U S DIAGNOSTIC INC, 10-Q, 2000-05-15

U S DIAGNOSTIC INC
10-Q, 2000-05-15
MEDICAL LABORATORIES

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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

-----------

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarter ended 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> 2

US DIAGNOSTIC INC.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical facts and may be forward-looking. Forward-looking
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, economic, competitive, regulatory, legal, growth and
integration factors, collections of accounts receivable, available financing or
available refinancing for existing debt, the ability to sell 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> 3

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> 4

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> 5

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> 6

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> 7

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> 8

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> 9

[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> 10

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> 11

[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> 12

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

12
<PAGE> 13

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> 14

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.

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

14
<PAGE> 15

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.

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.

15
<PAGE> 16

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.

16
<PAGE> 17

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.

17
<PAGE> 18

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.

18
<PAGE> 19

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.

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.

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").

19
<PAGE> 20

ITEM 3. QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK

The information has not changed materially since December 31, 1999.

20
<PAGE> 21

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.

21
<PAGE> 22

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.

22
<PAGE> 23

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.

23
<PAGE> 24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

US DIAGNOSTIC INC.

Dated: 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

<PAGE> 1
EXHIBIT 10.1

DAVID McINTOSH
7932 FLAGER COURT SOUTH
WEST PALM BEACH, FL 33405
(561) 650-0659; FAX (561) 655-5677

April 27, 2000

Mr. Joseph A. Paul, CEO
US Diagnostic, Inc.
777 South Flagler Drive
Suite 1200
West Palm Beach, FL 33401

Dear Joe:

In order to confirm the understanding we've reached orally, I restate below the
agreement under which I'll render consulting services to USD.

I've agreed to commit a minimum of 300 hours over the next 4 months or so, in
order to examine the feasibility of USD complementing its current endeavors
through an internet-based Application Service Provider (ASP) enterprise.

My time investment began Monday, April 24, in preparation for Tuesday's
meeting in your offices. I would hope to complete the task before the end of
August and will target completion by mid-August. I've committed to be
out-of-state for the last two weeks of July and the first week of August. While
I approach this engagement with a true sense of urgency (for all the reasons we
both understand about the need to launch such strategies as quickly as
possible), there can be no assurance that events beyond my control might not
delay the final written product.

My ability to complete the project in a timely manner is also dependent on the
availability of Stan Repetta to work with me. Stan has indicated that he
believes a substantial part of his time can be, and should be, devoted to this
effort. I'm pleased with his level of excitement about the project.

My work product will constitute a comprehensive report to the Board of
Directors, along with a suggested plan of action for the Company.

The Company has agreed to compensate me, as an independent contractor, at the
fixed rate of $15,000 per month for 4 months. The payments will be due on the
5th day of May, June, July and August of this year. In addition, the Company
will bear the cost of reasonable expenses incurred by me which have a direct
relationship to the engagement. If I advance money for such expenses, the
Company will reimburse me for directly-related expenses when I submit full
documentation of them.

Please signify your concurrence with this agreement at the bottom of this
letter.

My best to you,

/s/ DAVID McINTOSH
- -------------------
David McIntosh ACCEPTED:

/s/ JOSEPH A. PAUL, CEO 4/22/00
--------------------------------
Joseph A. Paul, CEO Date

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,334
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<RECEIVABLES> 58,568
<ALLOWANCES> 8,563
<INVENTORY> 0
<CURRENT-ASSETS> 62,971
<PP&E> 127,528
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0
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<COMMON> 226
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