SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24696
NATIONAL DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3248917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
737B West Brandon Blvd., Brandon, Florida 33511
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (813) 661-9501
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 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 stock as of the latest practicable date:
Class: Common Stock, Outstanding at April 24, 1996: 2,539,629
No Par Value
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
<PAGE>
NATIONAL DIAGNOSTICS, INC.
INDEX TO FORM 10-QSB
Page
Number
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1995 and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1995
and 1996 5
Condensed Consolidated Statements of Cash Flows
for three months ended March 31, 1995 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
ITEM - 1
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
ASSETS
March 31,
December 31, 1996
1995 (Unaudited)
Current assets:
Cash $ 128,094 $ 163,519
Accounts receivable, net of allowance of
$342,900 and $365,300 in 1995 and 1996,
respectively 1,500,841 1,852,148
Prepaid expenses and other current assets 301,761 355,661
--------- ---------
Total current assets 1,930,696 2,371,328
--------- ---------
Property and equipment 6,732,150 6,812,914
Less: accumulated depreciation and
amortization (2,197,420) (2,423,971)
---------- ----------
Net property and equipment 4,534,730 4,388,943
---------- ----------
Other assets:
Excess of purchase price over net assets
acquired, net of accumulated amortization
of $36,547 and $42,916 in 1995 and 1996
respectively 452,914 446,545
Deposits 53,115 56,471
Other 57,805 45,844
---------- ----------
Total other assets 563,834 548,860
---------- ----------
$ 7,029,260 $ 7,309,131
========= ==========
See Accompanying Notes.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
December 31, 1996
1995 (Unaudited)
Current liabilities:
Lines of Credit $ 409,500 $ 450,500
Note Payable 8,000 8,000
Note due to related party 49,243 50,000
Current installments of long-
term debt 100,487 98,000
Current installments of
obligations under capital
leases 648,909 652,000
Accounts payable 604,479 668,987
Accrued radiologist fees 225,815 281,198
Accrued expenses, other 411,262 439,155
Due to related party 57,231 75,057
---------- ---------
Total current liabilities 2,514,926 2,722,897
Long-term liabilities:
Long-term debt, excluding
current installments 541,124 520,414
Obligations under capital
leases, excluding current
installments 2,489,444 2,415,759
Deferred lease payments 210,335 276,260
--------- ---------
Total liabilities 5,755,829 5,935,330
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value,
1,000,000 shares authorized, no
shares issued and outstanding - -
Common stock, no par value,
9,000,000 shares authorized,
2,539,629 shares issued
and outstanding in 1996 and
1995 668 668
Additional paid-in capital 2,079,267 2,079,267
Retained earnings (deficit) (806,504) (706,134)
--------- ---------
Net stockholders' equity 1,273,431 1,373,801
--------- ---------
$ 7,029,260 $ 7,309,131
========= =========
See Accompanying Notes.
<PAGE>
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months Three months
ended ended
March 31, March 31,
1995 1996
(Unaudited) (Unaudited)
Revenue, net $1,342,031 $2,189,706
--------- ---------
Operating expenses:
Direct operating expenses 677,517 1,056,156
General and administrative 470,217 722,904
Depreciation and amortization 198,594 244,881
--------- ---------
Total operating expenses 1,346,328 2,023,941
Operating income (loss) (4,297) 165,765
Interest expense 75,538 97,837
Other income (loss) 7,306 32,442
---------- ----------
Income (loss) before income taxes (72,529) 100,370
Income taxes - -
---------- ----------
Net income (loss) $(72,529) $100,370
======== =======
Net income (loss) per common share $(.04) $.04
===== ====
Weighted average number of
common shares outstanding $1,700,000 $2,539,629
========= =========
See Accompanying Notes.
