employees and consultants and authorizes
grants of options to directors who are not employees of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Jennings and McIntosh served on the Company's Compensation
Committee during 1999. Neither of the Compensation Committee members is or has
been an officer or employee of the Company or any of its subsidiaries. In
addition, neither Mr. Jennings nor Mr. McIntosh has, or has had, any
relationship with the Company which is required to
32
<PAGE> 36
be disclosed under "Certain Relationships and Related Transactions" except that
on April 27, 2000, the Company and David McIntosh entered into a Consulting
Agreement for a four month period under which Mr. McIntosh will direct the
review of potential opportunities in which to reinvest the proceeds of the
Imaging Center Sales. Mr. McIntosh will be paid $15,000 per month plus
out-of-pocket expenses. No Company executive officer currently serves on the
compensation committee or any similar committee of another public company.
COMPENSATION OF DIRECTORS
Prior to August 1999, directors who were not officers or employees of the
Company received (i) a payment of $1,000 for each meeting of the Board that they
attended and $500 for each committee meeting they attended, and (ii) options to
purchase 10,000 shares of common stock on the date such director was first
elected or appointed to the Board of Directors and each year thereafter on the
day of the first meeting of the Board of Directors immediately following the
Annual Meeting of Stockholders (so long as the director's term as a director
continued after such annual meeting).
In August 1999, the Board of Directors approved a new non-employee director
compensation plan which consists of (a) an annual cash retainer of $10,000 to
each non-employee director, (b) $1,000 for each board meeting attended by a
non-employee director and $500 for a board committee meeting attended by a
non-employee director, and (c) a grant to each non-employee director of 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 year term. Board members are also reimbursed for
their reasonable expenses incurred in serving as a director of the Company. 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 addition, a bonus plan for non-employee directors has been adopted by
the Company. See "Proposal No. 2 -- Interests of Certain Persons."
EXECUTIVE OFFICERS
The following sets forth certain information with respect to the current
executive officers of the Company (other than Mr. Paul):
LEON F. MARAIST, age 57, has served as Executive Vice President and Chief
Operating Officer of the Company since November 1997. From 1993 to 1997, Mr.
Maraist served as Vice President of NMC Diagnostic Services, Inc. ("NMC"), which
provides mobile imaging diagnostics in physicians' offices and diagnostics in
fixed sites. His responsibilities with NMC included marketing, sales, finance
and operations. From 1992 to 1994, Mr. Maraist directed operations of the $1
billion nationwide dialysis division of NMC.
P. ANDREW SHAW, age 44, has been Executive Vice President of the Company
since July 1996 . He was appointed Executive Vice President & Chief Financial
Officer in January 2000, having previously served as Chief Financial Officer of
the Company from July 1996 until June 1997. Previously, he served as Controller
of MediTek Health
33
<PAGE> 37
Corporation from February 1992 until June 1996 when MediTek was acquired by the
Company and was Controller of ExpoSystems for more than seven years until
February 1992. He is a Certified Public Accountant licensed in Florida with six
years of public accounting experience with KPMG Peat Marwick and is a member of
the Florida Institute of Certified Public Accountants and the Financial
Executives Institute.
EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31, 1999, 1998
and 1997, the compensation paid or accrued by the Company to its current Chief
Executive Officer and its three most highly compensated executive officers as of
December 31, 1999 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- -----------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
COMPENSATION AWARD(S) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) (#) ($)
--------------------------- ---- ---------- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Paul............ 1999 281,918 100,000 12,000 -- -- 4,800(3)
Chief Executive Officer, 1998 235,000 100,000 12,000 -- 375,001 6,010(3)
President and Director 1997 222,346 50,000 15,240 -- 200,000(7) 7,450(3)
Leon F. Maraist(4)........ 1999 200,000 33,333 9,000 -- -- 4,800(3)
Executive Vice President, 1998 200,000 50,000 9,000 -- 75,000 65,173(4)
Chief Operating Officer 1997 26,154 -- 1,177 -- 80,000(7) --
J. Wayne Moor(5).......... 1999 165,288 33,333 9,000 -- -- --
Former Executive Vice 1998 155,354 50,000 7,154 -- 75,000 622(5)
President, Chief 1997 76,154 -- 3,486 -- 50,000(7) 46,110(5)
Financial Officer
Francis J. Harkins,
Jr.(6).................. 1999 145,385 43,333 6,000 -- -- 4,800(3)
Former Executive Vice 1998 135,000 20,000 6,000 -- 50,000 2,090(3)
President, General 1997 4,154 -- 185 -- 25,000(7) --
Counsel and Corporate
Secretary
</TABLE>
-------------------------
(1) Represents car allowance.
(2) The number of shares of unissued restricted stock at December 31, 1999
totaled 10,000 shares, all issued to Joseph A. Paul, which vest in two equal
annual installments, beginning on October 9, 2000. The aggregate value of
the restricted stock was $10,630 at December 31, 1999 based upon the closing
market price of the Company's common stock on that date. Dividends will be
paid on restricted stock to the extent paid on common stock.
(3) Represents Company contributions to the 401(k) Plan.
(4) Mr. Maraist's employment began in November 1997. During 1998, Mr. Maraist
was paid $64,932 as reimbursement for relocation expenses. The Company's
contributions to the 401(k) Plan on his behalf totaled $241.
34
<PAGE> 38
(5) Mr. Moor's employment began in June 1997. Mr. Moor was paid $622 as
reimbursement for relocation expenses in 1998. During 1997, the Company paid
Mr. Moor a total of $46,110 in consulting fees prior to his employment by
the Company. Mr. Moor resigned on January 21, 2000.
(6) Mr. Harkins' employment began in December 1997. Mr. Harkins resigned on
April 28, 2000.
(7) These options were canceled as part of the Company's stock option
cancellation and reissuance effective December 11, 1998.
STOCK OPTIONS
The following table sets forth year-end option values for the Named
Executive Officers who held unexercised options at December 31, 1999:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED IN-
UNDERLYING THE-MONEY
UNEXERCISED OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR END ($)
SHARES ACQUIRED YEAR END (#) EXERCISABLE/
ON VALUE EXERCISABLE/ UNEXERCISABLE
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (1)
---- --------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Joseph A. Paul.......... 0 0 187,501/187,500 23,625/23,625
Leon F. Maraist......... 0 0 37,500/ 37,500 4,725/ 4,725
J. Wayne Moor(2)........ 0 0 37,500/ 37,500 4,725/ 4,725
Francis J. Harkins,
Jr.(2)................ 0 0 25,000/ 25,000 3,150/ 3,150
</TABLE>
-------------------------
(1) As of December 31, 1999, these options were in the money.
(2) On January 21, 2000 and April 28, 2000, Messrs. Moor and Harkins resigned,
respectively, and all options expired immediately upon resignation.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee submits the following report for 1999:
COMPENSATION STRUCTURE
The key components of the compensation of the Company's Chief Executive
Officer and the other executive officers named in the Summary Compensation Table
are base salary, annual bonus and stock-based incentives. The objective of the
Company is to create a compensation package for executive officers that is
competitive with compensation payable by comparable medical imaging and other
companies of similar size and complexity, as well as to provide both short-term
rewards and long-term incentives for positive individual and corporate
performance. This policy is expected to attract, motivate
35
<PAGE> 39
and retain the qualified management necessary to promote continuing improvement
in the Company's performance and long-term stockholder value.
Based on both objective and subjective determinations and subject to the
terms of the employment agreements, the Chief Executive Officer recommends to
the Compensation Committee the amount of total compensation payable to the Named
Executive Officers other than himself for each year. The Committee undertakes a
review of such recommendations in light of the factors noted by the Chief
Executive Officer and the various factors discussed below. The Committee sets
the compensation payable to the Chief Executive Officer relying on similar
factors. In the compensation process, predetermined performance targets are used
for purposes of compensation decisions. Relevant subjective criteria are used as
well in the Committee's reasonable business discretion. The Committee and the
Board of Directors have historically approved the compensation recommendations
of the Chief Executive Officer.
The various components of the Company's executive compensation are
discussed below.
SALARIES
The base salaries of the Named Executive Officers, including the base
salary of the Chief Executive Officer of the Company, are set at a level the
Company believes to be comparable to salaries paid to executive officers of
companies of comparable size. The objective of the Company is to attract and
retain the best possible individuals while setting compensation at levels that
are sufficiently competitive with companies of similar size and complexity. The
base salary is reviewed annually.
Joseph A. Paul became President of the Company in June 1996 and Chief
Executive Officer in March 1997. Mr. Paul's base salary as an employee of the
Company for fiscal year 1999 was set at $281,918. His base salary is subject to
annual increases of at least 5% and includes other terms as set forth in the
"Employment Agreements" section of this Proxy Statement. These terms were
established after arms-length negotiations between the Company and Mr. Paul and
the Company believes them to be appropriate for an executive of Mr. Paul's
experience in the increasingly competitive and rapidly evolving medical imaging
industry.
BONUSES
Annual discretionary bonuses allow the Company greater flexibility in
rewarding favorable individual and corporate performance and in motivating
executives. The bonus for the Chief Executive Officer is tied to earnings per
share, among other considerations. Further, the Compensation Committee generally
considers in reviewing bonus recommendations such factors as increases in the
Company's revenues and profits, scan volume, new center openings, EBITDA,
collection of accounts receivable, completion and integration of significant
acquisitions, the execution of the Company's business plan and individual
performance, among other factors. For 1999, Mr. Paul's bonus was based primarily
on the successful sale in 1999 of certain medical diagnostic imaging centers in
Texas.
STOCK-BASED INCENTIVES
The third component of the Company's executive compensation has been
comprised of stock-based incentive plans. The Committee considers the current
year's vesting of
36
<PAGE> 40
previously issued shares under the 1995 Plan in evaluating the executive
compensation recommendations of the Chief Executive Officer. Whereas the cash
bonus payments are intended to reward positive short-term individual and
corporate performance, grants under the stock-based plans are intended to
provide executives with longer term incentives which appreciate in value with
the continued favorable performance of the Company. Such options generally vest
over a period of years and thus are helpful in retaining qualified executives.
The use of stock incentives is intended to align the interests of the Company's
executives with that of the Company's stockholders. In 1999, no options were
granted to Named Executive Officers.
The Compensation Committee
David McIntosh
37
<PAGE> 41
PERFORMANCE GRAPH
The graph below compares the cumulative total returns (as described below)
of the Company's Common Stock with the Nasdaq Stock Market (U.S.) Index and the
Nasdaq Health Services Index for the period commencing December 31, 1994 and
ending December 31, 1999. The interim measurement points are the last days of
the years during the measurement period: December 31, 1995, December 31, 1996,
December 31, 1997, December 31, 1998 and December 31, 1999.
Stockholder returns are calculated assuming $100 was invested at the
closing market prices on December 31, 1994, assuming in all cases reinvestment
of any subsequent dividends. The Performance Graph below is presented in
accordance with Securities and Exchange Commission requirements. Stockholders
are cautioned that historical stock price performance shown on the Performance
Graph is not necessarily indicative of future stock price performance and in no
way reflects the Company's forecast of future stock price performance.
<TABLE>
<CAPTION>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
US Diagnostic Inc. 100.00 161.11 205.56 81.94 18.75
Nasdaq Stock Market (U.S.) 100.00 141.33 173.89 213.07 300.25
Nasdaq Health Services 100.00 126.77 126.57 128.99 109.29
<CAPTION>
12/31/99
--------
<S> <C>
US Diagnostic Inc. 23.62
Nasdaq Stock Market (U.S.) 542.43
Nasdaq Health Services 90.32
</TABLE>
EMPLOYMENT AGREEMENTS
Joseph A. Paul and the Company entered into a five-year employment
agreement dated June 18, 1996 for Mr. Paul to serve as President and a director
of the Company effective on July 1, 1996. Effective in February 1997, he was
also appointed as interim Chief Executive Officer of the Company, and in March
1997, he became Chief Executive Officer. The agreement as amended provides for
an annual base salary of $235,000 during the first year of its term, and for
annual increases in each of the remaining years of at least 5%. The agreement
also provides for an annual bonus of $50,000 during the first year and
38
<PAGE> 42
a bonus in each subsequent year as currently determined by the Compensation
Committee. The agreement provides that all options and restricted stock awards
granted to Mr. Paul will vest if he is terminated without cause or upon a
"Change in Control" of the Company. The agreement also provides that, upon the
occurrence of certain events including a merger, consolidation, reorganization
or liquidation of the Company and a material breach of the agreement by the
Company, Mr. Paul has the right to elect to deem his employment to have been
terminated by the Company without cause and receive a lump sum payment equal to
2.9 times the annual salary and incentive or bonus payments made to him by the
Company during the most recent year.
Leon F. Maraist and the Company entered into an employment agreement
effective on November 1, 1997 and continuing through November 1, 2000, pursuant
to which Mr. Maraist serves as Executive Vice President and Chief Operating
Officer of the Company. The agreement provides for an annual base salary of
$200,000 and payment of annual bonuses at the discretion of the Board of
Directors. In addition, Mr. Maraist has been granted 75,000 stock options
pursuant to the terms and conditions of the 1995 Plan. In the event of a "Change
in Control" of the Company as defined in the 1995 Plan, the unvested portion of
the 75,000 options would automatically vest. See "Stock Option Cancellation and
Reissuance." The agreement also provided for reimbursement of relocation
expenses. In the event that the Company materially breaches the employment
agreement or in the event of the occurrence of certain changes in control or
ownership of the Company, including a merger, consolidation, reorganization or
liquidation of the Company, Mr. Maraist may elect, by written notice to the
Company, to deem his employment terminated by the Company without cause and
would be entitled to receive lump sum compensation equal to twice his annual
salary and incentive or bonus payments, if any, paid to Mr. Maraist during the
Company's most recent fiscal year.
P. Andrew Shaw and the Company entered into a one-year employment agreement
effective on January 27, 2000 and continuing through January 27, 2001 pursuant
to which Mr. Shaw serves as Executive Vice President and Chief Financial Officer
of the Company. The agreement provides for an annual base salary of $150,000 and
payment of bonus at the discretion of the CEO. Mr. Shaw has been granted 60,000
stock options pursuant to the terms and conditions of the 1995 Plan. In the
event of a "Change in Control" of the Company as defined in the 1995 Plan, the
unvested portion of the 60,000 options will automatically vest for a 60 day
period. In the event of the occurrence of certain changes in control or
ownership of the Company including a merger, consolidation, reorganization or
liquidation of the Company, Mr. Shaw may elect, by written notice to the
Company, to deem his employment terminated by the Company without cause and
would be entitled to receive lump sum compensation equal to twice his annual
salary and incentive or bonus payments, if any, paid to Mr. Shaw during the
Company's most recent fiscal year. In case of a termination without cause, Mr.
Shaw is entitled to a one-year severance agreement equal to his annual salary
and incentive or bonus payments, if any, paid to him during the Company's most
recent fiscal year.
In addition, each of the Named Executive Officers is entitled during the
term of his employment with the Company to customary employee benefits, such as
paid vacation, health insurance and a car allowance.
In addition, the Board of Directors has approved a retention bonus program.
See "Proposal 2 -- Interests of Certain Persons."
39
<PAGE> 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth, as of May 22, 2000,
the beneficial ownership of the Company's Common Stock ("Common Stock") by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Common Stock in reliance upon information set forth in any statements filed
with the Securities and Exchange Commission ("SEC") under Section 13(d) or 13(g)
of the Exchange Act, (ii) each director and Named Executive Officer of the
Company and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------------------------
NUMBER OF SHARES OWNED
AND NATURE OF
NAME AND ADDRESS OWNERSHIP PERCENT OF CLASS
---------------- ---------------------- ----------------
<S> <C> <C>
Warren G. Lichtenstein.................... 3,682,750(2)(12) 16.3%
Steel Partners II, L.P.................... 3,682,750(2)(12) 16.3
150 East 52nd Street
21st Floor
New York, New York 10029
The Robert C. Fanch Revocable Trust....... 1,755,300(12) 7.7
1873 South Bellaire Street, Suite 1550
Denver, CO 80222
Lighthouse Capital Insurance Company...... 1,687,750 7.4
Anderson Square
3rd Floor
P.O. Box 112356T
Grand Cayman, BVI
Dimensional Fund Advisors Inc............. 1,185,700(12) 5.2
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Francis D. Hussey, Jr. d/b/a Magnetic Scans 1,138,100(12) 5.0
2660 Airport Road South
Naples, FL 34112
C. Keith Hartley.......................... 494,445(3) 2.1
Michael A. O'Hanlon....................... 138,000(4) *
David McIntosh............................ 120,000(5) *
Joseph A. Paul............................ 251,226(6) 1.1
Leon F. Maraist........................... 47,664(7) *
J. Wayne Moor(8).......................... 0 *
Francis J. Harkins, Jr.(9)................ 100 *
P. Andrew Shaw............................ 30,000(10) *
All directors and executive officers as a
group (6 persons)....................... 1,081,335(11) 4.7
</TABLE>
-------------------------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. Each beneficial owner's
percentage ownership is determined by assuming that convertible securities,
options or warrants that are held
40
<PAGE> 44
by such person (but not those held by any other person) and which are
exercisable within 60 days after May 22, 2000 have been exercised.
Calculation of percentage ownership was based on 22,658,033 shares of
Common Stock outstanding as of May 22, 2000.
(2) Mr. Lichtenstein is Chairman of the Board, Secretary and Managing Member of
Steel Partners, L.L.C., the general partner of Steel Partners II, L.P. and
claims sole beneficial ownership of the shares held by such limited
partnership. His address is the same as such limited partnership.
(3) Mr. Hartley is a Managing Partner, Corporate Finance, of Forum Capital
Markets LLC ("Forum"), which served as an underwriter in connection with
the Company's $57.5 million subordinated convertible debenture offering.
Forum is the holder of record of warrants to purchase 319,445 shares of
Common Stock. Mr. Hartley disclaims beneficial ownership of such shares.
Amount also includes 175,000 shares subject to options.
(4) Includes 130,000 shares subject to options.
(5) Includes 110,000 shares subject to options.
(6) Includes 187,502 shares subject to options.
(7) Includes 37,500 shares subject to options.
(8) Resigned as of January 21, 2000.
(9) Resigned as of April 28, 2000.
(10) Includes 30,000 shares subject to options.
(11) Includes all shares and options described in footnotes 2-6 and 9 above.
(12) Information obtained from Schedule 13(d) or Schedule 13(g) filed with the
SEC by the beneficial owners.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2000, the Company entered into an agreement with Steel Partners
II, L.P., ("Steel Partners"), currently a 16.3% shareholder, which allows, for a
period of three years, Steel Partners to acquire up to 45% of the voting stock
of the Company without prior board approval. Further, Steel Partners has agreed
that for a period of three years after it becomes an Interested Stockholder, as
defined by the Delaware Business Combination Statute (the "Delaware Statute"),
any transaction proposed by Steel Partners to the shareholders must be one in
which all shareholders are treated alike. In addition, in order to enhance the
Company's strategic flexibility, the Board of Directors voted to make the
restrictive provisions of the Delaware Statute inapplicable to Steel Partners.
See the Company's Report on Form 8-K dated January 7, 2000.
The Company was a party to a Consulting Agreement effective as of January
1, 1995, with Dr. Gordon C. Rausser, as amended, pursuant to which Dr. Rausser
acted as a consultant to the Company on economic, financial and strategic
matters. Under the agreement, as amended, Dr. Rausser was entitled to a
consulting fee of $25,000 per calendar quarter until December 31, 1999, provided
that he offered or agreed to serve as a
41
<PAGE> 45
director of the Company and offered or agreed to serve as a consultant under the
agreement. In connection with entering into the agreement, as amended, Dr.
Rausser received a warrant to purchase 400,000 shares of common stock of the
Company exercisable at $5.00 per share at any time through December 31, 1999.
The warrant expired unexercised at December 31, 1999. Also in connection with
the Consulting Agreement, in October 1996, the Company issued 24,000 restricted
shares of common stock with a fair market value of $12.625 per share to Dr.
Rausser under the 1995 Plan, and in January 1997, the Company issued an
additional 51,000 restricted shares of common stock with a fair market value of
$8.625 per share to Dr. Rausser under the 1995 Plan. As of December 31, 1999,
26,600 of the restricted shares had not yet vested. In January 2000, 17,000 of
these shares vested and were issued to Mr. Rausser. The remaining 9,600
restricted shares will vest 4,800 in October 2000, and 4,800 in October 2001.
Dr. Rausser was a director until June 10, 1999.
In June 1996, the Company acquired U.S. Imaging in a merger transaction
pursuant to which U.S. Imaging merged into a wholly-owned subsidiary of the
Company. The merger consideration paid to the former sole stockholder of U.S.
Imaging, the Reese General Trust (the "Reese Trust"), was $7,000,000 in cash and
1,671,000 shares of the Company's common stock, of which 671,000 shares were
placed in escrow. The Reese Trust transferred the shares to Lighthouse Capital
Insurance Company. Dr. L.E. Richey, a former director, disclaims beneficial
ownership of these shares. The shares held in escrow were to be released to
Lighthouse if U.S. Imaging achieved certain financial results in 1997 and 1998.
Of the shares held in escrow, 400,000 shares were released in 1997 and the
balance was released in 1998. Dr. Richey was the President of U.S. Imaging at
the time of the merger, and became a director of the Company in June 1997. In
December 1997, Dr. Richey became a Co-Chairman of the Board of the Company and
in July 1998, Dr. Richey became Chairman of the Board of the Company. Dr. Richey
was not a director or an employee of the Company at the time that the Company
acquired U.S. Imaging. On February 12, 1999, the Company sold U.S. Imaging to
United Radiology Associates, Inc., a company with which Dr. Richey was
affiliated, for $11,650,000 including a secured promissory note payable to the
Company in the aggregate principal amount of $1,850,000, which was personally
guaranteed by Dr. Richey. Also on February 12, 1999, Dr. Richey resigned as a
director and Chairman of the Board of the Company. See detail of the legal
proceeding against Dr. Richey at Note 20 of Notes to Consolidated Financial
Statements set forth in the 1999 Form 10-K.
Pursuant to the terms of a Subscription Agreement dated December 1, 1996,
the Company purchased approximately 5,000,000 shares (which as a result of a
reverse 4:1 stock split in 1998 currently number 1,250,000 shares) of common
stock of Diversified Therapy Corp. ("DTC") for $3.5 million, representing
approximately 25% of all of the outstanding common stock of DTC at September 11,
1998. DTC commenced operations in 1996 to develop a leadership position in the
ownership and operations of U.S. wound care treatment facilities utilizing
hyperbaric chambers. Mr. Amos F. Almand, III, an executive officer of the
company until October 20, 1998, is the Chairman of the Board and a more than 5%
beneficial owner of DTC. Dr. Rausser, a director of the Company until June 10,
1999, is also a director of DTC. On December 31, 1998, the Company sold its
interest in DTC for a nominal amount which included a note receivable for
$250,000, and a common stock purchase warrant for 416,662 shares of DTC. DTC
subsequently defaulted on the note and failed to deliver the common stock
purchase warrant. As a result, USD retained 1,250,000 shares as collateral and
exercised its right to sell the pledged stock. On January 31, 2000, the pledged
stock was sold for $250,000 in cash to stockholders of DTC.
42
<PAGE> 46
DTC has executed a promissory note for unpaid interest due December 31, 2000,
and has issued a common stock purchase warrant to the Company for 416,662
shares.
On January 20, 1998, Michael O'Hanlon, the President and Chief Executive
Officer of DVI, Inc., an affiliate of DVI Business Credit Corporation ("DVIBC")
and DVI Financial Services, Inc. ("DVIFS"), was elected to the Board of
Directors of the Company. DVIFS and DVIBC are lenders to the Company. As of
December 31, 1999, DVI had loans with aggregate principal amounts outstanding
with the Company of approximately $90 million. In 1999, the Company paid an
aggregate of approximately $25.9 million in principal and interest to DVI and
its affiliates on these loans. In 2000, it is anticipated that the Company will
pay an aggregate of approximately $26.5 million in principal and interest to DVI
and its affiliates on these loans. In addition, in December 1998 and January
1999, the Company paid DVIFS loan fees totaling $647,000 and paid DVI Private
Capital an equity participation totaling $2.8 million, each in connection with
certain new financing. The Company had also issued DVI a warrant to purchase an
aggregate of 250,000 shares of common stock of the Company at an exercise price
of $.938 per share. The Company borrowed $11.8 million from DVIFS and DVIBC from
January 1, 2000 through May 31, 2000 in order to meet the Company's normal
operating expenses. Approximately $6.6 million of such borrowings are
collateralized by existing medical equipment, and the balance was borrowed on an
unsecured basis. As of May 31, 2000, the Company has repaid $2.0 million of this
line of credit and also has repaid $5.6 million to DVIFS on its unsecured credit
facility from DVIFS from the proceeds of the sale of a center in May 2000. See
Notes 6 and 7 of Notes to Consolidated Financial Statements set forth in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
On April 27, 2000, the Company and David McIntosh entered into a Consulting
Agreement for a four month period under which Mr. McIntosh will direct the
review of potential opportunities in which to reinvest the proceeds of the
Imaging Center Sales. Mr. McIntosh will be paid $15,000 per month plus
out-of-pocket expenses.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of the Company's Common
Stock (collectively, "Reporting Persons") to report ownership and changes in
ownership of the Company's Common Stock to the Securities and Exchange
Commission. Copies of these reports are also required to be delivered to the
Company.
The Company believes that, based solely on its review of the copies of such
reports received and written representations that no other reports were
required, during the year ended December 31, 1999, all Section 16(a) filing
requirements applicable to its Reporting Persons were complied with.
RELATIONSHIP WITH THE COMPANY'S AUDITORS
Representatives of Deloitte & Touche LLP, the independent certified public
accountants who audited the Company's consolidated financial statements for
1999, are expected to be present at the Annual Meeting. Such representatives
will be afforded the opportunity to make a statement, if they so desire, and are
expected to be available to
43
<PAGE> 47
respond to appropriate questions from stockholders. The Company is not required
to obtain stockholder approval or ratification of its selection of its auditors
under the laws of the State of Delaware, and the Audit Committee and the Board
of Directors have the discretion to select the Company's auditors as
appropriate.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be presented at
the Annual Meeting. However, if any matter is properly presented at the Annual
Meeting, the persons named in the enclosed proxy will have discretionary
authority to vote in accordance with their best judgment.
STOCKHOLDER PROPOSALS
Any stockholder who intends to present a proposal at the 2001 Annual
Meeting of Stockholders and who wishes to have a proposal included in the
Company's proxy statement and form of proxy for the 2001 Annual Meeting must
deliver the proposal to the Secretary of the Company no later than February 15,
2001. The Company will not be required to include in its proxy statement or
proxy card a stockholder proposal which is received after that date or which
otherwise fails to meet the requirements for stockholder proposals established
by the rules and regulations of the Securities and Exchange Commission.
In addition, the By-Laws provide that only stockholder proposals submitted
in a timely manner to the Secretary of the Company may be acted upon at an
annual meeting of stockholders. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the executive offices of the Company
not less than 90 days (March 17, 2001) nor more than 120 days (February 15,
2001) before the date of the originally scheduled meeting. The Annual Meeting of
Stockholders for the year ended December 31, 2001 is expected to be held no
later than June 15, 2001.
A proxy may confer discretionary authority on the proxy holders to vote on
an untimely stockholder proposal.
Any stockholder proposals should be addressed to Leon F. Maraist,
Secretary, US Diagnostic Inc., 777 South Flagler Drive, Suite 1201 East, West
Palm Beach, Florida 33401.
By Order of the Board of Directors,
/s/ LEON F. MARAIST
----------------------------------
Secretary
Dated: June 23, 2000
44
<PAGE> 48
APPENDIX A
PLAN OF RESTRUCTURING OF US DIAGNOSTIC INC.
This Plan of Restructuring (the "Plan") is intended to accomplish the
restructuring and possible complete liquidation and dissolution of US Diagnostic
Inc., a Delaware corporation (the "Company"), in accordance with the Delaware
General Corporation Law and Section 331 of the Internal Revenue Code of 1986, as
amended (the "Code"), as follows:
1. The Board of Directors of the Company (the "Board of Directors")
has adopted this Plan and called a meeting of the Company's stockholders
(the "Stockholders") to take action on the Plan. If, at said meeting of the
Stockholders, holders of a majority of the outstanding common stock, $0.01
par value per share (the "Common Stock"), vote for the adoption of the
Plan, the Plan shall constitute the adopted Plan of the Company as of the
date on which such Stockholder approval is obtained (the "Adoption Date").
No later than thirty (30) days following the Adoption Date, the Company
shall file Form 966 with the Internal Revenue Service.
2. The Company shall undertake to sell all of its medical diagnostic
imaging centers (the "Imaging Center Sales"). The Company will not
implement the liquidation provisions of this Plan unless the Board of
Directors determines to implement such provisions. In the event that the
Board of Directors determines to implement such liquidation provisions, it
shall establish a date that such implementation shall commence (such date,
the "Liquidation Date"). The Board of Directors is not required to make any
distribution to the Company's Stockholders, if at all, until after the
Liquidation Date. Prior to the Liquidation Date, the uses of the assets of
the Company that may be considered and approved by the Board of Directors
include the development, acquisition and/or investment in or merger with
new or existing businesses, distributions to the Company's Stockholders,
repurchases of the Company's securities and general business purposes. Such
activities could include the acquisition of an entire company or companies,
or divisions thereof, either through a merger or a purchase of assets, as
well as an investment in the securities of a company or companies or,
alternatively, a combination with another business in which the Company
would not be the surviving corporation. Consummation of any investments or
business combinations shall not be subject to any vote or approval by the
Stockholders except as required by law. If any investments or business
combinations are approved by the Board of Directors of the Company, this
Plan will be terminated.
3. After the Liquidation Date, the Company shall not engage in any
business activities except to the extent necessary to preserve the value of
its assets, wind up its business and affairs, and distribute its assets in
accordance with this Plan.
4. From and after the Liquidation Date, the Company shall complete the
following corporate actions:
(a) The Company shall determine whether and when to (i) transfer
the property and assets (other than cash, cash equivalents and
receivables) to a liquidating trust (established pursuant to 7 hereof),
or (ii) collect, sell, exchange or otherwise dispose of all of its
property and assets in one or more transactions
A-1
<PAGE> 49
upon such terms and conditions as the Board of Directors, in its
absolute discretion, deems expedient and in the best interests of the
Company and the Stockholders. In connection with such collection, sale,
exchange and other disposition, the Company shall collect or make
provision for the collection of all accounts receivable, debts and
claims owing to the Company.
