In an attempt to put a tumultuous management scandal behind it, U.S. Diagnostic said last week that it no longer employs its founding chief executive officer and general counsel, both on leave since Feb. 1.
To fill the void, U.S. Diagnostic's board has elected company President Joseph A. Paul to replace departed CEO Jeffrey Goffman and is searching for a new in-house lawyer.
Separately, the West Palm Beach, Fla.-based owner of diagnostic imaging centers surprised Wall Street by declaring a 1996 loss of $6.3 million, or 47 cents per share, on revenues of $102 million after taking $20.6 million in special pretax charges and adjustments. Industry analysts had expected U.S. Diagnostic would earn upward of 60 cents per share.
U.S. Diagnostic's unexpected financial modifications came in the wake of a monthlong audit by Arthur Andersen, which completed field work at the company in late March, said Paul during a conference call with analysts and investors last week. In addition, U.S. Diagnostic said it would restate earnings for the first three quarters of 1996 and would delay by a week or so filing its required annual financial statements, or 10K, with the Securities and Exchange Commission. Restatement of the company's quarterly SEC reports for 1996 would be made sometime in April, Paul said.
Forced to turn inward by management turmoil, ongoing SEC and NASDAQ investigations and six shareholder lawsuits, U.S. Diagnostic has all but halted its acquisition of outpatient imaging centers. Previously the most aggressive consolidator in the highly fragmented outpatient imaging segment, U.S. Diagnostic has closed only one deal this year: the $22 million purchase of Medical Diagnostics, a provider of fixed-site and mobile imaging services. In 1996, U.S. Diagnostic bought about 100 imaging centers.
Hackensack, N.J.-based rival Medical Resources recently beat out U.S. Diagnostic in two deals, Paul said, although he downplayed the financial significance of those losses. More telling, perhaps, Paul held out little hope that a stalled acquisition of American Shared Hospital Services, a San Francisco-based imaging service provider, would be completed. Paul said it was "highly unlikely" that U.S. Diagnostic would pursue an all-cash purchase of American Shared. And with U.S. Diagnostic stock trading at new lows-it closed at $6.13 per share on the NASDAQ exchange April 1, the day the management changes were announced-a stock swap for American Shared seems less workable now than in February, when the companies put their deal on hold after U.S. Diagnostic's share price sagged below $10 per share.
U.S. Diagnostic's cash war chest for acquisitions has dwindled to about $20 million. Until additional bank financing is secured, the company is unlikely to close more than a few deals in the $5 million to $10 million range, Paul said. Lenders have expressed interest in rekindling commitments that were put on hold during the management shake-up, Paul said, adding he is confident that goodwill soon would be converted into fresh credit lines.
"We've been significantly distracted over the last three months," he said. "Hopefully, after today we can get back to running the company."
Management said many of the accounting charges were taken on the advice of Arthur Andersen, and overall the company is seeking to take its financial lumps all at once rather than one at a time.
The largest single special charge-$5.5 million-was related to the payment of commissions and granting of stock options to Coyote Consulting, the firm linked to Keith Greenberg, a convicted felon alleged to have been a virtual executive with the company.
Second on the list was a $4.1 million charge reflecting an adjustment in the closing dates on five imaging center acquisitions in 1996.
Paul told analysts that $3.2 million had been set aside to cover costs stemming from the board investigation of the Greenberg matter and to deal with legal fees related to shareholder suits.
Arthur Andersen's auditing tab alone would likely run U.S. Diagnostic $1 million, Paul said, well above the $100,000 budgeted last year for routine auditing services.
The accounting adjustments, while unanticipated, struck some observers as prudent given recent developments at the company.
"The charges reserve for a lot of the potential surprises that could crop up," said Thomas G. Shea Jr., an industry analyst at Forum Capital Markets, Old Greenwich, Conn. Shea said he is optimistic about U.S. Diagnostic's prospects as a prime consolidator once bank financing is re-established, which he expects to happen after the company's 10K is filed.
Despite hopes for a better tomorrow, good news appears to be in short supply.
Board Chairman Laurans Mendelson said during the conference call that the board report on Greenberg is not yet complete. Given the exodus of past management and the raft of accounting adjustments, that report is unlikely to be glowing.
And while the SEC investigation is thought to be focused on U.S. Diagnostic's failure to adequately disclose consultant Greenberg's criminal record, there's no guarantee it couldn't expand.
"We don't think if they did there are any smoking guns or problems that would go beyond the Coyote matter," Paul said.
Despite its unresolved regulatory and legal challenges, U.S. Diagnostic said the changes in management and its financial books set the stage for rejuvenated growth.
"We think we've put a situation behind us," Mendelson said. "The board has put in place a new management team that is capable of doing quite well in this business."