<PAGE>
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three
Three months months
ended ended
March 31, March 31,
1995 1996
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $(72,529) $100,370
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Income taxes (11,000) -
Depreciation and amortization 198,594 244,881
Provision for bad debts - 22,400
Increase in accounts receivable (241,914) (373,707)
Loss on disposition of equipment - 4,377
(Increase) in prepaid expenses and other
current assets (141,289) (53,900)
Increase in organization & start-up costs (28,732) -
Increase in accounts payable 85,153 64,508
Increase in accrued radiologist fees - 55,383
Increase in other accrued expenses - 27,893
Increase in deferred lease payments - 65,925
------- --------
Net cash provided by operating activities (211,717) 158,130
-------- --------
Cash flows provided (used) by investing
activities:
Purchases of property and equipment (176,211) (18,927)
Increase in notes receivable (17,089) -
Increase in goodwill (69,535) -
-------- ---------
Net cash used by investing activities (262,835) (18,927)
-------- --------
Cash flows provided (used) by financing
activities:
Increase (net) in line of credit - 41,000
Repayment of long-term borrowings (313,567) (23,197)
Proceeds of borrowing from related parties - 18,583
Principal payments under capital lease
obligations (132,411) (136,808)
Proceeds from borrowings on long-term debt 345,378 -
Increase in deposits (88,678) -
Proceeds from borrowings on other notes
payable 48,697 (3,356)
-------- --------
Net cash (used) by financing activities (140,581) (103,778)
-------- --------
Net increase (decrease) in cash (615,133) 35,425
Cash at beginning of period 1,497,510 128,094
--------- --------
Cash at end of period $882,377 $163,519
======= =======
Supplemental disclosure of cash flow
information:
Interest paid $76,649 $ -
======= ======
Asset added under capital lease $ - $66,214
======= =======
See Accompanying Notes.
<PAGE>
March 31, 1996
(Unaudited)
(1) Significant Accounting Policies
The accounting policies followed by National Diagnostics, Inc., and
Subsidiaries (the "Company") for quarterly financial reporting purposes
are the same as those disclosed in the Company's annual financial
statements. In the opinion of management, the accompanying condensed
consolidated financial statements reflect all adjustments (which consist
only of normal recurring adjustments) necessary for a fair presentation
of the information presented.
The quarterly condensed consolidated financial statements herein have
been prepared by the Company without audit. Certain information and
footnote disclosures included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. Although the Company management believes the
disclosures are adequate to make the information not misleading, it is
suggested that these quarterly condensed consolidated financial
statements be read in conjunction with the audited annual financial
statements and footnotes thereto.
(2) Property and Equipment
Property and equipment consists of the following:
Estimated
service
December 31, March 31, life
1995 1996 (years)
Land $85,000 $85,000
Building 253,041 253,041 39
Medical Equipment 5,200,475 5,277,900 7
Office furniture and
equipment 477,739 483,347 7
Vehicles 232,542 228,165 5
Leasehold improvements 483,353 485,461 3-5
--------- ---------
$6,732,150 $6,812,914
========= =========
(3) Lines of Credit
The banks have a first security interest on certain accounts receivable.
The lines have varying interest rates ranging from bank index plus 1 to
2 percent (at March 31, 1996, 10.25%).
Line of credit limit $550,000
Qualifying borrowing base 550,000
Outstanding loan balance 450,500
Payment and declaration of dividends are restricted. In accordance with
the loan agreement the Company may not pay or declare dividends without
the prior written consent of the bank. No dividends have been paid or
declared at March 31, 1996.
(4) Long-Term Debt
Long-term debt is summarized as follows:
December 31, March 31,
1995 1996
Installment loans payable which
consist of a number of separate
installment loan contracts
secured by equipment and
vehicles. The loans require
monthly installments of
principal and interest over
terms that vary from two to five
years. At March 31, 1996, the
loans bear interest at rates
ranging from 9.5% to 12.25%. 346,334 324,071
Mortgage note payable in monthly
installments of $2,445.88
including interest at 8.75%;
maturing April, 2020; secured by
mortgaged real estate property. 295,277 294,343
-------- --------
Total long-term debt 641,611 618,414
Less current installments of
long-term debt 100,487 98,000
-------- --------
Long-term debt, excluding current
installments $541,124 $520,414
The aggregate principal payments of long-term debt required annually are:
Nine months ending December 31: 1996 $77,289
Year ending December 31: 1997 96,493
1998 91,967
1999 74,142
2000 5,184
2001 5,657
Thereafter 267,682
-------
$618,414
=======
(5) Leases
The Company has entered into capital leases for medical equipment which
expire in 2002. The gross amount of equipment and related accumulated
amortization recorded under capital leases are as follows:
December 31, March 31,
1995 1996
Medical equipment $5,012,412 $4,630,105
Less accumulated amortization 2,045,692 1,887,248
--------- ---------
$2,966,720 $2,742,857
========= =========
Amortization of assets held under capital lease is included with
depreciation expense.