(b) The Company shall pay or, as determined by the Board of
Directors, make reasonable provision to pay, all claims and obligations
of the Company, including all contingent, conditional or unmatured
claims known to the Company and all claims which are known to the
Company but for which the identity of the claimant is unknown.
(c) The Company shall distribute pro rata to the Stockholders, all
available cash including the cash proceeds of any sale, exchange or
disposition, except such cash, property or assets as are required for
paying or making reasonable provision to pay all claims and obligations
of the Company. Such distribution may occur all at once or in a series
of distributions and shall be in cash, in such amounts, and at such time
or times, as the Board of Directors or the Trustees (as defined in
Section 7 hereof), in their absolute discretion, may determine. If and
to the extent deemed necessary, appropriate or desirable by the Board of
Directors or the Trustees, in their absolute discretion, the Company may
establish and set aside a reasonable amount (the "Contingency Reserve")
to satisfy claims against the Company, including, without limitation,
tax obligations, and all expenses of the sale of the Company's property
and assets, of the collection and defense of the Company's property and
assets, and of the liquidation and dissolution provided for in this
Plan. The Contingency Reserve may consist of cash and/or property.
5. The distributions to the Stockholders pursuant to Sections 4, 7 and
8 hereof shall be in complete redemption and cancellation of all of the
outstanding Common Stock of the Company. As a condition to receipt of any
distribution to the Stockholders, the Board of Directors or the Trustees,
in their absolute discretion, may require the Stockholders to (i) surrender
their certificates evidencing the Common Stock to the Company or its agent
for recording of such distributions thereon or (ii) furnish the Company
with evidence satisfactory to the Board of Directors or the Trustees of the
loss, theft or destruction of their certificates evidencing the Common
Stock, together with such surety bond or other security or indemnity as may
be required by and satisfactory to the Board of Directors or the Trustees
("Satisfactory Evidence and Indemnity"). As a condition to receipt of any
final distribution to the Stockholders, the Board of Directors or the
Trustees, in their absolute discretion, may require the Stockholders to (i)
surrender their certificates evidencing the Common Stock to the Company or
its agent for cancellation or (ii) furnish the Company with Satisfactory
Evidence and Indemnity. The Company will finally close its stock transfer
books and discontinue recording transfers of Common Stock on the earliest
date (the "Final Record Date") to occur of (i) the close of business on the
record date fixed by the Board of Directors for the final liquidating
distribution, (ii) the close of business on the date on which the remaining
assets of the Company are transferred to the Trust or (iii) the date on
which the Company files a certificate of dissolution in accordance with the
Delaware General Corporation Law. After the Final Record Date, certificates
representing Common Stock will not be assignable or transferable on the
books of the Company except by will, intestate succession, or operation of
law.
A-2
<PAGE> 50
6. If any distribution to a Stockholder cannot be made, whether
because the Stockholder cannot be located, has not surrendered its
certificates evidencing the Common Stock as required hereunder or for any
other reason, the distribution to which such Stockholder is entitled
(unless transferred to the Trust established pursuant to Section 7 hereof)
shall be transferred, at such time as the final liquidating distribution is
made by the Company, to the official of such state or other jurisdiction
authorized by applicable law to receive the proceeds of such distribution.
The proceeds of such distribution shall thereafter be held solely for the
benefit of and for ultimate distribution to such Stockholder as the sole
equitable owner thereof and shall be treated as abandoned property and
escheat to the applicable state or other jurisdiction in accordance with
applicable law. In no event shall the proceeds of any such distribution
revert to or become the property of the Company.
7. If deemed necessary, appropriate or desirable by the Board of
Directors, in its absolute discretion, in furtherance of the liquidation
and distribution of the Company's assets to the Stockholders, as a final
liquidating distribution or from time to time, the Company shall transfer
to one or more liquidating trustees, for the benefit of the Stockholders
(the "Trustees"), under a liquidating trust (the "Trust"), any assets of
the Company which are (i) not reasonably susceptible to distribution to the
Stockholders, including without limitation non-cash assets and assets held
on behalf of the Stockholders (a) who cannot be located or who do not
tender their certificates evidencing the Common Stock to the Company or its
agent as hereinabove required or (b) to whom distributions may not be made
based upon restrictions under contract or law, including, without
limitation, restrictions of the federal securities laws and regulations
promulgated thereunder or (ii) held as the Contingency Reserve. If assets
are transferred to the Trust, each Stockholder on the Final Record Date
shall receive an interest (an "Interest") in the Trust pro rata to its
interest in the outstanding Common Stock on that date. All distributions
from the Trust will be made pro rata in accordance with the Interests. The
Interests shall not be transferable except by operation of law or upon
death of the recipient. The Board of Directors is hereby authorized to
appoint one or more individuals, corporations, partnerships or other
persons, or any combination thereof, including, without limitation, any one
or more officers, directors, employees, agents or representatives of the
Company, to act as the initial Trustee or Trustees for the benefit of the
Stockholders and to receive any assets of the Company. Any Trustees
appointed as provided in the preceding sentence shall succeed to all right,
title and interest of the Company of any kind and character with respect to
such transferred assets and, to the extent of the assets so transferred and
solely in their capacity as Trustees, shall assume all of the liabilities
and obligations of the Company, including, without limitation, any
unsatisfied claims and unascertained or contingent liabilities. Further,
any conveyance of assets to the Trustees shall be deemed to be a
distribution of property and assets by the Company to the Stockholders for
the purposes of Section 4 of this Plan. Any such conveyance to the Trustees
shall be in trust for the Stockholders of the Company. The Company, subject
to this Section 7 and as authorized by the Board of Directors, in its
absolute discretion, may enter into a liquidating trust agreement with the
Trustees, on such terms and conditions as the Board of Directors, in its
absolute discretion, may deem necessary, appropriate or desirable. Adoption
of this Plan by a majority of holders of the outstanding Common Stock shall
constitute the approval of the Stockholders of any such appointment and any
such liquidating trust agreement as their act and as a part hereof as if
herein written.
A-3
<PAGE> 51
8. Whether or not a Trust shall have been previously established
pursuant to Section 7, in the event it should not be feasible for the
Company to make the final distribution to the Stockholders of all assets
and properties of the Company prior to the date which is six months after
the "Liquidation Date" (such date, the "Final Distribution Date"), then, on
or before the Final Distribution Date, the Company shall be required to
establish a Trust and transfer any remaining assets and properties
(including, without limitation, any uncollected claims, contingent assets
and the Contingency Reserve) to the Trustees as set forth in Section 7.
9. After the Liquidation Date, the officers of the Company shall, at
such time as the Board of Directors, in its absolute discretion, deems
necessary, appropriate or desirable, obtain any certificates required from
the Delaware tax authorities and, upon obtaining such certificates, the
Company shall file with the Secretary of State of the State of Delaware a
certificate of dissolution (the "Certificate of Dissolution") in accordance
with the Delaware General Corporation Law.
10. Adoption of this Plan by holders of a majority of the outstanding
Common Stock shall constitute the approval by the Stockholders of the sale,
exchange or other disposition in liquidation of all of the property and
assets of the Company, whether such sale, exchange or other disposition
occurs in one transaction or a series of transactions, and shall constitute
ratification by the Stockholders of all contracts for sale, exchange or
other disposition which are conditioned on adoption of this Plan.
11. In connection with and for the purpose of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay any brokerage, agency,
professional and other fees and expenses of persons rendering services to
the Company in connection with the collection, sale, exchange or other
disposition of the Company's property and assets and the implementation of
this Plan.
12. In connection with and for the purpose of implementing and
assuring completion of this Plan, the Company may, in the absolute
discretion of the Board of Directors, pay to the Company's officers,
directors, employees, agents and representatives, or any of them,
compensation or additional compensation above their regular compensation,
in money or other property, in recognition of the extraordinary efforts
they, or any of them, will be required to undertake, or actually undertake,
in connection with the implementation of this Plan. Adoption of this Plan
by holders of a majority of the outstanding Common Stock shall constitute
the approval of the Company's Stockholders of the payment of any such
compensation.
13. To the extent permitted by the Delaware General Corporation Law,
the Company shall indemnify its officers, directors, employees, agents and
representatives in accordance with its certificate of incorporation,
by-laws and any contractual arrangements, for actions taken in connection
with this Plan and the winding up of the affairs of the Company. The
Company's obligation to indemnify such persons may also be satisfied out of
the assets of the Trust. The Trust will similarly be authorized to
indemnify the Trustees and any employees, agents or representatives of the
Trust for actions taken in connection with the operations of the Trust. Any
claims arising in respect of such indemnification will be satisfied out of
the assets of the Trust. The Board of Directors and the Trustees, in their
absolute discretion, are authorized to obtain and maintain insurance as may
be necessary or appropriate to cover the Company's obligations hereunder.
A-4
<PAGE> 52
14. Notwithstanding authorization or consent to this Plan and the
transactions contemplated hereby by the Stockholders, the Board of
Directors may modify, amend or abandon this Plan and the transactions
contemplated hereby without further action by the Stockholders to the
extent permitted by the Delaware General Corporation Law.
15. The Board of Directors of the Company is hereby authorized,
without further action by the Stockholders, to do and perform or cause the
officers of the Company, subject to approval of the Board of Directors, to
do and perform, any and all acts, and to make, execute, deliver or adopt
any and all agreements, resolutions, conveyances, certificates and other
documents of every kind which are deemed necessary, appropriate or
desirable, in the absolute discretion of the Board of Directors, to
implement this Plan and the transactions contemplated hereby, including,
without limiting the foregoing, all filings or acts required by any state
or federal law or regulation to wind up the affairs of the Company.
A-5
<PAGE> 53
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
US DIAGNOSTIC INC.
FOR THE 2000 ANNUAL MEETING OF THE STOCKHOLDERS
JULY 21, 2000
The undersigned stockholder of US Diagnostic Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
Proxy Statement, each dated June 23, 2000, and hereby appoints Joseph A. Paul,
Leon F. Maraist and P. Andrew Shaw, or any one of them, proxies, with full power
to each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at the 2000 Annual Meeting of Stockholders of US
Diagnostic Inc. to be held on July 21, 2000 at 10:00 a.m., local time, at the
Sheraton West Palm Beach Hotel, 630 Clearwater Park Road, West Palm Beach,
Florida 33401, and at any adjournment or adjournments thereof, and to vote all
shares of Common Stock which the undersigned would be entitled to vote if
personally present, on the matters set forth on this Proxy.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PROPOSALS SET FORTH HEREIN.
1. TO APPROVE THE IMAGING CENTER SALES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. TO APPROVE THE RESTRUCTURING PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. ELECTION OF DIRECTORS:
[ ] FOR all nominees listed below (except as indicated)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW.
<TABLE>
<S> <C>
C. Keith Hartley Michael A. O'Hanlon
David McIntosh Joseph A. Paul
</TABLE>
(Continued and to be SIGNED on the OTHER SIDE)
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
The Board of Directors recommends a vote FOR each of the proposals.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Dated: , 2000
-------------------
--------------------------------
Signature
--------------------------------
Signature If Shares Held Jointly
NOTE: Please sign exactly as
name appears hereon. When shares
are held by joint tenants, both
should sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name by the President or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
<PAGE> 54
EXHIBITS
[FOR EDGAR FILING ONLY]
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
2. The Company's Current Report on Form 8-K, dated May 10, 2000.
3. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2000.
<PAGE> 55
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File No. 1-13392
US DIAGNOSTIC INC.
--------------------------------------------------------------------------------
(Name of Registrant in its charter)
Delaware 11-3164389
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
777 South Flagler Drive, Suite 1201 East,
West Palm Beach, Florida 33401
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 832-0006
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to the
filing requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 8, 2000 was approximately
$31,727,858 based on the closing price of the common stock on March 8, 2000.
As of March 8, 2000, 22,658,033 shares of common stock of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 56
PART I
US DIAGNOSTIC INC.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical facts and may be forward-looking. Forward-looking
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, economic, competitive, regulatory, legal, growth and
integration factors, collections of accounts receivable, available financing or
available refinancing for existing debt, the ability to sell assets at fair
market value, cash flow and working capital availability, the availability of
sufficient financial resources to implement its business strategy, as well as
the Company's inability to carry out that strategy and other factors discussed
elsewhere in this report and in other documents filed by the Company with the
Securities and Exchange Commission ("SEC"). Many of these factors are beyond the
Company's control. Actual results could differ materially from the
forward-looking statements made. In light of these risks and uncertainties,
there can be no assurance that the results anticipated in the forward-looking
information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
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ITEM 1. BUSINESS
GENERAL
US Diagnostic Inc. (the "Company") is one of the nation's largest independent
operators of outpatient diagnostic imaging and related facilities ("Facilities")
with 81 locations owned, operated or managed nationwide at the date hereof. The
majority of services provided by the Company involve the use of Magnetic
Resonance Imaging ("MRI"), Computed Axial Tomography ("CT" or "CAT"),
mammography, x-ray and ultrasound equipment. The use of the type of imaging and
treatment equipment employed by the Company has grown rapidly in recent years
because it allows physicians to quickly and accurately diagnose and treat a wide
variety of diseases and injuries without exploratory surgery or other invasive
procedures, which are usually more expensive, carry more risk and are more
debilitating for patients.
The Company believes that the range of services provided at its Facilities
(which include anatomical and functional imaging) provides cross-referral
opportunities and increases the Company's ability to serve as a "one-stop"
provider of such services to increasingly important managed care organizations.
The Company was incorporated in Delaware in 1993. The Company's executive
offices are located at 777 S. Flagler Drive, Suite 1201E, West Palm Beach,
Florida 33401, its telephone number is (561) 832-0006/(800) 7-USDLAB and its web
site is at WWW.USDL.COM. Unless the context otherwise requires, all references
to the "Company" include US Diagnostic Inc. and its subsidiaries.
STRATEGY
OVERVIEW
During 1995 and 1996, the Company grew primarily through acquisitions of
Facilities from independent owners. In 1997, there was a significant decrease in
acquisition activity by the Company due to constraints on the Company's
financial resources and the need to consolidate prior acquisitions. In late
1997, the Company announced, and throughout 1998 and 1999 the Company pursued, a
four part strategy to: (i) reduce operating costs; (ii) divest non-core and
underperforming assets; (iii) reduce and refinance debt; and (iv) develop new
facilities and engage in prudent acquisitions as detailed below.
As part one of the aforementioned strategy, the Company implemented a cost
reduction plan in 1998 that included a significant reduction in nonessential
staff in the first quarter of 1998; retention of GE Business Solutions to
conduct a Company-wide efficiency and savings review; an emphasis on centralized
purchasing; consolidation of four regional billing offices and four regional
operational offices to three of each (effected in the first quarter of 1999) and
a further consolidation from three to two such offices in January 2000; and a
review of other consolidation synergies. Also, the Company reduced its
professional and outside consulting fees during 1999 and reorganized its data
telecommunications systems to further reduce cost.
The second part of the Company's corporate strategy was a review and sale of all
non-core assets and underperforming facilities. In 1998, the Company disposed of
its mobile imaging operations, its radiation oncology interests and its nuclear
medicine subsidiary in order to more closely focus on the Company's core
business of fixed site MRI and multi-modality imaging facilities. Additionally,
in January and February of 1999, in two separate transactions, the Company sold
its interests in certain subsidiaries
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located in Texas for an aggregate price of $23.4 million in cash, a promissory
note and assumption of certain liabilities. The Company has also divested itself
of non-core or underperforming assets by selling individual centers in
California and New Mexico in 1999, and closing of the Las Vegas center in
February 2000. The proceeds from the sales of both non-core assets and
underperforming facilities were used by the Company to reduce debt, meet
operating needs and generally to bolster the Company's working capital. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Due to financial market conditions in 1998, the Company decided to postpone the
third part of its strategy, which was a refinancing of its long-term debt.
However, in addition to the significant debt reduction described above, in
December 1998 and January 1999, the Company completed the repurchase in the open
market of $35.4 million aggregate principal amount of its 9% Convertible
Subordinated Debentures due 2003 for $25.0 million, resulting in a decrease in
long-term debt and related long-term interest expense. The Company may effect
further debenture repurchases as market conditions warrant and financial
resources allow.
A significant portion of the Company's cash flow is required to amortize debt.
As a result, new center development and additional acquisitions, which were the
fourth part of the Company's strategy, have been constrained by the Company's
limited capital resources and the inability of the Company to extend the
maturities of its debt through refinancing. Accordingly, the Company made only
one minor acquisition, and two new internally developed facilities were opened
in 1999.
RECENT DEVELOPMENTS
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. Furthermore, the relatively short
maturities of its indebtedness require the Company to devote a significant
portion of its annual cash flow to the amortization of debt. The Company also
has ongoing significant capital expenditure requirements in order to maintain
and modernize its imaging equipment. Although the Company's cash flow from
operating activities has been positive, it nevertheless has been and is
projected to be insufficient to meet the Company's 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, a refinancing to
extend the maturity of the Company's indebtedness is not currently anticipated
in the near term. These factors necessitate the incurrence of additional
indebtedness or the meeting of the Company's capital requirements through other
means.
Accordingly, despite the fact that the Company's primary lending source has
made additional funding available to the Company during the first quarter of
2000, the Company has begun 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.
Although the Company has been successful in the past in selling centers at
advantageous prices and in a timely fashion and, although the Company
anticipates entering into 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, or, even if such sales were successfully
completed and the Company subsequently was required by its capital needs to
continue to sell assets, the Company could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Notwithstanding the above, management believes it will be successful in
obtaining additional funding and/or will be able to sell selected imaging
centers at advantageous prices such that the Company will have sufficient funds
over the next twelve months to meet operating needs, fund capital expenditure
requirements and repay debt obligations as they become due.
The Company is continuing its evaluation, begun during 1999, of its strategic
alternatives to maximize stockholder value, including, without limitation, the
possible sale of additional imaging centers as the Company's or market
conditions warrant or the diversification of the Company's business into other
medical or nonmedical operations, including internet related opportunities,
utilizing some of the proceeds of divested imaging facilities. However, there
can be no assurance that the Company will have adequate financial resources to
implement any such diversification or, if implemented, that such
diversification would be profitable.
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INDUSTRY OVERVIEW
Total annual spending on diagnostic imaging services in the United States is
estimated to be between $56 billion and $70 billion. While 70% of this spending
is done in hospital settings, a significant share of the market is commanded by
the nation's approximately 2,900 outpatient testing facilities, especially in
relation to the roughly $10 billion subsector of advanced imaging services,
which includes MRI and CAT scans. These approximately 2,900 facilities are
mainly operated individually and represent a fragmented market.
Payment for services comes primarily from third-party payors, such as private
insurers (traditional indemnity and Blue Cross/Blue Shield plans), managed
health plans (HMOs, PPOs), government payors (Medicare, Medicaid), and state-run
worker's compensation programs. Some centers have significant relationships with
attorneys specializing in personal injury litigation. Typically, large
third-party payors, especially managed care programs and Medicare/Medicaid,
demand significant discounts from the list prices paid under direct-bill
circumstances.
The number of non-hospital-affiliated imaging centers has grown due to a number
of factors. First, when Congress reformed Medicare in 1983 by putting strict
controls on inpatient reimbursement, this led to the expansion of all types of
freestanding outpatient services, including outpatient surgery and imaging
centers. Second, the use of MRI, CT and other equipment became more prevalent
due to the quality and quantity of diagnostic information, technological
improvements and increased government and third-party reimbursement. Although
MRI was developed in the late 1970s, it was not approved for Medicare
reimbursement until 1984. Ultrasound and low-dose mammography technology
improved in the late 1980s. New technologies and procedures continue to be
developed, although some, such as positron emission tomography scanners ("PET"),
are relatively expensive and are not considered cost-effective for most
procedures. Third, the number of hospital and physician joint ventures increased
in the 1980s as hospitals were eager to minimize their financial exposure for
expensive equipment and physicians were seeking investments at a time when
traditional tax-sheltered investments were being eliminated or were less
economic. Thus, between 1984 and 1991, the number of outpatient imaging centers
in operation in the U.S. increased from roughly 700 to over 2,000.
The industry suffered setbacks in 1993 as utilization levels generally
stabilized and reimbursement per test declined sharply. Utilization rates
stopped growing primarily for three reasons: (i) the threat of sweeping
government health care reform put expensive procedures under increased scrutiny;
(ii) market forces - in the form of managed care which also discouraged
providers from ordering all but absolutely necessary tests; and (iii) the
extension in 1993 of federal laws (the "Stark Laws") prohibiting the referral by
physicians of Medicare and Medicaid patients to entities with which such
referring physicians have a financial relationship (either an ownership interest
or compensation arrangement). See "Regulation and Government Reimbursement".
Previously, these referral prohibitions had been applicable only to
Medicare-covered clinical laboratory services. Since the early 1990s, the total
installed base of MRI systems has remained relatively flat although the total
number of procedures has increased.
In 1996, Medicare reimbursement for MRI procedures increased approximately 1%-2%
over 1995 levels - the first increase in at least four years. In January 1998,
Medicare reimbursement for diagnostic
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procedures increased an additional 1%-2%. Effective January 2000, Health Care
Financing Administration ("HCFA") increased reimbursement by approximately 3%-4%
depending upon modality of service. A recent initiative by HCFA to impose a 24%
reduction in radiology reimbursement over a four year period beginning January
1999 has been indefinitely postponed due to flaws in the HCFA's imaging center
cost study. However, HCFA has indicated it will continue to evaluate radiology
reimbursement. It is unclear as to whether HCFA will recommend reductions or
increases in reimbursement. See "Regulation and Government Reimbursement".
Public HMOs, which have suffered from declining margins, have indicated that
their corrective actions will more likely take the form of more rational premium
pricing than of further pressure on providers' fee-for-service reimbursement
levels. The Company believes that, as managed care becomes more prevalent,
further decreases in the average reimbursement per test will be mostly
attributable to payor mix shifts to increased managed care business which
generally have lower reimbursement rates than commercial insurance payors. There
is also the potential for a softening pricing environment as companies become
more discerning in negotiating managed care contracts and as the industry
continues to consolidate.
IMAGING OPERATIONS
Diagnostic imaging services are performed on an outpatient basis by experienced
radiological technicians. After the diagnostic procedures are completed, the
images are reviewed by radiologists who have contracted with the Company. The
radiologists prepare reports of the tests and their findings, which are
delivered to the referring physician. Additionally, upon request, a report of
any critical abnormality, or "stat report" is provided by phone as soon as the
test is completed and evaluated.
Each of the Company's Facilities has agreements with radiologists as independent
contractors under long-term agreements to provide all radiology services to the
Facilities. Radiologists' compensation ranges between 10%-21% of net
collections attributable to radiology services performed by the radiologist. The
interpreting physicians are board-certified or board-eligible specialists in
radiology, orthopedics, cardiology or neurology, as appropriate. The Company
currently operates a majority of the Facilities out of two regional billing
offices which bill and collect both for technical services and professional
services of interpreting physicians at the Facilities. A few Facilities bill and
collect independently on individual systems.
Imaging revenues are dependent to a large extent upon the acceptance of
outpatient diagnostic imaging procedures as covered benefits under various
third-party payor programs. In order to receive reimbursement for these
services, payment must be approved by private insurers or the Medicare and
Medicaid reimbursement programs. Although the Company intends to continue its
participation in such reimbursement programs, there can be no assurance that its
imaging procedures will continue to qualify for reimbursement. See "Industry
Overview".
The Company's general operational strategies include the following:
PARTNERING WITH HOSPITALS AND RADIOLOGY GROUPS. Currently, the Company has
several joint ventures to provide services at hospitals with large companies
such as Tenet Healthcare and Universal Health Services. Hospitals are
increasingly outsourcing various components of their operations. The Company
believes opportunities exist to enter into agreements with many hospitals to
manage their in-patient radiology departments and intends to continue its
efforts to improve its partnering with hospitals.
INTERNAL GROWTH. Although the Company was developed through acquisitions, the
Company believes that currently the most advantageous way to build its business
is to develop new Facilities because it believes
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internal Facility development is more cost-effective. To the extent the Company
has the financial resources to do so, new Facility development will be primarily
concentrated in the Company's existing geographic markets. The Company is
experienced in the planning, opening and operation of Facilities, and is in the
process of developing several openings by fiscal year-end 2000 as well as a
schedule of additional openings in the following year. Facilities opened in 1999
include two Facilities in St. Louis, Missouri. Facilities scheduled to open in
2000 include the Westfall (Rochester, New York) and Montclair (Alabama)
Facilities.
ACHIEVE OPERATING EFFICIENCIES. The Company consolidates certain aspects of
imaging center operations, such as accounting, administration, billing,
collections, marketing, productivity, purchasing and materials management. By
rendering support and management functions, the Company seeks to realize
significant economies of scale while enabling the physicians providing services
at the Facilities to spend more time focusing on patient care and quality
control, which in turn positively impacts the utilization rate of the Company's
diagnostic equipment. The Company has made and continues to make a substantial
investment in the development of a state-of-the-art information system designed
to consolidate the Company's billing and collection operations.
CONTRACT WITH MANAGED CARE PROVIDERS. The Company actively pursues contractual
arrangements with managed care organizations. The Company believes that
third-party payors will increasingly prefer to contract for service on a
national or regional basis, and that the Company's network of centers assists it
in obtaining such contracts on favorable terms. Senior management of the Company
actively markets the Company's services to administrators of managed care
organizations in regions where the Company operates Facilities.
UPGRADE EXISTING MEDICAL TECHNOLOGIES. The Company offers state-of-the-art
diagnostic imaging and therapeutic technologies at Facilities. The Company
periodically replaces or upgrades the MRI, CT, and other miscellaneous equipment
at its Facilities with the latest available technology, resulting in improved
image quality and increased referring physician satisfaction. The Company also
has installed new high quality "Open MRI" equipment at certain locations to
accommodate a substantial number of patients who would otherwise forego this
procedure due to claustrophobia or obesity. In addition, the Company
periodically adds new modalities and procedures at its Facilities. Most of the
new technologies are designed to enhance the Company's revenue mix and shorten
examination times, resulting in increased capacity and profitability.
PROVIDE SERVICES WHICH ARE COMPLEMENTARY TO IMAGING. The Company has developed
medical services that are complementary to its core imaging operations such as
bone densitometry which is a specialized x-ray procedure that precisely
quantifies bone density at the spine, femur and other skeletal sites for
diagnosis and treatment of osteoporosis. In addition, the Company is evaluating
other modalities such as PET scanning and coronary scanning for blockage
causing plaque.
PROFESSIONAL MARKETING. In order to expand referral sources, the Company
provides marketing training and materials to Facility personnel to enhance
marketing efforts to area physicians and third-party payors such as managed care
organizations. The Company utilizes a variety of marketing techniques in the
communities where it does business, including meetings between the Facility
administrators or account executives and referring physicians and/or their
staff, and mailings of technical case studies and clinical articles.
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CLIENTS AND PAYORS
The Company is highly dependent on referrals from physicians who have no
contractual obligation or economic incentive to refer patients to the Company's
Facilities. Most Facilities currently receive referrals from several hundred
physicians. If a sufficiently large number of physicians elected at any time to
stop referring patients to the Company's Facilities, it would have a material
adverse effect on the Company's revenues and results of operations. In
particular, due to the potential for disruption of the physician relationship in
connection with the assumption of control of a Facility, there can be no
assurance that the Company will retain all of the business conducted by that
Facility at the time of its acquisition.
In 1999, revenues from conventional indemnity insurance carriers accounted for
approximately 23% of the Company's revenues, Medicare and Medicaid accounted for
approximately 17% of revenues, managed care accounted for approximately 38% of
revenues and the remainder was derived directly from patients and workers'
compensation cases.
The Company is a party to over 1,000 managed care contracts which require it to
provide services on a fixed fee-for-service basis. All Facilities are attempting
to obtain additional managed care contracts.
COMPETITION
The market for diagnostic imaging services is highly competitive. The market is
highly fragmented with over 2,900 outpatient diagnostic imaging centers
nationwide and no dominant national imaging services provider. Competition
varies by market and is generally higher in larger metropolitan areas where
there is likely to be more facilities and more managed care organizations
putting pricing pressure on the market. The Company competes with larger
healthcare providers, such as hospitals, as well as other private clinics and
radiology practices that own diagnostic imaging equipment. Competition often
focuses on physician referrals at the local market level. Successful competition
for referrals is a result of many factors, including participation in healthcare
plans, quality and timeliness of test results, type and quality of equipment,
facility location, convenience of scheduling and availability of patient
appointment times.
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REGULATION AND GOVERNMENT REIMBURSEMENT
OVERVIEW. The healthcare industry is highly regulated and is undergoing
significant change as third-party payors, such as Medicare and Medicaid, health
maintenance organizations and other health insurance carriers increase efforts
to control the cost, utilization and delivery of healthcare services.
Legislation has been proposed or enacted at both the federal and state levels to
regulate healthcare delivery in general and radiology services in particular.
Reductions in reimbursement for Medicare and Medicaid services may be
implemented from time to time, which may lead to reductions in the reimbursement
rates of other third party payors as well. The Company cannot predict the effect
healthcare reforms may have on its business, and there can be no assurance that
such reforms will not have a material adverse effect on the Company's
operations. All of the Company's Facilities are subject to governmental
regulation at the federal, state and local levels.
In 1994 Congress passed legislation that required the Health Care Financing
Administration ("HCFA") to develop a methodology for a new resource-based
relative value unit ("RBRVU") system for determining practice expense resource
value units ("PE-RVUs") for each physician service. Subsequently, Congress
passed the Balanced Budget Act of 1997 that extended the implementation date for
the new practice PE-RVU system to January 1999. On June 5, 1998, HCFA published
a Notice of Proposed Rulemaking ("NPRM") in the Federal Register to implement
these provisions of the Balanced Budget Act. The NPRM proposed a reduced
Medicare payment for the facilities, equipment, staff, supplies and other
"technical component" costs of diagnostic imaging by over 24% to be phased in
over four years at approximately 6% per year beginning January 1999. Industry
members were able to convince HCFA that the data used to determine the proposed
reductions may be flawed, indefinitely postponing the implementation until
further studies can be completed. On November 2, 1998, HCFA published in the
Federal Register a notice setting forth the new PE-RVUs for 1999 and beyond
which essentially maintain current payment levels for technical component
services. However, the notice reduces the professional component (the physician
fees for interpreting exams) for radiology services by 10% to be phased in over
four years at approximately 2.5% per year beginning January 1999. Because the
Company derives the majority of its revenue from the technical component, the
reduction in the professional component will not have a material effect on the
Company's revenue. However, there can be no assurance that HCFA will not attempt
to reduce the technical component of Medicare payments in the future.
