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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24696
NATIONAL DIAGNOSTICS, INC.
(Name of small business issuer in its charter)
FLORIDA 59-3248917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
755 WEST BRANDON BLVD.
BRANDON, FLORIDA 33511
(Address of principal executive offices) (Zip Code)
(813) 661-9501
(Issuer's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
UNITS CONSISTING OF ONE SHARE OF COMMON STOCK, WITHOUT PAR VALUE,
AND ONE COMMON STOCK PURCHASE WARRANT
(TITLE OF CLASS)
COMMON STOCK, WITHOUT PAR VALUE
(TITLE OF CLASS)
COMMON STOCK PURCHASE WARRANTS
(TITLE OF CLASS)
Check whether the issuer (1) 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 [ ] No [X]
Check if no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Issuer's revenues for the fiscal year ended December 31, 1997 were
$9,952,550.
As of March 31, 1998, there were outstanding 8,880,000 shares of Common
Stock, no par value. The aggregate market value of the voting stock held by
non-affiliates of the registrant based on the closing bid price reported on the
OTC Bulletin Board as of March 31, 1998 was $2,718,573.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE
- --------- -------------------
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
Page 1 of 71 Pages
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NATIONAL DIAGNOSTICS, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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PART I
Item 1 Description of Business........................................................... 3
Item 2 Description of Property........................................................... 16
Item 3 Legal Proceedings................................................................. 17
Item 4 Submission of Matters to a Vote of Security Holders............................... 18
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.......................... 18
Item 6 Management's Discussion and Analysis or Plan of Operation......................... 19
Item 7 Financial Statements.............................................................. 25
Item 8 Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 48
PART III
Item 9 Directors, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act......................................... 49
Item 10 Executive Compensation............................................................ 50
Item 11 Security Ownership of Certain Beneficial Owners and Management.................... 51
Item 12 Certain Relationships and Related Transactions.................................... 52
Item 13 Exhibits and Reports on Form 8-K.................................................. 54
</TABLE>
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PART I
ITEM 1 -- DESCRIPTION OF BUSINESS
GENERAL
National Diagnostics, Inc., its wholly-owned subsidiaries, SunPoint
Diagnostic Center, Inc. ("SunPoint"), National Diagnostics/Orange Park, Inc.
("Orange Park"), National Diagnostics/Riverside, Inc. ("Riverside"), Alpha
Associates, Inc. ("Alpha Associates") and Alpha Acquisitions Corp. ("Alpha
Acquisitions"), and Brandon Diagnostic Center, Ltd., a limited partnership of
which Alpha Associates and Alpha Acquisitions are the general and limited
partner, respectively, provide diagnostic imaging services through several
outpatient centers located in the State of Florida. Sundance Partners (a wholly
owned general partnership) owns the land and building associated with the
outpatient center leased to Orange Park. (As used herein, the term "Company"
refers to National Diagnostics, Inc., including its subsidiaries.) The Company's
principal facility is located in Brandon, just east of Tampa. This facility
accounted for 46% of the Company's net revenues in 1997. The SunPoint facility
is located in Ruskin, Florida. The Company acquired, through its Orange Park
subsidiary, substantially all of the assets of an existing mobile diagnostic
imaging business in greater metropolitan Jacksonville in February, 1995. In
August, 1995 the company opened in the Jacksonville area a third fixed site
facility. In September, 1995 the Company expanded its mobile facilities by
adding both a mobile MRI unit and mobile cardiology unit in the Jacksonville
area. In July 1996, the Company opened its fourth fixed site facility with its
Riverside facility in Jacksonville. This expansion from one facility to four was
made financially possible by the Company's initial public offering in September,
1994 and other credit arrangements.
The Company provides full service diagnostic imaging services to
patients and physicians in a comfortable, service-oriented environment located
outside of an institutional setting. Diagnostic imaging services provided
include magnetic resonance imaging ("MRI"), computer tomography ("CT"),
ultrasound, nuclear medicine, general radiology and fluoroscopy, neurodiagnostic
testing, and mammography. The Company's diagnostic imaging procedures are
performed by trained radiologic technologists and board certified radiologists.
Medical services are provided at each facility by interpreting physicians, who
are board certified radiologists and members of physician groups with whom the
Company has entered into long-term contracts. The Company provides management,
administrative, marketing and technical services, as well as equipment and
facilities, to its interpreting physicians. The Company accepts Medicare,
Medicaid, Worker's Compensation and most commercial insurance. The Company has
contracted with many health maintenance organizations and preferred provider
organizations. In 1996 and 1997, the Company's total net revenues were
$8,877,000 and $9,942,000, respectively, reflecting approximately 52,000 and
60,000 respective diagnostic imaging procedures.
The Company was incorporated in Florida in June of 1994. The Company's
executive headquarters are located at 755 West Brandon Blvd., Brandon, Florida
33511, and its telephone number is (813) 661-9501.
On February 23, 1998, the Company entered into a definitive "Merger
Agreement", amended March 17, 1998, with American Enterprise Solutions, Inc.
("AES"). The Company filed Form 8-K on March 10, 1998 describing the merger
transaction. Upon merger, the separate existence of AES will cease and National
Diagnostics, Inc. being the surviving corporation, will change its name to
American Enterprise Solutions, Inc.
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AES was founded in September, 1997, for the purpose of acquiring
seasoned and profitable high growth firms with operations and facilities to
create Community Healthcare Delivery Systems. These systems are designed to
provide comprehensive delivery of all healthcare services while electronically
interactively linking with AES's proprietary Internet/Intranet and virtual
network gateways. The network can link all of the healthcare industry's trading
partners, from patient/consumer/employees to the providers, payors, employers
and government agencies.
AES consists of businesses acquired in the first and second quarter of
1998 which complements AES' goal to create numerous Community Healthcare
Enterprises (an organization that owns and operates a complete community wide
healthcare delivery system). These businesses include: a multi specialty and
primary care physician group; a behavioral and mental healthcare facility; a
provider of referral management services for physician groups and insurance
companies ; and a nationally known healthcare consulting firm specializing in
corporate reengineering, business development and finance.
On March 30, 1998, Mr. Charles Broes and Mr. Cardwell C. Nuckols,
Ph.D., were appointed to the Company's Board of Directors. Mr. Broes and Dr.
Nuckols are CEO and Executive Vice President of AES. On March 31, 1998, Mr.
Broes and Dr. Nuckols were appointed as Officers of the Company in the capacity
as CEO and Secretary, respectively.
DIAGNOSTIC IMAGING SERVICES INDUSTRY
Overview
During the past ten years, the diagnostic imaging industry has
experienced substantial growth as well as a major shift from inpatient to
outpatient delivery of services. Due to the contrast and detail of a high
quality MRI scan, the use of MRI equipment frequently facilitates the
identification of disease and disorders of a patient and often reduces the
amount and cost of care needed to treat the patient and the need for certain
invasive procedures, like exploratory surgery. The number of MRI units in
operation has increased from fewer than 100 in 1984 to more than 4,800 in 1994.
This rapid growth resulted from increasing acceptance by physicians and patients
of MRI as well as an increasing need for MRI usage in imaging different body
organ systems and disease conditions. New software programs and hardware
capabilities, coupled with new contrast agents (chemicals administered to the
patient that enhance the signal generated by body tissues), are anticipated to
expand further the usage of the technology by physicians.
In addition, inpatient health care cost containment pressures have led
to the growth of outpatient delivery of services. Prior to 1983, most imaging
services were delivered to patients in a hospital radiology department. In 1983,
the federal government instituted the Prospective Payments System, which limited
the amount paid by Medicare to hospitals for inpatient care for most categories
of diseases. This restrictive reimbursement environment was a prime factor in
the shift from inpatient to freestanding, outpatient imaging centers, since
hospitals became less likely to purchase or lease expensive diagnostic imaging
equipment.
Ownership of outpatient diagnostic imaging centers remains highly
fragmented, with no dominant national provider. Most of the equity in outpatient
centers is owned by hospitals, independent radiologists, management companies or
other groups. This fragmentation provides the Company with potential acquisition
opportunities.
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Equipment and Modalities
Diagnostic imaging systems are based on the ability of energy waves to
penetrate human tissue and generate images of the body which can be displayed
either on film or on a video monitor. Imaging systems have evolved from
conventional x-rays to the advanced technologies of MRI, computerized
tomography, ultrasound, nuclear medicine, neurology and mammography. The
principal diagnostic imaging modalities used by the Company include the
following:
Magnetic Resonance Imaging. MRI is a sophisticated diagnostic
imaging system that utilizes a strong magnetic field in conjunction
with low energy electromagnetic waves which are processed by a
dedicated computer to produce high resolution multiple images of body
tissue. A principal virtue of MRI imaging is that atoms in various
kinds of body tissue behave differently in response to a magnetic
field, enabling the differentiation of internal organs and normal and
diseased tissue. During an MRI procedure, a patient is placed in a
large, cylindrical magnet. Multiple images to various planes and
cross-sections can be created without moving the patient. The images
can be displayed on a computer screen, stored within the computer, or
transferred to film for interpretation by a physician and retention in
a patient's file. Unlike computerized tomography and general radiology
and fluoroscopy, MRI does not utilize ionizing radiation which can
cause tissue damage in high doses. As with many other diagnostic
imaging technologies, MRI is generally non-invasive.
Computerized Tomography. CT is used to detect tumors and other
conditions affecting the skeleton and internal organs. CT provides
higher resolution images than conventional x-rays, but generally not as
well defined as those produced by MRI. During a CT procedure, a patient
is placed inside a ring on which a rotating x-ray tube is mounted. A
dedicated computer directs the movement of the x-ray tube to produce
multiple cross sectional images of a particular organ or area of the
body.
Ultrasound. Ultrasound has widespread application,
particularly for procedures in obstetrics, gynecology and cardiology.
Ultrasound imaging relies on the computer-assisted processing of sound
waves to develop images of internal organs and the vascular system. The
sound waves are generated and recorded by probes that are either passed
over or inserted into the body. A dedicated computer processes sound
waves as they are reflected by body tissue, providing an image that may
be viewed immediately on a computer screen or recorded continuously or
in single images for further interpretation.
Nuclear Medicine. Nuclear medicine is used primarily to study
anatomy and metabolic functions. During a nuclear medicine procedure,
short-lived radioactive isotopes are administered to the patient by
ingestion or injection. The isotopes break down rapidly, releasing
small amounts of radioactivity that can be recorded by a gamma or
scintigraphic camera and processed by a computer to produce a flat
image of various anatomical structures.
General Radiology and Fluoroscopy. The most frequently used
type of imaging equipment, radiology uses "x-rays" or ionizing
radiation to penetrate the body and record its images on film.
Fluoroscopy uses a video viewing system for real-time monitoring of the
organs being visualized.
Neurology. Neurological diagnostic testing, consisting of
nerve conduction studies, electromyography, evoked-potentials and
electroencephalography (EEG), is used for the evaluation of patients
with suspected radiculophy of the cervical and lumbar nerves and
diseases of the nervous system, such as multiple sclerosis (MS).
Neurological diagnostic testing equipment is designed to assess
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the integrity, conduction ability and functioning of the nervous system
through electro-physiological stimulation.
Mammography. Mammography is a specialized form of radiology
equipment using low dosage x-rays to visualize breast tissue. It is the
primary screening tool for breast cancer.
THE COMPANY'S GROWTH STRATEGY
Due to the recency of the pending merger between AES and the Company,
the Company is not able to elicit the growth strategies for the numerous
businesses that will be part of the merger with AES. The focus will be on the
Company's Diagnostic Division as it is prior to the merger.
The Company's strategy for growth involves increasing the revenues and
profitability of its existing facilities, establishing and developing additional
diagnostic imaging centers and acquiring existing imaging facilities in certain
target markets, as well as expanding its existing operations to include mobile
diagnostic imaging capabilities.
Expansion of Existing Facilities.
The Brandon facility is currently a full service imaging facility. In
1997, Brandon took delivery of a new non-surgical mammography biopsy unit to
expand the services offered in its Center for Women.
The SunPoint Diagnostic Center is a full-service imaging facility, with
the exception of MRI. The Company intends to add MRI capabilities to the
SunPoint facility at such time as the demand for such services warrants the
acquisition of MRI equipment. See "The SunPoint Facility."
In July of 1996, a new full service center "Riverside" was opened in
the Riverside area of Jacksonville, Florida. The new facility utilizes the
mobile MRI unit form Orange Park to offer MRI services.
Center Development and New Center Acquisitions.
The Company had deferred its external expansion in 1997, focusing more
directly on the continuing effort to build efficiencies and profitability into
existing new start ups. With the resources that will be available to the Company
as a result of the merger with AES, the Company intends, subsequent to the
merger, to embark on its external growth strategies in 1998. Due to the
synergies which will be experienced with other businesses in the AES fold, new
growth strategies will be developed which will include all other business merged
into the Company.
The Company's external growth strategy includes the development and/or
acquisition of diagnostic imaging facilities in target areas identified by
management initially in the State of Florida, with the potential for expansion
to other regions in the United States where AES already has a presence. In
seeking suitable locations for the development of new centers or the acquisition
of existing centers, the Company will focus primarily on demographic studies and
its analysis of local competition, physician referral patterns and imaging
services supply and demand. Also, the Company will focus on its ability to
either utilize the professional services of its existing interpreting physicians
to interpret test results or affiliate with other qualified interpreting
physicians.
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Installation and maintenance costs on equipment can be substantial,
particularly with respect to MRI units. Consequently, new facilities initially
will include most or all of the modalities offered by the existing Brandon
facility, with the exception of MRI. MRI has historically accounted for
approximately 20-30% of the Company's revenues. MRI procedures are expensive to
perform and have historically generated high margins for the Company. Due to the
significant capital expenditure required to install and maintain MRI equipment a
minimum average number of procedures must be performed daily at each facility
offering MRI to cover fixed costs associated with MRI equipment. As a result,
the Company currently intends to perform all MRI procedures required by its
facilities not offering MRI directly either at the Company's nearest full
service facility or via a mobile MRI unit acquired by Orange Park. The Company
expects to provide MRI services in this manner until such time as management
determines that the demand for MRI procedures at a particular facility is at a
level that will generate revenue sufficient to cover fixed costs associated with
MRI equipment.
The Company also believes that it can successfully acquire existing
imaging centers. Acquisition opportunities that were tied to the enactment of
federal and state laws and regulations restricting physician referrals to health
care facilities in which such physicians have a financial interest and limiting
permissible affiliations between tax exempt hospitals and "for profit"
outpatient medical centers have diminished. See "Business-Government
Regulation." The required divestitures of physician-owned centers have already
occurred. Nevertheless, management believes that acquisition opportunities
continue to exist due to the fragmented nature of the imaging center business.
The Company believes that it can successfully integrate the operations
of its new facilities and any facilities that it chooses to acquire by
leveraging its existing corporate infrastructure. No assurances can be given,
however, that adequate financing will be available to fund the development of
this or any other new facilities.
Increased Mobile Diagnostic Imaging Capabilities.
The Company's growth strategy also includes expanding its mobile
diagnostic imaging capabilities. The Company's Orange Park facility currently
provides mobile ultrasound, mobile nuclear cardiology imaging, mobile MRI
services, and mobile neurological diagnostic imaging services.