The present value of future minimum capital lease payments is as
follows:
Nine months ending December 31: 1996 $514,777
Year ending December 31: 1997 791,556
1998 877,911
1999 501,317
2000 238,418
2001 142,474
Thereafter 1,306
-------
Present value of minimum capital
lease payments 3,067,759
Less current installments of
obligations under capital leases 652,000
---------
Obligations under capital leases,
excluding current installments $2,415,759
=========
The Company is obligated under noncancellable operating leases that
expire through 2001.
Rental expense related to these noncancellable leases was approximately
$53,600 and $100,250 for the three months ended March 31, 1995 and 1996,
respectively.
(6) Notes Payable to Related Parties
Note payable to related parties is as follows:
December 31, March 31,
1995 1996
Note payable with interest at 8.5%,
payable in twelve monthly installments
of $4,167 plus interest commencing
September 1996. $49,243 $50,000
======= =======
Interest expense to related parties totaled $379 and $757 for the three
months ended March 31, 1995 and 1996, respectively.
(7) Other Notes Payable
Other notes payable are summarized as follows:
December 31, March 31,
1995 1996
Note payable with interest at 9.5%, due
April, 1996; unsecured $8,000 $8,000
===== =====
(8) Income Taxes
The Company had no income tax expense for the three months ended March 31,
1995 and 1996.
The income tax provision for 1995 and 1996 reconciled to the tax computed
at the statutory rate of 34% is as follows:
1995 1996
Income taxes (benefit) at statutory
rate $(25,000) $34,000
State income taxes (3,000) 4,000
Increase in valuation allowance 24,000 -
Nondeductible expenses 4,000 3,000
Utilization of operating loss
carryforwards - (41,000)
----- -----
$ - $ -
===== =====
The deferred tax asset and liability consist of the following:
December 31, March 31,
1995 1996
Assets
Net operating loss carry forward $158,000 $110,000
Allowance for doubtful accounts 133,700 142,500
Deferred rents 75,800 107,700
Accrued compensation 18,600 -
Pre-opening costs 29,900 25,900
Acquisition basis difference 122,300 122,000
------- -------
538,300 508,100
Less: valuation allowance (310,900) (269,300)
------- -------
227,400 238,800
------- -------
Liabilities
Fixed assets 227,000 238,300
Goodwill 400 500
------- -------
227,400 238,800
------- -------
Deferred taxes $ - $ -
======= ======
At March 31, 1996 approximately $232,000 in net operating carry
forwards remain which will expire if not utilized by 2010.
(9) Organization
The condensed consolidated financial statements include the accounts
of National Diagnostics, Inc. ("Company"), Alpha Associates, Inc.
("Associates"), Alpha Acquisitions Corp. ("Acquisitions"), SunPoint
Diagnostic Center, Inc. ("SunPoint"), National Diagnostics/Orange
Park, Inc. ("Orange Park") and National Diagnostics/Cardiology, Inc.
("Cardiology"). Associates and Acquisitions hold 100% of the
partnership interests in Brandon Diagnostic Center, Ltd. ("Brandon").
National Diagnostics, Inc., is a holding company which was formed in
June, 1994. The Company, Associates, and Acquisitions had common
stockholders. In September, 1994, the stockholders exchanged all of
their shares of common stock of Associates and Acquisitions for
1,200,000 shares of common stock and 1,200,000 common share purchase
warrants exercisable at $7.20 per share of the Company. The stock
exchange resulted in a combination of entities under common control
and was accounted for by combining the historical amounts of the
companies (similar to a pooling of interests).
Effective September 20, 1994, the Company completed an Initial Public
Offering (IPO) of 500,000 units wherein each unit consists of one
share of common stock and one common share purchase warrant
exercisable at $7.20 per share. The net proceeds from this sale were
approximately $2,400,000.
On November 7, 1994, the Company formed a wholly-owned subsidiary and
opened SunPoint Diagnostic Center, Inc. (SunPoint).
On February 1, 1995, the Company formed a wholly-owned subsidiary,
National Diagnostics/Orange Park, Inc. (Orange Park) and purchased the
assets of a mobile company.
The Company provides medical imaging services to patients in Brandon
(Brandon), Ruskin (SunPoint), and greater Jacksonville area (Orange Park
and Cardiology), Florida.