In December 1998, HCFA announced its final implementation date by which all
Independent Physiological Laboratories ("IPL") and other provider types are
required to convert to a status of Independent Diagnostic Testing Facility
("IDTF") in order to continue to receive reimbursement from Medicare. An IDTF is
independent of a hospital or physician's office in which diagnostic tests are
performed by licensed, certified nonphysician personnel under appropriate
physician supervision. All Medicare carriers were required to provide notice to
all affected entities that, beginning March 15, 1999, they will no longer be
able to bill as an IPL. In order to accomplish this conversion for all affected
Company Facilities, HCFA required that the respective Medicare carriers receive
all applications no later than February 1, 1999. This allowed for the 45 day
review provided to the Medicare carriers, with a final implementation date of
March 15, 1999. If the cutoff dates were not met by the entity applying for the
IDTF status change, claims for diagnostic testing services might have been
rejected. All applicable Company applications were filed by February 1, 1999.
The Company successfully converted all applicable Facilities to the IDTF status
within the aforementioned timeframes. Currently, the Company is awaiting further
clarification and final regulations from HCFA with respect to the physician
supervision requirements associated with the services performed in each
Facility.
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REGULATION OF OUTPATIENT IMAGING SERVICES. The operation of outpatient imaging
centers requires a number of licenses, including licenses for technical
personnel and certain equipment. Licensure requirements may vary somewhat from
state to state. The Company believes that it is in material compliance with
applicable licensure requirements. The Company further believes that diagnostic
testing will continue to be subject to strict regulation at the federal and
state levels and cannot predict the scope and effect thereof.
Diagnostic imaging centers performing mammography services must meet federal,
and in some jurisdictions, state standards for quality as well as certification
requirements. Under regulations issued by the federal Food and Drug
Administration ("FDA") pursuant to the Mammography Quality Standards Act of 1992
("MQSA"), all mammography Facilities are required to be accredited by an
approved non-profit organization or state agency. Pursuant to the accreditation
process, each Facility providing mammography services must: undergo an annual
mammography facility physics survey; be inspected annually and pay an annual
inspection fee; meet qualification standards for interpreting physicians,
mammography technologists, and medical physicists; meet certification
requirements for adequacy and training and experience of personnel; meet quality
standards for equipment and practices; and meet various requirements governing
record keeping of patient files. Compliance with these standards is required to
obtain payment for Medicare services and to avoid various sanctions, including
monetary penalties, or suspension of certification. Although all of the
Company's Facilities which provide mammography services are currently accredited
by the Mammography Accreditation Program of the American College of Radiology
and the Company anticipates continuing to meet the requirements for
accreditation, the withdrawal of such accreditation could result in the
revocation of certification. Congress has extended Medicare benefits to include
coverage of screening mammography subject to the prescribed quality standards
described above. The regulations apply to diagnostic mammography and image
quality examination as well as screening mammography.
REIMBURSEMENT FOR RADIOLOGY SERVICES. In general, Medicare reimburses radiology
services under a physician fee schedule which covers services provided not only
in a physician's offices, but also in freestanding Facilities, portable x-ray
suppliers, hospitals and other entities. The scheduled amount is based on a
resource-based relative value scale, recognizing three separate components of
the physician's services: professional, technical and malpractice. For radiology
there are separate Medicare scheduled amounts for the professional component of
a service or procedure (i.e. the physician's time) and the technical component
of the service or procedure (i.e. services and supplies necessary to perform
the procedure).
Congress and the U.S. Department of Health and Human Services have taken various
actions over the years to reduce reimbursement rates for radiology services and
proposals to reduce rates further are anticipated. As noted above, there have
been many proposals discussed within the last few years to further modify
reimbursement. The Company is unable to predict which, if any, proposals will be
adopted. Any reductions in Medicare reimbursement for radiology services could
have a material adverse effect on the Company.
REGULATION OF RADIOLOGY OWNERSHIP; FRAUD AND ABUSE. Medicare payment rules
discourage physicians from maintaining an investment interest in radiology
operations. The Omnibus Budget Reconciliation Act of 1989 contains provisions
which prohibit physicians from referring Medicare or Medicaid patients to
clinical laboratories in which the physician has an economic interest. In 1993,
Congress extended the physician self-referral prohibition to entities providing
other designated health care services, including radiology or other diagnostic
services, including MRI, CAT scans and ultrasound services, and radiation
therapy services. Violations of these provisions (collectively known as the
"Stark Laws") may result in
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denial of payments for the service, an obligation to refund payment for the
service, payment of civil monetary penalties and/or exclusion from the Medicare,
Medicaid and other state healthcare programs.
The Anti-Fraud and Abuse Amendments to the Social Security Act prohibit the
solicitation, payment, receipt or offer, directly or indirectly, of any
remuneration for the referral of Medicare or Medicaid patients or for the
provision of services, items or equipment which may be covered by the Medicare
or other state healthcare programs including Medicaid programs. Violations of
these provisions may result in civil and criminal penalties and exclusion from
participation in the Medicare, and Medicaid and other state healthcare programs.
In addition to federal restrictions, which are generally applicable to Medicare,
Medicaid and other state healthcare patients, a number of states in which the
Company operates Facilities have enacted prohibitions against physicians
referring patients to entities with which they have a financial relationship (an
ownership interest or compensation arrangement). Such state laws generally apply
to all patients, not just participants in the Medicare and Medicaid programs.
The Company has structured its acquisitions of physician-owned ventures and
ongoing relationships with physicians in a manner which it believes does not
raise significant issues under federal or state anti-kickback and self-referral
regulations.
CORPORATE PRACTICE OF MEDICINE; FEE SPLITTING. The operation of the Facilities
may be subject to the laws of certain states which prohibit the provision of
certain medical services by non-physicians and/or the splitting of fees between
physicians and non-physicians. The Company believes its operations are conducted
in material compliance with existing applicable laws relating to the corporate
practice of medicine and fee splitting. In response to such laws, in certain
states, the Company may operate Facilities pursuant to a management agreement
with a physician group rather than operating the Facility directly and
contracting with the physicians for professional medical services.
ACR ACCREDITATION. Aetna U.S. Healthcare announced in early 1999 that all of its
MRI providers must be ACR accredited by January 1, 2000. USD began efforts in
April 1999 to achieve this goal for all applicable Facilities. ACR accreditation
of MRI units initially was voluntary, however, with managed care having
reimbursed nearly 100,000 MRI procedures in 1998, this process has now become a
requirement of Aetna's in order to ensure future reimbursements. MRI
accreditation is a lengthy and complex process that requires radiologists,
technologists and physicists to meet certain educational and technical
experience in the field of MRI. In addition to the educational requirements,
phantom tests and clinical images must be submitted or evaluated by a panel of
ACR radiologists and physicists. As of October 20, 1998 the American College of
Radiology had granted accreditation to 115 facilities with 132 systems. Since
ACR began accepting applications, 104 non-USD facilities have failed this
process. Late in 1999, Aetna made the announcement to delay this requirement by
one full year, allowing additional time for all contracted facilities and the
ACR to complete the necessary tasks for accreditation. Currently, USD is working
to achieve this goal. All applications for the applicable facilities were
submitted in April 1999. USD believes other managed care entities will follow
suit in requiring ACR accreditation or similar programs in order to become or
remain participating providers.
INFECTIOUS WASTES. The Company is also subject to licensing and regulation under
federal and state laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. The sanctions for failure to
comply with these regulations may include denial of the right to conduct
business, significant fines and criminal penalties, any of which, if imposed,
could have a material adverse effect on the Company. The Company believes that
it is in substantial compliance with all applicable laws and regulations
relating to these materials.
11
<PAGE> 66
INSURANCE
The Company could be subject to legal actions arising out of the performance of
its diagnostic imaging services. Damages assessed in connection with, and the
costs of defending, any such actions could be substantial. The Company currently
maintains liability insurance that it believes is adequate for its present
operations. There can be no assurance that the Company will be able to continue
or increase such coverage at an acceptable cost, or that the Company will have
other resources sufficient to satisfy any liability or litigation expense that
may result from any uninsured or underinsured claims. The Company also requires
all of its affiliated physicians to maintain malpractice and other liability
coverage. In the event that a claim exceeds available coverage, the Company's
financial condition and results of operations could be adversely and materially
affected.
EMPLOYEES
As of March 15, 2000, the Company had approximately 995 full-time and 108
part-time employees, none of whom is represented under union contracts or other
collective bargaining arrangements. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices, corporate accounting and certain administrative
and other operations are located in West Palm Beach, Florida where the Company
leases an aggregate of approximately 34,767 square feet at two separate
locations. Annual rental payments under the two leases are $526,000 and $459,000
which expire in 2008 and 2009, respectively.
The Company operates imaging centers that range in size from approximately 800
to 21,600 square feet. During 1999, the Company had three regional billing
offices and three regional operational centers. The aggregate lease expense in
1999 for all such facilities was approximately $9.0 million. In January 2000, a
regional operational center was closed, and the Company relocated it to
corporate headquarters. The imaging centers, billing offices and operational
centers have leases expiring between 2000 and 2008.
ITEM 3. LEGAL PROCEEDINGS
CENTRE COMMONS MRI LTD., ET. AL. VS. US DIAGNOSTIC INC. ET. AL.; SANDERS ET.
AL. VS. US DIAGNOSTIC INC. ET. AL. - These two suits, which were filed against
the Company by sellers of diagnostic imaging centers who received the Company's
common stock in xpartial payment of the purchase price for their centers and who
alleged that undisclosed facts regarding the background of Keith Greenberg (a
former consultant to the Company) were material to their decision to sell, were
settled in 1999. 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 sought to compel the Company to repurchase approximately 750,000
shares of its common stock at a price of $12.125 per share and also alleged that
the Company's failure to register such shares under the Securities Act of 1933
diminished their value. The lawsuit was settled by agreement that USD would pay
$1,800,000 over a period of 30 months (beginning December 1999). In the second
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 $2,000,000. The lawsuit was settled by agreement that
USD would pay $180,000 over a period of eight months (beginning October 1999).
12
<PAGE> 67
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 March 2000 pending settlement discussions, and a further
minimum ninety day extension of the stay has been agreed to by the parties
recently, subject to court approval at the end of March.
In connection with the sale of USI, USD 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. USD 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 USD'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.
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. ("USD") 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.
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<PAGE> 68
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 69
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded under the symbol USDL on the NASDAQ
SmallCap Market since September 22, 1998 and on the NASDAQ National Market
System from October 9, 1995 to September 21, 1998. The following table sets
forth the high and low sales prices for the Company's common stock for each
quarter within the two years ended December 31, 1999 as reported by NASDAQ.
These prices do not reflect retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
----
January 1 through March 31, 1998.................................. $ 5 1/4 $3 5/8
April 1 through June 30, 1998..................................... 4 23/32 3 1/2
July 1 through September 30, 1998................................. 3 7/8 1 3/8
October 1 through December 31, 1998............................... 2 1/16 3/4
1999
----
January 1 through March 31, 1999.................................. $ 2 3/16 $ 13/16
April 1 through June 30, 1999..................................... 1 11/16 1 1/8
July 1 through September 30, 1999................................. 1 11/32 3/4
October 1 through December 31, 1999............................... 1 1/10 3/4
</TABLE>
The number of record holders of the Company's common stock as of March 15, 2000
was 270.
The Company has never paid a cash dividend on its common stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business and, accordingly, does not anticipate the payment of cash dividends.
The Company has outstanding debt that prohibits the payment of dividends by the
Company without the consent of the lender.
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<PAGE> 70
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below summarize certain historical
financial data and should be read in conjunction with the more detailed
consolidated financial statements of the Company and the notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue $ 155,602 $ 195,735 $ 216,222 $ 102,061 $ 29,416
Income (loss) before extraordinary item (10,793)(1) (512)(1) (116,712)(2) (6,331) 3,025
Extraordinary item, net of income taxes 2,598 5,311(3) -- -- 306
Net income (loss) (8,195) 4,799 (116,712) (6,331) 3,331
Basic earnings (loss) per common share
Income (loss) before extraordinary item (.47) (.02) (5.26) (.48) .70
Extraordinary item, net of income taxes .11 .23 -- -- .07
Net income (loss) (.36) .21 (5.26) (.48) .77
Diluted earnings (loss) per common share
Income (loss) before extraordinary item (.47) (.02) (5.26) (.48) .64
Extraordinary item, net of income taxes .11 .23 -- -- .06
Net income (loss) (.36) .21 (5.26) (.48) .70
Cash dividends declared per common share -- -- -- -- --
</TABLE>
(1) Includes $2.3 and $4.7 million gain on sale of subsidiaries in 1999 and
1998, respectively. See Note 11 of Notes to Consolidated Financial
Statements.
(2) Includes asset impairment losses of $92.9 million. See Note 5 of Notes
to Consolidated Financial Statements.
(3) Represents gain on repurchase of Convertible Subordinated Debentures.
See Notes 6, 7 and 17 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $217,742 $237,830 $287,999 $339,023 $ 57,279
Current portion of long-term debt
and capital leases 27,705 27,239 27,745 37,627 6,352
Total long-term obligations 128,640 147,701 191,547 123,984 21,653
</TABLE>
16
<PAGE> 71
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain matters discussed herein are forward-looking statements made pursuant to
the safe harbor provisions of the Securities Litigation Reform Act of 1995.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, including but not
limited to, economic, competitive, regulatory, growth strategies, available
financing, and other factors discussed elsewhere in this report and the
documents filed by the Company with the SEC. Many of these factors are beyond
the Company's control. Actual results could differ materially from the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur.
OVERVIEW AND RECENT DEVELOPMENTS
The Company grew primarily through acquisitions of diagnostic imaging centers
and businesses. The Company's operating performance is substantially dependent
upon: (i) its ability to integrate the operations of acquired Facilities into
the Company's infrastructure; (ii) its ability to bill and collect revenue in an
efficient and timely manner; (iii) its ability to reduce and control operating
expenses; (iv) its ability to effectively market its Facilities to physicians
requiring imaging services; and (v) various other risks associated with the
acquisition and operation of medical businesses, particularly in the
increasingly competitive and cost conscious managed care environment, including
the negotiation of favorable contracts with third-party payors. If the Company
is unable to manage these risks, the Company's operating results could be
materially adversely affected.
The Company reports revenue at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated contractual adjustments under reimbursement agreements with
third-party payors. These adjustments are accrued on an estimated basis in the
period the related services are rendered and are adjusted in future periods as
final settlements are determined.
The Company's revenues and profitability may be materially adversely affected by
the current trend in the healthcare industry toward cost containment, continuing
governmental budgetary constraints, reductions in reimbursement rates, changes
in the mix of the Company's patients and other changes in reimbursement for
healthcare services, among other factors, which may put downward pressure on
revenue per scan. See "Business - Clients and Payors" and "Business - Regulation
and Government Reimbursement."
During 1995 and 1996, the Company grew primarily through acquisitions of
Facilities from independent owners. In 1997, there was a significant decrease in
acquisition activity by the Company due to constraints on the Company's
financial resources and the need to consolidate prior acquisitions. Furthermore,
these acquisitions were financed with a significant amount of debt. In addition,
many of these acquisitions were made on valuations which ultimately would not be
supported by the Facilities acquired resulting in a $92.9 million asset
impairment charge in 1997. The Company has also been required to incur
additional debt to maintain and upgrade its
17
<PAGE> 72
Facilities as a result of technological changes. In late 1997, the Company
announced, and throughout 1998 and 1999 the Company pursued, a four part
strategy to: (i) reduce operating costs; (ii) divest non-core and
underperforming assets; (iii) reduce and refinance debt; and (iv) develop new
Facilities and engage in prudent acquisitions as detailed below. See Item 1.
Business - "Overview."
In order to address its liquidity needs, during the first quarter of 2000, the
Company has begun 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. Although the Company
has been successful in the past in selling centers at advantageous prices and in
a timely fashion and, although the Company anticipates entering into 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. See "Business - Strategy - Recent Developments."
18
<PAGE> 73
The following table sets forth items of income and expense as a percentage of
total revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET REVENUE 100.0% 100.0% 100.0%
-------- -------- --------
OPERATING EXPENSES
General and administrative 77.1 75.9 76.6
Asset impairment losses -- .3 42.9
Bad debt expense 3.9 3.3 8.2
Depreciation 11.8 10.1 8.9
Amortization 3.2 2.6 5.0
Loss on settlement of lawsuits -- -- 2.6
Settlement with Former Chief Executive Officer -- -- .8
Stock-based compensation .4 .6 .6
-------- -------- --------
TOTAL OPERATING EXPENSES 96.4 92.8 145.6
GAIN ON SALE OF SUBSIDIARIES 1.5 2.3 --
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 5.1 9.5 (45.6)
TOTAL OTHER EXPENSE (11.0) (8.9) (8.1)
-------- -------- --------
Income (loss) before minority interest, benefit for income
taxes and extraordinary items (5.9) .6 (53.7)
Minority interest and income tax benefit, net 1.1 .9 .3
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (7.0) (.3) (54.0)
Extraordinary item, net of taxes 1.7 2.7 --
-------- -------- --------
NET INCOME (LOSS) (5.3)% 2.4% (54.0)%
======== ======== ========
</TABLE>
19
<PAGE> 74
As discussed above, during 1999 and 1998, the Company sold several non-core and
underperforming facilities. The facilities sold during 1999 (US Imaging ,
Physician's Plaza, Townley, Santa Maria and Santa Fe) and 1998 (Integrated
Health Concepts, MDI, USCC and USH) are collectively referred to as the "1999
sold facilities" and "1998 sold facilities", respectively.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Net revenue decreased to $155.6 million in 1999 from $195.7 million in 1998,
primarily as a result of the sale of the facilities in 1998 and 1999. Excluding
the net revenue generated by the 1998 sold facilities as well as the 1999 sold
facilities, net revenue would have increased by 3.8% to $150.0 million in 1999,
from $144.5 million in 1998. For centers which were operational during the
entire comparable 1999 and 1998 periods, revenue was adversely affected due to
the loss of a fee for service contract in June 1999, and the renegotiations of
reimbursement under a contractual arrangement with a group of New York centers
that resulted in a one time reduction. To a lesser extent, net revenue was also
negatively impacted by a shift in mix of both payors and modalities.
General and Administrative ("G&A") expense decreased to $120.0 million in 1999,
compared to 1998 G&A expense of $148.4 million. To a large extent the decrease
resulted from the sale of the 1998 and 1999 sold facilities. Expressed as a
percentage of revenue, G&A increased from 75.9% in 1998 to 77.1% in 1999. The
sold facilities contributed a total of $41.6 million to G&A expenses in 1998,
compared to only $5.0 in 1999. Excluding the G&A expenses generated by the 1998
and 1999 sold facilities, G&A would have increased by 7.6% to $115.0 million in
1999 from $106.9 million in 1998. The increase is due to the fact that in 1999
the Company opened two 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. In addition, in 1999, the
Company experienced higher service costs on medical equipment that were no
longer covered by warranty. G&A expense was also increased by higher payroll
expenses, which the Company believes is a result of wage inflation across the
country, particularly for technical salaries.
Bad debt expense decreased to $6.1 million in 1999, compared to $6.5 million in
1998 due to the sale of the 1999 and 1998 sold facilities. As a percentage of
revenue, bad debt expense increased from 3.3% in 1998 to 3.9% in 1999. The
percentage increase is primarily due to $1.3 million of bad debt recoveries,
received in the 1998 period, of accounts receivable written off in 1997 in
conjunction with the conversion of the billing system during the 1997 period. In
addition, 1999 bad debt expense reflects $427,000 recorded for a group of
California centers adversely affected by the bankruptcy of a third-party payor.
Depreciation expense was $18.3 million in 1999, compared to $19.9 million in
1998. The decrease resulted primarily from a reduction in the depreciable asset
base due to the realization in 1999 of the full benefit of the sale of the 1998
sold facilities, as well as partial year savings from the 1999 sold facilities.
The decrease was partially offset by increases in property and equipment in
connection with medical equipment upgrades, enhancement of single modality
centers to multi-modality centers, ongoing improvements to facilities, and the
continued enhancements to the billing system.
Amortization expense remained consistent at approximately $5.0 million for both
periods.
During 1999 and 1998, the Company recorded net gains on sales of subsidiaries of
$2.3 and $4.7 million, respectively. The sale of the 1999 sold facilities
resulted in a gain of $2.3 million. The 1998 sale of
20
<PAGE> 75
MDI, which was purchased in 1997, generated a $5.8 million gain. The remaining
subsidiaries sold in 1998 and early 1999 generated an aggregate loss of $1.1
million. See Note 11 of Notes to Consolidated Financial Statements.
Interest expense decreased to $17.4 million in 1999, compared to $20.0 million
during 1998. This was a result of lower average borrowings outstanding during
1999 in connection with the sale of the 1999 sold facilities, and debt reduction
relating to the Debenture repurchases. During 1998, interest expense included
amortization of the estimated fair value of 250,000 warrants issued to DVI
Business Credit Corporation ("DVIBC").
During 1999 and 1998, the Company recorded extraordinary gains net of income
taxes of $2.6 million and $5.3 million related to the repurchase of
approximately $12.5 million and $22.9 million aggregate principal amounts of its
Convertible Subordinated Debentures, respectively, for amounts less than the
recorded amounts. See Notes 6, 7 and 17 of Notes to Consolidated Financial
Statements.
The Company had a basic and diluted loss per share of $.36 in 1999 compared to
basic and diluted net income per share of $.21 in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenue decreased to $195.7 million in 1998 from $216.2 million in 1997,
primarily as a result of the sale of the 1998 sold facilities. Excluding the net
revenue generated by the 1998 sold facilities as well as the facilities sold in
early 1999, net revenue would have decreased by 1% to $149.9 million in 1998,
from $151.1 million in 1997.
General and Administrative ("G&A") expense decreased to $148.4 million in 1998,
compared to 1997 G&A expense of $165.5 million. To a large extent the decrease
resulted from the sale of the 1998 sold facilities. Additionally, the Company
benefited from reduced professional fees related to litigation matters, reduced
accounting costs and the first quarter 1998 implementation of the cost reduction
plan (see "Overview").
Asset impairment loss was $680,000 in 1998 and $92.9 million in 1997. Such
losses related to those centers for which the sum of the expected future cash
flows did not cover the carrying value of the assets acquired. See Note 5 of
Notes to Consolidated Financial Statements.
Bad debt expense decreased to $6.5 million in 1998, compared to $17.6 million in
1997. The significantly higher bad debt expense in 1997 is attributable both to
the Company's overall rapid growth in revenue in 1997, and to an increase in
accounts receivable resulting from a failure to fully collect receivables on the
older billing and collection systems during the phase-in of a new billing and
collection system. During 1997 the new system was affected adversely by training
and operational related problems as well as by the installation complexity. In
addition, 1997 collections were negatively affected by inefficiencies in
realizing receivables in respect to patient co-payments and deductibles.
Depreciation expense was $19.9 million in 1998, compared to $19.2 million in
1997. The increase from 1997 to 1998 resulted primarily from increases in
property and equipment in connection with medical equipment upgrades,
enhancement of single modality centers to multi-modality centers, ongoing
improvements to facilities, and continued implementation of a new billing
system, partially offset by a decrease relating to the sale of the 1998 sold
facilities.
21
<PAGE> 76
Amortization expense decreased to $5.0 million in 1998, from $10.8 million in
1997. The decrease was due to the effect of the $92.9 million impairment loss
write-down of goodwill and certain other long-term assets during the fourth
quarter of 1997 as well as a decrease relating to the sale of the 1998 sold
facilities.
During 1998, the Company recorded a gain on sale of subsidiaries of $4.7
million. The sale of MDI, which was purchased in 1997, generated a $5.8 million
gain. The remaining subsidiaries sold in 1998 and early 1999 generated an
aggregate loss of $1.1 million. See Note 11 of Notes to Consolidated Financial
Statements.
Interest expense increased to $20.0 million in 1998, compared to $19.1 million
during 1997, resulting from higher average borrowings outstanding during 1998,
and interest expense recorded during 1998 relating to amortization of the
estimated fair value of 250,000 warrants issued to DVIBC on September 30, 1997,
partially offset by a decrease relating to the 1998 sold facilities.
During 1998, the Company recorded an extraordinary gain net of income taxes of
$5.3 million related to the repurchase of approximately $22.9 million aggregate
principal amount of its Convertible Subordinated Debentures for amounts less
than the recorded amounts. See Notes 6, 7 and 17 of Notes to Consolidated
Financial Statements.
The Company had basic and diluted net income per share of $.21 in 1998 compared
to a basic and diluted loss per share of $5.26 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficit of $4.6 million,
compared to working capital of $8.3 million at December 31, 1998. The decrease
from 1998 to 1999 was due to several factors, the more significant of which
consist of the following: (i) a decrease in cash from $9.2 million as of
December 31, 1998 to $5.8 million as of December 31, 1999 for reasons discussed
below; (ii) and a decrease in accounts receivable, net of bad debt reserves to
$41.3 million as of December 31, 1999 from $43.4 million as of December 31,
1998, resulting primarily from the sale of the 1998 sold facilities; (iii) an
increase in accounts payable which was $17.8 million as of December 31, 1999
compared to $10.9 million as of December 31, 1998; (iv) an increase in prepaid
expenses and other current assets from $5.3 million as of December 31, 1998 to
$7.3 million as of December 31,1999, resulting from restricted cash of $2.4
million; and (v) offset by a decrease in other receivables from $6.9 million as
of December 31, 1998 to $3.3 million as of December 31, 1999. The Company's
primary short-term liquidity requirements as of December 31, 1999 include the
current portion of long-term debt and capital leases (totaling $27.7 million),
accounts payable, other current liabilities and capital expenditures related to
the opening of new Facilities, the replacement and enhancement of existing
imaging equipment and Facilities, and continued improvements and enhancements to
the Company's management information systems.
Net cash provided by operating activities in 1999 was $17.8 million, compared to
$11.9 million provided by operating activities in 1998. The improved cash flow
from operations in 1999 was primarily a result of an increase in accounts
payable, accrued expenses and other liabilities, which was partially offset by a
growth in the Company's receivables and the net loss in 1999 (net of
the effect of the gain on sale of subsidiaries and extraordinary items).
Additionally, 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 problems associated with the conversion have been
resolved, the Company has not yet fully begun seeing its collections return to
levels experienced before the software conversion. Further, 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 $.3 million in 1999, compared to
net cash provided by investing activities of $10.1 million in 1998. In 1998, the
Company received $33.9 million in net cash proceeds from the 1998 sold
facilities versus $12.8 million in proceeds from the 1999 sold facilities. Cash
expenditures for purchases of equipment and other improvements totaled $12.7
million in 1999 compared to $23.5 million in 1998.
Net cash used in financing activities was $21.5 million in 1999 compared to
$30.3 million used in financing activities in 1998. Proceeds from new borrowings
totaled $42.5 million during 1998 compared to $24.4 million in 1999. Repayments
of notes and capital leases totaled $59.1 million in 1998 compared to $37.8
million in 1999. As discussed in Notes 6 and 7 of Notes to Consolidated
Financial Statements, the Company borrowed approximately $15.9 million in
December 1998 and $9.1 million in January 1999 to repurchase on the open market
and retire approximately $22.9 million and $12.5 million principal amount of
Debentures, respectively. As discussed in Notes 11 of the Notes to Consolidated
Financial Statements, the Company repaid an aggregate of $32.2 million under its
revolving credit loan with DVIBC from proceeds received upon the sales of
facilities in 1999 and 1998.
22
<PAGE> 77
As of December 31, 1999, the Company has approximately $3.4 million of purchase
commitments for capital expenditures which it either already has or expects to
have financing available to meet such commitments. This forward-looking
statement is subject to a number of uncertainties, including the Company's
ability to collect accounts receivable, to manage expenses, to obtain financing
or refinancing of existing debt on acceptable terms, regulatory changes in
Medicare reimbursement rates, and other factors discussed elsewhere in this
report.
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. Furthermore, the relatively short
maturities of its indebtedness require the Company to devote a significant
portion of its annual cash flow to the amortization of debt. The Company also
has ongoing significant capital expenditure requirements in order to maintain
and modernize its imaging equipment. Although the Company's cash flow from
operating activities has been positive, it is projected to be insufficient to
meet the Company's 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 is not currently anticipated in the near term. These factors
necessitate the incurrence of additional indebtedness or the meeting of the
Company's capital requirements through other means.
Accordingly, despite the fact the Company's primary lending source has made
additional funding available to the Company during the first quarter of 2000,
the Company has begun 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. Although the
Company has been successful in the past in selling centers at advantageous
prices and in a timely fashion and, although the Company anticipates entering
into 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, or,
even if such sales were successfully completed and the Company subsequently was
required by its capital needs to continue to sell assets, the Company could be
materially and adversely affected.
The Company is continuing its evaluation, begun during 1999, of its strategic
alternatives to maximize stockholder value, including, without limitation, the
possible sale of additional imaging centers as the Company's or market
conditions warrant or the diversification of the Company's business into other
medical or nonmedical operations, including internet related opportunities,
utilizing some of the proceeds of divested imaging facilities. However, there
can be no assurance that the Company will have adequate financial resources to
implement any such diversification or, if implemented, that such diversification
would be profitable.
During December 1999 and January 2000, the Company experienced a significant
disruption in its billing and collections function due to Year 2000 software
upgrades. For a period of several weeks, the Company was unable to bill in the
ordinary course of business. The Company has not yet fully recovered the amounts
affected by such disruption. During January, February and March 2000, the
Company borrowed an aggregate of $9.4 million from its primary lender to meet
its normal operating expenses. See discussions at "Year 2000 Compliance" also.
23
<PAGE> 78
Notwithstanding the above, management believes it will be successful in
obtaining additional funding and/or will be able to sell selected imaging
centers at advantageous prices such that the Company will have sufficient funds
over the next twelve months to meet operating needs, fund capital expenditure
requirements and repay debt obligations as they become due.
Additionally, even if the Company is successful at selling imaging centers, the
degree to which the Company continues to be leveraged could affect its ability
beyond year 2000 to service its indebtedness, make capital expenditures, respond
to market conditions and extraordinary capital needs, take advantage of business
opportunities or obtain additional financing. A failure to significantly improve
the Company's financial performance or obtain a refinancing of its debt or
additional financing could require the Company to continue to sell imaging
centers in order to maintain its operations and meet its obligations. If the
Company is required to continue its sale of imaging centers, its long-term
business and future prospects could be materially and adversely affected.