THERE CAN BE NO ASSURANCES THAT THE COMPANY CAN OR WILL SUCCESSFULLY
IMPLEMENT ITS CENTER GROWTH OR EXTERNAL GROWTH STRATEGIES.
Imaging Equipment.
The Company obtains its imaging equipment from large, well-established
companies, including Siemens Medical Systems Inc., Toshiba, Inc., Lo-Red Co. and
Raytheon, Inc. The Company is not dependent on any one supplier and believes
that it has satisfactory relationships with its suppliers.
Equipment acquisition costs can vary dramatically, depending upon the
model and peripheral equipment acquired. The Company reviews the technological
capabilities of new product offerings in order to improve and upgrade equipment
when necessary. Currently, equipment costs range as follows:
<TABLE>
<CAPTION>
EQUIPMENT PRICE RANGE
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<S> <C> <C>
MRI $900,000 to $1,700,000
CT 300,000 to 900,000
Ultrasound 100,000 to 250,000
Nuclear Medicine 250,000 to 400,000
Radiology 40,000 to 75,000
Fluoroscopy 200,000 to 350,000
Mammography 50,000 to 80,000
Neurology 25,000 to 60,000
</TABLE>
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Installation and maintenance costs on the equipment can be substantial,
particularly with respect to MRI units. Installation costs can range from
$35,000 to $125,000 for an MRI unit, depending on the particular installation
circumstances.
The Company generally obtains financing for its equipment from lenders
and lessors, with the equipment and other assets serving as security for the
loans. Leases for smaller medical equipment average three years and leases for
larger medical equipment are for seven years. Certain of such loans are
personally guaranteed by Mr. Alliston and Mr. Baugh.
Operations
The Company provides diagnostic imaging services to patients referred
by physicians who are either in private practice or affiliated with managed care
providers or other groups. Patients are scheduled for an appointment, informed
of any medications needed for the test, and pre-qualified with respect to their
medical requirements and insurance coverage by Company personnel. Procedures are
designed to avoid the admission and administrative complexities of in-hospital
diagnostic imaging services. All of the Company's imaging services are performed
on an outpatient basis by trained medical technologists under the direction of
the interpreting physician. Following the diagnostic procedures, the images are
reviewed by the interpreting physicians, who prepare a report of these tests and
their findings. These reports are transcribed by Company personnel and then
delivered to the referring physicians. The interpreting physicians are board
certified specialists in radiology, nuclear medicine, nuclear cardiology or
neuroradiology, as appropriate. Such interpreting physicians are members of an
independent health care provider group with which the Company has entered into a
long-term contract, and are not employees of the Company. The Company is not
engaged in the practice of medicine.
Typically, patients are charged an all-inclusive fee for the imaging
studies. The administrative staff is responsible for billing and collecting the
fee.
The Company contracts for interpreting physician services for which
typically the interpreting physician receives a fixed fee or a fixed percentage
of monthly collections. The Company believes that the structure of its
compensation arrangement with its interpreting physicians encourages high
quality service and fairly compensates these physicians for the interpretation
services they provide. The Company's agreement with its interpreting physicians
is typically for a three-year term and requires each physician to obtain medical
malpractice insurance.
THE BRANDON, FLORIDA FACILITY
The Brandon, Florida facility was established in 1991 as a full-service
diagnostic facility specializing in outpatient radiology. The Brandon facility
generally provides medical diagnostic services to the general population living
within approximately ten miles of Brandon, Florida. The Brandon, Florida area
population, currently in excess of 250,000, consists primarily of an expanding
base of middle income families and retirees. In 1996 and 1997, the Brandon
facility generated net revenues of approximately $4,900,000 and $4,600,000,
respectively, reflecting approximately 21,000 and 32,000 respective diagnostic
imaging procedures.
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The Brandon facility currently has one unit for each of MRI, CT and
nuclear medicine and two units for each of mammography, radiology, ultrasound
and fluoroscopy.
Annual expenses for equipment maintenance and repairs at the Brandon
facility were approximately $114,000 and $280,000 for the fiscal years ended
December 31, 1996 and December 31, 1997, respectively. The Company typically
enters into agreements with equipment manufacturers or other third parties for
equipment maintenance. In 1997, Brandon obtained maintenance contracts on
certain of its older equipment.
Patients at the Brandon facility are invoiced in the name of Brandon
Diagnostic Center. The interpreting physician's P.A. with which the Company has
currently contracted for interpreting physician services at the Brandon facility
receives a fixed percentage fee for services performed.
Brandon facility's interpreting physician is certified by the American
Board of Radiology. The interpreting physician's P.A. is responsible for
subcontracting with additional physicians to assure adequate coverage during
peak times, absences, etc. The Brandon facility has forty employees.
The Brandon facility is open from 7:30 a.m. to 6:00 p.m. Monday,
Wednesday and Friday, 7:30 a.m. to 8:00 p.m. on Tuesday and Thursday, 8:00 a.m.
to 2:00 p.m. on Saturdays and on an as-needed basis on Sundays.
THE SUNPOINT FACILITY
The Company, through its SunPoint subsidiary, opened its SunPoint
Diagnostic Center in Ruskin, Florida, approximately twenty miles south of
Brandon, in November, 1994. This facility is located near the Sun City Center
retirement community. The Ruskin area has a total population of approximately
45,000, including roughly 38,000 retirees. The SunPoint facility is a
full-service imaging facility, with the exception of MRI. It currently has one
unit for each of CT, ultrasound, nuclear medicine, mammography, radiology and
fluoroscopy. The equipment located at the SunPoint facility is obtained from the
same manufacturers as the Brandon facility equipment.
Consistent with the Company's expansion strategy, the Company intends
to add MRI capabilities to the SunPoint Diagnostic Center only as the demand for
such services develops and warrants the acquisition of MRI equipment. Until such
time, all MRI procedures required by SunPoint facility patients will be
performed at the nearby Brandon facility. All SunPoint patients requiring MRI
procedures are offered a free shuttle service to and from the Brandon facility.
The operational procedures at the SunPoint facility are virtually
identical to those described above under "Operations," the patients are invoiced
in the name of SunPoint Diagnostic Center. The SunPoint facility is staffed by
fifteen employees and one interpreting physician, who rotates with the other
interpreting physician serving the Brandon facility. The interpreting
physician's P.A. with which the Company has currently contracted for
interpreting physician services at the SunPoint Diagnostic Center receives a
fixed fee for services rendered.
The SunPoint facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday, and on an as needed basis on Saturdays.
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THE ORANGE PARK FACILITY
In February, 1995, the Company, through its Orange Park subsidiary,
acquired substantially all of the assets of Medical Imaging Consultants, Inc.
and certain of its affiliates, providers of both mobile and fixed site
ultrasound and related diagnostic testing services in the cardiac, cerebral
vascular and neurophysiology areas.
Orange Park currently provides mobile and fixed diagnostic services in
Clay, Duval, Nassau and St. Johns counties in northeastern Florida. Its
principal facility is located in Orange Park, Florida, where it has three mobile
units for neurology, two units for ultrasound, one each for nuclear cardiology
and MRI. All equipment at the Orange Park facility is either owned directly or
leased through an independent leasing company. The Orange Park facility became a
full service imaging facility, with its mobile facilities, by September, 1995.
The Company has one unit for each for CT, ultrasound, mammography, radiology,
and fluoroscopy at its Orange Park subsidiary. This mobile unit is used to
provide MRI services at Orange Park and any future facilities developed by the
Company in northeastern Florida. See "-The Company's Growth Strategy-Center
Development and New Center Acquisitions."
Orange Park follows the same operational procedures as the Company's
other facilities, except that patients are invoiced directly in the name of
Orange Park. The Orange Park facility is currently staffed by twenty-eight
employees. All interpreting services are provided by eight interpreting
physicians who are members of an independent health care provider group with
which the Company has entered into a long-term contract. These physicians are
not employees of the Company and the Company is not engaged in the practice of
medicine. The interpreting physician group with which the Company has contracted
for interpreting physician services at the Orange Park facility receives a
monthly fee equal to 17% of the monthly collections.
The Orange Park facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday, and on an as-needed basis on Saturdays. In 1997, the
Orange Park facility was awarded the Certificate of Accreditation from the Joint
Commission of Accreditation of Healthcare Organizations.
THE RIVERSIDE FACILITY
The Company, through its Riverside subsidiary, opened in July of 1996
the Riverside Diagnostic Center in the Riverside area of Jacksonville, Florida.
The facility is located in proximity of a thousand bed hospital in a residential
area of Jacksonville. The Riverside facility is a full-service imaging facility,
inclusive of mobile MRI services which it obtains from the Orange Park facility
(see Orange Park Facility). It currently has one unit each for CT, ultrasound,
nuclear cardiology, nuclear medicine and radiology and two units each for
mammography and fluoroscopy.
Riverside follows the same operational procedures as the Company's
other facilities, except that patients are invoiced directly in the name of
Riverside. The Riverside facility is currently staffed by eleven employees. All
interpreting services are provided by a group of physicians who received a
percentage (15% of the first $200,000 and 20% thereafter) of monthly
collections.
The Riverside facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday. In 1997, the Riverside facility was awarded the
Certificate of Accreditation from the Joint Commission of Accreditation of
Healthcare Organizations.
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CARDIOLOGY MOBILE SERVICES
In January, 1995, the Company, through its cardiology subsidiary,
entered into an exclusive agreement with Diagnostic Cardiology Associates, an
established group of 18 cardiologists based in Jacksonville and other physician
groups in northeast Florida, to provide mobile nuclear cardiology imaging
services. The Company acquired a mobile unit and placed it into operation in
September, 1995. Since then the Company has expanded its operations to
Fernandina Beach, Lake City and Palatka, Florida. The Company will seek to enter
into similar arrangements with other groups of cardiologists, but no assurances
can be made that such opportunities exist or can be realized. In May 1996, the
wholly owned cardiology company was merged into Orange Park.
MARKETING
The Company provides diagnostic imaging services to patients referred
by physicians who are either in private practice or affiliated with managed care
providers or groups. Consequently, the Company's marketing program focuses on
establishing and maintaining referring physician relationships by efficiently
providing needed medical services to patients of those physicians, and
maximizing reimbursement yields. The Company's marketing program targets
selected market segments consisting of local physicians who may have a need for
diagnostic imaging services. The Company utilizes a variety of marketing
techniques in its market areas to educate physicians in the availability and
capabilities of the various imaging technologies, including personal visits by
the Company's clinical coordinators to local physicians and their staffs, direct
mailings of marketing brochures and participation in seminars on recent
developments in diagnostic imaging and related technology.
The Company's clinical coordinators seek to maintain the satisfaction
of referring physicians by frequent contact with them, both to ascertain the
physicians' needs and, when appropriate, to seek suggestions on how to improve
the Company's delivery of services. The Company continually seeks to improve the
quality of its services by encouraging interaction between referring physicians
and interpreting physicians. The Company has also developed a database
containing referring physician and patient information in order to more
effectively coordinate its marketing activities with respect to its referring
physicians. The Company has joined the Florida Imaging Network, Inc., an
association recently established to develop and operate a statewide diagnostic
imaging services network to interface with managed care providers in the State
of Florida. The Company believes that this will provide an additional method of
expanding its referral base.
REIMBURSEMENT, BILLING AND COLLECTION
The Company charges patients a fee for each imaging study performed,
which is billed in the name of the applicable diagnostic center. The Company
generally accepts assignment by the patient of payment from insurers and is
reimbursed for services performed by payment, directly and indirectly, from
third-party commercial insurers, managed care organizations, government payors,
workmen's compensation and other sources. In many instances, the patient is
responsible for payment of a co-payment or deductible and, in some instances,
the patient remains responsible for payment of the entire fee. The extent to
which services provided by the Company are reimbursable depends upon a number of
factors, including the type of insurance coverage carried by the patient, the
type of imaging services provided to the patient, prevailing practices in the
relevant geographic area and the identity of the third-party payor.
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The following table sets forth the approximate percentages of
collections received during 1997 in each of the following categories:
<TABLE>
<CAPTION>
PERCENT OF
SOURCE COLLECTIONS
------ -----------
<S> <C>
Managed Care/HMO 35%
Private Insurance 38
Medicare/Medicaid 16
Private Pay 8
Workmen's Compensation 3
</TABLE>
The Company maintains a competitive billing strategy based upon
evaluation of available pricing data. The Company maintains sufficient price
flexibility to enable it to compete with other MRI imaging services provided in
the local community.
Obtaining the maximum amount of allowable reimbursement and collecting
receivables on a timely basis are critical to the Company's success and are a
priority of management. The Company has developed and is continuing to develop
systems to process claims. The Company endeavors to provide complete and
accurate claims data to the relevant payor sources to obtain the maximum amount
of allowable reimbursement and to accelerate the collection of accounts
receivable. Approximately eighteen of the Company's employees are involved in
reimbursement, billing and collection activities. There can be no assurance that
the Company will be successful with respect to the foregoing.
Third-party payors, including Medicare, Medicaid and certain commercial
payors, have taken extensive steps to contain or reduce the costs of health
care. A significant change in coverage or a reduction in payment rates by
third-party payors could have a material adverse effect upon the Company's
business. In 1996 and 1997, approximately 0.8% and 0.3%, respectively, of the
Company's total revenues were derived from providing imaging services to
patients involved in personal injury claims. The Company sometimes experiences
significant collection delays in connection with these services due to the fact
that the Company may not be paid for its services until the underlying legal
action is resolved.
COMPETITION
The outpatient diagnostic imaging industry is highly competitive. The
Company believes that its principal competitors are hospitals, independent or
management company-owned imaging centers, some of which are owned, in whole or
in part, by physician investors, and mobile diagnostic units. Some of these
competitors have greater financial and other resources than the Company. The
Company's competitors in the immediate Brandon area are a 120 bed hospital
providing full inpatient service and a new outpatient diagnostic center opened
in January of 1997. The Brandon facility has experienced a 7% decline in gross
revenues in 1997 compared to 1996 but is not able to determine if this is from
competitor pressures since its case load has continued to increase. The
Company's sole competitor in the Ruskin area is a 50 bed hospital also providing
full inpatient service. The Company has many competitors in the Jacksonville
area, including hospitals, independent or management company-owned imaging
centers and mobile diagnostic units, but, to the best of management's knowledge,
none of these competitors is a full modality center offering mobile and fixed
site diagnostic imaging services.
12
<PAGE> 13
The Company believes that as a result of its operating efficiencies, it
can provide outpatient diagnostic services more competitively than other local
providers. Principal competitive factors include quality and timeliness of test
results, type and quality of equipment, facility location, convenience of
scheduling and availability of patient appointment times. The Company may
benefit, or experience increased competition, to the extent proposed or future
regulations will reduce self referrals from physician investors and make their
referrals part of the market for which any center may compete. The Company
currently has no physician investors and, therefore, derives 100% of its
revenues from non-investor referrals.