On February 1, 1995, the Company purchased certain assets for $112,000
from a medical imaging diagnostic center in Middleburg, Florida. This
transaction was accounted for as a purchase. The purchase price is paid
as follows: $62,000 was paid at closing and $50,000 is to be paid in
twelve monthly installments beginning September, 1996. Additionally,
the Company is to issue an amount of its unregistered stock which when
multiplied by a price per share equal to the average of the bid and
asked price for the five trading days immediately preceding the closing
date equals the amount collected on the seller's accounts receivable for
the period February 1, 1995 through July 31, 1995. The $106,474
liability relative to this transaction is contained in the note due to
related party $49,243; and due to related party $57,231. Pro forma
information is not provided herein because of the transaction's
insignificant effect on the Company's financial statement.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The unaudited financial statements and the related notes
thereto for March 31, 1995 and 1996 include all normal and recurring
adjustments which in the opinion of management are necessary for a fair
presentation and are prepared on the same basis as the audited annual
statements. The interim results are not necessarily indicative of the
results that may be expected for the full fiscal year.
(10) Legal Action
On February 9, 1996 the physician group, which in December, 1995
terminated its contract for reading services with the Brandon and
SunPoint centers, filed suit against the centers alleging the centers
materially breached the contract by failing to pay physician fees
timely and incorrectly billed certain procedures. The Company denies
any material breach to the contract and has filed a motion to dismiss.
Management feels it has reserved an adequate loss provision in the
event of an adverse outcome.
On March 10, 1995 legal action was instituted against A.T. Brod & Co.,
Inc. (a national stock brokerage firm) by a terminated employee of
A.T. Brod & Co., Inc. ("A.T. Brod"). A.T. Brod was a major market
maker for National Diagnostics, Inc. stock. The action alleges
wrongful discharge, breach of contract, defamation of character,
conspiracy and tortious interference with a contract arising out of
the alleged wrongful termination of the plaintiff by A.T. Brod. The
Company was named in the suit. Compensatory and punitive damages of
$2,830,000 are sought. On June 14, 1995, a motion was made under the
rules of the National Association of Dealers to compel arbitration of
the matter and to stay the action in entirety against the Company
pending the outcome of the arbitration. Upon receiving the motion,
the plaintiff's attorney indicated he agreed with the defendants'
position, consenting to arbitration and to stay the action pending the
outcome of that arbitration. Through April 29, 1996, the plaintiff's
attorney has taken no steps to progress his claim in arbitration.
Based upon information available to defendants' counsel through this
date, counsel indicates the claim appears to be not meritorious. The
Company feels the suit is without merit and intends to vigorously
defend itself. The ultimate outcome of this legal matter cannot be
determined at this time, and accordingly, no adjustments have been
made to the consolidated financial statements.
(11) Subsequent Event
The Company has entered into a lease commitment for medical equipment
it expects to take receipt of in June, 1996. It will be an upgraded
replacement for a previously leased piece of equipment. Cost of the
unit will approximate $624,000 which will be financed with a 72 month
lease to be accounted for as a capital lease. Payment will be made in
66 monthly installments of $12,770. Future minimum lease payments are
as follows:
Future Lease Payments
1996 $26,000
1997 153,000
1998 153,000
1999 153,000
2000 139,000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere
herein.
Results of Operations
Net revenues for the three months ended March 31, 1996 were $2,189,706
compared to $1,342,031 for the same period in 1995, representing a 63%
increase. The increase is primarily attributable to an increase in the
volume of procedures performed. The Company generated net revenues of
$445,127 and $134,214 in the first quarter of 1996 as a result of the
addition of the National Diagnostics/Orange Park, Inc ("Orange Park") in
February 1995 and National Diagnostics/Cardiology, Inc. ("Cardiology") in
September 1995, respectively.
Direct operating expenses for the three months ended March 31, 1996 were
$1,056,156 compared to $677,517 for the same period in 1995, representing
a 55.9% increase. Direct operating expenses as a percentage of net
revenue decreased to 48.2% from 50.5% for the three months ended March 31,
1996 and 1995, respectively. The increase in direct operating expenses
was primarily due to the addition of Orange Park and Cardiology. The
decrease of direct costs as a percent of net revenue was a result of
certain cost cutting measures taken by the Company in December 1995
including obtaining more favorable contracts for medical supplies.