For a discussion of the Company's debt facilities, see Note 6 to the
Consolidated Financial Statements. For additional information regarding
contingencies and uncertainties related to litigation and regulatory matters,
see Item 1 - Business - Regulation and Government Reimbursement, Item 3 - Legal
Proceedings and Note 20 of Notes to Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming and embedded
code that may exist in computer systems as of January 1, 2000. Systems and
applications that use two digits to store the years might produce unpredictable
results when their digits turn to "double-zero" on January 1, 2000. The issues
are (1) whether such code exists in the Company's mission-critical applications
and/or computer hardware and if that code will produce accurate date-sensitive
calculations on or after January 1, 2000; and (2) whether certain embedded
applications that control certain medical imaging systems should be upgraded to
ensure Year 2000 compliance and the cost of such upgrades, if any.
The Company established a multi-phased Year 2000 Readiness Program 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 as well as non-IT medical equipment.
The Company completed all phases of the Year 2000 Readiness Program for IT
issues at a cost of $75,000, all of which was expensed in 1999. The Company
completed its Year 2000 Readiness Program for non-IT imaging systems at a cost
of approximately $600,000 (the majority of this total reflects totals of lease
payments to be made in the future in the case of equipment replacements); such
costs primarily will be amortized over the remaining lives of the upgraded
assets.
The Company reviewed the computer applications of its significant payors,
consisting of Medicare, Medicaid and private insurance carriers, to determine
whether such applications would be upgraded before January 1, 2000. The Company
obtained written confirmation from each of its private insurance carriers and
Medicare that the carriers were Year 2000 compliant.
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 collection software. While all of the
problems associated with the conversion have been resolved, the Company's
collections have not yet fully recovered the amounts affected by such disruption
Further, 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. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources").
24
<PAGE> 79
ITEM 7A. 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 December 31, 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 December 31,
1999.
In thousands
<TABLE>
<CAPTION>
Principal Amount Maturing in:
---------------------------------------------------------------------------------------------
Fair Value
2000 2001 2002 2003 2004 Thereafter Total At 12/31/99
---------- ---------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
liabilities:
Long-term debt
adjustable-rate
borrowings $ 51 $ 14,862 $ 61 $ 67 $ 73 $ 789 $ 15,903 $ 15,903
Average interest rate 9.07% 10.50% 9.07% 9.07% 9.07% 9.07% 10.40%
Long-term debt
fixed-rate borrowings 22,528 52,324 12,325 27,043 2,643 2,662 119,525 119,525
Average interest rate 10.04% 9.61% 10.34% 9.08% 10.14% 9.26% 9.65%
Capitalized lease
obligations
fixed-rate borrowings 5,126 5,073 3,785 2,979 1,530 -- 18,493 18,493
Average interest rate 10.46% 10.64% 10.75% 10.78% 10.71% -- 10.64%
---------- ---------- ---------- ---------- ---------- ---------- -------- --------
Total $ 27,705 $ 72,259 $ 16,171 $ 30,089 $ 4,246 $ 3,451 $153,921 $153,921
========== ========== ========== ========== ========== ========== ======== ========
Weighted-Average
Interest Rates 10.12% 9.86% 10.43% 9.25% 10.33% 9.21% 9.85%
========== ========== ========== ========== ========== ========== ========
</TABLE>
25
<PAGE> 80
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report (1999 and 1998) ................................... 27
Report of Independent Certified Public Accountants (1997) ...................... 28
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................... 29
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999 .............................................. 30
Consolidated Statements of Stockholders' Equity for each of the three years
in the period ended December 31, 1999 ....................................... 31
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1999 .......................................... 33
Notes to Consolidated Financial Statements ..................................... 36
</TABLE>
26
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
US Diagnostic Inc.:
We have audited the accompanying consolidated balance sheets of US Diagnostic
Inc. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. Our audits also included the consolidated
financial statement schedule shown as Schedule II. These consolidated financial
statements and consolidated financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, the consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 22, 2000
27
<PAGE> 82
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
US Diagnostic Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of US Diagnostic Inc. (a Delaware
corporation) and its subsidiaries for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of US Diagnostic Inc. and
subsidiaries operations and their cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II for the year ended December
31, 1997 is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
West Palm Beach, Florida,
April 13, 1998.
28
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
In thousands, except share data
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,811 $ 9,177
Accounts receivable, net of allowance for bad debts of $7,110
and $8,300 in 1999 and 1998, respectively 41,366 43,405
Other receivables 3,307 6,886
Prepaid expenses and other current assets 7,335 5,263
--------- ---------
TOTAL CURRENT ASSETS 57,819 64,731
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $45,401 and $39,475 in 1999 and 1998, respectively 83,888 91,345
INTANGIBLE ASSETS, net of accumulated amortization of $16,008
and $11,773 in 1999 and 1998, respectively 68,797 75,445
OTHER ASSETS 2,762 5,049
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES 4,476 1,260
--------- ---------
TOTAL ASSETS $ 217,742 $ 237,830
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 17,786 $ 10,932
Accrued expenses 12,979 13,763
Current portion of long-term debt 22,579 20,982
Obligations under capital leases - current portion 5,126 6,257
Other current liabilities 3,695 4,226
Purchase price due on companies acquired 294 296
--------- ---------
TOTAL CURRENT LIABILITIES 62,459 56,456
Subordinated convertible debentures 21,750 33,969
Long-term debt, net of current portion 91,099 100,956
Obligations under capital leases, net of current portion 13,367 10,227
Other liabilities 2,424 2,549
--------- ---------
TOTAL LIABILITIES 191,099 204,157
MINORITY INTEREST 2,815 2,120
COMMITMENTS AND CONTINGENCIES (Notes 14 and 20) -- --
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized; 22,641,033 and
22,712,433 shares issued and outstanding in 1999 and 1998,
respectively 226 227
Additional paid-in capital 147,945 148,047
Deferred stock-based compensation (400)
(973)
Accumulated deficit (123,943) (115,748)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 23,828 31,553
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 217,742 $ 237,830
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
In thousands, except per share data
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET REVENUE $ 155,602 $ 195,735 $ 216,222
--------- --------- ---------
OPERATING EXPENSES
General and administrative 120,007 148,433 165,549
Asset impairment losses -- 680 92,853
Bad debt expense 6,062 6,493 17,630
Depreciation 18,280 19,861 19,232
Amortization 5,000 5,012 10,790
Loss on settlement of lawsuits -- -- 5,739
Settlement with Former Chief Executive Officer -- -- 1,809
Stock-based compensation 573 1,219 1,261
--------- --------- ---------
TOTAL OPERATING EXPENSES 149,922 181,698 314,863
GAIN ON SALE OF SUBSIDIARIES 2,306 4,676 --
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 7,986 18,713 (98,641)
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (17,369) (20,032) (19,114)
Amortization of lender equity participation fees (1,853) -- --
Interest and other income 2,105 2,545 1,225
Gain on sale of marketable equity securities -- -- 407
--------- --------- ---------
TOTAL OTHER EXPENSE (17,117) (17,487) (17,482)
--------- --------- ---------
Income (loss) before minority interest, benefit
for income taxes and extraordinary item (9,131) 1,226 (116,123)
Minority interest in income of subsidiaries 2,811 2,423 2,428
--------- --------- ---------
Loss before benefit for income taxes
and extraordinary item (11,942) (1,197) (118,551)
Benefit for income taxes (1,149) (685) (1,839)
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (10,793) (512) (116,712)
Extraordinary item, net of income taxes 2,598 5,311 --
--------- --------- ---------
NET INCOME (LOSS) $ (8,195) $ 4,799 $(116,712)
========= ========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss before extraordinary item $ (.47) $ (.02) $ (5.26)
Extraordinary item .11 .23 --
--------- --------- ---------
Net income (loss) $ (.36) $ .21 $ (5.26)
========= ========= =========
Weighted-average common shares outstanding 22,719 22,594 22,182
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
30
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
--------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Additional Total
Common Common Paid-in Unrealized Deferred Accumulated Stockholders'
Shares Stock Capital Gain Compensation Deficit Equity
--------- --------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 23,749 $ 237 $ 141,941 $ 526 $ (5,357) $ (3,835) $ 133,512
Release of escrow shares
related to 1996
acquisitions -- -- 4,185 -- -- -- 4,185
Issuance of contingent shares
related to 1996
acquisitions 79 1 528 -- -- -- 529
Cancellation of escrow shares (1,164) (11) 11 -- -- -- --
Sale of marketable equity
securities -- -- -- (526) -- -- (526)
Stock options exercised 17 -- 73 -- -- -- 73
Bridge warrants exercised 7 -- 34 -- -- -- 34
Restricted stock issued 202 2 438 -- (440) -- --
Deferred compensation
component of settlement
with former executive
officer -- -- -- -- 2,344 -- 2,344
Amortization of deferred
compensation -- -- -- -- 1,261 -- 1,261
Adjustment of income tax
benefit from options
exercised -- -- (767) -- -- -- (767)
Warrants issued in connection
with financing agreement -- -- 1,407 -- -- -- 1,407
Net loss -- -- -- -- -- (116,712) (116,712)
--------- --------- --------- --------- --------- --------- ---------
BALANCE - DECEMBER 31, 1997 22,890 $ 229 $ 147,850 $ -- $ (2,192) $(120,547) $ 25,340
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Concluded)
--------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Additional Total
Common Common Paid-in Deferred Accumulated Stockholders'
Shares Stock Capital Compensation Deficit Equity
--------- --------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1998 22,890 $ 229 $ 147,850 $ (2,192) $(120,547) $ 25,340
Restricted stock issued 28 -- -- -- -- --
Purchase and retirement of stock (206) (2) (1,203) -- -- (1,205)
Release of escrow shares related to a
1996 acquisition -- -- 1,217 -- -- 1,217
Amortization of deferred compensation -- -- -- 1,219 -- 1,219
Warrants issued in connection
with financing agreement -- -- 183 -- -- 183
Net income -- -- -- -- 4,799 4,799
--------- --------- --------- --------- --------- ---------
BALANCE - DECEMBER 31, 1998 22,712 227 148,047 (973) (115,748) 31,533
Restricted stock issued 34 -- -- -- -- --
Purchase and retirement of stock (105) (1) (102) -- -- (103)
Amortization of deferred compensation -- -- -- 573 -- 573
Net loss -- -- -- -- (8,195) (8,195)
--------- --------- --------- --------- --------- ---------
BALANCE - DECEMBER 31, 1999 22,641 $ 226 $ 147,945 $ (400) $(123,943) $ 23,828
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In thousands
Years Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (8,195) $ 4,799 $(116,712)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Asset impairment losses -- 680 92,853
Depreciation and amortization 23,280 24,873 30,022
Bad debt expense 6,062 6,493 17,630
Deferred income tax benefit -- -- (3,002)
Stock-based compensation expense 573 1,219 1,261
Amortization of non-cash financing and other costs 965 1,305 239
Minority interest in income of subsidiaries 2,811 2,423 2,428
Gain on sale of marketable securities -- -- (406)
Loss on settlement of lawsuits -- -- 5,739
Settlement with former CEO -- -- 1,809
Loss on sale of fixed assets 419 -- 225
Gain on sale of subsidiaries (2,306) (4,676) --
Extraordinary item (3,936) (8,047) --
Changes in Assets and Liabilities
(Increase) decrease in, net of sales and acquisitions
of businesses:
Accounts receivable (10,918) (5,201) (31,101)
Other receivables 5,585 3,455 (4,757)
Prepaid expenses (2,334) (1,464) 4,308
Other assets 952 1,007 1,452
Increase (decrease) in, net of sales and acquisitions
of businesses:
Accounts payable and accrued expenses 5,558 (5,921) (3,199)
Minority interest (partnership distributions) (2,062) (2,722) (3,470)
Other liabilities 1,381 (6,353) (3,158)
--------- --------- ---------
Total adjustments 26,030 7,071 108,873
--------- --------- ---------
NET CASH - OPERATING ACTIVITIES 17,835 11,870 (7,839)
--------- --------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (269) (457) (21,827)
Equipment purchases (12,741) (23,450) (18,858)
Payment of purchase price due on companies acquired -- (75) (5,258)
Sale of marketable equity securities -- -- 7,161
Proceeds from dispositions of property and equipment 488 222 1,887
Investment in and advances to subsidiaries -- -- (724)
Proceeds from the sale of subsidiaries, net of cash
retained by purchasers 12,783 33,897 --
--------- --------- ---------
NET CASH - INVESTING ACTIVITIES 261 10,137 (37,619)
--------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term debt $ 24,351 $ 42,482 $ 78,729
Repayments of long-term debt and
obligations under capital leases (37,785) (59,135) (34,558)
Purchase of subordinated convertible debentures (7,925) (13,637) --
Common stock issued -- -- 106
Repurchase of common stock (103) -- --
-------- -------- --------
NET CASH-FINANCING ACTIVITIES (21,462) (30,290) 44,277
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,366) (8,283) (1,181)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 9,177 17,460 18,641
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,811 $ 9,177 $ 17,460
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 18,201 $ 19,517 $ 18,469
======== ======== ========
Income taxes $ 547 $ 2,961 $ 911
======== ======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Borrowing under capital leases were $9.0 million, $9.0 million and $4.8 million
in 1999, 1998 and 1997, respectively.
In 1999, long-term debt and capital lease obligations decreased by $3.3 million
from the sale of subsidiaries, and long-term debt and certain long-term assets
increased by $637,000 from the purchase of the operating assets of a center.
In 1998, long-term debt and capital lease obligations decreased by $27.5 million
from the sale of subsidiaries, and increased by $6.4 million from the purchase
of a partnership interest from a minority holder.
In 1999, the goodwill decreased by $2.9 million and investment in unconsolidated
subsidiaries increased by the same amount. This was due to conversion of a
partnership that was previously being consolidated, into an unconsolidated joint
venture.
The value of 271,000 shares of common stock released from escrow in 1998
relating to a 1996 acquisition was $1.2 million.
The value of 206,000 shares of common stock repurchased for debt and
subsequently retired in 1998 was $1.2 million.
Long-term debt, property and equipment and intangible assets increased by
$500,000 as a result of a 1998 acquisition.
In 1998, the Company acquired the remaining 50% interest in a subsidiary in
exchange for notes payable of $1.3 million.
In 1997, the Company acquired the remaining 20% interest in a subsidiary in
exchange for a note payable of $3.1 million.
Warrants issued in connection with financing arrangements were valued at
$183,000 and $1.4 million in 1998 and 1997, respectively.
The fair market value of common stock and options issued in connection with
acquisitions totaled $4.7 million in 1997.
34
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
--------------------------------------------------------------------------------
Restricted common stock with a value of $440,000 was issued for services
rendered to the Company in 1997.
Information with regard to the Company's acquisitions, all of which are
accounted for under the purchase method of accounting, is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Fair value of non-cash assets acquired, net of
liabilities $ (451) $ 1,038 $ 3,492
Goodwill 720 3,469 18,335
Non-cash consideration paid -- (4,050) --
------- ------- -------
Cash, net of cash acquired $ 269 $ 457 $21,827
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
35
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[1] DESCRIPTION OF THE COMPANY
The accompanying consolidated financial statements include the accounts of US
Diagnostic Inc. (formerly U.S. Diagnostic Labs Inc., the "Company"), its
wholly-owned subsidiaries and non-wholly-owned but controlled subsidiaries.
The Company was incorporated in Delaware on June 17, 1993, and is a medical
services provider specializing in the operation and management of multi-modality
diagnostic imaging centers and related medical facilities. The Company owns,
operates or manages 81 centers located throughout the United States. The Company
provides a variety of medical diagnostic testing and evaluation service
procedures including magnetic resonance imaging, computerized tomography
scanning, ultrasound, and various radiological services.
MANAGEMENT'S PLANS
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. Furthermore, the relatively short
maturities of its indebtedness require the Company to devote a significant
portion of its annual cash flow to the amortization of debt. The Company also
has ongoing significant capital expenditure requirements in order to maintain
and modernize its imaging equipment. Although the Company's cash flow from
operating activities has been positive, it is projected to be insufficient to
meet the Company's 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 is not currently anticipated in the near term. These factors
necessitate the incurrence of additional indebtedness or the meeting of the
Company's capital requirements through other means.
Accordingly, despite the fact the Company's primary lending source has made
additional funding available to the Company during the first quarter of 2000,
the Company has begun 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. Although the
Company has been successful in the past in selling centers at advantageous
prices and in a timely fashion and, although the Company anticipates entering
into 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, or,
even if such sales were successfully completed and the Company subsequently was
required by its capital needs to continue to sell assets, the Company could be
materially and adversely affected.
Notwithstanding the above, management believes it will be successful in
obtaining additional funding and/or will be able to sell selected imaging
centers at advantageous prices such that the Company will have sufficient funds
over the next twelve months to meet operating needs, fund capital expenditure
requirements and repay debt obligations as they become due.
Additionally, even if the Company is successful at selling imaging centers, the
degree to which the Company continues to be leveraged could affect its ability
beyond year 2000 to service its indebtedness, make capital expenditures, respond
to market conditions and extraordinary capital needs, take advantage of business
opportunities or obtain additional financing. A failure to significantly improve
the Company's financial performance or obtain a refinancing of its debt or
additional financing could require the Company to continue to sell imaging
centers in order to maintain its operations and meet its obligations. If the
Company is required to continue its sale of imaging centers, its long-term
business and future prospects could be materially and adversely affected.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and
non-wholly-owned but controlled subsidiaries. Investments in affiliates which
are not majority owned are reported using the equity method. Income recorded
under the equity method is included in other income. Significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets, liabilities,
income and expense and disclosures of contingencies. The most significant
estimates relate to contractual and bad debt allowances on accounts receivable,
useful lives of medical equipment, the realizability of long-lived and
intangible assets and reserves for litigation contingencies. Future events could
alter such estimates in the near term. In addition, healthcare industry reforms
and reimbursement practices will continue to impact the Company's operations and
the determination of contractual and other allowance estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and
certain highly liquid investments with a maturity of three months or less when
purchased. The carrying amount of cash equivalents approximates fair value due
to their short-term nature.
PREPAID EXPENSES AND OTHER CURRENT ASSETS - Prepaid expenses and other current
assets are comprised of prepaid insurance, restricted cash, and other prepaid
items, as well as medical supplies inventory. The inventory is carried at lower
of cost or market, using the first-in, first-out method. As of December 31,
1999, the company has approximately $2.4 million of restricted cash recorded in
other current assets.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the related assets or the remaining lease term. The equipment used by the
Company is technologically sophisticated and subject to accelerated obsolescence
the company in the event of significant technological change. Included in
property and equipment are capitalized costs for software and implementation
costs paid to external consultants related to the Company's billing and general
ledger systems.
INTANGIBLE ASSETS - Goodwill consists of the cost of purchased businesses in
excess of the fair value of net assets acquired. Goodwill is amortized on a
straight-line basis for a period of twenty years. Customer lists and covenants
not to compete are amortized on a straight line basis for a period of fifteen
years and five to ten years, respectively.
LONG-LIVED ASSETS - The Company recognizes impairment losses on impaired
long-lived assets (property and equipment and intangible assets) based on the
amount by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined by using a current market value modeling
approach or by evaluating the current market value of the acquired business
using fundamental analysis.
NET REVENUE - Revenues are reported at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated prospectively determined adjustments under reimbursement agreements
with third-party payors. These adjustments are accrued on an estimated basis
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
in the period the related services are rendered and adjusted in future periods
as final settlements are determined. The Company also has relatively
insignificant amounts of revenue comprised of fees charged by the Company for
management services for the technical component of procedures performed in
certain corporate practice of medicine states provided at non-Company owned
imaging facilities. This revenue also includes fees for management, billing and
collection, and marketing. Additionally, the Company has relatively
insignificant amounts of revenue generated from the sublease of real property
and equipment.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Provision for income taxes is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted SFAS No. 130 effective January
1, 1998. The components of comprehensive income which are excluded from net
income are not significant individually or in the aggregate, and therefore no
separate statement of comprehensive income has been presented.
EARNINGS (LOSS) PER SHARE - Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common stock outstanding for the period. Diluted EPS assumes
conversion of convertible debt and the issuance of common stock for all other
potentially dilutive shares, unless the effect of issuance would have an
anti-dilutive effect.
STOCK-BASED COMPENSATION PLANS - The Company accounts for stock-based
compensation using the intrinsic value method. Accordingly, compensation cost
for stock options issued is measured as the excess, if any, of the fair value of
the Company's common stock at the date of grant over the exercise price of the
options. The pro forma net earnings (loss) per common stock amounts as if the
fair value method had been used are presented in Note 12.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Generally accepted accounting principles
requires companies to disclose the fair value of financial instruments.
Management believes that the carrying values of its financial instruments
approximate their fair values and any differences which may exist between the
carrying values and fair values are not significant.
SEGMENT REPORTING - The Company adopted SFAS No. 131 "Disclosures About Segments
of an Enterprise and Related Information" effective January 1, 1998. The Company
currently has one reporting segment and therefore the adoption of SFAS No. 131
had no impact on the consolidated financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Management has not determined the effect,
if any, of adopting SFAS No. 133.
RECLASSIFICATIONS - Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.
[3] PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, is as follows:
In thousands
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Life
--------- --------- -----------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 --
Buildings 4,581 5,561 40 Years
Medical equipment 89,442 90,462 7 Years
Furniture and fixtures 3,055 3,451 7-10 Years
Office, data processing equipment and software 11,058 11,351 3-10 Years
Vehicles 572 626 3 Years
Leasehold improvements 18,713 17,501 10 Years
--------- ---------
Total 129,289 130,820
Less: accumulated depreciation
and amortization (45,401) (39,475)
--------- ---------
Property and equipment, net $ 83,888 $ 91,345
========= =========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $36.7 million and $28.9 million at December 31, 1999 and 1998, respectively.
Accumulated depreciation for equipment under capital leases was $12.9 million
and $9.1 million as of December 31, 1999 and 1998, respectively. Depreciation
expense amounted to approximately $18.3 million, $19.9 million and $19.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively, of which
$4.0 million, $4.6 million and $4.3 million was attributable to the equipment
under capital leases, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[4] INTANGIBLE ASSETS
A summary of intangible assets at December 31, is as follows:
In thousands
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Life
-------- -------- -----------
<S> <C> <C> <C>
Goodwill $ 78,247 $ 80,660 20 Years
Covenants not to compete 3,192 3,192 5-10 Years
Customer lists 3,189 3,189 15 Years
Other intangibles 177 177 3-5 Years
-------- --------
Total 84,805 87,218
Less: accumulated amortization (16,008) (11,773)
-------- --------
Intangible assets, net $ 68,797 $ 75,445
======== ========
</TABLE>
[5] ASSET IMPAIRMENT LOSSES
The majority of acquired businesses and imaging centers which comprise the
Company were purchased in 1996. As a result, 1997 was the first year of
uninterrupted operation for such acquired entities as part of the Company's
consolidated group. During 1997, management became aware that many of the
acquired centers were not performing as originally projected. At year-end 1997
all acquired businesses were analyzed in depth, in light of the additional
operating data during the period of the Company's ownership, to determine
whether such shortfalls in performance were of a temporary nature and if current
and expected future operating income would be sufficient to cover annual
amortization of intangible and long-lived assets acquired (see Note 2). The
analysis was repeated at the close of 1998 and 1999. Management has recorded
impairment losses for those centers for which the sum of the expected future
cash flows does not cover the carrying value of the assets acquired. No
impairment losses have been recorded for 1999. The components of the impairment
losses for 1998 and 1997 are as follows:
In thousands
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Intangible assets $ 250 $75,980
Investment in unconsolidated subsidiaries accounted for
using the equity method (primarily intangible assets
included therein) -- 6,269
Property and equipment 430 4,609
Acquired receivables -- 4,817
Other long-lived assets -- 1,178
------- -------
$ 680 $92,853
======= =======
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[6] LONG-TERM DEBT
Long-term debt at December 31 consists of the following (also, see Note 7):
In thousands
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revolving credit loan, up to $35.0 million maximum, interest at prime plus 2%
(10.5% at December 31, 1999), due February 2001.
Collateralized by accounts receivable. $ 14,807 $ 16,475
Acquisition and equipment line of credit, up to $25.0 million maximum, interest
from 10% to 11%, due in monthly installments
through June 2002. Collateralized by equipment. 5,718 8,983
10% to 11% term loans to lending institution, up to $15.0 million
maximum, due through October 2002. Collateralized by equipment. 9,317 11,982
Unsecured loan, up to $25.0 million maximum, interest at 10.75%,
due July 2001. 21,934 15,719
6 1/2% convertible note, discounted to yield 9%, due in June 2001. 9,727 9,555
6% convertible notes maturing through June 2000. 10 19
6% to 13% notes payable to lending institutions, due in monthly
installments through April 2012. Collateralized by property and
medical equipment. 44,669 48,343
5% to 11% notes payable related to acquisitions, due in monthly
installments through April 2004. Collateralized by
substantially all of the assets of the companies acquired. 7,496 10,862
--------- ---------
Total 113,678 121,938
Less: current portion (22,579) (20,982)
--------- ---------
Long-term debt $ 91,099 $ 100,956
========= =========
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
At December 31, 1999, aggregate maturities of long-term debt, not including
subordinated convertible debentures (see Note 7), were as follows:
In thousands
2000 $ 22,579
2001 67,278
2002 12,478
2003 5,082
2004 2,716
Thereafter 3,545
--------
Total $113,678
========
In February 1997, the Company entered into a financing agreement with DVI
Business Credit Corporation ("DVIBC") to provide two credit facilities of $25.0
million each. Borrowings are subject to certain conditions such as the
availability of unencumbered assets to collateralize advances and maintenance of
at least $5.0 million in cash during all reporting periods. The first $25.0
million (increased to $35.0 million pursuant to an amendment dated September 29,
1997) is a revolving credit loan from DVIBC secured by accounts receivable and
was initially due on February 28, 1998 (extended to February 28, 1999 pursuant
to an amendment dated September 29, 1997, extended to February 28, 2000 pursuant
to an amendment dated March 31, 1998 and further extended to February 28, 2001
pursuant to an amendment dated March 31, 1999), and bears interest, payable
monthly, at prime plus two percent (10.5% at December 31, 1999). The second
$25.0 million is an acquisition and equipment line of credit from DVI Financial
Services Inc. ("DVIFS") and is collateralized by equipment. Advance of funds
under the acquisition and equipment line of credit is based upon a review by
DVIFS of the entity acquired and/or a review of the assets securing the loan.
Each advance under the acquisition and equipment line of credit is repayable in
sixty monthly installments with interest from 10% to 11% per annum (see Note
22).
On September 29, 1997, the Company and its wholly-owned subsidiary, Medical
Diagnostics, Inc. ("MDI"), entered into a series of Loan and Security Agreements
with DVIFS pursuant to which DVIFS agreed to provide term loans to MDI, in the
aggregate not to exceed $15.0 million, the repayment of which was guaranteed by
the Company and secured by all of the outstanding shares of MDI and by liens on
equipment of MDI, principally consisting of MRI machines and computer equipment.
Each advance under the term loans is repayable in 60 equal monthly installments
inclusive of principal and interest at the rate of 10% per annum as to the first
$7.5 million borrowed and 11% per annum as to any additional amounts borrowed.
As further discussed in Note 11, in May 1998, the Company sold MDI. The Company
has retained all of the outstanding borrowings under the loan, which amounted to
$9.3 million and $12.0 million at December 31, 1999 and 1998, respectively, and
DVIFS released the liens it had on MDI's equipment and on the Company's
ownership in MDI common stock.
In connection with the term loans and pursuant to the modification of the
revolving credit loan (see above), the Company issued to DVIFS two warrants to
purchase an aggregate of 250,000 shares of common stock of the Company at an
exercise price of $7.6875 per share, which was the fair market value
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
of a share of such common stock on the date the warrants were issued. One of the
warrants to purchase 125,000 shares of common stock was exercisable immediately,
and a second warrant to purchase 125,000 shares of common stock was exercisable
beginning on or after April 30, 1998 but only if the entire indebtedness to
DVIFS and DVIBC has not been reduced by at least $12.5 million (exclusive of
regularly scheduled amortization) prior to the date of exercise. Both of the
warrants were to expire on September 30, 2004. The estimated fair value of the
warrants was $1.4 million as of the date of issuance. This amount is being
amortized to interest expense over the term of the related indebtedness. The
unamortized balance at December 31, 1999 and 1998 was $88,000 and $614,000,
respectively, and is offset against long-term debt in the accompanying
consolidated balance sheets. As discussed below, in December 1998, both of the
warrants were canceled and a new warrant was issued to DVIFS in connection with
additional financing from DVIFS. The unamortized balance relating to the
original warrants will continue to be amortized over the life of the revolving
credit loan because the valuation placed on these warrants when originally
issued was deemed to be a cost of the loan.
In December 1998, the Company entered into an unsecured loan agreement with
DVIFS. Advances under the loan agreement were limited to $25.0 million, could
only be made until January 31, 1999, and could only be used to purchase the
Company's Subordinated Convertible Debentures on the open market (see Note 7).
The loan was initially due June 21, 2000 with interest payable monthly at
10.75%. By an amendment dated July 1999, the loan was extended to July 1, 2001.
Additional terms of the loan agreement require that the Company pay DVIFS an
origination fee of 3% on amounts borrowed, as well as pay an equity
participation fee to DVI Private Capital ("DVIPC"), an affiliate of DVIFS, equal
to a percentage of the profit realized by the Company from the purchase of
Subordinated Convertible Debentures as more fully described in Note 7. The total
unamortized portion of such origination fees and equity participation aggregated
$1.2 million and $2.3 million as of December 31, 1999 and 1998, respectively.
These costs have been capitalized to other assets in the accompanying
consolidated balance sheets and are being amortized over the original life of
the related indebtedness. Borrowings outstanding were $21.9 million and $15.7
million at December 31, 1999 and 1998, respectively. In connection with the
loan, the Company canceled the two warrants issued to DVIFS in September 1997 to
purchase an aggregate of 250,000 shares of common stock of the Company (see
discussion of such warrants above) and issued a new warrant to purchase an
aggregate of 250,000 shares of common stock of the Company at an exercise price
of $.938 per share, which was the fair market value of a share of such common
stock on the date the warrant was issued. The new warrant expires on September
30, 2005. The estimated fair value of the new warrant was $184,000 as of the
date of issuance, and is being amortized to interest expense over the original
life of the related indebtedness. The unamortized balance at December 31, 1999
and 1998 was $54,000 and $184,000, respectively, and is offset against long-term
debt in the accompanying consolidated balance sheets.