GOVERNMENT REGULATION
The health care industry is highly regulated at the federal, state and
local levels. Although the following is not an exhaustive discussion, it
summarizes the key regulatory factors that affect the Company's operations and
development activities:
Certificates of Need and Licensing. Under Certificate of Need laws, a
health care provider is typically required to substantiate the need for, and
financial feasibility of, certain expenditures related to the construction of
new facilities, commencement of new services or purchases of medical equipment
in excess of statutory thresholds. The provision of outpatient health services,
including outpatient MRI, is exempt from Certificate of Need review in the State
of Florida. The operations of outpatient imaging centers are subject to federal
and state regulations relating to licensure, standards of testing, accreditation
of certain personnel and compliance with governmental reimbursement programs.
The Company is required to obtain and maintain general business licenses from
certain counties in which it operates centers, as well as licenses from the
State of Florida for the handling and disposal of radioactive materials used in
nuclear medicine procedures. Radioactive materials are currently delivered daily
to the Company's Brandon, SunPoint and Cardiology facilities. Medical waste
contaminated with radioactive material is placed in locked hazardous waste
containers and picked up daily for disposal by a licensed hazardous waste
vendor. The Company is subject to surprise inspection by nuclear inspectors.
Although the Company believes that it has obtained all necessary licenses, the
failure to obtain a required license could have a material adverse effect on the
Company's business. The Company believes that diagnostic testing will continue
to be subject to intense regulation at the federal and state levels and it
cannot predict the scope and effect thereof.
Medicare/Medicaid Anti-Kickback Provisions. The Medicare/Medicaid
Anti-Kickback Statute (the "Anti-Kickback Statute") prohibits the offering,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare or Medicaid patients for any item or service that is
covered by Medicare or Medicaid. Violation of the Anti-Kickback Statute is
punishable by substantial fines, imprisonment for up to five years or both. In
addition, the Medicare and Medicaid Patient and Program Protection Act of 1987
(the "Protection Act") provides that persons guilty of violating the
Anti-Kickback Statute may be excluded from participating as providers or
suppliers in the Medicare or Medicaid programs. Investigations leading to
prosecutions and/or program exclusion may be conducted by the Office of the
Inspector General ("OIG") of the United States Department of Health and Human
Services ("HHS"), the United States Department of Justice and State of Florida
agencies.
Under the Anti-Kickback Statute, law enforcement authorities, HHS and
the courts are increasingly scrutinizing arrangements between health care
providers and referral sources (such as physicians) in order to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient referrals. This scrutiny is not limited to financial arrangements that
involve a direct payment for patient referrals, but extends to payment
mechanisms that carry the potential for inducing Medicare or Medicaid referrals,
including situations where physicians hold investment interests in, or
compensation arrangements with, a health care entity to which such physicians
refer patients.
13
<PAGE> 14
Safe Harbor Regulations. The Protection Act directed the OIG to publish
regulations delineating health care payment practices that would not be subject
to criminal prosecution and would not provide a basis for program exclusion
under the Anti-Kickback Statute. In 1991, the OIG published final safe harbor
regulations that specify the conditions under which certain kinds of financial
arrangements, including (i) investment interests in public companies, (ii)
investment interests in small entities, (iii) management and personal services
contracts, and (iv) leases of space and equipment, will be protected from
criminal prosecution or civil sanctions under the Anti-Kickback Statute. The OIG
has stated that failure to satisfy the conditions of an applicable "safe harbor"
does not necessarily indicate that the arrangement in question violates the
Anti-Kickback Statute, but means that the arrangement is not among those that
the "safe harbor" regulations protect from criminal or civil sanctions under
that law.
One provision of the Safe Harbor Regulations includes a public company
exception applicable to investment in the Company by referring physicians. The
Company currently does not qualify for this exception. A return on investment,
such as a dividend or interest, is not a prohibited payment if, within the
previous fiscal year or 12 month period, the public company possesses more than
$50 million in undepreciated net tangible assets which are related to the
furnishing of health care items and services and the Company meets all five of
the following standards:
i) Equity securities must be registered with the Commission under
15 U.S.C. 78l(b) or (g);
ii) The investment interest of an investor in a position to make
or influence referrals to, furnish items or services to, or
otherwise generate business for, the Company must be obtained
on terms equally available to the public through trading on a
registered national securities exchange or on Nasdaq;
iii) The Company or any investor must not market or furnish the
Company's items or services to passive investors
(non-management shareholders) differently than to
non-investors;
iv) The Company must not loan funds to or guarantee a loan for an
investor who is in a position to make or influence referrals
to furnish items or services to, or otherwise generate
business for the entity if the investor uses any part of the
loan to make the investment; and
v) The amount of payment to the investor in return for the
investment interest must be directly proportional to the
amount of the investor's capital investment.
The Company does not meet the $50 million net tangible assets criterion
and, therefore, in order to avoid any issue as to fraud and abuse compliance, a
physician who owns any of the Company's securities might be prohibited from
making any patient referrals to the Company's diagnostic imaging facilities,
whether or not the remaining standards have been complied with.
With respect to the arrangements between the Company and its
interpreting physicians, there is a safe harbor for personal service agreements
which requires that such arrangements be in writing and last for at least one
year, and that the compensation paid to the physicians be based on the fair
market value of the professional services they provide and not on any referrals
or business generated between the parties. To the extent that the compensation
arrangements with the interpreting physicians do not fit within all of the
requirements of the safe harbor, they are not per se illegal, but in order to
avoid all risk of fraud and abuse issues, the interpreting physicians would not
be permitted to make any referrals to the Company for imaging services.
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<PAGE> 15
Florida Prohibition of Referrals. On March 13, 1992, the Florida
Legislature passed the "Patient Self-Referral Act of 1992" (the "1992 Act"),
which took effect April 9, 1992. The Act, as amended in 1993, prohibits
physicians' referrals of patients for designated health services, including
diagnostic imaging services, to facilities in which they own an investment
interest. Therefore, physicians who own Common Shares or Common Share Purchase
Warrants are prohibited from making any patient referrals to the Company's
diagnostic imaging facilities.
Medicare Reimbursement. Diagnostic imaging services provided to
Medicare beneficiaries are reimbursed based on Medicare's Resource-Based
Relative Value Scale, which sets limits on reimbursement for both the technical
and physician components of these services. There is no guarantee that the
amount paid by Medicare, either now or in the future, will be adequate to meet
the Company's costs of providing the imaging services. There is also no
guarantee that the U.S. Government will not enact law or adopt regulations
restricting the ability of free-standing diagnostic imaging centers from
providing services to Medicare or Medicaid patients, although the Company is
currently unaware of any proposal to do so. In 1998, the Medicare allowable
increased approximately 7%.
Omnibus Budget Reconciliation Act of 1993. As part of the Omnibus
Budget Reconciliation Act of 1993, Congress passed the "Stark II" law, which
prohibits a physician from referring Medicare and other federal program patients
for designated health services, including imaging services, to certain entities
with which the physician or a member of his or her immediate family has a
financial relationship. A "financial relationship" would include either an
ownership interest in, or compensation arrangement with, the entity. The Stark
II law has been incorporated into Section 1877 of Title XVIII of the Social
Security Act. The Company, as a provider of radiology and other diagnostic
services, would be such an entity, and therefore, a physician with such a
financial relationship with the Company could not make referrals of Medicare or
Medicaid business to the Company, unless the relationship falls within one of
the limited exceptions offered by Stark II. These limitations became effective
January 1, 1995.
Stark II provides an exception for referrals by a physician who, or a
member of whose immediate family, owned investment securities in a public entity
which may be purchased on terms generally available to the public, but only if
the entity met the following criteria: (i) its securities are listed on a
recognized stock exchange or traded on Nasdaq; and (ii) the entity has at the
end of its most recent fiscal year or on average during the previous three
fiscal years, stockholder equity exceeding $75 million. The Company does not
meet these criteria and, therefore, a physician who owns Common Shares or Common
Share Purchase Warrants of the Company is prohibited from making Medicare and
other federal program patient referrals to any of the Company's diagnostic
imaging facilities. The Company also is prohibited from presenting a claim for
services rendered in connection with such a prohibited referral. It would not be
necessary for the Company to have knowledge that the referral was unlawful in
order for there to be a violation for which the penalty could be denial of
payment for the claim or a refund to the payer. Penalties of up to $15,000 for
each violation and exclusion from Medicare and other programs could be assessed
if a bill is presented and the entity knows or should have known that it is the
result of a prohibited referral.
Physicians with compensation arrangements with the Company, such as its
interpreting physicians, also are subject to the foregoing referral prohibition,
unless the arrangement fits within a Stark II exception. Stark II permits
personal arrangements between such physicians and the Company if various
criteria are met, including that the arrangement is set out in writing, has a
duration of at least one year and the compensation paid to the physicians
represents the fair market value of the professional services provided and does
not take into account the volume or value of any referrals or other business
generated between the parties. Stark II also specifically states that a
prohibited referral does not include a request by a radiologist for diagnostic
radiology services if such services are furnished by or under the supervision of
that radiologist.
15
<PAGE> 16
To its knowledge the Company currently does not have any physicians who
are significant shareholders and, therefore, the Company's revenue growth has
been derived entirely from non-investor physician referrals. In the event the
Company has physician shareholders in the future federal and state law will
prohibit referrals by such investors to any of the Company's imaging centers.
As a provider of diagnostic services, the Company is required to report
the names and unique identification number of physicians who, or whose immediate
family members, have an investment interest in or compensation arrangement with
the Company. The Company's current shareholders are not physicians and,
therefore, do not provide referrals in potential violation of the foregoing
provisions. In the future, however, many of the Company's Common Shares or
Warrants may be held by physicians or their immediate family members or in
"street name", and therefore, not readily subject to discovery. Management
believes that monitoring of such ownership would be extremely difficult.
However, management is investigating methods of minimizing its exposure to
inadvertently accepting a prohibited referral. Management will also assess and
monitor its compensation arrangements with physicians.
Although the Company believes that it is in material compliance with
all applicable federal and state laws and regulations, there can be no assurance
that such laws or regulations will not be enacted, interpreted or applied in the
future in such a way as to have a material adverse impact on the Company, or
that federal or state governments will not impose additional restrictions upon
all or a portion of the Company's activities, which might adversely affect the
Company's business.
EMPLOYEES
As of March 24, 1998, the Company had 118 employees (all full time),
including 2 executive officers, 73 administrative personnel, 2 sales and
marketing person and 41 technical personnel. The Company is not a party to any
collective bargaining agreement and considers its relationship with its
employees to be good.
INSURANCE
The Company carries workmen's compensation insurance, comprehensive and
general liability coverage, fire and allied perils coverage in amounts deemed
adequate by management. The Company is not engaged in the practice of medicine
and, therefore, does not carry medical malpractice insurance. See "Risk
Factors." There is no assurance that potential claims will not exceed the
coverage amounts, that the cost of coverage will not substantially increase or
require the Company to insure itself or that certain coverages will not be
reduced or become unavailable. The Company also requires that physicians
practicing at the imaging centers carry medical malpractice insurance to cover
their individual practices. The interpreting physicians are responsible for the
costs of this insurance.
ITEM 2 -- DESCRIPTION OF PROPERTY
The Company's executive office and its primary diagnostic facility are
located in Brandon, Florida and occupy approximately 11,325 square feet of
space. The Company entered into a lease with respect to such facilities on
September 1, 1994, expiring August 31, 1997, which is followed by a renewal
option of five years. The Company exercised its option to renew and incurred,
pursuant to the lease agreement, a one-time 10% escalation upon exercise of the
renewal option. The new lease consolidated prior leases pertaining to the
Brandon facility's then existing space and provided additional space to
accommodate the Company's Center for Women.
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<PAGE> 17
Under both prior leases and its existing lease, the Company paid an aggregate of
approximately $133,000 (including common area maintenance and real estate taxes)
in fiscal 1997 for space at such facility. Pursuant to the lease terms, the
annual rental for the Brandon facility is subject to an annual escalation of up
to four percent based upon the Consumer Price Index.
The Company entered into a month to month lease for 1,500 square feet
of office space in Jacksonville to serve as the Company's northeast Florida
regional office. Annual rent approximates $18,000. The lease for this space is
with Ronald Baugh, the President and Chief Operating Officer of Orange Park. The
office was closed in March, 1998.
The Company also has entered into a lease relating to its 6,390 square
foot SunPoint facility in Ruskin, Florida. The initial term of the Ruskin lease
is five years, beginning September 1, 1994, with one five year renewal option.
Base rental payments (excluding common area maintenance and real estate taxes)
under the lease was approximately $23,000 in 1995 and $48,000 annually
thereafter. Pursuant to the lease terms, the annual rental for the Ruskin
facility is subject to a four percent annual escalation after 1996. Rent expense
with common area maintenance approximated $62,000 in 1997.
The Orange Park mobile operations and fixed site facility are based in
a 5,100 square foot medical building located in Orange Park, Florida. The
facility is owned by Sundance Partners, a Florida general partnership which is
owned 100% by the Company. A triple net lease was entered into with an initial
term of ten years, beginning April 1, 1995. Base rental payments under the lease
are approximately $ 44,000 annually. Rent expense for 1997 approximated $50,000
which is eliminated upon consolidation.
The Company entered into a triple net lease for its Riverside facility
(which opened in July of 1996) with Sundance Partners II, a Florida general
partnership in which the general partners are officers/directors and majority
shareholders of the Company. The facility is a newly constructed 7,100 square
foot stand alone medical center constructed to Company specifications. The lease
has an initial term of five years with a one time renewal option for five more
years. Base rental payments are $110,050 annually. The base rent shall escalate
up each year by $.25 per square foot. Rent expense for 1997 approximated
$117,000.
The Company believes its present and anticipated leased facilities to
be in excellent condition and suitable for their intended operations.
ITEM 3 -- LEGAL PROCEEDINGS
In December, 1995 the physician group which contracted with Brandon and
SunPoint for radiology readings terminated the contract. On February 9, 1996 the
physician group filed a suit entitled East Pasco Radiology Associates, P.A. vs.
Brandon Diagnostic Center, Ltd., and SunPoint Diagnostic Center, Inc. in the
Hillsborough County Florida Circuit Court against the Company alleging the
centers materially breached the contract by failing to pay physician fees timely
and incorrectly billing certain procedures. The physician group sought payment
for services rendered (approximately $178,000) and lost profits (approximately
$850,000). In February of 1997, the court denied the claim for lost profits and
entered an award in favor of the physician group relating to services rendered.
The Company adequately reserved for the claim for services in 1995 and satisfied
the judgement in February of 1997. Subsequently, a motion by the physicians for
a rehearing was denied. The physicians filed a notice of appeal in the District
Court of Appeal, Second District of Florida, for the lost profits claim in
April, 1997. The appeal was denied in January, 1998.
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<PAGE> 18
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
Diagnostic, Inc. stock. The Company was named in the suit entitled James I.