General and administrative expenses for the three months ended March 31,
1996 were $722,904 compared to $470,217 for the same period in 1995,
representing a 53.7% increase. The increase is primarily attributable to
the addition of the Orange Park and Cardiology facilities and additional
personnel costs. Personnel were added in response to the increase volume
of procedures performed overall and the expansion of facilities.
The substantial increase in net revenues over that experienced in 1995 (a
14% or $264,000 increase in revenues from the preceding quarter ending
December 31, 1995 and containment of operating expenses down 7% or
$157,000 from the preceding quarter ending December 31, 1995) resulted in
a net profit of $100,370 for the three months ended March 31, 1996 from a
net (loss) of $(72,529) for the three months ended March 31, 1995. Net
income for the Brandon Diagnostic Center ("Brandon"), the Company's most
mature center, increased to $318,355 on revenues of $1,272,847 for the
three months ended March 31, 1996 from $140,824 on revenues of $1,029,128
for the three months ended March 31, 1995 as a result of expanded services
and additional capacity to perform services. Net income for the National
Diagnostics/SunPoint, Inc. ("SunPoint") facility increased to $21,247 on
revenues of $337,518 for the three months ended March 31, 1996 from a loss
of $(110,438) on revenues of $270,257 for the same period in 1995 as a
result of increased revenues and decreased expenses. National
Diagnostics/Orange Park, Inc. ("Orange Park") did not become a full fixed
site facility until the 3rd quarter of 1995. However, Orange Park
realized a loss of $(108,151) on revenues of $445,127 for the quarter
ending March 31, 1996 compared to the preceding quarter's loss of
$(147,312) on revenues of $504,366. National Diagnostics/Cardiology, Inc.
("Cardiology") was not operational until the 3rd quarter of 1995.
However, Cardiology realized a profit of $1,003 on revenues of $134,214
for the quarter ending March 31, 1996 compared to the preceding quarter's
loss of $(15,662) on revenues of $132,806. National Diagnostics, Inc.
("Parent") company which provides executive management, billing and
accounting functions for its subsidiaries realized a loss of $(128,563) on
management fees of $173,000 for the quarter ending March 31, 1996 compared
to a loss of $(65,314) on management fees of $56,000 for the same period
in 1995. The management fees charged to its subsidiaries are eliminated
upon consolidation. The billing services and costs did not commence until
the 3rd quarter of 1995.
Liquidity and Capital Resources
The Company generated $158,130 from operations in the 1st quarter 1996
compared to the same period in 1995 when operations used $(211,717).
Investing activities used $18,927 for the acquisition of equipment.
Financing activities used $103,778; approximately $163,000 was used toward
debt retirement offset by approximately $58,000 of proceeds from
additional borrowing. The Company increased its net cash balance after
the above transaction by approximately $35,000. The Company attributes
the positive performance experienced in the first quarter to the increase
in revenues and certain cost cutting measures the Company undertook in
December 1995 (see discussion under Results of Operations). Based on the
Company's belief that the positive performance from operations will
continue and other financing factors discussed below, the Company believes
that its presently anticipated short and long-term needs for operations,
capital debt repayments and capital expenditures with respect to its
current operations can be satisfied through internally generated funds,
third party leasing, and its existing credit facilities with South Trust
Bank of West Florida. (See also the Company's growth strategy below).
There is no assurance that these short-term needs can be met.
Pursuant to a prior and a subsequent agreement the Company will issue in
the 2nd quarter 33,448 common shares of stock to retire approximately
$67,000 of current debt owed to a Company executive. Additionally, a
$50,000 note payable to the Company executive has been refinanced with a
principal reduction to be made in twelve equal monthly installments
commencing September, 1996.
Due to the rapid expansion of facilities and increase in additional
personnel and related costs the Company has continued to experience
difficulty in meeting timely its current obligations to its trade vendors.
All fixed commitments to its banking and leasing creditors have been
timely satisfied. In December the Company acted upon numerous annual cost
cutting measures from which a partial effect has already been realized in
the 1st quarter. The Company expects the positive effects of these
savings and increased revenues to continue. There is no assurance that
these goals will be met.
Medical equipment, capital improvements, acquisitions and new center
development historically have been funded through the Company's initial
public offering in September 1994, third party capital lease and debt
obligations and internally generated cash flow. The leases are generally
secured by the equipment, and sometimes other assets, of particular
facilities. Interest rates in connection with the leases and borrowings
range from fixed rates of up to 12.25% to a variable rate equal to the
bank prime rate plus 1%. Certain of the Company's long-term debt
obligations are personally guaranteed by the Company's principal
shareholders and their spouses.