The 6 1/2% Convertible Note (the "Note") was originally issued to HEICO
Corporation ("HEICO") in 1996, and subsequently modified on September 10, 1997,
as partial consideration for the Company's acquisition of all of the outstanding
stock of MediTek Health Corporation from HEICO (see Note 21). The Note matures
on June 30, 2001, and originally was convertible into the Company's common stock
at $9.25 per share for an aggregate of 1,081,081 shares (adjusted to $8.50 per
share for an aggregate of 1,176,472 shares as modified on September 10, 1997 as
consideration for deferring the demand feature of the Note). The Note may be
prepaid by the Company, at its $10 million face value, upon 60 days written
notice, after January 1, 1999. The Company granted to the holder of the Note
registration rights to the common stock into which the Note is convertible.
Until such time as the shares were registered, the
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
holder could require the Company to redeem the Note for cash at its face value
of $10 million at anytime after January 1, 1999. Effective December 1998, the
Company registered the shares for resale under the Securities Act. The Company
can require the holder to convert the Note at the conversion price if the last
sale price of the common stock averages at least $9.25 per share for the ten
trading days immediately preceding the "required conversion date". The "required
conversion date" was any time commencing on the later of December 31, 1997
(extended to January 1, 1999 as modified on September 10, 1997) or December 8,
1998 (the date that the shares of common stock into which the Note is
convertible were registered for resale by the Company under the Securities Act
of 1933).
On September 16, 1997, HEICO sold the Note to Forum Capital Markets L.P.
("Forum") and, also on September 16, 1997, Forum resold the Note to eighteen
(18) individual parties in various amounts totaling $10 million, resulting in
the Company re-issuing separate Notes to each of the purchasers for their
respective amounts. Each individual Note contains the same terms and conditions
as the amended Note that HEICO sold to Forum. In November, 1997, the Company
listed a global note for trading on the PORTAL Market; and the Company has given
holders that qualify as Qualified Institutional Buyers (as defined under Rule
144A of the Securities Act of 1933) the opportunity to exchange their Notes for
an interest in a global note to be held by the Depository Trust Company in
accordance with its book entry system.
The 6% convertible notes are convertible into shares of common stock at an
average conversion price of $6.50 per share or 1,477 shares as of December 31,
1999.
The 6% to 13% notes payable to lending institutions represent several different
notes payable, and are collateralized by property and medical equipment.
The 5% to 11% notes payable relate to acquisitions from 1996 and earlier and are
collateralized by substantially all of the assets of the companies acquired
to which they relate.
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[7] SUBORDINATED CONVERTIBLE DEBENTURES
In 1996, the Company consummated a $57.5 million offering of 9% Subordinated
Convertible Debentures (the "Debentures") due in 2003. Interest is payable
semi-annually in March and September. Holders of the Debentures are entitled to
convert 100% of the principal amount into common stock of the Company at a
conversion price of $9.00 per share. The conversion price is subject to
adjustment under certain circumstances as described in the Debenture Indenture
("Indenture"). The Company was not permitted to redeem the Debentures, in whole
or in part at any time prior to March 31, 1999. Thereafter, the Debentures are
redeemable at certain redemption prices as set forth in the Indenture. In the
event of a "change of control" as defined in the Indenture, the Company must
offer to repurchase each holder's Debenture at a purchase price equal to 100% of
the principal amount, plus accrued interest.
In December 1998, the Company repurchased approximately $22.9 million of its
Debentures in the open market, and immediately retired the Debentures. The
Company financed the purchase of the Debentures from borrowings under a $25.0
million loan agreement entered into with DVIFS in December 1998 (see Note 6).
The Debentures were purchased at a total price of $15.9 million, consisting of
$13.6 million paid directly to the Debenture holders, $409,000 paid to DVIFS
representing a 3% loan origination fee on amounts borrowed under the loan
agreement, and $1.9 million paid to DVIPC 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 difference between the aggregate carrying value of the
Debentures (as well as pro rata portions of unamortized capitalized financing
costs and unamortized fair value of warrants issued to the underwriter when the
Debentures were originally issued), and the amounts paid to the Debenture
holders, was recorded as an extraordinary gain after taxes of $5.3 million in
the accompanying consolidated statement of operations (see Note 17). The loan
origination fees and the equity participation amount aggregating $2.3 million
was capitalized to other assets in the accompanying balance sheets and is being
amortized over the original life of the related indebtedness. At December 31,
1998, the balance outstanding under the Debentures was $34.0 million.
In January 1999, the Company made additional open market purchases of its
Debentures aggregating $12.5 million, and immediately retired the Debentures.
The Company financed the purchase of the Debentures from borrowings under a
$25.0 million loan agreement entered into with DVIFS in December 1998 (see Note
6). The Debentures were purchased at a total price of $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 DVIPC, 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 were capitalized to other assets in
the accompanying 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 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
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FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
extraordinary gain of $2.6 million (net of related costs and income taxes) - See
Note 17. At December 31, 1999, the balance outstanding under the Debentures was
$21.8 million.
Warrants to acquire 319,445 shares of the Company's common stock at $9.00 per
share were issued in 1996 to the underwriter of the offering of the Debentures.
The estimated fair value of the warrants at the date of the offering was $1.7
million. This amount is being amortized to interest expense over the term of the
related Debentures. In December 1998 and January 1999, $405,000 and $214,000,
respectively, of the proportionate share of the unamortized balances, were
written off as an offset to extraordinary gain in connection with the Company's
open market purchase and cancellation of a portion of its Debentures (see Note
17). The unamortized balance at December 31, 1999 and 1998 is $293,000 and
$610,000, respectively, and is offset against long-term debt in the accompanying
consolidated balance sheets.
Debenture issuance costs of $3.5 million are being amortized as interest expense
over the term of the related Debentures. In December 1998 and January 1999,
$831,000 and $455,000, respectively, of the proportionate share of the
unamortized balances, were written off as an offset to extraordinary gain in
connection with the Company's open market purchase and cancellation of a portion
of its Debentures (see Note 17). The unamortized balance at December 31, 1999
and 1998 is $592,000 and $1.3 million, respectively, and is included in other
assets in the accompanying consolidated balance sheets.
Pursuant to the Indenture, the Company is required to maintain consolidated net
worth of at least $18.0 million. In the event that the Company's consolidated
net worth at the end of two consecutive fiscal quarters is below $18.0 million,
the Company must offer to repurchase 12.5% of the aggregate principal amount of
Debentures originally issued (or lesser amount outstanding at the time of the
deficiency). Under certain covenants of the Indenture, the Company is limited in
the amount of debt, as defined, it may incur. The Company and its subsidiaries
may generally incur debt if the ratio of debt to operating cash flow, as
defined, of the Company and its subsidiaries after giving pro forma effect to
such debt is 6.5 to 1 or less.
As the Company previously disclosed in its annual report on Form 10-K for the
year ended December 31, 1997, in March 1998, the Company determined that it was
not in compliance with the Indenture's debt to operating cash flow ratio in the
fourth quarter of 1997. The non-compliance was due to the required treatment of
certain items in the ratio calculation relating to significant non-operating
write-offs, reserves and expenses taken by the Company in 1996 and 1997 for
various items including the settlement of shareholder class action claims, the
previously disclosed NASDAQ and SEC proceedings and related legal and accounting
professional services fees totaling approximately $10.0 million. The Company
obtained the consent of a majority of the holders of outstanding Debentures to
waive any non-compliance in the fourth quarter of 1997 and permit the Company to
modify the Indenture to add back $10.0 million representing the above noted
items to the operating cash flow calculation for each quarter ended March 31,
1998, June 30, 1998 and September 30, 1998 (the "Consent"). Based upon the
receipt of the Consent, the Company was in compliance with the modified debt
to operating cash flow ratio during the quarter ended March 31, 1998, and was in
compliance with the original and the modified debt to operating cash flow ratio
during the quarters ended June 30, 1998, September 30, 1998 and December 31,
1998. The Company was in compliance with all of the above noted ratios at each
of the four quarters ending December 31, 1999.
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Indenture also prohibits the Company from paying any dividends on common
stock. In addition, the Indenture requires that the Company and its subsidiaries
engage solely in the acquisition, operation and management of multi-modality
diagnostic imaging centers and other medical service facilities.
[8] OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases are stated on the accompanying consolidated
balance sheets at the present value of future minimum lease payments. Interest
rates on capital leases ranged primarily between 7 1/2% and 15%.
Future minimum lease payments under capital leases, together with the present
value of minimum lease payments subsequent to December 31, 1999, are as follows:
In thousands
<TABLE>
<CAPTION>
Date Amount
---- ------
<S> <C>
2000 $ 6,812
2001 6,222
2002 4,481
2003 3,315
2004 1,635
Thereafter --
--------
Total 22,465
Less: amount representing interest (3,972)
--------
Total 18,493
Less: current portion (5,126)
--------
Long-term portion $ 13,367
========
</TABLE>
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[9] INCOME TAXES
The provision (benefit) for income taxes shown in the consolidated statements of
operations consists of the following:
<TABLE>
<CAPTION>
In thousands
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current
Federal $(1,332) $(3,288) $ 115
State 183 2,603 1,048
------- ------- -------
(1,149) (685) 1,163
------- ------- -------
Deferred
Federal -- -- (2,600)
State -- -- (402)
------- ------- -------
-- -- (3,002)
------- ------- -------
Total $(1,149) $ (685) $(1,839)
======= ======= =======
</TABLE>
FEDERAL TAX RATE RECONCILIATION
The difference between the effective income tax rate and the federal income tax
rate is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal tax rate (34)% (34)% (34)%
Impairment of non-deductible intangible assets -- 38 17
Non-deductible amortization of intangible assets 7 51 2
Increase (decrease) in valuation allowance 64 (242) 12
State taxes, net of federal benefit 1 144 1
Sale of subsidiaries (51) (38) --
Meals and entertainment -- 6 --
Debenture gain -- 11 --
Other 3 7 --
-------- -------- --------
Effective tax rate (10)% (57)% (2)%
======== ======== ========
</TABLE>
For the years ended December 31, 1999 and 1998, the extraordinary gains of $3.9
million and $8.0 million are shown net of $1.3 million and $2.7 million in
income taxes, respectively.
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
In thousands
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current
Deferred tax assets:
Allowance for bad debts $ 2,214 $ 2,796
Other allowances and reserves 528 733
Deferred tax liabilities:
Cash to accrual differences on acquired entities -- (459)
Valuation allowance (2,742) (3,070)
-------- --------
Net current deferred tax assets -- --
-------- --------
NON-CURRENT
Deferred tax assets:
Net operating losses 20,012 16,353
Basis differences of intangible assets 8,976 11,061
Compensatory options 615 430
Asset impairment 24 533
Capital loss carryforward 7,714 --
Other 2,372 2,240
Deferred tax liabilities:
Equipment basis differences (7,346) (7,025)
Other (1,772) (269)
Valuation allowance (30,595) (23,323)
-------- --------
Net non-current deferred tax liability -- --
-------- --------
Net deferred income tax asset $ -- $ --
======== ========
</TABLE>
The Company accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In 1997, management
provided a valuation allowance for the net deferred tax asset for which it
is more likely than not that a tax benefit will not be realized. During 1999 the
valuation allowance increased $6.9 million primarily due to generated capital
loss carryforwards ($7.7 million), current year net operating loss generated
($3.7 million) and a decrease in intangible assets ($2.1 million).
The Company has tax operating loss carryforwards of approximately $58.9 million
expiring through the year 2013. Approximately $22.3 million of the operating
loss carryforwards relate to acquired entities. The utilization of the acquired
loss carryforwards is limited to approximately $2.2 million per year. The
49
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Company has capital loss carryforwards of $19.7 million expiring through the
year 2004. Approximately $18.0 million and $1.7 million were generated in 1999
and 1998, respectively, due to the sale of subsidiaries.
[10] CAPITAL TRANSACTIONS
In connection with the Company's initial public offering in 1994, all of the
Company's stockholders at that time entered into an escrow agreement pursuant to
which they placed into escrow 1,163,853 shares (the "IPO Escrow Shares") of the
Company's common stock owned by them. Because the Company did not meet specified
minimum income goals, all of the IPO Escrow Shares were canceled in early 1997.
During 1997, earnings targets were achieved for certain companies, and 720,785
of such shares were released from escrow. Additionally, 79,135 shares were
issued during 1997 related to such earnings targets for one of its acquisitions.
As of December 31, 1997, 271,000 shares remained in escrow, pending achievement
of specified earnings. During 1998, the earnings target was met and the
remaining 271,000 shares were released from escrow. As of December 31, 1998,
there were no shares held in escrow. There were no activities in 1999.
In December 1996, the Company and Jeffrey Goffman, who was at the time the
Company's Chief Executive Officer, entered into a Settlement Agreement with
Consolidated General Ltd. ("General"), U.K. Errington Ltd. ("Errington"), and
certain other persons (collectively, the "Claimants"). Under the Settlement
Agreement, the Company issued an aggregate of 68,400 shares of its common stock,
with a fair market value of $654,000 at the date of issuance, to the Claimants
and paid to the Claimants an aggregate of $1.3 million in cash. In exchange, the
Claimants executed general releases in favor of the Company and Mr. Goffman.
Under the Settlement Agreement, the Claimants settled claims relating to
allegations that they had escrowed too many shares of their common stock under
the escrow agreement entered into in connection with the Company's initial
public offering. The Claimants also released their claims relating to promissory
notes in the aggregate principal amount of $850,000 executed by Mr. Goffman in
favor of the Claimants, which promissory notes were collateralized by 150,000
shares of the Company's common stock owned by Mr. Goffman. After the execution
of these promissory notes, Mr. Goffman executed an assignment and assumption
agreement on behalf of himself and the Company, under which the Company
purportedly assumed Mr. Goffman's obligations under such promissory notes. These
promissory notes were executed by Mr. Goffman in payment of consideration to the
Claimants under consulting agreements between Mr. Goffman and the Claimants,
which Mr. Goffman asserted were entered into by him for the benefit of the
Company. Under the terms of these consulting agreements, the Claimants were to
provide consulting and advisory services to Mr. Goffman, purportedly on behalf
of the Company, to assist in funding, evaluating and structuring business
opportunities and transactions. The fair market value of the shares issued and
the cash paid totaled $2.0 million, which was included in loss on settlement of
claims in 1996. Subsequently, the Claimants alleged that the Company had not
registered the aforementioned 68,400 shares of common stock by the date
contemplated in the Settlement Agreement and made claims against the Company.
The dispute was settled as to General in November 1997 and as to Errington in
January 1998 by payment by the Company to the Claimants of a total of
approximately $364,000 to settle all additional claims and the Company was
released from any further liability under the Settlement Agreement. The
settlement amount was expensed in the accompanying consolidated statement of
operations for 1997.
See Note 12 regarding activity under the Company's stock option plans and
warrants issued by the Company.
50
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Prior to January 1997, the Company granted contractual rights to certain persons
to whom the Company issued securities to register such securities under the
Securities Act of 1933, and state securities registration statutes, and in some
instances the Company agreed to repurchase the stock issued to these persons or
to pay specified liquidated damages if such registration was not effected in a
timely manner. The Company's inadvertent failure to timely file a Form 8-K
report in connection with one of its 1996 acquisitions made it impracticable for
the Company to file registration statements under the Securities Act of 1933
until June 1998. As such, the Company had not registered certain securities in
accordance with provisions of various registration rights agreements. In
November 1997 and January 1998 the Company entered into settlement agreements
with two of the holders of such registration rights who had received a total of
68,400 shares of common stock as part of an earlier settlement with the Company
in December 1996. Pursuant to the November 1997 and January 1998 settlements
pertaining to registrations, the Company paid an aggregate of $364,000 in
December 1997 and February 1998 in full and final satisfaction of its
registration and any other obligations. Such amount is included in general and
administrative expense in the accompanying consolidated statement of operations
for 1997. Another individual who asserted an agreement to register securities
requested and received a commitment to provide piggyback registration rights for
50,000 shares of the Company's common stock, at no cost to the Company, in full
satisfaction of the Company's registration obligations, if any. Such agreement
has been delivered to the individual.
The only other parties to assert non-compliance with an agreement to register
the Company's common stock was a group of sellers of centers in Pennsylvania and
certain sellers of centers in New York. Both of these lawsuits were settled in
1999 as more specifically described in Note 20.
The Company's financial condition may also be materially adversely affected to
the extent that persons to whom the Company has issued securities successfully
assert claims against the Company based upon inadequacy of disclosure regarding
the background of Keith Greenberg, as more fully discussed in Note 20. In
addition to the class action lawsuits which had been settled in 1998, two other
suits have also been settled in 1999. The two suits are more specifically
described in Note 20.
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. In
October 1999, 105,000 shares were purchased and retired by the Company. No
further shares have been repurchased as of the date herein.
At December 31, 1999, the Company had 22,641,033 shares of common stock issued
and outstanding.
A summary of shares of common stock reserved for potential future issuance as of
December 31, 1999, is as follows (in thousands of shares):
Subordinated convertible debentures 2,449
Stock option plans 2,274
Underwriter options and warrants 966
$10.0 million convertible note 1,176
Warrants issued to lender 250
Warrants outside of stock option plans 225
Other convertible debt 1
1996 restricted stock grants not yet issued 166
------
Total 7,507
======
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[11] SALES AND ACQUISITIONS OF BUSINESSES
In December 1999, the Company sold a facility for a total purchase price of $2.2
million; $615,000 in cash and $1.6 million assumption of certain liabilities. In
September 1999, the Company sold a facility for $2.75 million in cash. During
the second quarter of 1999, the Company sold its interest in two facilities for
approximately $1.3 million.
On February 12, 1999, the Company sold its 100% interest in US Imaging, Inc.,
("USI"), to United Radiology Associates, Inc. ("URA"). USI and its subsidiaries
owned and operated eight diagnostic imaging centers in Houston and San Antonio,
Texas. Additionally, on February 12, 1999, the Company sold to URA certain
assets relating to the Company's billing and regional corporate offices located
in Houston and San Antonio, Texas. URA is affiliated with Dr. L.E. Richey, M.D.,
who was Chairman of the Board of the Company. Effective February 12, 1999, Dr.
Richey resigned as Chairman of the Board and as a Director of the Company. The
Company obtained a fairness opinion in connection with the transaction. The
consideration received for the stock of USI and for the billing and regional
corporate office assets totaled $11.7 million, consisting of cash received of
$8.6 million, a secured promissory note of $1.9 million, due February 12, 2001,
with interest at 6% payable semi-annually, and debt assumed by URA of $1.2
million. Immediately upon the closing, $6.2 million of the cash proceeds were
used to repay a portion of the outstanding balance under the DVIBC credit loan
(see Note 6), and another $1.4 million was paid to DVI in full payment of an
equipment loan. In April 1999, URA defaulted on the note (see Note 20).
On January 22, 1999, the Company sold its interest in Integrated Health
Concepts, Inc. ("IHC") to Dr. Mohammad Athari, M.D., ("Athari") the owner of a
minority interest in IHC. IHC and its subsidiaries owned and operated six
diagnostic imaging centers in Houston, Texas. The sales price was $11.7 million,
consisting of cash received of $3.3 million and the assumption by Athari of debt
amounting to $8.4 million. Immediately upon the closing, $1.0 million of the
cash proceeds were used to repay a portion of the outstanding balance under the
DVIBC credit loan (see Note 6).
In November 1998, the Company sold its 100% interest in US Heartcare Management,
Inc. ("US Heartcare"). US Heartcare provided management services to several
third party nuclear medicine and diagnostic imaging centers in the New York City
metropolitan area. The sale was effective as of October 1, 1998. The $12.0
million aggregate consideration received consisted of $2.7 million in cash,
notes receivable of $1.0 million ($500,000 of which is due in various monthly
and quarterly installments with interest at 7% per annum, and the remaining
$500,000 due on September 30, 2001 with interest at 7% per annum payable
quarterly), and the assumption and forgiveness of debt by the purchaser
aggregating $8.3 million. Additionally, as part of the transaction, the Company
entered into an agreement for the provision of general consulting services to US
Heartcare for an annual fee of $500,000, payable quarterly in arrears, for a
period of three years. During February and March 1999, the purchaser of US
Heartcare paid the entire $1.0 million of notes receivable to the Company
without penalty.
In May 1998, the Company sold certain non-core assets consisting of the
Company's mobile subsidiary, Medical Diagnostics, Inc. ("MDI"), which had been
acquired during 1997, to Alliance Imaging Inc. for $35.5 million in cash less
debt assumed of $5.9 million. Immediately upon the closing, the Company used
$25.0 million of the cash proceeds to repay a portion of the outstanding balance
under the DVIBC credit loan.
52
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Also in May 1998, the Company sold its 50.1% interest in United States Cancer
Care Inc., a non-core asset, and its 100% interest in a subsidiary which held a
50% interest in a radiation oncology partnership, (collectively, the "Oncology
Interests"), to USCC Acquisition Corp. ("USCC"), a Delaware corporation. Upon
the closing, USCC changed its name to U.S. Cancer Care, Inc. The sale price
consisted of $2.0 million in cash, a promissory note for $750,000 due in
twenty-four equal installments from May 1999 through April 2001 with interest at
8% per annum, and the assumption by USCC of certain additional liabilities
aggregating approximately $1.4 million.
All of the acquisitions made by the Company during each of the three years in
the period ended December 31, 1999, were accounted for under the purchase method
of accounting. The Company allocates the purchase price to net assets acquired
based upon their estimated fair market values. During the initial year after
acquisition the Company may adjust the allocation of the purchase price as more
information becomes available.
During 1997, the only acquisition made by the Company was Medical Diagnostics,
Inc. in the first fiscal quarter. Total consideration paid was approximately
$22.0 million in cash and assumption of debt of $8.6 million. MDI provided fixed
and mobile diagnostic imaging services to approximately 40 hospitals. As further
discussed above, in May 1998 the Company sold MDI.
Effective April 1, 1998, the Company purchased from Phycor of Jacksonville, Inc.
("Phycor"), a wholly-owned subsidiary of Phycor, Inc., certain accounts
receivable owned by Phycor as well as Phycor's 50% interest in Diagnostic Equity
Partners ("DEP"), a joint venture between the Company and Phycor. The purchase
price was $2.0 million, of which $1.5 million was paid (without interest) in
July 1998, and the remaining $500,000 was paid in two equal installments
(without interest) in October 1998 and January 1999. The Company's interest in
DEP had previously been accounted for under the equity method of accounting. As
a result of the purchase, DEP was dissolved, and the assets and liabilities of
DEP have been recorded by the Company. The Company operates the imaging centers
previously managed by DEP.
On December 31, 1998, the Company purchased the remaining 50% interest in
Imaging Center of Orlando for $1.3 million. Half of such purchase price is
payable in six equal quarterly installments beginning April 1999 including
interest at 7% per annum. The other half of such purchase price is payable at
any time at the discretion of the Company for a period of five years from date
of purchase with an option to extend for an additional five years, with
accumulated interest at 4.5% which was the federal interest rate under Internal
Revenue Code Section 1274 (d) at December 31, 1998.
During the second quarter of 1999, the Company acquired a facility for
approximately $900,000 and merged its operations with an existing facility.
In connection with a certain 1996 acquisition, the Company guaranteed to
repurchase 206,000 shares of the Company's common stock issued to the seller if,
on the last trading day prior to the second anniversary of the closing date (as
defined), the market price of the Company's common stock was more than $2.00
below a defined price. The Company placed 103,000 of these shares into escrow,
which were released in late 1997 when certain earnings targets were met. The
Company's share price was more than $2.00 below the defined price as of the
specified date, resulting in a liability to repurchase the common stock at a
total price of approximately $1.9 million. As of December 31, 1997, the Company
had
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
recorded $1.2 million ($825,000 in 1996 and $379,000 in 1997) in paid-in
capital to reflect the market price as of the date earned of the 206,000 shares
and recorded a "purchase price due on companies acquired" of approximately
$694,000 (representing the difference between amount to be paid of $1.9 million
and the recorded value of the shares to be repurchased). As a result, goodwill
of $1.9 million related to the required repurchase of the 206,000 shares was
recorded as of December 31, 1997. In June, 1998, the Company reached an
agreement with the seller for the payment of $1.9 million over 36 equal
installments plus interest at 10%, and the 206,000 shares were returned to the
Company and retired. As a result, the Company recorded a liability of $1.9
million, reduced common stock and paid-in capital by $1.2 million, and reduced
purchase price due on companies acquired by $700,000.
The Company also entered into non-compete agreements with certain individuals of
some of the companies acquired. The cost of these non-compete agreements is
recorded as an intangible asset as of the date of the related acquisition and
amortized over the contractual life of the agreement.
The results of operations of the acquired businesses are included in the
Company's consolidated statements of operations from the date of acquisition.
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following summarizes the unaudited pro forma effect of the businesses
acquired in 1999, 1998 and 1997, accounted for under the purchase method as if
the businesses had been acquired as of the beginning of the year immediately
preceding the year of acquisition. This presentation is prepared in accordance
with generally accepted accounting principles and does not reflect estimates for
potential operating efficiencies and other cost savings.
UNAUDITED:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
In thousands, except per share data
Net revenue as reported $ 155,602 $ 195,735 $ 216,222
Effect of acquisitions 164 3,319 11,305
--------- --------- ---------
Pro forma net revenue $ 155,766 $ 199,054 $ 227,527
========= ========= =========
Loss before extraordinary item as reported $ (10,793) $ (512) $(116,712)
Effect of acquisitions 56 62 109
--------- --------- ---------
Pro forma loss before extraordinary item $ (10,737) $ (450) $(116,603)
========= ========= =========
Net income (loss) as reported $ (8,195) $ 4,799 $(116,712)
Effect of acquisitions 56 62 109
--------- --------- ---------
Pro forma net income (loss) $ (8,139) $ 4,861 $(116,603)
========= ========= =========
Basic and diluted loss per common share
Loss before extraordinary item as reported $ (.47) $ (.02) $ (5.26)
Effect of acquisitions -- -- --
--------- --------- ---------
Pro forma loss before extraordinary item $ (.47) $ (.02) $ (5.26)
========= ========= =========
Basic and diluted loss per common share
Net income (loss) as reported $ (.36) $ .21 $ (5.26)
Effect of acquisitions -- -- --
--------- --------- ---------
Pro forma net income (loss) $ (.36) $ .21 $ (5.26)
========= ========= =========
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[12] STOCK OPTION PLANS AND WARRANTS
At December 31, 1999, the Company has two stock-based compensation plans. In
accordance with SFAS No. 123 "Accounting for Stock-Based Compensation", ("SFAS
No. 123"), the Company has accounted for all stock-based compensation grants
issued to non-employees subsequent to December 15, 1995 as provided for by SFAS
No. 123. The Company has elected to continue to account for its stock-based
compensation grants to employees and directors in accordance with the provisions
of APB Opinion No. 25 "Accounting for Stock Issued to Employees". However, in
accordance with SFAS No. 123, the pro forma effect of the issuance of such
options is set forth below. The fair value of each option granted subsequent to
December 15, 1995 to non-employees and employees has been estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 5.7 percent
to 6.6 percent for 1997, 4.3 percent to 5.5 percent for 1998, and 5.9 percent
for 1999; dividend yield of zero percent for all years; expected lives ranging
from 3 to 6 years for 1997, and 2 to 5 years for 1998, and 1 to 5 years for
1999; and volatility of 82 percent for 1997, 87 percent for 1998, and 90 percent
for 1999. Compensation cost charged to operations in connection with the
Company's stock-based compensation plans totaled $3.6 million (including $2.3
million which is included in the net Settlement to Former Chief Executive
Officer) in 1997, $1.2 million in 1998, and $573,000 in 1999, respectively.
The following represents the pro forma effect had the Company valued all of its
stock-based compensation in accordance with SFAS No. 123 using the option
pricing model assumptions described above.
In thousands, except per share data
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss)
As reported $ (8,195) $ 4,799 $ (116,712)
Pro forma $ (8,305) $ 2,893 $ (120,758)
Basic and diluted earnings (loss) per share
As reported $ (.36) $ 0.21 $ (5.26)
Pro forma $ (.36) $ 0.13 $ (5.44)
</TABLE>
The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the issuance
of incentive stock options and non-qualified stock options. Under the terms of
the 1993 Plan, a maximum of 200,000 shares of the Company's common stock may be
issued upon the exercise of stock options granted thereunder. The 1993 Plan
provides for administration by the Company's Board of Directors (or a committee
of the Board of Directors) which, subject to the terms of the 1993 Plan,
determines to whom grants are made and the vesting, timing, amounts and other
terms of such grants. Incentive stock options may be granted only to employees
of the Company, while non-qualified stock options may be granted to the
Company's employees, officers, directors, consultants and advisors. The exercise
price of incentive stock options may not be less than the fair market value of
the Company's common stock on the date of grant and the term of these options
may not exceed 10 years; however, with respect to incentive stock options
granted to holders of more than 10% of the Company's common stock, the exercise
price may not be less than 110% of the fair market value of the Company's common
stock on the date of grant and the term of these options may not exceed five
years. The 1993 Plan has no options available for new grants since December 31,
1998.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company's 1995 Long-Term Incentive Plan (the "1995 LTIP") provides for the
issuance of incentive stock options and non-qualified stock options. The 1995
LTIP also provides for awards of restricted stock. Under the terms of the 1995
LTIP, as amended, a maximum of 4,000,000 shares of the Company's common stock
may be issued upon the exercise of stock options granted thereunder and a
maximum of 700,000 shares of common stock are available for restricted stock
awards. The 1995 LTIP provides for administration by the Company's Board of
Directors (or a committee of the Board of Directors) which, subject to the terms
of the 1995 LTIP, determines to whom grants are made and the vesting, timing,
amounts and other terms of such grants. The 1995 LTIP provides that the total
number of shares of common stock that may be subject to stock options or
restricted stock awards granted to any person in any calendar year may not
exceed 25% of the maximum number of shares that may be issued and sold under the
Plan. The Company has a policy pursuant to which non-employee directors shall
receive an option to purchase shares of common stock under the 1995 LTIP on the
date that such director first becomes a director. Effective August 1999, the
Board of Directors approved a new non-employee director compensation plan which
included a grant to each non-employee director of 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 $.91 per share, the closing price of
the Company's stock on August 27, 1999. The options vest immediately and have a
five year term.