Blackey vs. A.T. Brod & Co., Inc., Arthur M. Stupay, Jugal Taneja, R.K. Khosla,
Bancapital Investment Corporation, and National Diagnostics, Inc. pending the
Supreme Court of the State of New York, County of Erie, Index Number I-1995-
2249. Mr. J. Taneja was Chairman, Chief Executive Officer and Director of A. T.
Brod and the Company. Mr. Taneja resigned as Chairman and all offices of the
Company on January 19, 1998. The action alleges wrongful discharge, breach of
contract, deformation of character, conspiracy and tortious interference with a
contract arising out of the alleged wrongful termination of the plaintiff by
A.T. Brod and seeks compensatory and punitive damages of $2,830,000. In April of
1997 the Company reached a settlement for $5,000 which has been fully paid by
the Company.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From October 12, 1994 through August 18, 1997, the Company's Common
Shares had been traded separately in the Nasdaq SmallCap Market under the symbol
NATD. Since August 18, 1997 the Company's Common Shares have been traded
separately on the Over The County Bulletin Board. The following table sets forth
the high and low bid prices for Common Shares as reported by Nasdaq for the
periods indicated. These prices are not necessarily indicative of prices at
which actual buy and sell transactions could occur.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
1994
Fourth Quarter (from October 12) $4-3/4 $3
1995
First Quarter $6-1/4 $1-7/8
Second Quarter $4 $1-1/2
Third Quarter $1-7/8 $1
Fourth Quarter $3-1/2 $1-11/16
1996
First Quarter $3-3/8 $2-5/16
Second Quarter $4-1/2 $2-1/2
Third Quarter $4 $2-1/2
Fourth Quarter $2-3/4 $1-11/16
1997
First Quarter $2-7/16 $1-1/4
Second Quarter $1-41/64 $0-13/6
Third Quarter $1-7/8 $0-5/8
Fourth Quarter $0-30/32 $0-14/32
</TABLE>
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<PAGE> 19
On March 24, 1998, the closing bid quote for the Common Shares was
$0.9375 per share, and there were 32 holders of record of Common Shares. The
majority of over 280 individual shareholders held their stock in a "street
name".
The Company has not paid cash dividends on its Common Shares and does
not anticipate doing so in the foreseeable future. The Company intends to retain
earnings, if any, for future growth and expansion opportunities. Payment of cash
dividends in the future, as to which there can be no assurance, will be
dependent upon the Company's earnings, financial condition, capital requirements
and other factors determined to be relevant by the Board of Directors.
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's audited consolidated financial statements included elsewhere herein.
Due to the Company's financial operating results and condition which has
resulted in the Company being in default of its major lease and loan agreements,
our independent certified public accountants have qualified their accountants'
report dated April 30, 1998, on the Company's 1997 financial statements as to a
going concern uncertainty. The following commentary within "Management
Discussion and Analysis" addresses the Company's operations for 1997 and its
plan to improve future results. The reader should also refer to Note 2l of the
audited financial statements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
The following table sets forth selected operating results as a
percentage of net revenues for 1997 as compared to 1996.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- -----------
<S> <C> <C>
Net Revenue 100.0% 100.0%
Direct Operating Expenses 53.6 54.6
General and Administrative Expense 44.3 40.3
Depreciation and Amortization 14.5 13.6
Operating loss (12.5) (8.6)
Interest 7.0 6.3
Other Income 0.2 .9
Income Taxes (benefit) 0 0
Net Loss (19.2) (14.0)
</TABLE>
Net revenues for fiscal 1997 were $9,942,000 as compared to $8,877,000
for fiscal 1996, representing an approximately 12% increase. This increase was
primarily attributable to relatively new start up facilities and an increase in
the volume of procedures performed at these facilities. Orange Park mobile
operations started up in February 1995, opening a fixed site facility in August;
and in September a mobile MRI facility and a mobile cardiology unit were placed
in service. Riverside operations started up in July, 1996. The start up
facilities accounted for approximately $1,171,000 of the increase in revenues.
The Brandon facility decreased its revenues $334,000 or approximately 7% to
$4,593,000 in 1997. SunPoint increased its revenues $228,000 or approximately
18% to $1,505,000 in 1997.
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<PAGE> 20
Direct operating expenses increased approximately 10% to $ 5,331,000
for 1997 from $4,850,000 for 1996. This increase is a direct result of the
increased number of diagnostic procedures performed in 1997 compared to the
preceding year. Direct costs as a percentage of net revenue decreased
approximately 1% from the preceding year. This is attributable to various costs
that do not vary proportionately with net revenue.
General and administrative expenses increased approximately 23% to
$4,406,000 for 1997 as compared to $3,576,000 for 1996. This increase was
primarily attributable to the addition of the Riverside facility which completed
its first full year of operation and personnel and the related payroll and
related benefit costs associated with such personnel. Such personnel costs
increased approximately $462,000 to $2,448,000 inclusive of executive
compensation. The personnel were added in response to the increased volume of
procedures performed. General and administrative expenses also increased because
of current operating expenses for start-up operations relating to the addition
of Riverside (an increase of $180,000 exclusive of personnel related costs).
Depreciation (depreciation expense approximating $1,319,000) and
amortization increased 19% to $1,445,000 in 1997 as compared to $1,210,000
during 1996. The dollar increase was principally attributable to the acquisition
of new equipment for the start-ups and amortization (approximately $60,000) of
previously capitalized start-up costs which are amortized over 12 months
commencing with the date of first patient services.
Interest expense increased to $695,000 in 1997 from $564,000 in 1996 as
a result of additional financing for equipment acquisitions and working capital.
The increase in net revenues was offset by a greater increase in
expenses resulting in a net loss of $1,910,000 for 1997 compared to a net loss
of $1,242,000 in 1996. This is primarily attributable to the start up operations
which bear the costs of a fully operational diagnostic facility while building
its patient and referring physician base from day one. Orange Park in its second
full year of operation has a loss of $ 660,000. Riverside in its first full year
of operation has a loss of $635,000. Revenues increased steadily; however, the
ramp up of revenues for the new starts did not meet the Company's expectations.
The Company has responded in the last quarter of 1997 and first quarter of
1998 by realligning and terminating personnel.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Net revenues for fiscal 1996 were $8,877,000 as compared to $6,233,000
for fiscal 1995, representing an approximately 42% increase. This increase was
primarily attributable to new start up facilities and an increase in the volume
of procedures performed at pre-existing facilities. Orange Park mobile
operations started up in February 1995, opening a fixed site facility in August;
and in September a mobile MRI facility and a mobile cardiology unit were placed
in service. Riverside operations started up in July, 1996. The start up
facilities accounted for approximately $1,344,000 of the increase in revenues.
The Brandon facility increased its revenues $1,005,000 or approximately 26% to
$4,927,000 in 1996. SunPoint increased its revenues $314,000 or approximately
30% to $1,276,000 in 1996.
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<PAGE> 21
The Company's net accounts receivable increased $630,000 to $2,131,000
from $1,501,000 at December 31, 1996 and 1995, respectively. Approximately 52%
of this increase is the direct result of the Company's start up operations
inclusive of the Orange Park Center opened in August, 1995. The cash position of
the Company decreased to $104,000 from $128,000 at December 31, 1996 and 1995,
respectively.
The following table sets forth selected operating results as a
percentage of net revenues for 1996 as compared to 1995.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
----------- -----------
<S> <C> <C>
Net Revenue 100.0% 100.0%
Direct Operating Expenses 54.6 56.0
General and Administrative Expense 40.3 42.3
Depreciation and Amortization 13.6 14.2
Operating loss (8.6) (12.6)
Interest 6.3 5.3
Other Income 0.1 1.7
Income Taxes (benefit) 0 (2.9)
Net Loss (14.0) (13.3)
</TABLE>
Direct operating expenses increased approximately 38% to $ 4,850,000
for 1996 from $3,495,000 for 1995. This increase is a direct result of the
increased number of diagnostic procedures performed in 1996 compared to the
preceding year. Direct costs as a percentage of net revenue decreased
approximately 2% from the preceding year. This is attributable to various costs
that do not vary proportionately with net revenue. Rents increased approximately
2% as a percent of revenues primarily from the costs associated with the
operating lease for the Orange Park mobile MRI which completed its first full
year of operation. In addition, radiology reading fees as a percent of net
revenue decreased approximately 3% due to the more favorable contracts the
Company entered into for 1996; wages decreased approximately 1% as a percent of
net revenue due to increased efficiencies.
General and administrative expenses increased approximately 35% to
$3,576,000 for 1996 as compared to $2,635,000 for 1995. This increase was
primarily attributable to the addition of personnel and the related payroll and
related benefit costs associated with such personnel. Such personnel costs
increased approximately $631,000 to $1,986,000 inclusive of executive
compensation. The personnel were added in response to the expansion of
facilities and increased volume of procedures performed. Executive compensation
increased from approximately $468,000 in 1995 to $555,000 in 1996 as a result of
the employment of two additional executives in 1995 receiving their first full
year of salary in 1996. General and administrative expenses also increased
because of current operating expenses for start-up operations relating to the
addition of Riverside (an increase of $137,000 exclusive of personnel related
costs).
Depreciation (depreciation expense approximating $1,085,000) and
amortization increased 36% to $1,210,000 in 1996 as compared to $890,000 during
1995, while decreasing as a percentage of net revenue. The dollar increase was
principally attributable to the acquisition of new equipment for the start-ups
and amortization (approximately $50,000) of previously capitalized start-up
costs which are amortized over 12 months commencing with the date of first
patient services.
Interest expense increased to $564,000 in 1996 from $334,000 in 1995 as
a result of additional financing for equipment acquisitions and working capital.
21
<PAGE> 22
The increase in net revenues was offset by a greater increase in
expenses resulting in a net loss of $1,242,000 for 1996 compared to a net loss
of $835,000 in 1995. This is primarily attributable to the start up operations
which bear the costs of a fully operational diagnostic facility while building
its patient and referring physician base from day one. Orange Park in its first
full year of operation has a loss of $ 898,000. Riverside in its six months of
operation has a loss of $511,000. Revenues increased steadily; however, the ramp
up of revenues for the new starts did not meet the Company's expectations. The
Company has responded in the first quarter of 1997 by terminating certain
management and executive personnel and placing additional emphasis on marketing
for the new start ups. The Company estimates this will save approximately
$150,000 in executive compensation. Additionally, the Board has acted effective
of January 1, 1997 to eliminate C.E.O. and C.O.O. bonuses (in the 1996 this
approximated $136,000) until the Company becomes profitable for two consecutive
quarters.
Liquidity and Capital Resources
Medical equipment, capital improvements, acquisitions and new center
development historically have been funded through 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 borrowing range from fixed
rates of up to 14.5% to a variable rate equal to the bank prime rate, plus 1 to
2%. The Company at December 31, 1997 was, and is at March 31, 1998, in default
of its capital lease obligations due to late payments of approximately $124,000
and $418,000, respectively, as a result of its liquidity problems discussed more
fully below. Generally, while in default the lessor may accelerate the lease
obligation (at December 31, 1997 total long-term portion of all leases prior to
reclassification to current liabilities, approximated $2,446,000). The Company's
major lessor has been cooperating and working with the Company during the period
of delinquency and has refrained from exercising its rights under default.
Meetings and discussions are expected to be concluded in May of 1998 to arrive
at a solution to the delinquency under the lease agreements. The other remaining
lessors (approximately 17% of the total lease obligations outstanding at
December 31, 1997) have been cooperating with the Company, generally allowing
not more than 60 days past due on lease payments. There is no assurance the
Company will be successful in achieving these goals.
Capital expenditures, including capital lease obligations, for the
years ended December 31, 1997 and 1996 totaled approximately $539,000 and
$2,930,000, respectively.
In October 1997, the Company refinanced with HealthCare Financial
Partners, Inc. ("HCFP", a lender specializing in medical receivables), its
existing $2,000,000 line of credit previously financed with DVI Business Credit
Corporation ("DVI"). An additional term loan for $235,000 calling for monthly
installments of $9,792 with interest was also financed by HCFP. The lender has a
first security interest on all accounts receivable and the term loan is
personally guaranteed by the principals. Interest is at prime plus 2.0%. Initial
proceeds from the loans went to pay off $1,224,348 of the existing line of
credit with DVI and approximately $333,000 went toward arrearages of a work out
agreement with the Company's major lessor, which left approximately $136,000 to
fund current operations. At year end the Company had drawn approximately
$136,000 in excess of its borrowing base for the line with a loan balance
approximating $1,309,000. The Company was at December 31, 1997 in technical
default of a loan covenant due to the Company's stockholder deficit exceeding
$500,000. However, this has been cured with the infusion of captial (see below)
in March, 1998. At year end the term loan approximated $220,000. HCFP has
allowed the Company to make daily payments of approximately $4,000 toward
reducing the overdraw and will begin reducing the term loan upon satisfaction of
the overdraw. At May 7, 1998 the over draw had been paid and the line balance
approximated $1,256,000. The term loan balance at May 7, 1998 approximated
$210,000.
22
<PAGE> 23
In February of 1997 the Company settled its litigation with its prior
radiologists (see Item 3-Legal Proceedings). The settlement plus legal fees
approximated $205,000 which were paid by the Company. In March of 1997, the
Company borrowed $125,000 from a related party corporation (majority owned by
Messrs., Taneja and Alliston). The proceeds were used to pay property taxes. The
loan balance at year end is $62,500 and is due on demand. It is expected to be
paid out of receipts from overdue providers payments.
Due to the rapid expansion of facilities and increases in additional
personnel and related costs the Company has continued to experience difficulty
in meeting timely its current obligations to its lessors (discussed above) and
trade creditors. At year end and as of March 25, 1998, the Company has past due
payables in the amount of $1,294,000 and $1,596,000, respectively. Most of the
vendors have accepted late payments. However, certain vendors will ship only on
a cash on delivery basis. The Company has been able to operate to date with no
known lost revenues.
In 1997 the Company reduced its net cash by $104,000. Operations
contributed the total cash increases of $426,000. Investing for capital assets,
primarily equipment, utilized approximately $245,000, net financing activities
used approximately $285,000. More than $1,114,000 was used in debt retirement of
long-term debt and capital lease obligations. Equipment acquired through capital
leasing approximated $274,000.
The Company's net accounts receivable decreased $72,000 to $2,059,000
from $2,131,000 at December 31, 1997 and 1996 respectively. This is the result
of additional collection efforts made to collect receivables and an adjustment
to reserves for approximately $316,000 for older accounts receivable deemed
uncollectable.
In March of 1998 the Company entered into a private placement Stock
Purchase Agreement with AES. The Company issued 500,000 shares of Series A
Preferred Stock in exchange for 8,000,000 common shares of Halis, Inc.
(OTCBB:HLIS) held by AES and valued at $2,000,000. This value was based upon
the market value at the date of exchange less a discount due to, among other
things, the exchange being a large block of Halis, Inc. common stock. The
Company, at present, intends to utilize a major portion of the Halis, Inc.
securities as collateral for securing debt financing and obtaining extended
loan or lease terms for existing obligations. The remaining Halis, Inc.
securities may be sold to provide cash if needed. Currently, the Company has
not determined the time frame required to sell the securities nor the selling
price that would be realized upon sale of the Halis, Inc. securities.
Therefore, the amount available for potential future cash needs is not known at
this time.
Five hundred thousand shares of Series A Preferred Stock of the
Company were issued with voting rights of eight votes per preferred share and
conversion rights at the rate of 44.11 shares of NDI common stock per preferred
share. In March of 1998, AES exercised its right to convert 131,185 shares of
the Company's Preferred Stock into 5,786,570 shares of Common Stock. This
effectively gave AES 65% of the voting rights for the Company's Common Stock.