The Company's remaining growth strategies will require additional funds.
In the event the Company proceeds with the establishment of additional
facilities, or encounter favorable acquisition opportunities in the near
future, the Company may incur, from time to time, additional indebtedness
and attempt to issue equity or debt securities in public or private
transactions. The Company entered into a contract effective April 1, 1996
with financial consultants. They will assist in the formulation and
execution of the Company's continued acquisition and financing program.
As partial compensation the Company intends to issue warrants to purchase
40,000 common shares exercisable at $2.50 per share and 40,000 common
shares exercisable at $3.00 per share. Additionally, the Company entered
into a consulting contract effective April 1, 1996 to structure the
Company's management and financial information systems for future
expansion. As partial compensation the Company will issue warrants to
purchase 100,000 shares, exercisable at $3.00 per share. There is no
assurance that the Company will be successful in securing additional
financing or capital through equity or debt securities.
On March 6, 1995, Brandon Diagnostic Center, Ltd. entered into a credit
facility with SouthTrust Bank of West Florida, consisting of a $300,000
five-year term loan and a $500,000 revolving line of credit. The proceeds
of the term loan were used to refinance an existing $300,000 term loan
with another financial institution. Interest on both the revolving line
of credit and term loan are payable at the bank's prime rate (9% as of May
5, 1996), plus one percent. As of April 29, 1996, the outstanding
principal balance thereunder was $460,500. The revolving line of credit
is scheduled for renewal on June 30, 1996 (the Company received an
extension for thirty days beyond the original May 30, 1996 expiration date
and is currently negotiating to obtain a renewal). The Company is also
discussing the possibility of increasing or refinancing the line of credit
by financing all of its trade receivables; thereby expanding available
credit by as much as $400,000. Additionally, the Company is placing
additional emphasis on the collection of receivables with an increase in
staff and refinement of its existing billing and collection efforts.
The Company has over the last few years experienced increased pressures on
reimbursement from third parties. The Company expects such pressures to
cause reduced pricing in the aggregate for diagnostic procedures in the
future. Due primarily from the Company's revenue mix the effects of
reduced pricing have been minimized . Approximately 47% of which has been
derived from private insurance carriers, individuals, worker's
compensation and other sources that have not experienced reimbursement
pressures characteristics of managed care providers, Medicare and
Medicaid. Additionally, the Company has entered into certain capitation
contracts with minimum flooring reimbursements which the Company believes
will ultimately bring new found business to the Centers.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 9, 1996 the physician group, which in December, 1995
terminated its contract for reading services with the Brandon and
SunPoint centers, filed suit against the centers alleging the centers
materially breached the contract by failing to pay physician fees timely
and incorrectly billed certain procedures. The Company denies any
material breach to the contract and has filed a motion to dismiss.
Management feels it has reserved an adequate loss provision in the event
of an adverse outcome.
The has been no material developments in the "Blackey" legal action
described in Note 10 to the financial statements and more fully
described in Part I Item 3 of Form 10-KSB for the year ending December
31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.31 Letter agreement regarding consulting services by and between
the Company and Mark A. Marsella dated March 29, 1996.
10.32 Letter agreement regarding financial, consulting, and
investment banking services by and between the Company and
Judson Enterprises, Ltd. dated March 29, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
March 31, 1996.
<PAGE>
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 thereunto duly authorized.
Date: July 18, 1996
NATIONAL DIAGNOSTICS, INC.
/s/ Curtis L. Alliston
Curtis L. Alliston
President and Chief Operating Officer
/s/ Dennis C. Hult
Dennis C. Hult
Comptroller
<PAGE>
NATIONAL DIAGNOSTICS, INC.
EXHIBIT INDEX TO FORM 10-QSB
Exhibits
10.31 Letter agreement regarding consulting services by and between the
Company and Mark A. Marsella dated March 29, 1996.
10.32 Letter agreement regarding financial, consulting, and investment
banking services by and between the Company and Judson Enterprises,
Ltd. dated March 29, 1996.
10.31
Mark A. Marsella
67 Shore Road, Clinton, CT 06418
March 29, 1996
Curtis L. Alliston
National Diagnostics, Inc.
