Medical Resources acquisition offer rattles U.S. Diagnostic’s rebuilding

U.S. Diagnostic executive blasts Medical Resources proposal

Imaging services provider U.S. Diagnostic made a bold move this month to put to rest the company's troubled past by cutting ties with founder and chief executive Jeffrey Goffman. The move was upstaged several days later, however, by an unexpected acquisition bid from Medical Resources, which offered to buy U.S. Diagnostic for $6.25 a share.

The week of corporate drama began on March 31, when U.S. Diagnostic of West Palm Beach, FL, announced that Goffman and USDL general counsel Michael Karsch were no longer employed by the company. Goffman's departure in particular was a stunning development, as he was the primary architect behind USDL's rapid rise from obscurity to imaging-center powerhouse.

The seeds of Goffman's demise were planted in late December, when investment house Bear, Stearns & Co. announced that it was discontinuing coverage of USDL. The investment house had discovered that USDL's mergers and acquisitions consultant Keith Greenberg of Coyote Consulting had pleaded guilty to fraud charges in 1994 for his involvement in a retail merchandising business in the 1980s. USDL was subsequently hit with several shareholder lawsuits charging the company with failing to adequately disclose Greenberg's past and the nature of his relationship with USDL. Officials with the Securities and Exchange Commission and NASDAQ stock market also began inquiries. USDL subsequently terminated its association with Greenberg.

In an effort to contain the damage, Goffman in February went on temporary leave and USDL's board of directors formed a special committee to investigate the charges (SCAN 2/19/97). The committee, which apparently didn't like what it discovered, announced his departure on March 31. USDL declined to release details on why Goffman and Karsch left the company, due to the shareholder litigation.

Replacing Goffman as CEO is Joseph Paul, a MediTek Health veteran who became president of USDL after it acquired MediTek last year. Laurans Mendelson will continue to serve as USDL's chairman.

If USDL was expecting Goffman's departure to calm things down, those hopes were dashed on April 3, when Medical Resources announced that it was prepared to acquire U.S. Diagnostic in a stock swap worth $212 million. The Hackensack, NJ, company said it had been approached by a financial adviser to U.S. Diagnostic, which had been retained to explore a possible sale of the company, according to Medical Resources.

The offer represented a slight premium to the price of USDL's stock at the time of the bid, which was trading at about $5.50 a share. It's doubtful whether many USDL shareholders would make money if their company accepted the proposal, however, as USDL shares have been beaten down in recent months due to the Coyote Consulting revelations. USDL shares were trading at $10 a share as recently as early March, and rebounded after the Medical Resources bid to close at $7.50 on April 9.

Medical Resources president and COO William Farrell said the offer represented a fair price to U.S. Diagnostic shareholders, especially considering the recent turmoil at the company. Medical Resources went public with the offer on the advice of its attorneys, Farrell said.

The value of the deal, and the public way in which it was tendered, did not win Medical Resources many friends at U.S. Diagnostic, however. The company confirmed that it had received an acquisition letter from Medical Resources, but said it was not interested in the offer. Chief executive Joseph Paul blasted the offer as premature and undervalued.

"We do not take what they did as responsible, either to the company or to the industry," he said. "They could have communicated (the offer) in a very different way."

Paul confirmed that his company has retained Smith Barney of New York City for advice on acquisitions, divestitures, and other strategic alternatives, but that USDL is not looking to sell off the company. USDL is primarily interested in using Smith Barney to raise additional funds to continue its growth strategy, Paul said.

Getting back on track. Raising additional funding is one prong in USDL's strategy of getting back on its feet in the wake of the Coyote Consulting debacle. The firm still has to cope with the shareholder lawsuits and the SEC and NASDAQ inquiries. The shareholder lawsuits-there are about half a dozen-are being consolidated into a single case, Paul said. With regard to the inquiries, Paul is confident that the NASDAQ investigation will be resolved without adverse consequences to the company. USDL is still waiting to hear from the SEC on the status of that investigation, but the company has already taken the steps that it believes the SEC will recommend, Paul said.

USDL also needs to get its financial picture back in line. At the same time that the company announced Goffman's departure, it disclosed preliminary 1996 year-end financial results that fell far short of analysts' expectations. The company said it was negatively affected by $20.6 million in one-time charges, with the end result being that USDL finished the year with a net loss of $6.3 million on revenues of $102 million. USDL had also hired a new accounting firm, Arthur Andersen, which treated some accounting items differently than USDL's previous firm, forcing the company to restate quarterly results for 1996.

The hiring of Arthur Andersen took place in April 1996 and occurred because USDL needed a Big Six accounting firm as its auditor in order to complete a $57.5 million convertible debt issue, Paul said. Once USDL realized that its 1996 results were going to fall short of expectations, the firm chose to include as many one-time charges in the year as possible.

"Once the numbers were going to be significantly lower… we went ahead and said, 'As long as 1996 is going to be bad, let's make sure that we don't taint 1997, and anything that is even questionable, let's reserve it or write it off,'" Paul said.

USDL is now working on reestablishing connections with several banks that were planning to raise the additional capital that USDL needs to continue its acquisition strategy, but that chose to postpone the fund-raising due to the Coyote Consulting revelations. With the Arthur Andersen audit completed, that should occur shortly, according to Paul.

"We feel very confident that we will be able to rejuvenate those commitments from the banks and move forward on our strategic plan, which is to continue to consolidate," he said.