Concurrent with the merger with AES the Board will call for all the preferred
shares issued to be converted into common stock. Upon completion of the merger
NDI "old" shareholders (those of record before the Preferred Stock Issue and
merger) will effectively hold a 12.3% interest in ("new") NDI common stock after
the merger. AES "old" shareholders effectively hold a 87.7% interest in the new
NDI common stock after the merger.
The Company expects to implement additional financial and operational
strategies it believes will enhance stockholder value. Due to the recency of the
pending merger, details are not available. However, the Company believes debt
re-alignment, equipment refinancing, operational efficiencies, consolidation,
management re-alignment, capital infusion alternatives which may include selling
additional stock, acquisitions, and new start ups will all play a role in making
NDI a leader in the medical community. These is no assurance that these goals
will be met.
The Company's determination whether to proceed with new facilities in
Florida or elsewhere in the United States will depend on management's
consideration of such factors as (i) the demographics of a particular area, (ii)
competition from other diagnostic service providers in such area, (iii)
physician referral patterns, (iv) the mix of managed care providers,
Medicare/Medicaid patients and patients insured by commercial insurance
carriers, (v) estimates of potential sales in relation to the capital investment
required to establish a facility, (vi) the availability of commercial lease
property for a start-up facility, and (vii) financial analysis of potential
acquisition targets.
23
<PAGE> 24
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 49% of the company's revenue has been derived from
private insurance carriers, individuals, worker's compensation and other sources
that have not experienced reimbursement pressures characteristic of managed care
providers, Medicare and Medicaid.
Seasonality
The Company, in prior years, has experienced an 8 to 12% decrease in
revenues during the third quarter of the fiscal year due to reduced activity
during the summer months. This trend was not evident in 1996 or 1997 due to the
upward trend for services experienced in the new start ups.
Effects of Inflation
The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to the Company's operations to date. Management is aware
of increased inflationary expectations and realizes that the Company may not be
able to raise the prices for its diagnostic imaging procedures in an amount
sufficient to offset inflation. The Company, however, does believe that this can
be offset by increased volume.
New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement, and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in 1998
and expects no material impact to the Company's financial statement
presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. This Statement requires annual financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach, along with interim reports. The management
approach requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information the
way management organizes the segments for making business decisions and
assessing performance. It also eliminates the requirement to disclose additional
information about subsidiaries that were not consolidated. The Company plans to
adopt SFAS No. 131 in 1998 with impact only to the company's disclosure
information and not its results of operations.
The AICPA's Accounting Standards Executive Committee has issued SOP 98-5,
Reporting on the Costs of Start-Up Activities. The SOP requires that costs of
start-up activities, including organization costs, be expensed as incurred. It
applies to all nongovernmental entities. Start-up activities are broadly
defined and include one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer or beneficiary, initiating a
new process in an existing facility, commencing some new operation, and
organizing a new entity.
SOP 98-5 is generally effective for financial statements for fiscal years
beginning after December 15, 1998, with initial application reported as the
cumulative effect of a change in accounting principle. The Company has had the
policy of capitalizing pre opening costs. At December 31, 1997 there exist $0
unamortized cost. Therefore, the Company does not believe that the adoption of
SOP 98-5 will have a significant effect on the Company's financial statements.
24
<PAGE> 25
Item 7 -- Financial Statements
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...............................................................26
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996........................................................................27
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1996..................................................................29
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996..................................................................30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1996..................................................................32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................................33
</TABLE>
25
<PAGE> 26
Report of Independent Certified Public Accountants
Board of Directors
National Diagnostics, Inc.
We have audited the accompanying consolidated balance sheets of National
Diagnostics, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National
Diagnostics, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared, assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $1,910,131 during the year ended
December 31, 1997, and as of that date, the Company has a retained earnings
(accumulated deficit) of $3,958,296 and current liabilities exceed current
assets by $6,190,476. The Company's present financial condition has resulted
in the Company being in default of its major lease and loan agreements. The
Company's ability to fund its operations and meet its obligations in 1998 will
be dependent upon the Company improving its overall level of profitability and
its ability to successfully cure its lease and loan defaults. In addition, the
success of the Company could, among other things, require obtaining additional
financing or an infusion of capital. These factors, among other, addressed in
Note 21 raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 21. The financial statements do not included any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Tampa, Florida
April 30, 1998
26
<PAGE> 27
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash $ -- $ 104,335
Accounts receivable, net of allowances of $1,011,942 and
$664,402 in 1997 and 1996, respectively 2,058,647 2,131,284
Prepaid expenses and other current assets 148,903 220,864
----------- -----------
Total current assets 2,207,550 2,456,483
----------- -----------
Property and equipment 9,974,924 9,481,198
Less: accumulated depreciation and
amortization (4,574,173) (3,264,655)
----------- -----------
Net property and equipment 5,400,751 6,216,543
----------- -----------
Other assets:
Excess of purchase price over net assets acquired,
net of accumulated amortization of $85,751 and
$61,274 in 1997 and 1996, respectively 403,711 428,187
Deposits 54,941 47,444
Other 41,894 51,020
----------- -----------
Total other assets 500,546 526,651
----------- -----------
$ 8,108,847 $ 9,199,677
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE> 28
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Current liabilities:
Lines of credit $ 1,309,612 $ 993,818
Note due to related party 62,500 99,882
Note payable, other -- 4,294
Current installments of long-term debt 413,243 105,410
Current installments of obligations under
capital leases 3,820,933 1,103,952
Accounts payable 1,655,858 1,080,236
Accrued radiologist fees 439,066 489,785
Accrued expenses, other 696,814 738,687
----------- -----------
Total current liabilities 8,398,026 4,616,064
Long-term liabilities:
Long-term debt, excluding current installments 594,064 619,227
Obligations under capital leases,
excluding current installments -- 3,454,456
Deferred lease payments 175,136 236,912
----------- -----------
Total liabilities 9,167,226 8,926,659
----------- -----------
Commitments and contingencies -- --
Stockholders' equity (deficit):
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, 3,093,430 and 2,628,577 shares
issued and outstanding in 1997 and 1996 779 686
Additional paid-in capital 2,899,138 2,320,497
Retained earnings, (accumulated deficit) (3,958,296) (2,048,165)
----------- -----------
Net stockholders' equity (deficit) (1,058,379) 273,018
----------- -----------
$ 8,108,847 $ 9,199,677
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 29
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Net revenue $ 9,942,050 $ 8,876,652
----------- -----------
Operating expenses:
Direct operating expenses 5,331,362 4,850,088
General and administrative 4,405,975 3,576,087
Depreciation and amortization 1,445,492 1,210,245
----------- -----------
Total operating expenses 11,182,829 9,636,420
----------- -----------
Operating loss (1,240,779) (759,768)
Interest expense 694,575 563,951
Other income 25,223 82,058
----------- -----------
Loss before income taxes (1,910,131) (1,241,661)
Income taxes -- --
----------- -----------
Net loss $(1,910,131) $(1,241,661)
=========== ===========
Loss per common share $ (.60) $ (.48)
=========== ===========
Weighted average number of common
shares outstanding 3,159,884 2,579,380
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 30
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,910,131) $(1,241,661)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,445,492 1,210,245
Common stock issued for services 48,397 --
Warrants issued for services -- 8,000
Increase in accounts receivable allowances 347,540 321,502
Gain (loss) on disposition of equipment (5,086) 23,551
Increase in accounts receivable (274,903) (951,945)
Increase (decrease) in prepaid expenses and
other assets 13,325 (9,026)
Increase in accounts payable and
accrued expenses 799,465 1,067,152
Increase due to related party 23,819 10,067
Increase (decrease) in deferred lease payments (61,776) 26,577
----------- -----------
Net cash provided by operating activities 426,142 464,462
----------- -----------
Cash flows used in investing activities:
Increase in intangible assets (38,963) --
Purchases of property and equipment (207,732) (793,870)
Deposits 1,563 5,671
----------- -----------
Net cash used in investing activities (245,132) (788,199)
----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock, net 77,990 165,950
Proceeds from borrowings on line of credit 315,794 584,318
Proceeds from note payable 205,000 4,294
Repayment of notes payable (209,294) (8,000)
Proceeds from borrowings on long-term debt 385,000 164,358
Repayment of long-term borrowings (102,330) (81,332)
Proceeds of borrowing from related parties 125,000 67,306
Repayment of related parties borrowings (70,742) (16,667)
Principal payments under capital lease obligations (1,011,763) (580,249)
----------- -----------
Net cash provided (used) by financing activities (285,345) 299,978
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(continued)
30
<PAGE> 31
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Net increase (decrease) in cash (104,335) (23,759)
Cash at beginning of period 104,335 128,094
----------- -----------
Cash at end of period $ -- $ 104,335
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 747,113 $ 453,712
=========== ===========
Income tax paid $ -- $ --
=========== ===========
Non-cash investing financing activities:
Capital lease obligations incurred $ 274,288 $ 2,136,163
=========== ===========
Capital lease obligations canceled and return of equipment
(net book value of equipment approximating $120,000) $ -- $ 135,859
=========== ===========
Stock issued as satisfaction of related party debt (See Note 13) $ 275,604 $ 67,292
=========== ===========
Stock issued as satisfaction for trade creditor debt $ 205,140 $ --
=========== ===========
Stock issued for equipment acquisition $ 20,000 $ --
=========== ===========
Stock issued in exchange for marketable securities $ 1,800,000 $ --
=========== ===========
Stock exchange for marketable securites rescinded $(1,800,000) $ --
=========== ===========
Note received on disposal of equipment $ -- $ 9,770
=========== ===========
</TABLE>
In September of 1996 the Company refinanced its bank lines of credit
approximating $517,000 with a new line from DVI Business Credit (see note 4).
Additionally, in 1996 the Company refinanced a $208,000 equipment loan and a
$50,000 related party note.
In October of 1997 the Company refinanced its line of credit approximating
$1,200,000 with a new line from HealthCare Financial Partners, Inc., including a
term loan of $235,000 personally guaranteed by principals.
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 32
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Paid-In (accumulated Stockholders'
Stock Capital deficit) Equity (Deficit)
-------- ------------ ------------- -------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $ 668 $ 2,079,267 $ (806,504) $ 1,273,431
Issuance of common stock
(33,448 shares) 7 67,291 -- 67,298
Issuance of warrants
(100,000 warrants) -- 8,000 -- 8,000
Exercise of warrants
(55,500 shares) 11 165,939 -- 165,950
Net Loss -- -- (1,241,661) (1,241,661)
----- ----------- ----------- -----------
Balances at December 31, 1996 $ 686 $ 2,320,497 $(2,048,165) $ 273,018
Issuance of common stock 375 2,300,369 -- 2,300,744
(1,872,041 shares)
Common stock issue rescinded (292) (1,799,708) -- (1,800,000)
(1,459,188 shares)
Exercise of warrants 10 77,980 -- 77,990
(52,000) shares
Net Loss -- -- (1,910,131) (1,910,131)
----- ----------- ----------- -----------
Balance at December 31, 1997 $ 779 $ 2,899,138 $(3,958,296) $(1,058,379)
===== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 33
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1) Organization and Basis of Presentation
The consolidated financial statements include the accounts of National
Diagnostics, Inc. and its subsidiaries (Company): Alpha Associates,
Inc. (Associates); Alpha Acquisitions Corp. (Acquisitions); SunPoint
Diagnostic Center, Inc. (SunPoint); National Diagnostics/Orange Park,
Inc. (Orange Park); and National Diagnostics/Riverside, Inc.
(Riverside). Associates and Acquisitions hold 100% of the partnership
interests in Brandon Diagnostic Center, Ltd. (Brandon). The Company and
Orange Park hold 100% of the partnership interests in Sundance Partners
(a real estate holding partnership.) National Diagnostics, Inc., is a
holding company which was formed in June 1994.
The Company provides medical imaging services to patients at its
centers or mobile facilities in Brandon (Brandon), Ruskin (SunPoint),
and greater Jacksonville area (Orange Park and Riverside), Florida.
The Company intends to merge with American Enterprise Solutions, Inc.
("AES"). The Company will be the surviving corporation; however, it
will change its name to American Enterprise Solutions, Inc. AES was
founded in 1997 for the purpose of acquiring seasoned and profitable
high growth firms with operations and facilities which complement AES's
goal to create Community Healthcare Enterprises (an organization that
owns and operates a complete community wide healthcare delivery
system). These businesses include: a multi-speciality and primary care
physician group; a behavioral and mental healthcare facility; and
TMRCorp, a nationally known healthcare consulting firm specializing in
corporate reengineering, business, business development and finance.
The financial information presented represents the Company as it was
before merger.
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. As an example of such an estimate is the
Company's determination of its contractual adjustments and doubtful
accounts provision. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and their affiliates. All
significant intercompany balances and transactions have been
eliminated.
2) Summary of Significant Accounting Policies
a) Property Equipment
Property and equipment is stated at cost. Depreciation expense
is charged to operations over the estimated useful service
period of the assets using the straight-line method. Property
and equipment held under capital leases are generally
amortized straight-line over the shorter of the lease term or
estimated useful life of the asset. The Company uses
accelerated depreciation for tax purposes.
33
<PAGE> 34
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
b) Income Taxes
Income taxes are provided based upon provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
c) Pre-Opening Costs
Pre-opening costs consisting of outside consulting, other
directly related professional fees, equipment testing and
calibration and office set up which are incurred prior to
opening are deferred and amortized over 12 months commencing
with a Center opening. Such costs which are included net of
amortization in other current assets totaled approximately
$-0- and $59,089 at December 31, 1997 and 1996, respectively.
Amortization expense for pre-opening costs for 1997 and 1996
was $59,089 and $73,665, respectively. (See Note 2-K)
d) Excess of Purchase Price Over Net Assets Acquired
Excess of purchase price over net assets acquired are
amortized over 20 years. Management reviews the performance of
the related assets on a quarterly basis to determine if
impairment has taken place. No impairment costs have been
realized in the current years. Amortization expense for the
excess of purchase price over net assets acquired for 1997 and
1996 was $24,187 and $24,477, respectively. (See Note 2-K)
e) Cash and Cash Equivalents
For financial statement purposes cash equivalents include
short-term investments with an original maturity of ninety
days or less. At December 31, 1997 and 1996, respectively, the
Company had no cash equivalents.
f) Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of
On a quarterly basis, the Company evaluates the projected
undiscounted cash flows of each business unit to determine,
when indicators of impairment are present, whether or not
there has been permanent impairment of its long-lived assets,
and accrues expenses for the amount, if any, determined to be
permanently impaired. No impairment exists as of December 31,
1997.
g) Revenue Recognition and Accounts Receivable
Revenues are recognized on the date services and related
products are provided to patients and are recorded at amounts
estimated to be received under reimbursement arrangements with
third party payors, including private insurers, prepaid health
plans, Medicare and Medicaid. Net revenue represents gross
revenue less contractual adjustments and provision for bad
debts
34
<PAGE> 35
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(see note 10). The Company's management at least quarterly
determines the adequacy of the accounts receivable valuation
allowances by, among other procedures, reviewing historical
experience for changes in factors affecting billing and
collections (e.g. third party reimbursement arrangements). For
all years presented, approximately 15% to 18% of the Company's
revenues are reimbursed under arrangements with
Medicare/Medicaid. No other third party payor group represents
10% or more of the Company's revenues. Therefore,
concentration of credit risk with respect to the remaining
accounts receivable is limited due to the large number of
payors representing the patient base.