A summary of the status of the Company's two stock option plans at December 31,
1999, 1998 and 1997, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,556 $ 4.42 3,171 $ 7.97 2,620 $ 8.42
Granted:
Exercise price equals market price 400 .91 2,410 1.68 695 6.76
Exercise price is less than market price -- -- -- -- -- --
Exercised -- -- -- -- (16) (4.44)
Forfeited (1,682) 6.00 (2,025) (6.72) (128) (11.06)
------ --------- ------ --------- ------ ---------
Outstanding at end of year 2,274 $ 2.61 3,556 $ 4.42 3,171 $ 7.97
====== ========= ====== ========= ====== =========
Options exercisable at end of year 1,691 1,807 1,975
Weighted-average fair value of options
granted during the year:
Exercise price equals market price $ .91 $ 1.68 $ 6.76
Exercise price is less than market price N/A N/A N/A
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table summarizes information about stock options outstanding at
December 31, 1999. (Shares in thousands)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Shares Shares
Range of Exercise Outstanding at Weighted-Average Weighted-Average Exercisable Weighted-Average
Price 12/31/99 Remaining Life Exercise Price at 12/31/99 Exercise Price
----------------- -------------- --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.91 - $ 0.91 400 4.65 $ 0.91 400 $ 0.91
$ 0.94 - $ 0.94 1,135 3.95 0.94 630 0.94
$ 4.00 - $7.00 465 1.49 4.99 416 5.09
$ 7.13 - $9.00 250 1.58 7.41 233 7.32
$13.63 - $13.63 24 3.43 13.63 12 13.63
----- ------ ------ ----- ------
$ 0.91 - $13.63 2,274 3.30 $ 2.61 1,691 $ 2.92
===== ====== ====== ===== ======
</TABLE>
Not issued pursuant to the plans discussed above are a total of 225,000 warrants
outstanding at December 31, 1999, issued during 1995 to individuals to purchase
common stock at exercise prices ranging from $5.00 to $5.13.
In connection with the Company's 1994 and 1995 public stock offerings, the
Company issued unit purchase options to the underwriters. The 1994 options allow
the holder to acquire 170,000 shares of common stock at $7.25 per share, 170,000
warrants convertible into common stock at $6.25 per share and 340,000 warrants
convertible into shares of common stock at $8.00 per share. These options and
related warrants expired in October 1999. The 1995 options allow the holder to
acquire 161,500 shares of common stock at $7.82 per share, 161,500 warrants
convertible into shares of common stock at $6.25 per share and 323,000 warrants
convertible into shares of common stock at $8.00 per share. These options and
related warrants, which are convertible into a total of 646,000 shares, are
outstanding at December 31, 1999, and expire November 15, 2000.
In connection with the 1996 issuance of the Company's Subordinated Convertible
Debentures, warrants to acquire 319,445 shares of the Company's common stock at
$9.00 per share were issued to the underwriter, such warrants expire March 31,
2003. All of these warrants are outstanding at December 31, 1999.
During 1995 and 1996, the Company granted, respectively, 50,000 and 195,000
shares of restricted common stock to the Company's former Chief Executive
Officer under the 1995 LTIP. These restricted stock grants vested over two and
five years, and the Company recorded deferred charges of $175,000 and $2.5
million, respectively, to be amortized over the vesting period of the stock. The
unamortized deferred compensation balance of approximately $2.1 million was
recorded as part of Settlement with Former Chief Executive Officer during the
second quarter ended June 30, 1997 (see Note 19).
The Company granted 94,000 and 51,000 shares of restricted common stock to
certain other officers and directors of the Company in 1996 and 1997,
respectively, under the 1995 LTIP. These restricted stock grants have vesting
periods ranging from two to five years. Related deferred charges in 1996 and
1997 amounted to $1.2 million and $440,000, respectively, which are being
amortized to compensation expense over the vesting periods of the restricted
stock. The unamortized deferred compensation
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
balance as of December 31, 1999 and 1998 is $247,000 and $567,000, respectively.
In March 1997, the Company granted options to acquire 100,000 shares of the
Company's common stock to its then Chairman of the Board and options to acquire
35,000 shares of the Company's common stock to each of two directors, all under
the 1995 LTIP. The three Directors comprised the Special Committee appointed by
the Company's Board of Directors to review the Company's prior relationship with
Coyote Consulting and Keith Greenberg (see Note 19). The options vested on
September 30, 1997. The exercise price of the options is $8.625 which was the
market value of the Company's common stock at the date of grant. As of December
31, 1999 all of these options were canceled.
During 1997, the Company issued to one of its lenders two warrants to purchase
an aggregate of 250,000 shares of common stock of the Company at an exercise
price of $7.6875 per share. In connection with additional financing in December
1998 by the same lender, the two warrants were canceled and a new warrant was
issued to purchase 250,000 shares of common stock of the Company at an exercise
price of $0.938 per share. See Notes 6 and 7.
On July 13, 1998, the Board of Directors of the Company elected Dr. L.E. Richey,
M.D., then a Co-Chairman of the Board of the Company, to the position of sole
Chairman of the Board. Concurrently, the Company granted Dr. Richey options to
purchase 350,000 shares of the Company's common stock under the 1995 LTIP in
recognition of the extensive amount of time he devoted to the Company and in
anticipation of his future contributions as Chairman. The options were
exercisable at a price of $3.50, which represented the closing price of the
Company's common stock on the day immediately preceding the date of grant, and
fully vest one year from the date of grant.
On December 11, 1998, options to purchase 1,966,000 shares of the Company's
common stock under its 1995 LTIP were canceled. These canceled options were
granted at various times in the past and under various terms and conditions (at
exercise prices ranging from $3.69 to $13.50), with 1,215,000 of such total
having been issued to current directors and executive officers of the Company
and 751,000 having been issued to other employees. Concurrent with the
cancellation of these options, options (hereinafter defined as "new options") to
purchase 1,165,001 shares of the Company's common stock under the 1995 LTIP were
granted to current directors and executive officers, and new options to purchase
530,000 shares of common stock were granted to certain other employees. The
December 1998 cancellation and reissuance was consummated in lieu of the July
1998 cancellation and reissuance previously disclosed which was not consummated.
The new options were issued in order to provide an appropriate incentive to the
grantees, especially those whose previous options were granted with exercise
prices substantially above the current market price of the Company's common
stock. All such new options are exercisable at a price of $0.937, which
represents the closing price of the Company's common stock on the day
immediately preceding the date of grant. New options issued to non-employee
directors fully vest on the first anniversary of the date of grant and have a
term of five years. All other new options granted vested 25% at date of grant
and will vest 25% on each anniversary date thereafter, and have a term of five
years. During 1999, 560,000 of these options were canceled, of which 515,000
were granted to previous executive officers and directors and 45,000 were
granted to other employees. As of December 31, 1999, 1,135,000 of these options
remain outstanding. At December 31, 1999, Dr. Richey was no longer on the
Company's Board of Directors, and all of his options granted as described herein
have been canceled.
59
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[13] EARNINGS PER SHARE
The Company had a loss before extraordinary item in each of the three years in
the period ended December 31, 1999, and all potentially dilutive securities were
excluded from basic and diluted earnings per share in each year since the effect
would be anti-dilutive. Such potentially dilutive securities consist of the
following: (i) unexercised stock options and warrants to purchase 3.7 million,
6.1 million and 5.7 million shares of the Company's common stock as of December
31, 1999, 1998 and 1997, respectively; (ii) 3.6 million, 5.0 million and 7.8
million shares of the Company's common stock issuable upon conversion of
convertible debt as of December 31, 1999, 1998 and 1997, respectively; (iii)
unvested restricted stock amounting to 165,600, 199,000 and 228,000 shares of
the Company's common stock as of December 31, 1999, 1998 and 1997, respectively;
and (iv) 271,000 shares of the Company's common stock held in escrow as of
December 31, 1997, to be released to the sellers related to certain acquisitions
only if certain earnings targets were achieved. As of December 31, 1998, all
shares of the Company's common stock held in escrow had been released.
[14] COMMITMENTS
The Company and its subsidiaries have non-cancelable operating leases for use of
their facilities and various equipment. These leases may require payment of
various expenses as additional rent. Certain leases contain renewal options and
escalation clauses.
Minimum future rental payments for each of the next five years and thereafter
under non-cancelable operating leases having remaining terms in excess of one
year as of December 31, 1999 are:
In thousands
Date Amount
---- --------
2000 $ 12,929
2001 10,322
2002 8,055
2003 6,936
2004 5,727
Thereafter 15,769
--------
Total $ 59,738
========
Rent expense for the years ended December 31, 1999, 1998 and 1997, under various
operating leases amounted to $9.8 million, $13.2 million and $10.5 million,
respectively.
The Company has comprehensive maintenance contracts with its equipment vendors
for its magnetic resonance imaging ("MRI"), computerized tomography ("CT") and
other diagnostic medical equipment. The terms of these contracts are between one
and five years, but may be canceled by the Company under certain circumstances.
Such non-cancelable service contracts are included in the minimum future rental
payments schedule above. In addition, the Company has approximately $3.4 million
of purchase commitments for capital expenditures as of December 31, 1999.
The Company has entered into employment agreements with certain officers. The
employment agreements have original terms of one to five years. All of the
agreements provide for a specific amount
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
of annual base salary. Certain of the agreements provide for incentive bonuses,
stated minimum base salary increases, and options to acquire the Company's
common stock. In addition, certain of the employment agreements, including at
will contracts, provide that in the event of certain changes in control of the
Company, the officers may deem their employment terminated and receive lump sum
payments pursuant to terms provided in each of the applicable employment
agreements. The aggregate amount of compensation under all existing employment
agreements, based upon the base salaries in effect at December 31, 1999, for the
remaining terms of the respective employment agreements, was approximately $1.3
million at December 31, 1999. In addition, the amount of compensation in the
event of certain changes in control of the Company, was approximately $2.6
million at December 31, 1999.
Each of the Company's Facilities has agreements with radiologists as independent
contractors under long-term agreements to provide all radiology services to the
Facilities. Radiologist compensation ranges between 10% and 21% of net
collections attributable to radiology services performed by the radiologist.
[15] CONCENTRATION OF CREDIT RISKS
The Company's imaging centers grant credit without collateral to its patients,
most of whom are residents of the areas where the centers are located and are
insured under third-party payor agreements.
The mix of receivables from third-party payors and patients at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Medicare and Medicaid 13% 12%
Workers' Compensation and Self Pay 11 10
Commercial 17 17
Managed Care 36 36
Other 23 25
-------- --------
Total 100% 100%
======== ========
</TABLE>
[16] 401(k) PROFIT SHARING PLAN
The 401(k) Profit Sharing Plan (the "401(k) Plan") is offered to full-time
employees who have completed six months of service. Eligible employees may make
elective deferrals in any amount up to 15% of their compensation. The Company
contributes 100% of the amount withheld from the Participant's compensation (up
to a maximum of 3%) and may make additional discretionary contributions.
Employer contributions to the 401(k) Plan totaled $464,000, $486,000 and
$526,000 in fiscal 1999, 1998 and 1997, respectively.
[17] EXTRAORDINARY ITEM
The Company repurchased approximately $12.5 and $22.9 million, aggregate
principal amount of its Convertible Subordinated Debentures in the open market
during 1999 and 1998, respectively, for amounts less than the recorded amounts
(see Note 7). The Company financed the purchase of the Debentures from
borrowings under a $25.0 million loan agreement entered into with DVIFS in
December
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1998 (see Note 6). The transaction resulted in an extraordinary gain after taxes
in 1999 and 1998 of approximately $2.6 and $5.3 million, respectively.
[18] INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES
In 1997, as the result of losses incurred by Diversified Therapy Corporation
("DTC"), a previously unconsolidated investment in a start-up company accounted
for using the equity method of accounting, the Company recorded a loss of $3.6
million in the quarter ended June 30, 1997, representing the Company's entire
recorded investment in DTC. Such loss amount is included in asset impairment
losses in 1997 as discussed in Notes 2 and 5. On December 31, 1998, the Company
sold its interest in DTC for a nominal amount which included a note receivable
for $250,000, and a common stock purchase warrant for 416,662 shares of DTC.
Effective April 1, 1998, the Company purchased from Phycor certain accounts
receivable owned by Phycor as well as Phycor's 50% interest in DEP (see Note
11). The Company's interest in DEP had previously been accounted for under the
equity method of accounting. As a result of the purchase, DEP was dissolved, and
the assets and liabilities of DEP have been recorded by the Company. The Company
operates the centers previously managed by DEP. For the three months ended March
31, 1998, DEP had total revenues of $3.0 million, total expenses of $3.3
million, and a net loss of $320,000. At December 31, 1997 DEP had current assets
of $444,000 and total assets of $11.0 million, current liabilities of $4.0
million and total liabilities of $9.3 million and total partnership capital of
$1.7 million. During 1997, DEP had total revenues of $11.5 million, total
expenses of $12.5 million, and a net loss of $1.0 million.
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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following is a combined financial summary of all unconsolidated subsidiaries
(other than DEP discussed above), which the Company is accounting for under the
equity method. The Company's ownership interests in the partnerships varies
between 18% and 50%. On December 17, 1998, one of the partnership entities was
dissolved and the operations were terminated. In 1998, the Company opened a
center in the same city that provides similar as well as expanded services. The
Company's combined investments in and advances to these entities were $4.5
million and $1.3 million as of December 31, 1999 and 1998, respectively.
In thousands, as of December 31:
1999 1998
------ ------
Current Assets $5,105 $5,121
Non-Current Assets 3,297 3,359
------ ------
Total Assets $8,402 $8,480
====== ======
Current Liabilities $1,725 $1,650
Non-Current Liabilities 2,175 2,921
Partnership Capital 4,502 3,909
------ ------
Total Liabilities and Capital $8,402 $8,480
====== ======
1999 1998 1997
------- ------- -------
Results of Operations
Net Revenue $12,798 $12,571 $12,237
Expenses 7,706 7,345 7,224
------- ------- -------
Net Income $ 5,092 $ 5,226 $ 5,013
======= ======= =======
During July 1999, the Company contributed certain assets of a wholly-owned
subsidiary to a 50% owned joint venture, Jefferson Magnetic Resonance Imaging,
LLC. The goodwill related to these assets was recorded as Investment in
Unconsolidated Subsidiaries. Equity in the net income of the subsidiary which
has been reduced by the amortization of goodwill, is reflected in the
accompanying consolidated statements of operations. Goodwill is being amortized
using the straight-line method over seven years, the term of the joint venture
agreement. Amortization expense of $192,000 was recorded in 1999.
The reconciliation of the investment in the unconsolidated subsidiaries at
December 31, 1999, in thousands, is as follows:
Equity Interest at Respective Ownership Percentages $1,491
Advances to Unconsolidated Subsidiaries 244
Unamortized Goodwill 2,741
------
Carrying Value $4,476
======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[19] TERMINATION OF EMPLOYMENT AND CONSULTING AGREEMENTS
On February 3, 1997, Jeffrey Goffman, at the time the Company's Chairman and
Chief Executive Officer, was voluntarily placed on administrative leave by the
Company's Board of Directors. During this administrative leave, he was relieved
of all corporate duties and did not participate in any meetings of the Company's
Board of Directors. On March 25, 1997, Mr. Goffman declared his election to
treat himself as having been terminated without cause by the Company under his
employment contract, thus, invoking constructive termination provisions of his
employment agreement. This action followed the recommendation of a Special
Committee of the Board of Directors reviewing the Company's former relationship
with Coyote Consulting and Keith Greenberg, an employee of Coyote who had
provided services to the Company.
On April 24, 1997, the Company and Mr. Goffman entered into a Letter of Intent
(the "Letter") with respect to the resolution of employment related disputes
between them. Pursuant to the terms of the Letter, Mr. Goffman resigned as an
officer, director and employee of the Company effective as of March 31, 1997,
and received $165,000 upon execution of the Letter. On July 11, 1997, the
Company and Mr. Goffman entered into a Settlement Agreement and General Release
(the "Settlement Agreement"), pursuant to which, among other things, the Company
paid Mr. Goffman an additional $33,000 implementing the terms of the letter and
agreed to pay an additional $267,000 in sixteen equal monthly consecutive
installments of $17,000 beginning in August 1997. Mr. Goffman also agreed to
transfer or vote, as required by the Company, all proxies or other agreements by
which he exercised the right to vote or exercise legal control over the
Company's stock in which others have a beneficial interest. As part of this
settlement, it was agreed that all previously vested restricted stock and stock
options granted to Mr. Goffman would be retained by him and all unvested
restricted stock as of March 31, 1997 (220,000 shares) would become vested and
be placed in an escrow account. All of Mr. Goffman's options were canceled as of
December 31, 1999.
The $165,000 paid to Mr. Goffman upon execution of the Letter, the $33,000 paid
within two days of the execution of the Settlement Agreement, the $267,000 to be
paid over sixteen months and unamortized deferred compensation relating to Mr.
Goffman in the amount of $2.3 million were recorded in Settlement with Former
Chief Executive Officer during the second quarter ended June 30, 1997.
On September 30, 1997 the Company entered into a second settlement with Mr.
Goffman which fully resolved the remaining issues between them including
ownership of the escrow account previously established. Pursuant to this
settlement, Mr. Goffman agreed to contribute $1.0 million to the Company's
settlement of the class actions in the form of $850,000 cash and the forgiveness
of the next nine monthly payments totaling $150,000 which would otherwise be due
to him from the Company under the earlier settlement. Mr. Goffman delivered the
$850,000 to the Company on March 17, 1998. The Company thereafter released its
claim to the remainder of the securities covered by the Escrow and Settlement
Agreement.
During the quarter ended September 30, 1997, a credit of $1.0 million was
recorded in Settlement with Former Chief Executive Officer to reflect the
contributions and debt forgiveness from Mr. Goffman.
Michael D. Karsch, the Company's former Senior Vice President, General Counsel
and Secretary of the Company, and the Company were parties to a five-year
employment agreement dated June 1, 1996. On February 3, 1997, Mr. Karsch was
placed on administrative leave by the Company's Board of Directors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
This action followed the recommendation of a Special Committee of the Board of
Directors reviewing the Company's former relationship with Coyote Consulting and
Keith Greenberg. During this administrative leave, Mr. Karsch was relieved of
all corporate duties and did not participate in any meetings of the Company's
Board of Directors. On March 25, 1997, Mr. Karsch declared his election to treat
himself as having been terminated without cause by the Company under his
employment contract, thus invoking constructive termination provisions of his
employment agreement. The Company has treated this election as a resignation.
The Company has not agreed to any severance arrangements with Mr. Karsch. At
December 31, 1998, the Company had deferred compensation totaling $93,000
relating to Mr. Karsch which is included in Deferred Stock-Based Compensation in
the accompanying consolidated balance sheets. Such deferred compensation has
been fully amortized in 1999.
Coyote Consulting and Keith Greenberg (an employee of Coyote) sued the Company
alleging that they were entitled to receive additional cash, stock and/or
options in an unspecified amount in connection with the Company's December 1996
termination of its consulting relationship with Coyote. The complaint was
dismissed in 1999.
[20] LITIGATION
CENTRE COMMONS MRI LTD., ET. AL. VS. US DIAGNOSTIC INC. ET. AL.; SANDERS ET. AL.
VS. US DIAGNOSTIC INC. ET. AL. - These two suits, which were filed against the
Company by sellers of diagnostic imaging centers who received the Company's
common stock in partial payment of the purchase price for their centers and who
alleged that undisclosed facts regarding the background of Keith Greenberg (a
former consultant to the Company) were material to their decision to sell, were
settled in 1999. 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 sought to compel the Company to repurchase approximately 750,000
shares of its common stock at a price of $12.125 per share and also alleged that
the Company's failure to register such shares under the Securities Act of 1933
diminished their value. The lawsuit was settled by agreement that USD would pay
$1,800,000 over a period of 30 months (beginning December 1999). In the second
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 $2,000,000. The lawsuit was settled by agreement that
USD would pay $180,000 over a period of eight months (beginning October 1999).
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 March 2000 pending
settlement discussions, and a further minimum ninety day extension of the stay
has been agreed to by the parties recently, subject to court approval at the end
of March.
In connection with the sale of USI, USD 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. USD 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 USD'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.
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. ("USD") 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
66
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US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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.
[21] RELATED PARTY TRANSACTIONS
As of January 1, 1995, and amended effective September 1995, the Company entered
into a consulting agreement with Gordon Rausser, a member of the Company's Board
of Directors until June 10, 1999, to retain his services as an economic
consultant to the Company. The compensation under this agreement was (a) $25,000
cash for each quarter commencing January 1, 1995, through December 31, 1999, for
which he offered or agreed to serve on the Company's Board of Directors and
provided other consulting services to the Company; and (b) warrants to acquire
400,000 shares of the Company's common stock immediately exercisable at $5.00
per share through December 31, 1999. The warrants expired unexercised at
December 31, 1999.
In connection with Mr. Karsch, a former executive officer and director of the
Company, employment agreement, the Company provided him a loan of up to $100,000
for relocation expenses, of which $51,000 was outstanding as of December 31,
1999.
A member of the Company's Board of Directors, Keith Hartley, is the managing
partner of Forum Capital Markets L.P. ("Forum"). Forum was the underwriter of
the Company's $57.5 million Subordinated Convertible Debenture Offering
consummated in 1996 (see Note 7), and was paid an underwriting fee of $2.9
million. In addition, the Company sold to Forum, for nominal consideration,
warrants which entitle Forum to purchase 319,445 shares of common stock of the
Company at an exercise price of $9.00 per share. The warrants are outstanding as
of December 31, 1999. Mr. Hartley was elected to the Board of Directors of the
Company on September 19, 1996, subsequent to the Debenture Offering.
In connection with the MediTek acquisition, the Company issued a Note to HEICO
for $10.0 million. On September 10, 1997, certain terms of the Note were
amended, and on September 16, 1997, HEICO sold the Note to Forum, which on the
same day resold the note to 18 individual parties.
The Company entered into an Installation Agreement ("Installation Agreement")
dated February 27, 1997, and a Network Support Agreement ("Support Agreement")
dated July 31, 1997, with CIERRA Solutions, Inc. ("CSI"). A brother of Todd
Smith, who was a Vice President and the Chief Information Officer of the Company
through October 1998, was a substantial minority shareholder of CSI. CSI
provided project management services to the Company in connection with the
deployment of a wide area computer network to over 100 of the Company's
locations and other services from February 1996 to April 1999. The Installation
Agreement had a one-year term. The Support Agreement covered a six-month term
and was renewable by mutual consent of the parties for successive periods. The
Company decided not to renew the Support Agreement with CIERRA and let the
contract lapse on April 30, 1999. Payments made to CSI in the years ended
December 31, 1999, 1998, and 1997 totaled $347,000,
67
<PAGE> 122
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
$1.0 million, and $1.1 million, respectively, including reimbursement for
expenses and equipment purchases of $117,000, $206,000, and $268,000,
respectively.
The Company has a policy pursuant to which non-employee directors shall receive
an option under the Company's 1995 Long-Term Incentive Plan to purchase shares
of common stock on the date that such director first becomes a director.
Effective August 1999, the Board of Directors approved a new non-employee
director compensation plan which included a grant to each non-employee director
of 100,000 options to purchase the Company's common stock. See Note 12 for
further detail.
On January 20, 1998, Michael O'Hanlon, the President and Chief Executive Officer
of DVI, Inc., an affiliate of DVIBC and DVIFS, was elected to the Board of
Directors of the Company. DVIFS and DVIBC are lenders to the Company. As of
December 31, 1999, DVI had loans with aggregate principal amounts outstanding
with the Company of approximately $90.0 million. In 1999, the Company paid an
aggregate of approximately $25.9 million in principal and interest to DVI and
its affiliates on these loans. In 2000, it is anticipated that the Company will
pay an aggregate of approximately $26.5 million in principal and interest to DVI
and its affiliates on these loans. In addition, in December 1998 and January
1999, the Company paid DVIFS loan fees totaling $647,000 and paid DVIPC an
equity participation fee totaling $2.8 million, each in connection with certain
new financing. The Company had also issued DVI a warrant to purchase an
aggregate of 250,000 shares of common stock of the Company at an exercise price
of $.938 per share. In February 2000, the Company paid DVIFS $150,000 in
connection with a $3.2 million borrowing, effected after December 31, 1999. See
Notes 6 and 7.
In January 1998, the Company reimbursed Leon F. Maraist, the Company's Chief
Operating Officer, for $65,000 in relocation costs to facilitate his relocation
to Palm Beach County, Florida.
In August 1998, the Company purchased a condominium from J. Wayne Moor, the
Company's former Chief Financial Officer, for $200,000 to facilitate Mr. Moor's
relocation to Palm Beach County, Florida. In February 1999, the Company sold the
condominium for $187,000. Mr. Moor resigned as the Chief Financial Officer in
January 2000.
On February 12, 1999, L.E. Richey, M.D., a director and Chairman of the Board of
the Company, resigned in connection with the purchase of US Imaging, Inc. from
the Company by a corporation with which Dr. Richey is affiliated (see Note 11
for further discussions).
68
<PAGE> 123
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
[22] SUBSEQUENT EVENTS
The Company borrowed $4.0 million from DVIBC in January 2000. The Company also
borrowed $4.2 million from DVIFS in February 2000, and $1.2 million in March
2000. The $4.2 million and the $1.2 million borrowings are collateralized by
existing medical equipment. The borrowings were incurred in order to meet the
Company's normal operating expenses.
During December 1999 and January 2000, the Company experienced a significant
disruption in its billing and collections function due to Year 2000 software
upgrades. For a period of several weeks, the Company was unable to bill in the
ordinary course of business. The Company has not yet fully recovered the amounts
affected by such disruption.
[23] SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 (a)
-----------------------------------------------------
(In thousands, except per share data) Q1 Q2 Q3 Q4
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 39,928 $ 39,929 $ 38,469 $ 37,276
Loss before extraordinary items (1,427) (2,212) (2,914) (4,240)
Net income (loss) 1,171 (2,212) (2,914) (4,240)
Loss before extraordinary items per common
share - basic and diluted (.06) (.10) (.13) (.18)
Net income (loss) per common share - basic and diluted .05 (.10) (.13) (.18)
</TABLE>
<TABLE>
<CAPTION>
1998 (a)
-----------------------------------------------------
Q1 Q2 Q3 Q4
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 54,458 $ 52,459 $ 46,289 $ 42,529
Income (loss) before extraordinary items 746 3,411 (1,424) (3,245)
Net income (loss) 746 3,411 (1,424) 2,066
Income (loss) before extraordinary items per common
share - basic and diluted .03 .15 (.06) (.14)
Net income (loss) per common share - basic and diluted .03 .15 (.06) .09
</TABLE>
(a) Certain amounts have been reclassified to be consistent with the
presentation of the financial statements for the years ended December 31,
1999 and 1998. Net income (loss) during these periods was not affected for
these reclassifications.
69
<PAGE> 124
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Previously reported on Form 8-K dated October 30, 1998.
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<PAGE> 125
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The following sets forth the names and ages of the four individuals serving on
the Company's Board of Directors, their respective principal occupations or
employment histories and the period during which each has served as a director
of the Company.
C. Keith Hartley -- age 57-- has been a member of the Board of Directors of the
Company since September 1996 and served as Co-Chairman of the Board from
December 1, 1997 to July 1998. Since August 1995, Mr. Hartley also has been
Managing Partner, Corporate Finance, of Forum Capital Markets LLC, an investment
banking firm. From May 1991 to August 1995, Mr. Hartley was an independent
financial consultant, and from February 1990 to May 1991, he was a Managing
Director of Peers & Co., a merchant banking firm. From 1973 to 1989, Mr. Hartley
was a Managing Director of Drexel Burnham Lambert Incorporated. Mr. Hartley also
is a director of Comdisco, Inc. and Swisher International Group, Inc.
David McIntosh -- age 53-- has been a member of the Board of Directors of the
Company since October 1998. Since June 1998, Mr. McIntosh has been the Chief
Executive Officer of Barricade International, Inc., a developer and distributor
of a fire-blocking gel. From 1984 through April 1998, Mr. McIntosh was the Chief
Executive Officer of Gunster, Yoakley, Valdes-Fauli and Stewart, P.A., a
prominent Florida-based international law firm. Prior to 1984, Mr. McIntosh was
a partner with Coopers & Lybrand, a public accounting firm. He is a director,
officer and active member of numerous local, state and national foundations,
committees, task forces, associations and charitable organizations. Mr. McIntosh
also is a director of Florida Banks, Inc., which operates a community banking
system in Florida through its wholly-owned banking subsidiary, Florida Bank,
N.A.
Michael A. O'Hanlon -- age 53-- has served as a director of the Company since
January 1998. Since November 1995, Mr. O'Hanlon has served as the President and
Chief Executive Officer of DVI, Inc. ("DVI"), the largest independent financier
to the health care market in the United States. Mr. O'Hanlon was President and
Chief Operating Officer of DVI from September 1994 to November 1995, and
previously served as Executive Vice President of DVI. For nine years prior to
joining DVI, Mr. O'Hanlon served as President and Chief Executive Officer of
Concord Leasing, Inc., a provider of medical, aircraft, shipping, industrial and
medical imaging equipment financing. Mr. O'Hanlon also is a director of DVI.
Joseph A. Paul -- age 42 -- has been a member of the Company's Board of
Directors and its President since July 1, 1996, its Chief Operating Officer from
July 1, 1996 through October 31, 1997, its interim Chief Executive Officer
effective February 1, 1997 and became the Company's Chief Executive Officer in
March 1997. From May 1994 to June 30, 1996, he was President of MediTek Health
Corporation ("MediTek"), a corporation acquired by the Company from HEICO
Corporation ("HEICO") in July 1996. Mr. Paul joined HEICO in 1991 as a Vice
President and was responsible for forming MediTek. From 1981 until June 1997,
Mr. Paul was a Vice President of Ambassador Square, Inc., a real estate
development and management company, and from 1988 until June 1997, served as a
Vice President of Columbia Ventures, Inc., a private investment company.
Mr. Paul is a member of the American Institute of Certified Public Accountants
and the Florida Institute of Certified Public Accountants.
71
<PAGE> 126
EXECUTIVE OFFICERS
The following sets forth certain information with respect to the executive
officers of the Company who served in 1999:
Francis J. Harkins, Jr. -- age 50 -- joined the Company in December 1997 as
Executive Vice President, General Counsel and Corporate Secretary. Prior to
joining the Company, Mr. Harkins served as Assistant General Counsel from 1993
to 1996, as Corporate Secretary from 1995 to 1997 and as Vice President and
Associate General Counsel from 1996 to 1997, of Peoples Telephone Company, Inc.,
one of the largest independent operators of public pay telephones in the United
States.