737 B West Brandon Blvd.
Brandon, FL 33511
Re: Consulting Services
Dear Mr. Alliston,
Our recent meeting provided the opportunity to understand your innovative
management style and vision for National Diagnostics, Inc. "NATD". As we
discussed, automated systems and information management are making
significant contributions to NATD's overall efficiency and patient
satisfaction. While the current systems architecture has the capacity to
support internal growth, a strategic automation plan would be required to
assess the impact, and detail the integration of patient records, billing
information and business policies associated with a large acquisition. To
structure NATD's information systems for the growth and special
integration required to merge business systems during anticipated
acquisitions, I propose to develop and maintain a strategic information
technology plan. The plan will provide the basis for:
- Assessing the value of current software and scheduled upgrades
- Developing "Fault Tolerant" operational practices (low cost
failure/recovery options)
- Evaluating costs associated with merging or converting different
information systems
- Designing a modular system architecture to reduce hardware costs
- Creating an efficient archival methodology for patient information
and records
- Managing the costs of complying with diverse governmental and
insurance regulations
- Implementing employee training and update policies
My recent tour of National Diagnostics, Inc.'s Brandon facility provided
the operational overview required to outline the plan. During the next 45
days, I will work with you to develop, review, and finalize a strategic
automation plan. Following the completion of the plan, I will
periodically update the plan to reflect NATD's operating practices and
business conditions.
The ability to efficiently process patient information/records, schedule
diagnostic procedures, bill the appropriate payer (using the proper
format), provides a competitive advantage for NATD while contributing to a
patient friendly facility. The rapid increases in capacity and workload
associated with a major acquisition could require hardware upgrades,
additional software and employee training/retraining. Proper planning is
vital to insuring that any changes do not have a negative impact on
current operations. In fact as the overall system of centers expands a
properly designed system will enhance the quality of services provided
will maintaining the lowest possible operating cost.
As compensation for my services in providing the strategic automation plan
and ongoing review services, NATD will pay one hundred and fifty dollars
($150.00) per hour consulting charge not to exceed fifteen thousand
dollars ($15,000.00) for the initial plan and 12 months of update access.
(NATD will reimbursed me for any approved travel to complete the plan or
updates). In addition, NATD will issue warrants to purchase a total of
one hundred thousand (100,00) shares of NATD common stock at @ $3.00 per
share exercisable until the twelfth month anniversary of this letter.
Neither the options, nor the shares will be registered under the
Securities Act. I will enter into a registration rights agreement with
NATD granting one-time demand and one-time "piggyback" registration
rights, at no expense to me, which will expire on the same date as the
options, and which will contain other customary provisions.
Kindly sign in the space below to confirm that this letter correctly sets
forth our agreement.
Very truly yours,
Mark A. Marsella
Accepted by
Curtis L. Alliston, President and Chief Operating Officer
cc: Jugal Taneja, Chairman of the Board
10.32
JUDSON
Enterprises, LTD
March 29, 1996
Curtis L. Alliston
National Diagnostics, Inc.
737B West Brandon Blvd.
Brandon, FL 33511
Re: Financial/Consulting/Investment Banking Services
Dear Mr. Alliston:
Judson Enterprises, Inc. ("Judson"), is seeking to confirm it's engagement
by National Diagnostics, Inc. ("NATD") to act as the non-exclusive
financial advisor to NATD in connection with the proposed re-
capitalization/financing and efficient growth of NATD. Judson's services
will include assistance and advice regarding:
- The development of a Business Plan to facilitate the efficient
financing and image of NATD, with emphasis on "Equity Management"
- The identification of potential sources of equity and debt capital.
- The formulation of an Acquisition/Financing Program. We will assist
NATD in identifying, negotiating and closing acquisitions.
- Efficient creation and ongoing implementation of a
"Corporate/Management" image of NATD. Our overall objective will be
to strengthen U.S. equity markets to NATD, while focusing on NATD's
creation of growing business markets, the creation of increasing cash
flows and underlying asset values.
Judson agrees that in the course of it's engagement, it will be
responsible for ensuring that none of its activities will cause Judson or
NATD to be in violation of any applicable provision of federal or state
securities laws. Without limiting the generality of the foregoing, Judson
will not (a) engage in any activity which could cause NATD to be in
violation of the registration provisions of the Security Act of 1933 by
improperly engaging in general solicitation or advertising or making
unlawful offers to sell securities or (b) furnish any information to third
parties other than written information approved in writing by NATD or (c)
engage in any activities which violate requirements of the securities laws
of any self-regulatory organizations.