The Brandon facility contributed approximately 46% and 55% of
total revenues for 1997 and 1996, respectively.
h) Accounting for Stock Based Compensation
The Company has adopted only the disclosure provisions of
Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation," as it relates to employment awards.
It applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted
stock.
i) Loss Per Common Share
The Company has adopted Standard of Financial Accounting
Standards No. 128 (SFAS No. 128), "Earnings Per Share" as this
standard became effective for financial statements issued
after December 15, 1997. SFAS No. 128 eliminates primary and
fully dilutive net income per common share and replaces them
with basic and diluted net income per common share. Basic loss
per share is the same as the diluted loss per share since the
Company had a net loss for the year ended December 31, 1997
and 1996. Outstanding stock options and warrants have not been
considered in these computations since the effect of their
inclusion would be antidilutive. Accordingly, all loss per
common share data for the previous periods did not require
reinstatement to conform to the new standard.
The following table reconciles the numerator and denominator
of the basic and dilutive EPS computation:
<TABLE>
<CAPTION>
Numerator: 1997 1996
----------- -----------
<S> <C> <C>
Net Loss
$(1,910,131) $(1,241,661)
=========== ===========
Denominator:
Weighted average number of common shares used in basic EPS 3,159,884 2,579,380
Effect of dilutive stock options and warrants -- --
----------- -----------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS 3,159,884 2,579,380
=========== ===========
</TABLE>
35
<PAGE> 36
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
j) Fair Value of Financial Instruments
At December 31, 1997 and 1996, the carrying amount of cash,
accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short-term maturities of
these assets.
The carrying amounts of current obligations approximate the
fair market value due to either the short-term maturity of the
obligation or the interest rate changes with market interest
rates. Carrying amounts of long-term obligations approximate
the fair market value due to either the fact that the
obligation was recently financed or refinanced, or in the case
of other obligations, the interest rates approximate that
which the Company is able to obtain currently.
k) New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, is effective for
fiscal years beginning after December 15, 1997. This Statement
establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The new rule requires
that the Company (a) classify items of other comprehensive
income by their nature in a financial statement, and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The
Company plans to adopt SFAS No. 130 in 1998 and expects no
material impact to the Company's financial statement
presentation.
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, is effective for fiscal years beginning
after December 15, 1997. This Statement supersedes SFAS No.
14, Financial Reporting for Segments of a Business Enterprise,
and amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. This Statement requires annual financial
statements to disclose information about products and
services, geographic areas and major customers based on a
management approach, along with interim reports. The
management approach requires disclosing financial and
descriptive information about an enterprise's reportable
operating segments based on reporting information the way
management organizes the segments for making business
decisions and assessing performance. It also eliminates the
requirement to disclose additional information about
subsidiaries that were not consolidated. The Company plans to
adopt SFAS No. 131 in 1998 with impact only to the company's
disclosure information and not its results of operations.
The AICPA's Accounting Standards Executive Committee has
issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. The SOP requires that costs of start-up
activities, including organization costs, be expensed as
incurred. It applies to all nongovernmental entities. Start-up
activities are broadly defined and include one-time activities
related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary,
initiating a new process in an existing facility, commencing
some new operation, and organizing a new entity.
SOP 98-5 is generally effective for financial statements for
fiscal years beginning after December 15, 1998, with initial
application reported as the cumulative effect of a change in
accounting principle. The Company has had the policy of
capitalizing pre opening costs. At December 31, 1997 there
exist $0 unamortized cost. Therefore, the Company does not
believe that the adoption of SOP 98-5 will have a significant
effect on the Company's financial statements.
l) Operational matters and liquidity
The Company has a net loss for 1997 of $1,910,131 and at
December 31, 1997 has a retained earnings accumulated deficit
of $3,958,296 and a working capital deficiency of $6,190,476.
The Company's present financial condition has resulted in the
Company being in default of the major lessors lease
agreements. In view of these matters, recoverability of a
major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued
operation of the Company, which in turn is dependent upon the
Company's improving its overall level of profitability and
its ability to successfully cure its lease and loan defaults.
In addition, the success of the Company could also, among
other things, require obtaining additional financing or
capital infusions. The financial statements do not include any
adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be
unable to continue in existence.
36
<PAGE> 37
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following commentary addresses the Company's operations for 1997
and its plan to improve future results.
The Company attributes the loss in 1997 primarily to the effect the
losses from its relatively new start up facilities had on the Company:
Orange Park (opened in July of 1995) had a loss of $661,000 and
Riverside (opened July of 1996) had a loss of $635,000. Due to the
expansion and growth, the Company's working capital has decreased to
the extent that the Company has fallen behind in meeting its lease and
vendor obligations. Most of the vendors have been cooperative by
allowing extended terms. The Company expects in May of 1998 to conclude
negotiating a favorable resolve to the delinquency with its major
lessor. In March of 1998 the Company entered into a private placement
Stock Purchase Agreement with AES. The Company issued 500,000 shares
of Series A Preferred Stock in exchange for 8,000,000 common shares of
Halis, Inc. (OTCBB:HLIS) held by AES and valued at $2,000,000. This
value was based upon the market value at the date of exchange less a
discount due to, among other things, the exchange being a large block
of Halis, Inc. common stock. The Company, at present, intends to
utilize a major portion of the Halis, Inc. securities as collateral
for securing debt financing and obtaining extended loan or lease terms
for existing obligations. The remaining Halis, Inc. securities may be
sold to provide cash if needed. Currently, the Company has not
determined the time frame required to sell the securities nor the
selling price that would be realized upon sale of the Halis, Inc.
securities. Therefore, the amount available for potential future cash
needs is not known at this time.
The Company believes as the increase in revenues for start ups
continues, certain cost cutting measures take effect, and an acceptable
resolution with the Company's major lessor is achieved, the Company
will return to a profitable position though no absolute assurances can
be given.
3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, December 31, service
1997 1996 life (years)
------------- -------------- ------------
<S> <C> <C> <C>
Land $ 85,000 $ 85,000 --
Buildings 253,041 253,041 39
Medical Equipment 7,846,004 7,414,946 7
Office furniture and equipment 728,930 665,295 7
Leasehold improvements 836,732 837,699 3-5
Vehicles 225,217 225,217 5-7
--------------- ------------
$ 9,974,924 $ 9,481,198
--------------- ------------
</TABLE>
Depreciation and amortization expense totaled $1,445,492 and
$1,210,245 for the year ended December 31, 1997 and 1996,
respectively.
4) Lines of Credit
In 1997 the Company refinanced its line of credit with a lender that
specializes in medical receivable financing. The lender has a first
security interest on all accounts receivable. The borrowing base on
the line fluctuates proportionately with accounts receivable balance
and is adjusted on a daily basis. The line has an interest rate of
prime plus 2% (at December 31, 1997, 10.5%) paid monthly, the line
matures September, 1999.
<TABLE>
<CAPTION>
1997
--------------
<S> <C>
Line of credit limit $ 2,000,000
Qualifying borrowing base $ 1,173,102
Outstanding loan balance at December 31, 1997 $ 1,309,160
</TABLE>
At December 31, 1997 the Company borrowed approximately $136,000 in
excess of its borrowing base and was in technical default of a loan
covenant due to the stockholder deficit exceeding certain limits
(approximately $500,000). This was cured with the infusion of
capital in March of 1998, (see subsequent events footnote).
37
<PAGE> 38
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5) Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt is summarized as follows: December 31, December 31,
1997 1996
----------- -------------
<S> <C> <C>
Installment loans payable which consist of a number of separate
installment loan contracts collateralized by equipment and vehicles.
The loans require monthly installments of principal and interest over
terms that vary from two to five years. At December 31, 1997, the
loans bear interest at rates ranging from 9.0% to 12.25%. $ 348,259 $ 432,681
Mortgage notes payable in monthly installments of $3,821 including
interest at 8.75% and 11%; maturing through April, 2020;
collateralized by mortgaged real estate property. 438,262 291,956
Installment loan payable collateralized by accounts receivable and
personal guarantees. The loan requires monthly installments of
approximately $11,000 including interest at prime plus 2%;
maturing October, 1999. 220,786 --
--------- ----------
Total long-term debt 1,007,307 724,637
Less current installments of long-term debt 413,243 105,410
--------- ----------
Long-term debt, excluding current installments $ 594,064 $ 619,227
========= ==========
</TABLE>
The aggregate principal payments of long-term debt required annually
are:
<TABLE>
<S> <C> <C>
Year ending December 31: 1998 $ 413,243
1999 200,525
2000 81,220
2001 44,719
2002 6,180
Thereafter 261,420
-----------
$ 1,007,307
===========
</TABLE>
38
<PAGE> 39
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6) Leases
The Company has entered into capital leases for medical equipment
which expire in 2001. The gross amount of equipment and related
accumulated depreciations recorded under capital leases are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Medical equipment $ 6,274,000 $ 6,000,000
Less accumulated depreciation 3,004,000 2,410,000
----------- -----------
$ 3,270,000 $ 3,590,000
=========== ===========
</TABLE>
The present value of future minimum capital lease payments based on
interest rates ranging from 9% to 14.5% is as follows:
<TABLE>
<S> <C>
Year ending December 31: 1998 $ 1,375,352
1999 911,315
2000 680,086
2001 596,775
2002 257,405
------------
Present value of minimum capital lease payments 3,820,933
Less current installments of obligations under capital leases 1,375,352
------------
Less long-term portion reclassified due to default 2,445,581
------------
3,820,933
Obligations under capital leases, excluding
current installments $ --
============
</TABLE>
The Company was at December 31, 1997 and currently (March, 1998) is
in default of its capital lease obligations due to late payments of
approximately $124,000 and $418,000, respectively. Generally, while
in default the lessor may accelerate the lease obligation. The
Company's major lessor, considering the Company's merger transaction,
has been cooperating and working with the Company during the period
of delinquency and has refrained from exercising its rights under
default. Discussions are to be concluded in May of 1998 to arrive at
a solution to the delinquency under the lease agreements. The other
remaining lessors (approximately 17% of the total leases obligations
outstanding at December 31, 1997) have also been cooperating with the
Company; generally allowing not more than 60 days past due on lease
payments. The long-term portion of the these lease approximates
$2,445,581. Since waivers of default have not been received from the
lessors by the Company, the long-term portion has been reclassified
from long-term to current liabilities.
The Company is obligated under noncancellable operating leases that
expire through 2002.
39
<PAGE> 40
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Future minimum lease payments under these leases are as follows:
<S> <C> <C>
Year ending December 31: 1998 $ 1,014,458
1999 974,392
2000 903,778
2001 292,376
2002 189,277
Thereafter 55,386
-----------
$ 3,429,667
===========
</TABLE>
Rental expense related to these non-cancelable leases was
approximately $1,161,000 and $1,066,000 for the years ended December
31, 1997 and 1996, respectively.
7) Notes Payable to Related Parties
Note payable to related parties are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Note payable with interest at 9%,
payable on demand $62,500 $ --
Installment note payable with interest at 10%
payable in monthly payments of $4,167;
Paid in full in 1997 $ -- $33,333
Notes payable with interest at 8% payable
on demand; Paid in full in 1997 $ -- $66,549
------- -------
$62,500 $99,882
======= =======
</TABLE>
Interest expense to related parties totaled $8,527 and $3,469 for the
years ended December 31, 1997 and 1996, respectively.
8) Note Payable, Other
Other note payable is summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Installment note payable with interest at 10.25%
due December 1997; unsecured. $ -- $ 4,294
======= ========
</TABLE>
40
<PAGE> 41
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9) Income Taxes
The provision for income tax expense (benefit) at December 31,
consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current $ -- $ --
Deferred -- --
----------- -----------
$ -- $ --
----------- -----------
</TABLE>
The income tax provision for 1997 and 1996 reconciled to the
tax computed at the statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Income taxes at statutory rate $ (649,400) $ (422,100)
State income taxes (95,800) (48,000)
Current year net operating loss not utilized 730,900 453,700
Non deductible expenses 14,300 16,400
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The deferred tax asset and liability consist of the following
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Assets
Net operating loss carry forward $ 1,196,300 $ 477,400
Allowance for doubtful accounts 394,700 259,100
Deferred rents 65,300 87,800
Other 600 --
Nondeductible accrued compensation 2,000 47,300
Pre-opening costs 54,000 44,800
Acquisition basis difference 118,200 121,500
----------- -----------
1,831,100 1,037,900
Less: valuation allowance (1,493,800) (763,800)
----------- -----------
337,300 274,100
----------- -----------
Liabilities
Fixed assets 335,700 273,200
Goodwill 1,600 900
----------- -----------
337,300 274,100
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
41
<PAGE> 42
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Management, using SFAS 109 criteria and placing greater weight on the
1996/1997 taxable losses along with expectations for 1998, concluded
that the above valuation allowance at December 31, 1997, was
reasonable. The net increase in the valuation allowance in 1997
approximated $730,000.
At December 31, 1997 approximately $3,067,000 in net operating carry
forwards remain which will expire if not utilized by 2011.
10) Concentration of Accounts Receivable
The Company's accounts receivable are due from the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Commercial insurance carriers $1,410,200 $1,077,500
Managed care providers 710,900 753,100
Private patients 475,189 431,300
Worker's compensation 105,500 140,700
Medicare/Medicaid 358,300 393,086
---------- ----------
3,060,089 2,795,686
Less allowances:
Contractual adjustments 626,842 625,402
Doubtful accounts 374,600 39,000
---------- ----------
$2,058,647 $2,131,284
========== ==========
</TABLE>
11) Commitments and Contingencies
a) Guarantees
A term loan and certain equipment loans of the Company are fully
guaranteed by an officer/stockholder.
b) Employment Contracts
The President and Chief Executive Officer operate under three year
employment contracts that became effective July 1, 1995. The
President and Chief Executive Officer receive salaries of $150,000
and $75,000, respectively, plus certain benefits. Under the contracts
each executive is to receive a 5% bonus of the annual net income of
the Company in excess of the prior fiscal year's income.
Additionally, a bonus equal to 2.5% of net revenue in excess of the
prior year's net revenue is to be paid to each executive. In 1997 the
bonus arrangement was eliminated until the Company experiences two
consecutive profitable quarters. The Chief Executive Officer resigned
and the employment contract terminated effective January 19, 1998.
Total compensation earned by the Chief Executive Officer and
President under the existing contracts for the years ended December
31, 1997 and 1996 was approximately $240,900 and $401,742
respectively.