Leon F. Maraist -- age 57 -- has served as Executive Vice President and Chief
Operating Officer of the Company since November 1997. From 1993 to 1997, Mr.
Maraist served as Vice President of NMC Diagnostic Services, Inc. ("NMC"), which
provides mobile imaging diagnostics in physicians' offices and diagnostics in
fixed sites. His responsibilities with NMC included marketing, sales, finance
and operations. From 1992 to 1994, Mr. Maraist directed operations of the $1
billion nationwide dialysis division of NMC.
J. Wayne Moor -- age 48 -- served as the Chief Financial Officer and Executive
Vice President of the Company from June 1997 through January 2000 when Mr. Moor
resigned. From October 1994 until June 1997, Mr. Moor was an independent
accounting consultant, and he served in that capacity for the Company from
February 1997 until June 1997. From 1989 to October 1994, he was Executive Vice
President in charge of commercial real estate and business lending at Cartaret
Savings and AmeriFirst Banks.
P. Andrew Shaw -- age 43 -- has been Executive Vice President of the Company
since July 1996 . He was appointed Executive Vice President & Chief Financial
Officer in January 2000, having previously served as Chief Financial Officer of
the Company from July 1996 until June 1997. Previously, he served as Controller
of MediTek Health Corporation from February 1992 until June 1996 when MediTek
was acquired by the Company and was Controller of ExpoSystems for more than
seven years until February 1992. He is a Certified Public Accountant licensed in
Florida with six years of public accounting experience with KPMG Peat Marwick
and is a member of the Florida Institute of Certified Public Accountants and the
Financial Executives Institute.
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<PAGE> 127
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31, 1999, 1998 and
1997, the compensation paid or accrued by the Company to its current Chief
Executive Officer and its three most highly compensated executive officers as of
December 31, 1999, (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------------- -----------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Compensation Award(s) Options Compensation
Principal Position Year Salary($) Bonus($) ($)(1) ($)(2) (#) ($)
------------------- ---- --------- -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Paul 1999 281,918 100,000 12,000 -- -- 4,800(3)
Chief Executive Officer, 1998 235,000 100,000 12,000 -- 375,001 6,010(3)
President and Director 1997 222,346 50,000 15,240 -- 200,000 7,450(3)
Leon F. Maraist (4) 1999 200,000 33,333 9,000 -- -- 4,800(3)
Executive Vice President, 1998 200,000 50,000 9,000 -- 75,000 65,173(4)
Chief Operating Officer 1997 26,154 -- 1,177 -- 80,000 --
J. Wayne Moor (5) 1999 165,288 33,333 9,000 -- -- --
Former Executive Vice President, 1998 155,354 50,000 7,154 -- 75,000 622(5)
Chief Financial Officer 1997 76,154 -- 3,486 -- 50,000 46,110(5)
Francis J. Harkins, Jr. (6) 1999 145,385 43,333 6,000 -- -- 4,800(3)
Executive Vice President, 1998 135,000 20,000 6,000 -- 50,000 2,090(3)
General Counsel and Corporate 1997 4,154 -- 185 -- 25,000 --
Secretary
</TABLE>
----------
(1) Represents car allowance.
(2) The number of shares of unissued restricted stock at December 31,
1999 totaled 10,000 shares, all issued to Joseph A. Paul, which vest in
two equal annual installments, beginning on October 9, 2000. The
aggregate value of the restricted stock was $10,630 at December 31,
1999 based upon the closing market price of the Company's common stock
on that date. Dividends will be paid on restricted stock to the extent
paid on common stock.
(3) Represents Company contributions to the 401(k) Plan.
(4) Mr. Maraist's employment began in November 1997. During 1998, Mr.
Maraist was paid $64,932 as reimbursement for relocation expenses, and
the Company's contributions to the 401(k) Plan on his behalf totaled
$241.
(5) Mr. Moor's employment began in June 1997. Mr. Moor was paid $622 as
reimbursement for relocation expenses in 1998. During 1997, the Company
paid Mr. Moor a total of $46,110 in consulting fees prior to his
employment by the Company. Mr. Moor resigned on January 21, 2000.
(6) Mr. Harkins' employment began in December 1997.
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<PAGE> 128
STOCK OPTIONS
The following table sets forth year-end option values for the Named Executive
Officers who held unexercised options at December 31, 1999:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-The-Money
Shares Unexercised Options At Options At
Acquired On Value Fiscal Year End (#) Fiscal Year End ($)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Joseph A. Paul 0 0 187,501/187,500 23,625/23,625
Leon F. Maraist 0 0 37,500/37,500 4,725/4,725
J. Wayne Moor 0 0 37,500/37,500 4,725/4,725
Francis J. Harkins, Jr. 0 0 25,000/25,000 3,150/3,150
</TABLE>
----------
(1) As of December 31, 1999, these options were in the money.
DIRECTOR COMPENSATION:
Prior to August 1999, directors who were not officers or employees of the
Company received (i) a payment of $1,000 for each meeting of the Board that they
attended and $500 for each committee meeting they attended, and (ii) options to
purchase 10,000 shares of common stock on the date such director was first
elected or appointed to the Board of Directors and each year thereafter on the
day of the first meeting of the Board of Directors immediately following the
Annual Meeting of Stockholders (so long as the director's term as a director
continued after such annual meeting).
In August 1999, the Board of Directors 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. Board members are also reimbursed for
their reasonable expenses incurred in serving as a director of the Company. 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.
EMPLOYMENT AGREEMENTS
Joseph A. Paul and the Company entered into a five-year employment agreement
dated June 18, 1996 for Mr. Paul to serve as President and a director of the
Company effective on July 1, 1996. Effective in February 1997, he was also
appointed as interim Chief Executive Officer of the Company, and in March 1997,
he became Chief Executive Officer. The agreement as amended provides for an
annual base salary of $235,000 during the first year of its term, and for annual
increases in each of the remaining years of at least 5%. The agreement also
provides for an annual bonus of $50,000 during the first year and a bonus in
each subsequent year as currently determined by the Compensation Committee. The
agreement provides that all options and restricted stock awards granted to Mr.
Paul will vest if he is terminated
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<PAGE> 129
without cause or upon a change of the Company. The agreement also provides that,
upon the occurrence of certain events including a "change in control" of the
Company as defined in the agreement and a material breach of the agreement by
the Company, Mr. Paul has the right to elect to deem his employment to have been
terminated by the Company without cause and receive a lump sum payment equal to
2.9 times the annual salary and incentive or bonus payments made to him by the
Company during the most recent year.
Leon F. Maraist and the Company entered into an employment agreement effective
on November 1, 1997 and continuing through November 1, 2000, pursuant to which
Mr. Maraist serves as Executive Vice President and Chief Operating Officer of
the Company. The agreement provides for an annual base salary of $200,000 and
payment of annual bonuses at the discretion of the Board of Directors. In
addition, Mr. Maraist has been granted 75,000 stock options pursuant to the
terms and conditions of the 1995 Plan. In the event of a "change in control" of
the Company as defined in the 1995 Plan, the unvested portion of the 75,000
options would automatically vest. The agreement also provided for reimbursement
of relocation expenses. In the event that the Company materially breaches the
employment agreement or in the event of the occurrence of certain changes in
control or ownership of the Company enumerated in the agreement, Mr. Maraist may
elect, by written notice to the Company, to deem his employment terminated by
the Company without cause and would be entitled to receive lump sum compensation
equal to twice his annual salary and incentive or bonus payments, if any, paid
to Mr. Maraist during the Company's most recent fiscal year.
J. Wayne Moor and the Company entered into a three-year employment agreement
effective on June 18, 1997 and ending June 17, 2000, pursuant to which Mr. Moor
would serve as Vice President and Chief Financial Officer of the Company. Mr.
Moor became an Executive Vice President of the Company on October 20, 1998. Mr.
Moor resigned on January 21, 2000. The agreement provided for an annual base
salary of $150,000 and payment of annual bonuses at the discretion of the Board
of Directors. The determination of bonus entitlement was based 50% upon the
profitability and performance of the Company and 50% upon Mr. Moor's
performance. Mr. Moor has been granted 75,000 stock options, 37,500 of which
were vested as of the date of his resignation.
P. Andrew Shaw and the Company entered into a one-year employment agreement
effective on January 27, 2000 and continuing through January 27, 2001 pursuant
to which Mr. Shaw serves as Executive Vice President and Chief Financial Officer
of the Company. The agreement provides for an annual base salary of $150,000 and
payment of bonus at the discretion of the CEO. Mr. Shaw has been granted 60,000
stock options pursuant to the terms and conditions of the 1995 Plan. In the
event of a "change in control" of the Company as defined in the 1995 Plan, the
unvested portion of the 60,000 options will automatically vest. In the event of
the occurrence of certain changes in control or ownership of the Company
enumerated in the agreement, Mr. Shaw may elect, by written notice to the
Company, to deem his employment terminated by the Company without cause and
would be entitled to receive lump sum compensation equal to twice his annual
salary and incentive or bonus payments, if any, paid to Mr. Shaw during the
Company's most recent fiscal year. In case of a termination without cause, Mr.
Shaw is entitled to a one-year severance agreement equal to his annual salary
and incentive or bonus payments, if any, paid to him during the Company's most
recent fiscal year.
Francis J. Harkins, Jr. and the Company entered into an employment agreement
effective on December 9, 1997 and continuing through November 30, 2000, pursuant
to which Mr. Harkins serves as Executive Vice President and General Counsel of
the Company. As amended, the agreement currently provides for an annual base
salary of $150,000 and payment of annual bonuses at the discretion of the
Company. In addition, Mr. Harkins has been granted 50,000 stock options pursuant
to the terms and conditions of the
75
<PAGE> 130
1995 Plan. In the event of a "change in control" of the Company as defined in
the 1995 Plan, the unvested portion of the 50,000 options would automatically
vest. In the event that the Company materially breaches the employment agreement
or in the event of the occurrence of certain changes in control or ownership of
the Company enumerated in the agreement, Mr. Harkins may elect, by written
notice to the Company, to deem his employment terminated by the Company without
cause and would be entitled to receive lump sum compensation equal to twice his
annual salary and incentive or bonus payments, if any, paid to Mr. Harkins
during the Company's most recent fiscal year.
In addition, each of the Named Executive Officers is entitled during the term of
his employment with the Company to customary employee benefits, such as paid
vacation, health insurance and a car allowance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Kenneth R. Jennings, Ph.D. and David McIntosh served on the Company's
Compensation Committee during 1999. Neither of the Compensation Committee
Members is or has been an officer or employee of the Company or any of its
subsidiaries. In addition, neither Jennings nor McIntosh has, or has had, any
relationship with the Company which is required to be disclosed under "Certain
Relationships and Related Transactions." No Company executive officer currently
serves on the compensation committee or any similar committee of another public
company.
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<PAGE> 131
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the notes thereto set forth, as of March 8, 2000, the
beneficial ownership of the Company's Common Stock ("Common Stock") by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock in reliance upon information set forth in any statements filed with
the Securities and Exchange Commission ("SEC") under Section 13(d) or 13(g) of
the Exchange Act, (ii) each director and Named Executive Officer of the Company
and (iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
-------------------------
Name Common Stock Percent
---- ------------ -------
<S> <C> <C>
Steel Partners II, L.P. 3,384,000(12) 14.9
150 East 52nd Street
21st Floor
New York, New York 10029
The Robert C. Fanch Revocable Trust 1,755,300(12) 7.7
1873 South Bellaire Street, Suite 1550
Denver, CO 80222
Lighthouse Capital Insurance Company 1,687,750 7.4
Anderson Square
3rd Floor
P.O. Box 112356T
Grand Cayman, BVI
Dimensional Fund Advisors Inc. 1,185,700(12) 5.2
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Francis D. Hussey, Jr. d/b/a Magnetic Scans 1,138,100(12) 5.0
2660 Airport Road South
Naples, FL 34112
C. Keith Hartley 494,445(2) 2.1
Michael A. O'Hanlon 138,000(3) *
Kenneth R. Jennings, Ph.D 110,000(4) *
David McIntosh 120,000(5) *
Joseph A. Paul 251,227(6) 1.1
Leon F. Maraist 47,664(7) *
J. Wayne Moor 37,500(8) *
Francis J. Harkins, Jr 25,100(9) *
P. Andrew Shaw 30,000(10) *
All directors and executive officers as a group (9 persons) 1,253,936(11) 5.3
</TABLE>
----------
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. Each beneficial owner's
percentage ownership is determined by assuming that convertible
77
<PAGE> 132
securities, options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
after March 8, 2000 have been exercised. Calculation of percentage
ownership was based on 22,658,033 shares of Common Stock outstanding as of
March 8, 2000.
(2) Mr. Hartley is a Managing Partner, Corporate Finance, of Forum Capital
Markets LLC ("Forum"), which served as an underwriter in connection with
the Company's $57.5 million subordinated convertible debenture offering.
Forum is the holder of record of warrants to purchase 319,445 shares of
Common Stock. Mr. Hartley disclaims beneficial ownership of such shares.
Amount also includes 175,000 shares subject to options.
(3) Includes 130,000 shares subject to options.
(4) Includes 110,000 shares subject to options.
(5) Includes 110,000 shares subject to options.
(6) Includes 187,502 shares subject to options.
(7) Includes 37,500 shares subject to options.
(8) Includes 37,500 shares subject to options.
(9) Includes 25,000 shares subject to options.
(10) Includes 30,000 shares subject to options.
(11) Includes all shares and options described in footnotes 2-10 above.
(12) Information obtained from Schedule 13(d) or 13(g) filed with the SEC by
the beneficial owners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 2000, the Company entered into an agreement with Steel Partners II,
L.P., ("Steel Partners"), currently a 14.9% shareholder, which allows, for a
period of three years, Steel Partners to acquire up to 45% of the voting stock
of the Company without prior board approval. Further, Steel Partners has agreed
that for a period of three years after it becomes an Interested Stockholder, as
defined by the Delaware Business Combination Statute (the "Delaware Statute")
any transaction proposed by Steel Partners to the shareholders must be one in
which all shareholders are treated alike. In addition, in order to enhance the
Company's strategic flexibility, the board of directors voted to make the
restrictive provisions of the Delaware Statute inapplicable to Steel Partners.
See the Company's Report on Form 8-K dated January 7, 2000.
The Company was a party to a Consulting Agreement effective as of January 1,
1995, with Dr. Gordon C. Rausser, as amended, pursuant to which Dr. Rausser
acted as a consultant to the Company on economic, financial and strategic
matters. Under the agreement, as amended, Dr. Rausser was entitled to a
consulting fee of $25,000 per calendar quarter until December 31, 1999, provided
that he offered or agreed to serve as a director of the Company and offered or
agreed to serve as a consultant under the agreement. In connection with entering
into the agreement, as amended, Dr. Rausser received a warrant to purchase
400,000 shares of common stock of the Company exercisable at $5.00 per share at
any time through December 31, 1999. The warrant expired unexercised at December
31, 1999. Also in connection with the Consulting Agreement, in October 1996, the
Company issued 24,000 restricted shares of common stock with a fair market value
of $12.625 per share to Dr. Rausser under the 1995 Plan, and in January 1997,
the Company issued an additional 51,000 restricted shares of common stock with a
fair market value of $8.625 per share to Dr. Rausser under the 1995 Plan. As of
December 31, 1999, 26,600 of the restricted shares had not yet vested. In
January 2000, 17,000 of these shares vested and were issued to Mr. Rausser. The
remaining 9,600 restricted shares will vest 4,800 in October 2000, and 4,800 in
October 2001. Dr. Rausser was a director until June 10, 1999.
In June 1996, the Company acquired U.S. Imaging in a merger transaction pursuant
to which U.S. Imaging merged into a wholly-owned subsidiary of the Company. The
merger consideration paid to the
78
<PAGE> 133
former sole stockholder of U.S. Imaging, the Reese General Trust (the "Reese
Trust"), was $7,000,000 in cash and 1,671,000 shares of the Company's common
stock, of which 671,000 shares were placed in escrow. The Reese Trust
transferred the shares to Lighthouse Capital Insurance Company. Dr. L.E. Richey,
a former director, disclaims beneficial ownership of these shares. The shares
held in escrow were to be released to Lighthouse if U.S. Imaging achieved
certain financial results in 1997 and 1998. Of the shares held in escrow,
400,000 shares were released in 1997 and the balance was released in 1998. Dr.
Richey was the President of U.S. Imaging at the time of the merger, and became a
director of the Company in June 1997. In December 1997, Dr. Richey became a
Co-Chairman of the Board of the Company and in July 1998, Dr. Richey became
Chairman of the Board of the Company. Dr. Richey was not a director or an
employee of the Company at the time that the Company acquired U.S. Imaging. On
February 12, 1999, the Company sold U.S. Imaging to United Radiology Associates,
Inc., a company with which Dr. Richey was affiliated, for $11,650,000 including
a secured promissory note payable to the Company in the aggregate principal
amount of $1,850,000, which was personally guaranteed by Dr. Richey. Also on
February 12, 1999, Dr. Richey resigned as a director and Chairman of the Board
of the Company. See detail of the legal proceeding against Dr. Richey at Note 20
of Notes to Consolidated Financial Statements.
Pursuant to the terms of a Subscription Agreement dated December 1, 1996, the
Company purchased approximately 5,000,000 shares (which as a result of a reverse
4:1 stock split in 1998 currently number 1,250,000 shares) of common stock of
Diversified Therapy Corp. ("DTC") for $3.5 million, representing approximately
25% of all of the outstanding common stock of DTC at September 11, 1998. DTC
commenced operations in 1996 to develop a leadership position in the ownership
and operations of U.S. wound care treatment facilities utilizing hyperbaric
chambers. Mr. Amos F. Almand, III, an executive officer of the company until
October 20, 1998, is the Chairman of the Board and a more than 5% beneficial
owner of DTC. Dr. Rausser, a director of the Company until June 10, 1999, is
also a director of DTC. On December 31, 1998, the Company sold its interest in
DTC for a nominal amount which included a note receivable for $250,000, and a
common stock purchase warrant for 416,662 shares of DTC. DTC subsequently
defaulted on the note and failed to deliver the common stock purchase warrant.
As a result, USD retained 1,250,000 shares as collateral and exercised its right
to sell the pledged stock. On January 31, 2000, the pledged stock was sold for
$250,000 in cash to stockholders of DTC. DTC has executed a promissory note for
unpaid interest due December 31, 2000, and has issued a common stock purchase
warrant to the Company for 416,662 shares.
On January 20, 1998, Michael O'Hanlon, the President and Chief Executive Officer
of DVI, Inc., an affiliate of DVIBC and DVIFS, was elected to the Board of
Directors of the Company. DVIFS and DVIBC are lenders to the Company. As of
December 31, 1999, DVI had loans with aggregate principal amounts outstanding
with the Company of approximately $90 million. In 1999, the Company paid an
aggregate of approximately $25.9 million in principal and interest to DVI and
its affiliates on these loans. In 2000, it is anticipated that the Company will
pay an aggregate of approximately $26.5 million in principal and interest to DVI
and its affiliates on these loans. In addition, in December 1998 and January
1999, the Company paid DVIFS loan fees totaling $647,000 and paid DVI Private
Capital an equity participation totaling $2.8 million, each in connection with
certain new financing. The Company had also issued DVI a warrant to purchase an
aggregate of 250,000 shares of common stock of the Company at an exercise price
of $.938 per share. In February 2000, the Company paid DVIFS $150,000 in
connection with a $3.2 million borrowing, effected after December 31, 1999. See
Notes 6 and 7 of Notes to Consolidated Financial Statements.
79
<PAGE> 134
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Report
(1) Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999
Notes to Consolidated Financial Statements
(2) Schedule II, Valuation and Qualifying Accounts and Reserves,
for each of the three years ended December 31, 1999 is
submitted herewith.
(b) Reports on Form 8-K
A report on Form 8-K dated March 1, 1999 was filed during the
quarter ended March 31, 1999 disclosing an Item 2 event and
an Item 7 event.
A report on Form 8-K dated April 7, 1999 was filed during the
quarter ended June 30, 1999 disclosing an Item 5 event.
A report on Form 8-K dated September 2, 1999 was filed during
the quarter ended September 30, 1999 disclosing an Item 5
event.
(c) Exhibits -- (See Index to Exhibits included elsewhere herein.)
80
<PAGE> 135
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
US DIAGNOSTIC INC.
Date: March 29, 2000 By: /s/ Joseph A. Paul
-----------------------------------
Joseph A. Paul
Chief Executive Officer, President,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph A. Paul Chief Executive Officer, President March 29, 2000
---------------------------------------- and Director (Principal Executive Officer)
Joseph A. Paul
/s/ P. Andrew Shaw Executive Vice President and Chief Financial March 29, 2000
---------------------------------------- Officer (Principal Financial Officer and
P. Andrew Shaw Principal Accounting Officer)
/s/ C. Keith Hartley Director March 29, 2000
----------------------------------------
C. Keith Hartley
/s/ David McIntosh Director March 29, 2000
----------------------------------------
David McIntosh
/s/ Michael O'Hanlon Director March 29, 2000
----------------------------------------
Michael O'Hanlon
</TABLE>
81
<PAGE> 136
US DIAGNOSTIC INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
IN THOUSANDS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Description Period Expenses Accounts (describe) Period
------------ ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DEC. 31, 1999
------------------------
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $ 8,300 $ 6,062 $ -- $ 7,252(a) $ 7,110
Allowance for possible loss on
other receivables $ -- $ -- $ -- $ -- $ --
YEAR ENDED DEC. 31, 1998
------------------------
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $17,312 $ 6,493 $ -- $15,505(a) $ 8,300
Allowance for possible loss on
other receivables $ -- $ -- $ -- $ -- $ --
YEAR ENDED DEC. 31, 1997
------------------------
Reserves deducted from assets to which they apply:
Allowance for possible loss on
accounts receivable $ 9,670 $15,179 $ 1,822(b) $ 9,359(a) $17,312
Allowance for possible loss on
other receivables $ 923 $ 2,451 $ 3,491(b) $ 6,865(a) $ --
</TABLE>
(a) Accounts written off.
(b) Amount represents the allowance for estimated uncollectable portion of
acquired accounts receivable from the various acquisitions.
82
<PAGE> 137
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Restated Bylaws of the Registrant.(2)
3.3 Restated Bylaws as amended October 20, 1998 of the Registrant.
4.1 Form of Unit Purchase Option.(1)
4.2 Form of Warrant Agreement.(1)
4.3 Indenture relating to 9% Subordinated Convertible Debentures by the
Company to American Stock Transfer & Trust Company, as Trustee, dated as
of March 29, 1996.(14)
4.4 Registration Rights Agreement.(12)
4.5 Form of Amended and Restated 6 1/2% Convertible Negotiable Note Due June
30, 2001. (15)
4.6 First Supplemental Indenture to Indenture relating to 9% Subordinated
Convertible Debentures dated as of March 24, 1998. (15)
10.1 1993 Stock Option Plan.(1)
10.2 Asset Purchase Agreement among the Company, Columbus Diagnostic Center
Inc. and Physicians Diagnostic Associates of Columbus, L.P. (1)
10.3 Equipment Lease with Ventura Partners.(1)
10.4 Lease between the Company and United Properties Co.(1)
10.5 Stock Purchase Agreement dated as of February 15, 1995 among the Company,
Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(3)
10.6 Employment Agreement dated as of February 15, 1995 among the Company,
Laborde Diagnostics, Inc. and Jeffrey J. Laborde, M.D.(3)
10.7 1995 Long Term Incentive Plan.(4)
10.8 Consulting Agreement with Gordon Rausser.(4)
10.9 Consulting Agreement with Coyote Consulting.(4)
10.10 Asset Purchase Agreement dated as of October 10, 1995 among the Company,
Central Alabama Medical Enterprises, Inc. and Advanced Medical Imaging
Center, Inc., a subsidiary of the Company.(5)
10.11 Property Lease dated as of October 10, 1995 among the Company, Central
Alabama Medical Enterprises, Inc. and Advanced Medical Imaging Center,
Inc., a subsidiary of the Company.(5)
10.12 Employment Agreement dated as of August 1, 1995 between the Company and
David Cohen.(5)
10.13 Amendment to Employment Agreement of Jeffrey Goffman.(6)
10.14 Amendment to Coyote Consulting Agreement.(6)
10.15 Asset Purchase Agreement dated as of June 28, 1996 among the Company,
Allegheny Open MRI/CT Group and USDL Pittsburgh Inc., a subsidiary of the
Company.(7)
10.16 Registration and Sale Rights Agreement dated as of June 28, 1996 among
the Company and the Allegheny Open MRI/CT Group.(7)
10.17 Employment Agreement dated as of June 18, 1996 between the Company and
Joseph Paul.(7)
10.18 Employment Agreement dated as of June 1, 1996 between the Company and
Michael Karsch.(7)
10.19 Employment Agreement dated as of July 1, 1996 between the Company and P.
Andrew Shaw. (7)
10.20 Stock Purchase Agreement dated as of June 20, 1996 among the Company,
MediTek Health Corporation and HEICO Corporation.(8)
10.21 Registration and Sale Rights Agreement dated as of June 20, 1996 between
the Company and HEICO Corporation.(8)
10.22 Termination Agreement dated January 29, 1997 among the Company, Coyote
Consulting & Financial Services LLC and Keith Greenberg.(10)
10.23 Loan and Security Agreement and Secured Promissory Note among US
Diagnostic Inc. and DVI Credit Corporation dated as of February 25,
1997.(13)
10.24 Subscription Agreement between Diversified Therapy Corp. and US
Diagnostic Inc.(13)
10.25 Employment Agreement dated August 31, 1994 between US Diagnostic Labs,
Inc. and Jeffrey A. Goffman.(13)
10.26 Employment Agreement dated June 30, 1995 between the Company and Amos F.
Almand, III.(13)
83
<PAGE> 138
10.27 Employment Agreement dated October 15, 1996 between the Company and Len
Platt.(13)
10.28 Employment Agreement dated May 1, 1996 between the Company and Alan M.
Winakor.(13)
10.29 Employment Agreement dated October 15, 1996 between the Company and
Arthur Quillo.(13)
10.30 Consulting Agreement dated October 1, 1996 between the Company and Robert
Burke, M.D.(13)
10.31 Memorandum of Understanding.(16)
10.32 Settlement Agreement and General Release dated July 11,1997 between the
Company and Jeffrey Goffman. (15)
10.33 Escrow Agreement between the Company, Jeffrey Goffman and Roberto
Martinez. (15)
10.34 Promissory Note between the Company and Jeffrey Goffman. (15)
10.35 Voting Agreement between the Company and Jeffrey Goffman. (15)
10.36 Employment Agreement dated June 18, 1997 between the Company and Wayne
Moor. (15)
10.37 Employment Agreement dated October 20, 1997 between the Company and Leon
Maraist. (16)
10.38 Settlement Agreement and General Release dated September 30, 1997 between
the Company and Jeffrey Goffman. (16)
10.39 Common Stock Purchase Warrant dated September 29, 1997 of the Company
issued to DVI Financial Services Inc. (16)
10.40 Common Stock Purchase Warrant dated September 29, 1997 of the Company
issued to DVI Financial Services Inc. (16)
10.41 Amended and Restated Note dated December 21, 1998 between US Diagnostic
Inc. and DVI Financial Services, Inc. (21)
10.42 Amended and Restated Common Stock Purchase Warrant Agreement between US
Diagnostic Inc., and DVI Financial Services, Inc. (21)
10.43 Letter of Agreement dated September 29, 1997 between the Company and DVI
Business Credit Corporation confirming amendment of Loan and Security
Agreement dated as of February 25, 1997. (16)
10.44 Stock Purchase Agreement among Alliance Imaging, Inc., US Diagnostic Inc.
and Medical Diagnostics, Inc. dated as of March 30, 1998. (18)
10.45 Stock Purchase Agreement, dated as of February 11, 1999, by and among US
Imaging, Inc., US Diagnostic Inc. and United Radiology Associates, Inc.
(20)
10.46 Secured Promissory Note dated February 12, 1999. (20)
10.47 Guaranty dated as of February 12, 1999. (20)
10.48 Security Agreement dated as of February 12, 1999. (20)
10.49 Stock Purchase Agreement, dated as of January 21, 1999, by and among
Integrated Health Concepts, Inc., US Diagnostic Inc., and Mohammad
Athari, M.D. (20)
10.50 Amendment No. 1 to Stock Purchase Agreement, dated as of January 21,
1999, by and among Integrated Health Concepts, Inc., US Diagnostic Inc.,
and Mohammad Athari, M.D. (20)
10.51 Asset Purchase Agreement, dated as of February 11, 1999, by and among US
Diagnostic Inc. and United Radiology Associates, Inc. (20)
10.52 Stock Redemption and Purchase Agreement dated November 5, 1998 among US
Diagnostic Inc., US Heartcare Management, Inc., Lawrence Lee and Barry
Enholm. (21)
10.53 Amendment No. 2 dated March 31, 1999 to the Loan and Security Agreement
by DVI Business Credit Corporation of the Thirty-Five Million Dollar Note
dated February 25, 1997.
10.54 Letter of Agreement dated July 19, 1999 between the Company and DVI
Financial Services, Inc. confirming amendment of the Twenty-Five Million
Dollar Note dated December 21, 1998.
10.55 Nondiscrimination Agreement between US Diagnostic, Inc. and Steel
Partners II, L.P. dated January 6, 2000. (22)
10.56 Employment Agreement dated November 1, 1999 between the Company and Len
Platt.
10.57 Employment Agreement dated November 15, 1999 between the Company and
Arthur Quillo.
10.58 Employment letter dated January 27, 2000 between the Company and P.
Andrew Shaw.
10.59 Employment Agreement dated December 9, 1997 between the Company and
Francis J. Harkins, Jr.
84
<PAGE> 139
10.60 Amendment No. 4 dated November 8, 1999 to the Loan and Security Agreement
by DVI Business Credit Corporation of the Thirty-Five Million Dollar Note
dated February 25, 1997.
10.61 Secured Promissory Note A dated November 8, 1999, relating to Amendment
No. 4.
10.62 Secured Promissory Note B dated November 8, 1999, relating to Amendment
No. 4.
10.63 Amendment to Security Agreements (Loan A Guarantors) dated November 8,
1999, relating to Amendment No. 4.
10.64 Amendment to Security Agreements (Loan B Guarantors) dated November 8,
1999, relating to Amendment No. 4.