The following outlines our intention and commitment to NATD:
Outline of Preliminary Plan to Create Visibility, Credibility and Capital
Raising Ability of:
National Diagnostics, Inc. (NATD)
1. Arrange, and have NATD management review, an in-depth Research Report
on the Company so as to highlight the Management history/capability,
Industry opportunity, and significant Equity Investments made in
NATD. The detailed report will provide the background for
understanding the "Efficient Growth Plan" of NATD, and create a
basis for valuing current and anticipated performance of NATD. (This
will require visits to the Company by Judson to complete necessary
due diligence and appropriate follow-up.) We will agree than
projections in our Report should be updated to establish and maintain
a credible source of information of NATD.
2. Explore with Management potential financing, acquisitions, management
additions, technology requirements, dissolution of extraneous
holdings, spin-off's (Public or Private), and simplifications where
appropriate, so as to achieve minimum dilution and corporate
efficiency. We would utilize relationships in place, along with
specific financing contacts to create a broad enthusiastic awareness
of NATD, along with an informed, growing and loyal stockholder group
that would be beneficial to the effective completion of a Corporate
Growth Plan including future private/secondary financings, for NATD.
3. We will arrange for large mailings/faxing of NATD Research Reports to
the majority of Judson's Corporate lists, with emphasis on markets,
geographical or otherwise, that NATD is active in, interested in
entering, and to all Brokers, historically or currently, active in
NATD stock. The objective of Judson is:
- To create a strong awareness of the attractiveness of NATD,
including the potential for continued increases in revenues and
profitability.
- Increase retail activity in the stock
- Create a presence and awareness of Money Managers in the trading
of NATD common stock.
4. We will engage in a committed telephone/mailing campaign to acquaint
investors, Money Managers, established Financing Sources, Brokers,
Analysts, and targeted industry business owners, etc. with the
opportunity that NATD represents.
5. NATD Management will make TARGETED presentations to Key Individuals,
Money Managers, Institutions (financial etc.), Potential Acquisitions
and selected Registered Representatives Identified by Judson.
6. Work with Management to expand NATD's Blue Sky situation, i.e.
Moody's, S&P, Boston Stock Exchange, etc. with emphasis on increasing
liquidity (NMS), and developing awareness in important states where
the process of contacting common stock investors might assist in
building NATD's business.
7. Maintain close contact with management to assure ongoing CREDIBILITY
and appropriate information flow to the public, including shareholder
letters, annual report, expanded research coverage, etc. and assist
in any and all block trades.
8. As awareness of NATD increases, we would plan a series of meetings in
key cities, including NATD operating locations (current or planned)
with the Companies Management, utilizing Brokers already aware of
NATD to introduce the company to the Business community in these key
cities.
9. WE would act, if appropriate, as NATD's Investment Banker to assist
in the Acquisition/Financing of companies in existing, attractive or
related markets.
10. We will make Judson available to NATD as necessary in regards to
business planning, financing, acquisition or technology
opportunities.
As compensation for Judson's services, NATD will; pay Judson a one-time
fee of Four Thousand dollars ($4,000.00) for the initial financing
plan/research report, two thousand dollars ($2,000.00) per month for six
months beginning April 1, 1996, compensate Judson for expenses (approved
by NATD for travel, conference calls, etc.) issue to Judson warrants to
purchase a total of 80,000 shares of common stock of NATD as follows:
40,000 shares @ 2.50 per share exercisable until (36) month anniversary of
this letter and 40,000 shares @ $3.00 per share, exercisable until the
fifth anniversary of this letter. Neither the warrants nor the shares
will be registered under the Securities Act. Judson will enter into a
registration rights agreement with NATD granting one-time demand and one-
time "piggyback" registration right to Judson, at no expense to Judson,
which will expire on the same date as the warrants, and which will contain
other customary provisions.
Kindly sign in the space below to confirm that this letter correctly sets
forth our agreement.
Very truly yours, Accepted by,
Mark A. Marsella, Exec. Vice President Curtis L. Alliston, President
Judson Enterprises, LTD
cc: John McGill, President
Donald J. Porter, Senior Consultant