42
<PAGE> 43
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company entered into an employment agreement with the President of
Orange Park for a three year period commencing February 1, 1995. The
executive is to receive as compensation an annual salary of $100,000
(adjusted from $85,000 in July, 1996) plus certain benefits. In
addition, the executive will earn a 10% bonus based on the increase in
adjusted profits of the Orange Park center. No bonus was awarded in
1996 or 1997. The employment agreement was extended through June, 1998.
In November, 1995 the Company entered into a three year employment
agreement with the Vice President of Development. The executive was to
receive a salary of $85,000 plus certain benefits. This executive was
terminated effective February 1997.
C) PROFESSIONAL SERVICES AGREEMENT
The Company enters into agreements with physician groups to provide
radiological services. The physicians are paid with a percentage of the
net receipts or fixed fee amount. The contracts are generally three
years or less.
The Company entered into radiological service contracts that were
effective for the period February 1 through June 30, 1997, for its
Brandon, SunPoint and Orange Park facilities. The contracts were
terminated by the Company effective June 30, 1997 due to
non-performance of all representations made by the contracted
radiologist group. A settlement of $238,000 was reached wherein the
Company agreed to pay for services rendered. The agreement calls for
the assumption of a $48,000 liabilitity due to tenant locums used by
the Centers; a $50,000 payment due March 15, 1998, and the balance of
$140,000 to be paid evenly in 12 monthly installments thereafter. The
Company adequately reserved for these amounts in 1997, assumed the
liability and made the May 15, 1998 payment.
Physician service expense under the current and previously existing
contracts for the years ended December 31, 1997 and 1996 was
approximately $1,284,000 and $1,228,000, respectively.
(D) LEGAL ACTIONS
In December of 1995, the physician group terminated its contract for
reading services with the Brandon and SunPoint centers and in February
of 1996, 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 physician group sought
payment for services rendered (approximately $178,000) and lost profits
(approximately $850,000). In February of 1997, the court denied the
claim for lost profits and entered an award in favor of the physician
group relating to services rendered. The Company substantially reserved
for the claim for services and satisfied the judgement in February of
1997 by obtaining financing for approximately $205,000 from its
accounts receivable lender. Subsequently, a motion by the physicians
for a rehearing was denied. The physicians filed a notice of appeal for
the lost profits claim in April, 1997. Also, a motion for costs
relating to the lawsuit (approximating $10,000) was filed by the
physician group. The appeal was denied by the District Court of Appeal,
Second District of Florida on January 30, 1998 and became final after
30 days. Attorney fees were awarded to Brandon Diagnostic Center, Ltd.
The Company is a defendent in a suit filed on January 5, 1998 by Lake
City Medical Group, P.A. ("P.A.") for past due rents approximating
$16,500. The Company has reached an out of court settlement in which
the Company has agreed to pay $12,000.
43
<PAGE> 44
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company filed suit against TeleQuest, Inc. due to its
non-performance under the radiologist contract. However, an out of
court settlement had been reached. (See c - Professional Services
Agreements, above.)
12) SHAREHOLDERS' EQUITY
COMMON STOCK
In 1997, the Company issued 104,815 shares of common stock in
satisfaction of $156,742 of trade creditor debt.
In June of 1997, the Company entered into an agreement for consulting
and funding services which called for compensation payable in nine
installments of 14,583 shares of common stock each, four quarterly
installments of $43,750 each in value of common stock at the prevailing
market price, plus options. The Company subsequently, in 1997,
terminated the contract and in January of 1998, entered into a release
and settlement agreement. The Company issued in 1997 29,166 shares of
Common Stock valued at $48,397 under the contract and settled with an
additional payment of $15,000 in 1998.
The Company on June 27, 1997 acquired 127,773 shares of common stock
(net of 14,197 shares given in payment of commission) of Equisure, Inc.
(American Stock Exchange: EQE) valued at the providing market rate
totalling $1,800,000 from an investment trust in exchange for 1,459,188
shares of its own common stock. There was an agreement in place with
the trust that in the event the market value of the shares would
decline additional shares would be issued to effectively eliminate the
market risk. On August 4, 1997 the AMEX called a halt to trading EQE
shares on the AMEX. On September 9, 1997 the Company and the trust
agreed to rescind the transaction in its entirety.
STOCK OPTIONS
On April 21, 1995 the Board of Directors approved an Employee Stock
Option Plan ("employee plan") and a Non-employee Director Stock Option
plan ("director plan") for the purpose of competing successfully in
attracting, motivating, and retaining employees and non-employee
directors with outstanding abilities. Options granted under the
employee plan are intended to be incentive stock options. The total
number of shares to which options may be granted under the employee and
director plans are 200,000 shares. Generally, the exercise price shall
be fixed at no less than 100% of the average fair market value of the
shares at date of option.
During 1996 options for 10,000 shares were granted under the employee
plan. No options were granted in 1997 under the employee or director
plans; however, in 1997 option for 15,000 shares were gratned for
services rendered.
44
<PAGE> 45
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's outstanding stock options as
of December 31, 1997, and 1996, and changes during the years ending on
those dates is presented below.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Options outstanding, December 31, 1995 50,000 $ 7.20
Options granted 10,000 $ --
Options exercised -- --
Options outstanding, December 31, 1996 60,000 $ 6.69
Options granted 15,000 --
Options exercised -- --
Options outstanding, December 31, 1997 75,000 $ 5.95
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options.
<TABLE>
<CAPTION>
Weighted Weighted
Range of Number Remaining Contract Average
Exercise Prices Outstanding Life (Years) Exercise
--------------- ----------- ------------------ --------
<S> <C> <C> <C> <C>
Outstanding Options: $1.50-7.20 75,000 9 $5.95
Exercisable Options: $1.50-7.20 75,000 9 $5.95
</TABLE>
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123 "Accounting of Stock-Based Compensation,"
as it relates to employment awards. It applies APB Option No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plans. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date
forwards under these plans consistent with the methodology prescribed
by SFAS 123, the Company's net loss per common share would be increased
to the pro forma amounts indicated below for the years ended December
31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net loss As reported $ 1,910,131 $ 1,241,661
Pro forma 1,920,181 1,261,661
Loss per common share As reported $ .60 $ .48
Pro forma .61 .49
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Binomial options-pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, no
dividend yield for all years, expected volatility of approximately 80%
and 124%; risk-free interest rates of approximately 5.5% and 6% and
expected lives of approximately 1 and 2.5 years, respectively.
45
<PAGE> 46
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS
Pursuant to consulting agreement dated March 29, 1996 between the
Company and an outside computer consultant the Board authorized 100,000
warrants exercisable at $3.00 to be issued for services rendered. The
warrants were issued on July 25, 1996 and valued at the fair value of
the contracted services performed ($8,000.) 55,500 of these warrants
were exercised during 1996; the remaining warrants were exercised in
1997.
In March on 1996, the Company entered into an agreement for financial,
consulting and investment banking services. The Company agreed to pay a
compensation for these services $16,000 which it recognized in 1996.
The Company was going to issue up to 80,000 warrants for these
services, however, the contract was subsequently terminated before the
services were rendered.
A summary of the status of the Company's outstanding warrants as of
December 31, 1997 and 1996, and changes during the years ending on
those dates is presented below.
<TABLE>
<CAPTION>
Weighted Average
Warrants Exercise Price
-------- --------------
<S> <C> <C>
Warrants outstanding, December 31, 1995 92,705 $7.20
Warrants granted 100,000 --
Warrants exercised 55,500 7.20
Warrants outstanding, December 31, 1996 137,205 7.20(1)
Warrants granted -- 3.00
Warrants exercised 52,000 1.50(2)
Warrants expired 85,205 3.00
Warrants outstanding, December 31, 1997 --
</TABLE>
(1) Effective May 24, 1996 the Company lowered the strike price to
$3.00 a share (the fair market value of the common share at
that date) for all outstanding warrants at that date.
(2) Effective June 17, 1997, the Company lowered the strike price
to $1.50 a share for all outstanding warrants at that date.
46
<PAGE> 47
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) RELATED PARTIES
At December 31, 1996 the Company was indebted to the President of
Orange Park for $33,000 which is reflected in the December 31, 1996
balance sheet in a "Notes due to related parties." During 1996 the
Company reimbursed this executive approximately $10,000 for expenses
that he paid on behalf of the Company. In 1997, the Company issued its
common stock valued at $51,804 as satisfaction of the remaining balance
of this debt; purchase of certain medical equipment valued at $20,000
and reimbursement of expenses paid by this executive on behalf of the
Company.
The Company through its Orange Park facility utilizes various
diagnostic and office equipment leased by Neurophysiology Associates,
Inc. ("NPA"). NPA is 100% owned by the President and Chief Operating
Officer of Orange Park. The Company has agreed to compensate NPA in no
more or less favorable terms than the original lease calls for. Monthly
payments approximate $1,920; annual rent expense approximated $23,000
in 1996 and 1997. Certain payments by the Company are made directly to
the third party lessor.
In July of 1996, the Company entered into a month to month rental
arrangement for its regional office (approximately 2,200 square feet)
in northeast Florida with Medical Consultants Inc. President and Chief
Operating Officer of Orange Park is 100% owner of Medical Consultants,
Inc. The agreement calls for rental payments of $1,500 per month. Rent
expense for these spaces in 1997 and 1996 totaled $18,000 and $9,000,
respectively. The office was closed in March, 1998.
In July of 1996, a triple net lease became effective between the
Company and Sundance Partners II (a Florida general partnership) for a
free standing 7,100 medical facility used for Riverside's Diagnostic
Center. The facility is located in the Riverside area of Jacksonville,
Florida. The lease term is for an initial five years with a one time
option to extend for a five year period. Rent expense for 1997 and 1996
approximated $117,000 and $58,000, respectively. Sundance Partners II
is 100% owned by the Company's Chief Executive Officer and President.
In November 1996, the past CEO and the COO loaned the Company
approximately $33,000 each. The loans were due on demand and bear an 8%
interest rate. In 1997, the officers each accepted stock valued at
$121,900 as payment of this indebtedness and unpaid bonuses from 1996.
One of the Company's directors (currently resigned), a partner of Foley
and Lardner, a law firm that is one of the Company's legal counselors.
Total expense to the firm amounted to approximately $36,000 in 1996. In
1997, the firm accepted stock value at $150,000 in settlement for the
Company's indebtedness which, at the time, approximated that amount.
In March 1997, the Company borrowed $125,000 from a related party
corporation (majority owned by the Company's past CEO and the COO. The
proceeds were used to pay property taxes. The loan was due April 29,
1997 and was expected to be paid out of receipts from overdue provider
payments. The loan was paid down and a remaining $62,500 remains to be
paid and appears in the balance sheet as "Note Due Related Party".
The Company has contracted with Healthy Services, Inc. which performs
bone density diagnostic services. Mr. Curtis Alliston (President and
COO) owns 50% interest in Healthy Services. The Company bills and
collects for the services rendered and retains a percentage of
collection varying from 25% to 50%. Total net fees earned by Healthy
Services for 1997 approximate $68,000.
47
<PAGE> 48
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company engages Alan Serna (D.B.A.: Clearway Cleaning) to perform
janitorial services and laundry services for the corporate office,
Brandon and SunPoint facilities. Mr. Serna is the step son-in-law of
Mr. Alliston.
During 1995 the Company incurred approximately $88,000 in costs related
to a potential opening of a new site. Under an agreement with Sundance
III (a Florida general partnership), owned jointly by Mr. Taneja and
Mr. Alliston, Sundance III was to rent the Company its building for the
above mentioned site. However, in the event the Company was to abandon
the opening, Sundance III was to sell off the building and reimburse
the Company from the proceeds of such sale. In 1996, the project was
abandoned, sold and the reimbursement made.
(14) SUBSEQUENT EVENTS
On February 23, 1998 the Company entered into a definitive agreement to
merge with American Enterprise Solutions, Inc. ("AES"). The transaction
is expected to close in the second quarter of 1998. Upon merger the
separate existence of AES will cease and the Company, being the
surviving corporation, will change its name to American Enterprise
Solutions, Inc. It is intended that the merger transaction be, for tax
purposes, a tax free reorganization.
In March of 1998 the Company entered into a private placement Stock
Purchase Agreement with AES. The Company issued 500,000 shares of
Series A Preferred Stock in exchange for 8,000,000 common shares of
Halis, Inc. (OTCBB:HLIS) held by AES and valued at $2,000,000. This
value was based upon the market value at the date of exchange less a
discount due to, among other things, the exchange being a large block
of Halis, Inc. common stock. The Company, at present, intends to
utilize a major portion of the Halis, Inc. securities as collateral for
securing debt financing and obtaining extended loan or lease terms for
existing obligations. The remaining Halis, Inc. securities may be sold
to provide cash if needed. Currently, the Company has not determined
the time frame required to sell the securities nor the selling price
that would be realized upon sale of the Halis, Inc. securities.
Therefore, the amount available for potential future cash needs is not
known at this time.
The Preferred Stock has conversion rights at the rate of 44.11 shares
of Common Stock to one share of Preferred Stock. A portion of the
Preferred Shares were converted giving AES 65% of the total 8,880,000
shares of Common Stock outstanding on March 27, 1998. As part of the
merger, the remaining Preferred Shares will also be converted to Common
Stock. After a total of 22,057,407 of Common Stock are issued and in
accord with appropriate amendments to the Articles of Incorporation,
NDI's "old" shareholders will own an aggregate of 12.3% of the post
merger Common Stock and AES "new" shareholders will own 87.7%.
Subsequently, a reverse stock split will take place.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE> 49
PART III
ITEM 9 - DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Prior to January 19, 1998, the Board of Directors consisted of Curtis L.
Alliston, Jugal K. Taneja, Martin A. Traber, Donald Ward and Susan Carmichael.
Mr. Ward resigned as a director effective January 1, 1997. Mr. Traber resigned
as director effective March 27, 1997. Susan Carmichael resigned as director
effective April 7, 1997. Mr. Taneja resigned as director effective January 19,
1998.
CURTIS L. ALLISTON, Age 52, currently is a director, the President and Chief
Operating Officer of the Company. He also serves as a director and the President
and Chief Executive Officer of Brandon Clinical Associates, Inc., a home health
care group, and President and Chief Executive Officer of Alliston Enterprises,
an investment and construction Company. From 1988 to 1992, he served as
President and Chief Executive Officer of Tampa Medical Group Management, a
medical practice management firm, and President and Chief Executive Officer of
Bay Cardiac Imaging, a mobile cardiac ultrasound service provider. Mr. Alliston
was the founder of Positron Partners, Inc., a joint venture specializing in
positron emission tomography, and served as its President and Chief Executive
Officer from 1990 to 1992. Also, from 1990 to 1993, Mr. Alliston served as the
President and Chief Executive officer of Cleveland Avenue Real Estate Partners,
a medical real estate investment group.
JUGAL K. TANEJA, Age 51, was a director, the Chief Executive officer and
Secretary of the Company. Mr. Taneja also serves as the Chairman, Chief
Executive Officer and director of NuMED Home Health Care, Inc. and Chief
Executive Officer and director of NuMED Surgical, Inc., publicly-held entities
involved in the home health care and medical equipment industries. He also
serves as the President and director of Bancequity Petroleum, Inc. Before his
association with Bancapital and NuMED, Mr. Taneja served as Senior Vice
President of Union Commerce Bank and Huntington National Bank.