10.65 Security Agreement (Springing Lien A) dated November 8, 1999, relating to
Amendment No. 4.
10.66 Security Agreement (Springing Lien B) dated November 8, 1999, relating to
Amendment No. 4.
10.67 Acknowledgement and Confirmation of Guaranties dated November 8, 1999,
relating to Amendment No. 4.
10.68 Amendment No. 6 dated January 18, 2000 to the Loan and Security Agreement
by DVI Business Credit Corporation of the Thirty-Five Million Dollar Note
dated February 25, 1997.
16.1 Letter of Arthur Andersen LLP to the Securities and Exchange Commission
dated October 30, 1998. (19)
21 Subsidiaries.
23.1 Consent of Arthur Andersen LLP dated March 27, 2000.
23.2 Consent of Deloitte & Touche LLP dated March 29, 2000.
27 Financial Data Schedule.
99.1 Press release dated January 29, 1997.(10)
99.2 Complaints filed in the United States District Court of the Southern
District of Florida entitled Lynne M. Golden, Trustee, UAD 1/6/96; Lynne
M. Golden Trust; individually and on behalf of a class of all persons
similarly situated vs. U.S. Diagnostic Inc., Jeffrey A. Goffman, Keith G.
Greenberg, Joseph A. Paul, Robert D. Burke; Amos F. Almand, III and
Coyote Consulting & Financial Services LLC: Muriel Edelstein vs. U.S.
Diagnostic Inc., Jeffrey A. Goffman, Joseph A. Paul, Dr. Robert D. Burke
and Keith G. Greenberg: Steven Shapiro, Plaintiff; vs. U.S. Diagnostic
Inc., et al, Defendants: Sandra Neuman, Plaintiff vs. U.S. Diagnostic
Inc., et al., Defendants.(10)
99.3 Permanent Injunction against Keith Greenberg.(10)
99.4 Information and Guilty Plea by Keith Greenberg.(10)
99.5 Press Release of U.S. Diagnostic Inc. dated February 3, 1997.(11)
99.6 Press Release of U.S. Diagnostic Inc. dated July 31, 1997.(14)
99.7 Press Release of U.S. Diagnostic Inc. dated January 6, 2000.(22)
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (file no. 33- 73414).
(2) Incorporated by reference to the Company's Report on Form 8-K dated
January 11, 1995.
(3) Incorporated by reference to the Company's Report on Form 8-K dated March
20,1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (file no. 33- 93536).
(5) Incorporated by reference to the Company's Report on Form 8-K dated
October 30,1995.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31,1995.
(7) Incorporated by reference to the Company's Report on Form 8-K dated June
28, 1996.
(8) Incorporated by reference to the Company's Report on Form 8-K dated July
24, 1996.
(9) Incorporated by reference to the Company's Report on Form 10-QSB for the
three months ended June 30, 1996.
(10) Incorporated by reference to the Company's Report on Form 8-K dated
January 29, 1997.
(11) Incorporated by reference to the Company's Report on Form 8-K dated
February 3, 1997.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-3 dated June 6, 1996.
85
<PAGE> 140
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1996.
(14) Incorporated by reference to the Company's Report on Form 8-K dated July
31, 1997.
(15) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended June 30, 1997.
(16) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended September 30, 1997.
(17) Incorporated by reference to the Company's Report on Form 10-K for the
year ended December 31, 1997.
(18) Incorporated by reference to the Company's Report of Form 8-K dated May
19, 1998.
(19) Incorporated by reference to the Company's Report on Form 8-K dated
October 30, 1998.
(20) Incorporated by reference to the Company's Report on Form 8-K dated
January 22, 1999.
(21) Incorporated by reference to the Company's Report on Form 10-K for the
year ended December 31, 1998.
(22) Incorporated by reference to the Company's Report on Form 8-K dated
January 7, 2000.
86
<PAGE> 141
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported): MAY 10, 2000
----------------------------
US DIAGNOSTIC INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE
-------------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
1-13392 11-3164389
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
777 SOUTH FLAGLER DRIVE, WEST PALM BEACH, FLORIDA 33401
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 832-0006
-------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 142
ITEM 5. OTHER EVENTS
On May 10, 2000, US Diagnostic Inc. announced that its Board of
Directors has approved a restructuring plan which contemplates the sale of all
or substantially all of its imaging centers. The restructuring plan requires
Stockholder approval. Under the restructuring plan, the Company may reinvest
into a new business or businesses the net proceeds from the sale of assets. 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 a distribution to
Stockholders. The plan allows the Board to seek, at any time, debt refinancing
as an alternative to the sale of the imaging centers.
Further, the Company and the Board of Directors 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.
Proxy materials will be mailed to the Stockholders of record at the
close of business on June 2, 2000 for the Annual Meeting of the Stockholders to
be held in July.
US Diagnostic Inc.'s press release is attached hereto as Exhibit 99 and
is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
99 Press Release of US Diagnostic Inc. dated May 10, 2000
2
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
US DIAGNOSTIC INC.
Date: May 10, 2000
By /s/ P. Andrew Shaw
--------------------------------
P. Andrew Shaw
Executive Vice President and
Chief Financial Officer
3
<PAGE> 144
EXHIBIT INDEX
EXHIBIT NO.
-----------
99 Press Release of US Diagnostic Inc. dated May 10, 2000
4
<PAGE> 145
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 March 31, 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 11-3164389
------------------------------------------------------------- --------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
</TABLE>
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 MAY 10, 2000:
----- ----------------------------
Common stock, $ .01 par value 22,683,033 shares
<PAGE> 146
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 assets at fair
market value, cash flow and working capital availability, the approval by the
Company's stockholders of a restructuring plan, the availability of sufficient
financial resources to implement its restructuring plan if approved by the
stockholders, as well as the Company's inability to carry out 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> 147
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
In thousands, except per share data
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................ $ 6,334 $ 5,811
Accounts receivable, net of allowance for bad debts of $8,563
and $7,110 in 2000 and 1999, respectively ............................ 46,722 41,366
Other receivables ........................................................ 3,283 3,307
Prepaid expenses and other current assets ................................ 6,632 7,335
--------- ---------
TOTAL CURRENT ASSETS ................................................. 62,971 57,819
--------- ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
of $45,817 and $45,401 in 2000 and 1999, respectively ..................... 81,711 83,888
INTANGIBLE ASSETS, net of accumulated amortization of $17,247
and $16,008 in 2000 and 1999, respectively ................................ 67,558 68,797
OTHER ASSETS .................................................................. 2,242 2,762
INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES ..................... 4,318 4,476
--------- ---------
TOTAL ASSETS .............................................................. $ 218,800 $ 217,742
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ......................................................... $ 19,760 $ 17,786
Accrued expenses ......................................................... 11,535 12,979
Current portion of long-term debt ........................................ 26,034 22,579
Obligations under capital leases - current portion ....................... 5,339 5,126
Other current liabilities ................................................ 3,932 3,989
--------- ---------
TOTAL CURRENT LIABILITIES ............................................ 66,600 62,459
Subordinated convertible debentures ........................................... 21,773 21,750
Long-term debt, net of current portion ........................................ 93,826 91,099
Obligations under capital leases, net of current portion ...................... 12,039 13,367
Other liabilities ............................................................. 2,301 2,424
--------- ---------
TOTAL LIABILITIES .................................................... 196,539 191,099
MINORITY INTEREST ............................................................. 3,082 2,815
COMMITMENTS AND CONTINGENCIES (Note 9) ........................................ -- --
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; 22,658,033 and
22,641,033 shares issued and outstanding in 2000 and 1999,
respectively ......................................................... 226 226
Additional paid-in capital ............................................... 147,945 147,945
Deferred stock-based compensation ........................................ (316) (400)
Accumulated deficit ...................................................... (128,676) (123,943)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ............................................ 19,179 23,828
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .................................. $ 218,800 $ 217,742
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 148
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
In thousands, except per share data
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2000 1999
----- -----
<S> <C> <C>
NET REVENUE ......................................... $ 38,511 $ 39,928
-------- --------
OPERATING EXPENSES
General and administrative ..................... 30,841 30,073
Bad debt expense ............................... 1,430 1,345
Depreciation ................................... 4,411 4,709
Amortization ................................... 1,343 1,205
Stock-based compensation ....................... 84 195
-------- --------
TOTAL OPERATING EXPENSES ..................... 38,109 37,527
-------- --------
INCOME FROM OPERATIONS .............................. 402 2,401
-------- --------
OTHER INCOME (EXPENSE)
Interest expense ............................... (4,180) (4,371)
Amortization of lender equity participation fees (463) (463)
Interest and other income ...................... 283 468
-------- --------
TOTAL OTHER INCOME (EXPENSE) ................. (4,360) (4,366)
-------- --------
Loss before minority interest, provision (benefit)
for income taxes and extraordinary item ........... (3,958) (1,965)
Minority interest in income of subsidiaries
641 570
-------- --------
Loss before provision (benefit) for income taxes
and extraordinary item ............................ (4,599) (2,535)
Provision (benefit) for income taxes ................ 134 (1,108)
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM ................. (4,733) (1,427)
Extraordinary item, net of income taxes ............. -- 2,598
-------- --------
NET INCOME (LOSS)............................... $ (4,733) $ 1,171
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Loss before extraordinary item ................. $ (.21) $ (.06)
Extraordinary item ............................. -- .11
-------- --------
Net income (loss) .............................. $ (.21) $ .05
======== ========
Average common shares outstanding .............. 22,653 22,724
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 149
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY
------ ----- ------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 2000 22,641 $ 226 $ 147,945 $ (400) $(123,943) $ 23,828
Restricted stock issued.. 17 -- -- -- -- --
Amortization of deferred
compensation .......... -- -- -- 84 -- 84
Net loss ............... -- -- -- -- (4,733) (4,733)
--------- --------- --------- --------- --------- ---------
BALANCE - MARCH 31, 2000 22,658 $ 226 $ 147,945 $ (316) $(128,676) $ 19,179
========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 150
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
NET CASH - PROVIDED BY (USED IN) OPERATING ACTIVITIES ....... $ (1,860) $ 5,285
-------- --------
INVESTING ACTIVITIES
Purchases of equipment ...................................... (2,224) (1,585)
Dispositions, net of cash ................................... -- 110
Payment of purchase price due on companies acquired.......... (22) (3)
Proceeds from the sale of subsidiaries, net of cash retained
by purchasers ............................................. -- 8,529
Proceeds from dispositions of property and equipment ........ 51 --
Contribution of capital by minority partner ................. 70 --
-------- --------
NET CASH - PROVIDED BY (USED IN) INVESTING ACTIVITIES ....... (2,125) 7,051
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings .................................... 12,680 14,729
Purchase of subordinated convertible debentures ............. -- (7,925)
Repayments of notes payable and
obligations under capital leases ........................ (8,172) (18,726)
-------- --------
NET CASH - PROVIDED BY (USED IN) FINANCING ACTIVITIES ....... 4,508 (11,922)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................... 523 414
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD ................... 5,811 9,177
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD ......................... $ 6,334 $ 9,591
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................... $ 4,926 $ 4,586
======== ========
Income taxes ................................................ $ 11 $ 161
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Borrowings under capitalized leases were $374 and $4,000 in 2000 and
1999, respectively.
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 151
US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
[1] BASIS OF PRESENTATION
MANAGEMENT'S PLANS
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. Furthermore, the relatively short
maturities of its indebtedness require the Company to devote a significant
portion of its annual cash flow to the amortization of debt. The Company also
has ongoing significant capital expenditure requirements in order to maintain
and modernize its imaging equipment. The Company's cash flow from operating
activities has been and is projected to continue to be 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 is not currently anticipated in the near term. These
factors necessitate the incurrence of additional indebtedness or the meeting of
the Company's capital requirements through other means.
Accordingly, despite the fact the Company's primary lending source has made
additional funding available to the Company during the first and second quarters
of 2000, in 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. In April and the beginning of May 2000, the
Company contracted to sell four centers in two separate transactions which are
expected to close by the end of June 2000. Although the Company has been
successful in the past in selling 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.
On May 10, 2000, the Company announced that its Board of Directors has approved
a restructuring plan which contemplates the sale of all or substantially all of
its imaging centers. The restructuring plan requires stockholder approval. Under
the restructuring plan, the Company may reinvest into a new business or
businesses the net proceeds from the sale of assets. 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.
Additionally, 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 could be materially
and adversely affected.
Notwithstanding the above, management believes it will be successful in
implementing a 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.
7
<PAGE> 152
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements as of March 31,
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.
8
<PAGE> 153
[2] PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
In thousands
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, ESTIMATED
2000 1999 USEFUL LIFE
--------- ------------ ---------
<S> <C> <C> <C>
Land $ 1,868 $ 1,868 --
Buildings 4,550 4,581 40 Years
Medical equipment 87,867 89,442 7 Years
Furniture and fixtures 3,080 3,055 7-10 Years
Office, data processing equipment and software 11,118 11,058 3-10 Years
Vehicles 572 572 3 Years
Leasehold improvements 18,473 18,713 10 Years
--------- ------
Total 127,528 129,289
Less: accumulated depreciation and amortization (45,817) (45,401)
--------- ------
Property and equipment, net $ 81,711 $ 83,888
======== ========
</TABLE>
Included in property and equipment is equipment under capital leases amounting
to $35.2 million and $36.7 million at March 31, 2000 and December 31, 1999,
respectively. Accumulated depreciation for equipment under capital leases was
$13.1 million and $12.9 million as of March 31, 2000 and December 31, 1999,
respectively.
Depreciation expense amounted to $4.4 million and $4.7 million during the
quarter ended March 31, 2000 and 1999, respectively, of which $1.0 million and
$1.2 million, respectively, was attributed to equipment under capital leases.
During the quarter ended March 31, 1999, property and equipment (net of
accumulated depreciation) decreased by $6.9 million in connection with the sale
of certain subsidiaries (see Note 7).
[3] INTANGIBLE ASSETS
A summary of intangible assets is as follows:
In thousands
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, ESTIMATED
2000 1999 USEFUL LIFE
--------- ------------ ---------
<S> <C> <C> <C>
Goodwill $78,247 $78,247 20 Years
Covenants not to compete 3,192 3,192 5-10 Years
Customer lists 3,189 3,189 15 Years
Other intangibles 177 177 3-5 Years
--------- ------------
Total 84,805 84,805
Less: accumulated amortization (17,247) (16,008)
--------- ------------
Intangible assets, net $67,558 $68,797
======== ===========
</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
9
<PAGE> 154
operating results of the businesses acquired. On an ongoing basis, the Company
measures realizability of goodwill by the ability of the acquired business to
generate current and expected future operating income in excess of annual
amortization of goodwill and long-lived assets. 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.
[5] DEBT
In connection with the sale of certain subsidiaries during the quarter ended
March 31, 1999 (see Note 7), 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 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 were capitalized to other assets in the accompanying
condensed consolidated balance sheets, and the amortization of such amount under
a method that approximates the interest method over an eighteen month period 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 under a method that approximates the interest method
over an eighteen month period 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, were recorded as an extraordinary gain after taxes of $2.6
million in the accompanying condensed consolidated statement of operations (see
Note 8). At March 31, 2000, the balances outstanding under the Debentures and
the $25.0 million loan agreement were $21.8 million and $22.0 million,
respectively.
The Company borrowed $10.6 million from DVIFS and DVI Business Credit
Corporation ("DVIBC") in the first quarter of 2000 in order to meet the
Company's normal operating expenses. Approximately $6.6 million of such
borrowings are collateralized by existing medical equipment and the balance was
borrowed on an unsecured line of credit. The Company is required to repay $2.0
million of the line of credit in weekly installments of $180,000. The Company
has repaid $900,000 of such borrowing in the first quarter 2000 (see Note 10).
The maturity date of the Company's $35.0 million revolving credit loan from
DVIBC has been extended to April 1, 2002.
10
<PAGE> 155
[6] EARNINGS PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2000 1999
---- ----
In thousands, except per share data
Loss before extraordinary item ........... $ (4,733) $ (1,427)
Extraordinary item ....................... -- 2,598
-------- ----------
Net income (loss) ........................ $ (4,733) $ 1,171
======== ==========
BASIC AND DILUTED EPS:
Weighted-average common shares outstanding 22,653 22,724
======== ==========
EPS - loss before extraordinary item ..... $ (.21) $ (.06)
EPS - extraordinary item ................. -- .11
-------- ----------
EPS - net income (loss) .................. $ (.21) $ .05
======== ==========
The Company had a loss for the three months ended March 31, 2000, and all
potentially dilutive securities were excluded from basic and diluted earnings
per share during such period since the effect of inclusion would be
anti-dilutive. Additionally, certain potentially dilutive securities were
excluded from basic and diluted earnings per share for the three months ended
March 31, 1999 because their effect would be anti-dilutive. Such potentially
dilutive securities consist of the following: (i) unexercised stock options and
warrants to purchase 3.4 million and 6.0 million shares of the Company's common
stock as of March 31, 2000 and 1999, respectively; (ii) 3.6 million and 3.9
million shares of the Company's common stock issuable upon conversion of
convertible debt as of March 31, 2000 and 1999, respectively; (iii) and
unexercised restricted stock amounting to 148,600 and 177,400 shares of the
Company's common stock as of March 31, 2000 and 1999, respectively.
[7] DISPOSALS OF BUSINESSES
On January 22, 1999, the Company sold its interest in Integrated Health
Concepts, Inc. ("IHC") to Dr. Mohammad Athari, M.D., ("Athari") the owner of a
minority interest in IHC. IHC and its subsidiaries owned and operated six
diagnostic imaging centers in Houston, Texas. The sales price was $11.7 million,
consisting of cash received of $3.3 million and the assumption by Athari of debt
amounting to $8.4 million. Immediately upon the closing, $1.0 million of the
cash proceeds were used to repay a portion of the outstanding balance under the
DVIBC credit loan.
11
<PAGE> 156
On February 12, 1999, the Company sold its 100% interest in US Imaging, Inc.,
("USI"), to United Radiology Associates, Inc. ("URA"). USI and its subsidiaries
owned and operated eight diagnostic imaging centers in Houston and San Antonio,
Texas. Additionally, on February 12, 1999, the Company sold to URA certain
assets relating to the Company's billing and regional corporate offices located
in Houston and San Antonio, Texas. URA is affiliated with Dr. L.E. Richey, M.D.,
who was Chairman of the Board of the Company. Effective February 12, 1999, Dr.
Richey resigned as Chairman of the Board and as a Director of the Company. The
Company obtained a fairness opinion in connection with the transaction. The
consideration received for the stock of USI and for the billing and regional
corporate office assets totaled $11.7 million, consisting of cash received of
$8.6 million, a secured promissory note of $1.9 million, due February 12, 2001,
with interest at 6% payable semi-annually, and debt assumed by URA of $1.2
million. Immediately upon the closing, $6.2 million of the cash proceeds were
used to repay a portion of the outstanding balance under the DVIBC credit loan,
and another $1.4 million was paid to DVI in full payment of an equipment loan.
In April 1999, URA defaulted on the note (see Note 9).
[8] 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 5). 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.
[9] 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
12
<PAGE> 157
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 March 2000 pending settlement discussions, and a further
minimum ninety day extension of the stay has been agreed to by the parties
recently.
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.
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
13
<PAGE> 158
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.
[10] SUBSEQUENT EVENTS
The Company borrowed $1.2 million from DVIFS in May 2000. The borrowing is
collateralized by existing medical equipment and was incurred in order to meet
the Company's normal operating expenses. The Company has repaid an additional
$1,080,000 in April and May 2000 against the $2.0 million of line of credit that
was borrowed during the first quarter 2000 (see Note 5).
The Company has contracted to sell four centers in two separate transactions
which are expected to close by the end of June 2000.
On May 10, 2000, the Company announced that its Board of Directors has approved
a restructuring plan which contemplates the sale of all or substantially all of
its imaging centers. The restructuring plan requires stockholder approval. Under
the restructuring plan, the Company may reinvest into a new business or
businesses the net proceeds from the sale of assets. 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.
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.
During 1995 and 1996, the Company grew primarily through acquisitions of
facilities from independent owners. In 1997, there was a significant decrease in
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acquisition activity by the Company due to constraints on the Company's
financial resources and the need to consolidate prior acquisitions. Furthermore,
these acquisitions were financed with a significant amount of debt. The Company
has also been required to incur additional debt to maintain and upgrade its
facilities as a result of technological changes. In late 1997, the Company
announced, and throughout 1998 and 1999 the Company pursued, a four part
strategy to: (i) reduce operating costs; (ii) divest non-core and
underperforming assets; (iii) reduce and refinance debt; and (iv) develop new
facilities and engage in prudent acquisitions. See Item 1. "Business - Strategy
- Overview" in the Company's Form 10-K for the year ended December 31, 1999.
In order to address its liquidity needs, 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. In April and the
beginning of May 2000, the Company contracted to sell four centers in two
separate transactions which are expected to close by the end of June 2000.
Although the Company has been successful in the past in selling centers at
advantageous prices and in a timely fashion and, there can be no assurance that
the Company will be able to sell additional imaging centers at favorable or
acceptable prices or at all.
On May 10, 2000, the Company announced that its Board of Directors has approved
a restructuring plan which contemplates the sale of all or substantially all of
its imaging centers. The restructuring plan requires stockholder approval. Under
the restructuring plan, the Company may reinvest into a new business or
businesses the net proceeds from the sale of assets. 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.
Further, the Company and the Board of Directors 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.
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The following table sets forth items of income and expense as a percentage of
total revenues:
THREE MONTHS ENDED
MARCH 31,
----------------
2000 1999
---- ----
NET REVENUE .......................................... 100.0 % 100.0 %
------ -----
OPERATING EXPENSES
General and administrative ...................... 80.1 75.3
Bad debt expense ................................ 3.7 3.4
Depreciation .................................... 11.5 11.8
Amortization .................................... 3.5 3.0
Stock-based compensation ........................ .2 .5
------ -----
TOTAL OPERATING EXPENSES ............................. 99.0 94.0
------ -----
INCOME FROM OPERATIONS ............................... 1.0 6.0
TOTAL OTHER INCOME (EXPENSE) ......................... (11.3) (10.9)
------ -----
Loss before minority interest, provision (benefit) for
income taxes and extraordinary item ............. (10.3) (4.9)
Minority interest and provision (benefit) for
income tax ...................................... 2.0 (1.3)
------ -----
LOSS BEFORE EXTRAORDINARY ITEM ....................... (12.3) (3.6)
Extraordinary item, net of income taxes .............. -- 6.5
------ -----
NET INCOME (LOSS) .................................... (12.3)% 2.9 %
====== =====
During the first quarter of 1999, the Company sold several underperforming
facilities which included Integrated Health Concepts, Inc. and US Imaging, Inc.
These non-core assets and underperforming facilities are collectively referred
to as the "sold facilities". See "Overview and Recent Developments" above and
the Company's Form 10-K for the year ended December 31, 1999 for further
information relating to these dispositions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1999.
Net revenue for the three months ended March 31, 2000 (the "2000 three month
period") decreased to $38.5 million, from $39.9 million for the three months
ended March 31, 1999 (the "1999 three month period"). The decrease resulted from
the sale of the sold facilities during 1999. Excluding the net revenue generated
by the sold facilities, net revenue increased by 3.3% to $38.0 million during
the 2000 three month period, from $36.8 million during the 1999 three month
period.
General and Administrative ("G&A") expense increased to $30.8 million or 80.1%
of net revenue during the 2000 three month period, compared to G&A expense of
$30.1 million or 75.3% of net revenue during the 1999 three month period. The
increase from 1999 to 2000 resulted primarily from higher usage of medical
supplies and increased repair and maintenance resulting from equipment no longer
covered under warranty.
Bad debt expense was $1.4 million and $1.3 million during the 2000 and 1999
three month periods, respectively.
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Depreciation expense was $4.4 million during the 2000 three month period,
compared to $4.7 million during the 1999 three month period. Depreciation
expense decreased from 1999 to 2000 primarily as a result of the sale of the
sold facilities.
Amortization expense increased to $1.3 million during the 2000 three month
period, compared to $1.2 million during the 1999 three month period.
Interest expense decreased to $4.2 million, excluding amortization of lender
equity participation fees, during the 2000 three month period, compared to $4.4
million during the 1999 three month period.
As further discussed in Notes 5 and 8 of Notes to Condensed Consolidated
Financial Statements, the Company recorded an extraordinary gain net of taxes of
$2.6 million during the 1999 three 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 DVIPC 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 life of the related indebtedness). The amortization expense during
both 2000 and 1999 three month periods 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.
The Company had a basic and diluted loss per share of $.21 during the 2000 three
month period compared to basic and diluted earnings per share of $.05 during the
1999 three month period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had working capital deficit of $3.6 million,
compared to working capital deficit of $4.6 million at December 31, 1999. The
decrease in the deficit from 2000 to 1999 is due to several factors, the more
significant of which consist of the following: (i) additional borrowings for
working captial purposes totaling $10.6 million in the first quarter of 2000;
(ii) a decrease in accrued expenses which was $11.5 million as of March 31, 2000
compared to $13.0 million as of December 31, 1999; (iii) an offset by an
increase in accounts payable which was $19.8 million as of March 31, 2000
compared to $17.8 million as of December 31, 1999; and (iv) an offset by an
increase in accounts receivable which was $46.7 million as of March 31, 2000
compared to $41.4 million as of December 31, 1999. The Company's primary
short-term liquidity requirements as of March 31, 2000 include the current
portion of long-term debt and capital leases (totaling $31.4 million), accounts
payable, other current liabilities, 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 used in operating activities during the 2000 three month period was
$1.9 million, compared to $5.3 million provided by operating activities during
the 1999 three month period. The negative cash flow from operations in 2000 was
primarily a result of the growth in the Company's receivables and the net loss
in 2000, partially offset by an increase in accounts payable. 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. Additionally, the Company expects to collect amounts in excess
of historical experiences for those periods that suffered disruption. 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. In addition, in January 2000, the Company closed a
regional operational center and relocated it to the corporate headquarters. This
resulted in a disruption of billing and collection of receivables relating to
this region.
Net cash used in investing activities was $2.1 million during the 2000 three
month period, compared to net cash provided by investing activities of $7.1
million during the 1999 three month period. During the 1999 three month period,
the Company received $8.5 million in net cash proceeds from the sale of certain
facilities. Additionally, equipment purchases were $2.2 million during the 2000
three month period compared to $1.6 million during the 1999 three month period.
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Net cash provided by financing activities was $4.5 million during the 2000 three
month period compared to $11.9 million used by financing activities during the
1999 three month period. Proceeds from new borrowings totaled $12.7 million
during the 2000 three month period compared to $14.7 million during the 1999
three month period. Repayments of notes and capital leases totaled $8.2 million
during the 2000 three month period compared to $18.7 million during the 1999
three month period. As discussed in Notes 5 and 8 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
7 of the Notes to Condensed Consolidated Financial Statements, the Company
repaid an aggregate of $7.2 million under its revolving credit loan with DVIBC
from proceeds received upon the sales of certain facilities during the 1999
three month period.
As of March 31, 2000, the Company has approximately $2.7 million of purchase
commitments for capital expenditures which it either already has or expects to
have financing available to meet such commitments.
Despite the Company's debt and expense reduction efforts during 1998 and 1999,
the Company remains highly leveraged. Furthermore, the relatively short
maturities of its indebtedness require the Company to devote a significant
portion of its annual cash flow to the amortization of debt. The Company also
has ongoing significant capital expenditure requirements in order to maintain
and modernize its imaging equipment. The Company's cash flow from operating
activities is projected to be insufficient to meet the Company's 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 is not currently anticipated
in the near term. These factors necessitate the incurrence of additional
indebtedness or the meeting of the Company's capital requirements through other
means.
Accordingly, despite the fact the Company's primary lending source has made
additional funding available to the Company during the first and second quarters
of 2000, 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. In April and the beginning of May 2000, the
Company contracted to sell four centers in two separate transactions which are
expected to close by the end of June 2000. Although the Company has been
successful in the past in selling 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.
On May 10, 2000, the Company announced that its Board of Directors has approved
a restructuring plan which contemplates the sale of all or substantially all of
its imaging centers. The restructuring plan requires stockholder approval. Under
the restructuring plan, the Company may reinvest into a new business or
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<PAGE> 163
businesses the net proceeds from the sale of assets. 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 a distribution to stockholders. The plan allows
the Board to seek, at any time, debt refinancing as an alternative to the sale
of the imaging centers.
Further, the Company and the Board of Directors 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.
During December 1999 and January 2000, the Company experienced a significant
disruption in its billing and collections function due to Year 2000 software
upgrades. For a period of several weeks, the Company was unable to bill in the
ordinary course of business. In addition, the billing systems were not fully
operational from these disruptions until April 2000. From January through May
2000, the Company borrowed an aggregate of $11.8 million from its primary lender
to meet its normal operating expenses (see Notes 5 and 10). See discussions at
"Year 2000 Compliance" below.
Additionally, 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 could be materially
and adversely affected.
For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Part II - Item 1 - Legal Proceedings and
Note 9 of Notes to Condensed Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The Company completed all phases of the Year 2000 Readiness Program for IT
issues at a cost of $75,000, all of which was expensed in 1999. The Company
completed its Year 2000 Readiness Program for non-IT imaging systems at a cost
of approximately $600,000 (the majority of this reflects the totals of lease
payments to be made in the future in the case of equipment replacements); such
costs primarily will be amortized over the remaining lives of the upgraded
assets.
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 collection software. All of the
problems associated with the conversion have been resolved and the Company's
collections have now begun to recover from such disruption. Further, 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. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources").
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ITEM 3. QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK
The information has not changed materially since December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 March 2000 pending settlement discussions, and a further
minimum ninety day extension of the stay has been agreed to by the parties
recently.
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.
ITEM 5. OTHER INFORMATION
On April 7, 2000, NASDAQ notified the Company that it did not meet the net
tangible assets/market capitalization/net income requirement for continued
listing on the NASDAQ SmallCap Market. NASDAQ advised the Company that it had
until April 25, 2000 to provide a specific plan for achieving compliance with
the listing requirements. The Company submitted a request for a temporary
exception to the requirements through June 15, 2000.
There can be no assurance that the Company's common stock will continue to trade
on the NASDAQ SmallCap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Consulting Agreement with David McIntosh dated April 27, 2000.
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27 Financial Data Schedule.
(b) Reports on Form 8-K
A report on Form 8-K dated January 6, 2000 was filed during the quarter
ended March 31, 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: May 15, 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
24