MARTIN A. TRABER, Age 48, is a partner in the law firm of Foley & Lardner, a
national general practice law firm. He has also served as an Adjunct Professor
of Law at Cleveland Marshall Law School where he structured a course on and
lectured in the area of real estate finance. Prior to joining Foley & Lardner in
August, 1994, he practiced with Arter & Hadden since 1970 and was a partner in
the Cleveland office.
DONALD G. WARD, Age 53, has served as Administrative Director of Clay Cardiology
Associates, P.A., a group of cardiology specialists associated with several
major hospitals in northeastern Florida and northeastern Georgia, since 1992.
From 1990 to 1992, Mr. Ward was the Director of Special Projects/Mobile Imaging
Services for St. Vincent's Health Care Systems in Jacksonville, Florida. Prior
thereto, he has served in various position in the health care industry.
SUSAN J. CARMICHAEL, Age 48, is currently President and Chief Operating Officer
of NuMED Home Health Care, Inc. and Board Director since 1991. Ms. Carmichael
was the past President of Whole Person Home Health Care and Pennsylvania Medical
Concepts prior to being purchased by NuMED to serve as its entrance into the
home health industry. NuMED employs an average of 500+ employees and caring for
700+ clients in Florida, Pennsylvania, and Ohio. Previously Co-owner, President,
and Chairperson of the Board for Health Consulting Associates (1981-1985),
served as Chairperson for the Erie Pennsylvania Mental Health/Mental Retardation
Board for two, six-year terms, and has received the "Outstanding Service to the
Community" citation from Erie County.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and holders of more than 10% of the Common Stock to file
with the Securities Exchange commission initial reports of beneficial ownership
and reports of changes in beneficial ownership of Common Stock and any other
equity securities of the Company. To the Company's knowledge, based solely upon
a review of the forms filed with the Company by such person, all such Section
16(a) filing requirements were complied with by such persons in 1997.
49
<PAGE> 50
ITEM 10 - EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation paid
to or earned by the Company's Chief Executive Officer and President and
President of Orange Park. No other executive officer earned more than $100,000
for the fiscal years ended December 31, 1996 and 1997. The directors of the
Company receive no compensation.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- ---------------------
FISCAL ALL OTHER SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------- ------ ------ ----- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Jugal K. Taneja, 1997 75,000 -- 7,950 --
Chief Executive Officer 1996 75,000 68,015(2) 20,356(1) --
1995 76,250 75,614 18,958(1) 25,000
1994 10,000 10,000 16,400(1) --
1993 -- -- -- --
Curtis L. Alliston, 1997 150,000 -- 7,950
President and Chief 1996 150,000 68,015(2) 20,356(1) --
Operating Officer 1995 150,000 69,125 19,708(1) 25,000
1994 83,600 54,000 8,700(1) --
1993 75,000 -- 6,700(1) --
Ron Baugh, 1997 100,000 -- 10,200(1) --
President of Orange Park
</TABLE>
(1) Represents club dues and automobiles expense allowance.
(2) Received stock in lieu of payment.
The following tables set forth information with respect to grants of options to
purchase shares of Common Stock during 1997 to the executive officers named in
the Summary Compensation Table. The amounts shown as potential realizable values
on the options are based on assumed annualized rates of appreciation in the
price of the Common Stock of 0%, 5% and 10% over the term of the options, as set
forth in rules of the Securities and Exchange Commission. Actual gains, if any,
on stock option exercises are dependent on future performance of the Common
Stock. There can be no assurance that the potential realizable values reflected
in this table will be achieved.
50
<PAGE> 51
STOCK OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
MARKET POTENTIAL REALIZABLE VALUE AT ASSUMED
% OF TOTAL PRICE PER ANNUAL RATES OF STOCK PRICE
OPTIONS SHARE OF APPRECIATION FOR OPTION TERM(2)
NUMBERS OF GRANTED TO UNDERLYING -------------------------------------
SECURITIES EMPLOYEES SECURITY ON
UNDERLYING IN FISCAL EXERCISE DATE OF EXPIRATION
NAME OPTIONS GRANTED 1997 PRICE PER SHARE GRANT (1) DATE 0% 5% 10%
- ------------------ --------------- ----------- --------------- ------------ ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
No options were granted to executive officers in 1997.
</TABLE>
- ---------------
The following table sets forth information concerning each exercise of options
during 1997 by the executive officers named in the Summary Compensation Table.
No options were outstanding as of December 31, 1997.
OPTION EXERCISES IN 1997
<TABLE>
<CAPTION>
SHARES ACQUIRED ON
NAME EXERCISE VALUE REALIZED ($)
- ------------------- ------------------ ------------------
<S> <C> <C>
No options were exercised by executives in 1997. VALUE REALIZED ($)
</TABLE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the Record Date, March 31, 1998, with respect
to: (i) each of the Company's directors; (ii) each of the Company's executive
officers named in the Summary Compensation Table; (iii) all directors and
executive officers of the Company as a group; and (iv) each person known by the
Company to own beneficially more than 5% of the Common Stock. Except as
otherwise indicated, each of the shareholders listed below has sole voting and
investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED
--------------------
NAME SHARES PERCENT
- ---- ------ -------
<S> <C> <C>
Curtis L. Alliston (3)(4) ............................................................... 622,000 7.0%
Directors and executive officers as a group (1 persons)(5) .............................. 622,000 7.0%
Jugal K. Taneja (1)(2) .................................................................. 1,020,000 11.5%
American Enterprise Solutions, Inc. ..................................................... 5,786,570 65.2%
</TABLE>
(1) The address of Mr. Taneja is 7270 Sawgrass Point Drive, Pinellas Park,
Florida 33782.
(2) Includes 100,000 shares of Common Stock held by First Delhi Trust
established in 1987 which was established for the benefit of Mr.
Taneja's children, over which Mr. Taneja will exercise voting rights;
720,000 shares are held by Twenty First Century Health Care Fund, LLC
("CHCF") over which Mr. Taneja has no economic interest but shares
voting rights with other members of CHCF. The 1,020,000 shares shown
does not include 115,000 shares held by Mr. Taneja's children, who are
over the age of 21 years.
51
<PAGE> 52
(3) Includes 100,000 shares of Common Stock held by Alliston Family Limited
Partnership, which was established for the benefit of Mr. Alliston's
children, over which Mr. Alliston will exercise voting rights.
(4) The business address of Mr. Alliston is 755 West Brandon Boulevard,
Brandon, Florida 33511.
(5) Includes notes (1) through (3) above.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Company has an Employee Stock Option Plan ("employee plan") and a
Non-employee Director Stock Option plan ("director plan"). Options granted under
the employee plan are intended to be incentive stock options. The total number
of shares to which options may be granted under the employee and director plans
are 200,000 shares. Generally, the exercise price shall be fixed at no less than
100% of the average fair market value of the shares at date of option. During
1996 the Company granted options for 10,000 shares exercisable at $3 per share
under the Employee Plan. At December 31, 1997 there are no outstanding options
under the Director Plan and there are 10,000 outstanding options under the
Employee Plan.
The Company through its Orange Park facility utilizes various diagnostic and
office equipment leased by Neurophysiology Associates, Inc ("NPA"). NPA is 100%
owned by Ron Baugh, President and Chief Operating Officer of Orange Park. The
Company has agreed to compensate NPA in no more or less favorable terms than the
original lease calls for. Monthly payments approximate $1,920; annual rent
expense approximated $23,000 in 1996 and 1997. Certain payments by the Company
are made directly to the third party lessor.
In July of 1996, the Company entered into a month to month rental arrangement
for its regional office (approximately 2,200 square feet) in northeast Florida
with Medical Consultants Inc. The President and Chief Operating Officer of
Orange Park is 100% owner of Medical Consultants, Inc. The agreement calls for
rental payments of $1,500 per month. Rent expense for these spaces in 1997 and
1996 totaled $18,000, and $9,000, respectively.
In July of 1996, a triple net lease became effective between the Company and
Sundance Partners II (a Florida general partnership) for a free standing 7,100
medical facility used for Riverside's Diagnostic Center. The facility is located
in the Riverside area (an old "upscale" residential area) of Jacksonville,
Florida. The lease term is for an initial five years with a one time option to
extend for a five year period. Rent expense for 1997 and 1996 approximated
$117,000, and $58,000, respectively. Sundance Partners II is 100% owned by
Messrs. J. Taneja and C. Alliston.
One of the Company's directors (currently resigned) Mr. Traber is a partner of
Foley and Lardner, a law firm that is one of the Company's legal counselors.
Total expense to the firm amounted to approximately $36,000 in 1996. In 1997,
the firm accepted Company stock valued at $150,000 in settlement for the
Company's indebtedness which, at the time, approximated that amount.
In November , 1996 J. Taneja and C. Alliston loaned the Company approximately
$33,000 each. The loans are due on demand and bear an 8% interest rate. In 1997,
the officers each accepted stock valued at $121,900 as payment of this
indebtedness and unpaid bonuses from 1996.
52
<PAGE> 53
At December 31, 1996 the Company is indebted to the President of Orange Park for
$33,000 which is reflected in the December 31, 1996 balance sheet in a "Notes
due to related parties." During the year the Company reimbursed this executive
approximately $10,000 for expenses that he paid on behalf of the Company. In
1997, the Company issued its common stock valued at $51,804 as satisfaction of
the balance of this debt, purchase of certain medical equipment valued at
$20,000 and reimbursement of expenses paid by this executive on behalf of the
Company.
In March of 1997 the Company borrowed $125,000 from a related party corporation
(majority owned by Messrs. Taneja and Alliston). The proceeds were used to pay
property taxes. The loan was due April 29, 1997 and is expected to be paid out
of receipts from overdue provider payments. The loan was paid down and a
remaining $62,500 remains to be paid.
The Company has contracted with Healthy Services, Inc. which performs bone
density diagnostic services. Mr. Curtis Alliston (President and COO) owns 50%
interest in Healthy Services. The Company bills and collects for the services
rendered and retains a percentage of collection varying from 25% to 50%. Total
net fees earned by Healthy Services for 1997 approximate $68,000.
During 1995 the Company incurred approximately $88,000 in costs related to a
potential opening of a new site. Under an agreement with Sundance III (a Florida
general partnership), owned jointly by Mr. Taneja and Mr. Alliston, Sundance III
was to rent the Company its building for the above mentioned site. However, in
the event the Company was to abandon the opening, Sundance III was to sell off
the building and reimburse the Company from the proceeds of such sale. In 1996,
the project was abandoned, sold and the reimbursement made.
53
<PAGE> 54
Item 13 - Exhibits and Reports on Form 8-K
(a) List of exhibits filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company (Exhibit 3.1 to the Company's
Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
3.2 By-laws of the Company (Exhibit 3.2 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
3.3 Articles of Amendment to Articles of Incorporation (Exhibit 10.50,
pages 11-15 of Exhibit B to the Company's Form 8-K dated April 10, 1998
is incorporated by reference herein).
4.1 1995 Employee Stock Option Plan. (Exhibit 4.1 of Company's Form S-8
Registration No.33-80293 is incorporated by reference herein).
4.2 1995 Non-Employee Director Stock Option Plan. (Exhibit 4.2 of Company's
Form S-8 Registration No. 80293 is incorporated by reference herein).
4.3 Warrants Agreement (Exhibit 4.4 to Amendment No. 3 to the Company's
Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
10.3 Lease Agreement dated April 1, 1995 by and between National
Diagnostics/Orange Park, Inc. and Sundance Partners. (Exhibit 10.3 of
Company's Form 10-QSB for the period ended March 31, 1995 is
incorporated by reference herein).
10.4 Brandon Diagnostic Center, Ltd.'s Revolving Note dated May 30, 1995.
(Exhibit 10.1 of Company's Form 10-QSB for the period ended June 30,
1995 is incorporated by reference herein.)
10.5 Employment Agreement by and between the Company and Curtis L. Alliston
dated November 10, 1995. (Exhibit 10.1 of Company's Form 10-QSB for the
period ended September 30, 1995 is incorporated by reference herein).
10.6 Employment Agreement by and between the Company and Jugal K. Taneja
dated November 10, 1995. (Exhibit 10.2 of Company's Form 10-QSB for the
period ended September 30, 1995 is incorporated by reference herein).
10.7 Lease Agreement dated July 12, 1995 between National Diagnostics/Orange
Park, Inc. and Siemens Medical Systems, Inc. effective September 14,
1995. (Exhibit 10.3 of Company's Form 10-QSB for the period ended
September 30, 1995 is incorporated by reference herein).
10.8 Professional Services Agreement dated December 21, 1995 between Brandon
Diagnostic Center, Ltd., SunPoint Diagnostic Center, Inc. and Robert D.
Marshall, M.D., P.A. (Exhibit 10.8 of Company's Form 10-KSB for the
period ended December 31, 1995 filed on April 1, 1996 is incorporated
by reference herein).
10.9 Purchase Agreement dated February 19, 1996 between National
Diagnostics, Inc., National Diagnostics/Orange Park, Sundance Partners,
and partners (Exhibit 10.9 of the Company's Form 10-KSB for the period
ended December 31, 1995 filed on April 1, 1996 is incorporated by
reference herein).
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.10 Agreement of Partnership of Sundance Partners (a Florida partnership)
dated March 1, 1995. (Exhibit 10.10 of the Company's Form 10-KSB for
the period ended December 31, 1995 filed on April 1, 1996 is
incorporated by reference herein).
10.11 Lease Agreement dated September 3, 1991 and modification thereto dated
August 8, 1992 by and between Brandon Diagnostic Center, Ltd. and Bay
Land Investment, Inc. relating to a portion of the Company's Brandon,
Florida facility. (Exhibit 10.2 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.12 Lease Agreement dated February 1, 1992 and modification thereto dated
August 8, 1992 by and between Brandon Diagnostic Center, Ltd. and Bay
Land Investment, Inc. relating to a portion of the Company's Brandon,
Florida facility. (Exhibit 10.3 to the Company's Form SB-1 Registration
Statement Reg. No. 33-80612) is incorporated by reference herein).
10.13 Lease Agreement dated January 15, 1993 by and between Brandon
Diagnostic Center, Ltd. and Bay Land Investment, Inc. relating to a
portion of the Company's Brandon, Florida facility. (Exhibit 10.4 to
the Company's Form SB-1 Registration Statement (Reg. no. 33-80612) is
incorporated by reference herein).
10.14 Lease Agreement dated May 4, 1994 by and between Alpha Associates, Inc.
and Sun Point Associates, Inc. and Sun Point Associates relating to the
Company's Ruskin, Florida facility. (Exhibit 10.5 to the Company's for
SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
10.15 Equipment Lease Agreement dated September 11, 1991 by and between
Brandon Diagnostic Center, Ltd. and Siemens Credit Corporation and
supplements thereto relating to the Company's magnetic resonance
imaging equipment. (Exhibit 10.6 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
10.16 Equipment Lease Agreement dated September 11, 1991 by and between
Brandon Diagnostic Center, Ltd. and Siemens Credit Corporation and
supplement thereto relating to the Company's computer tomography
equipment. (Exhibit 10.7 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.17 Equipment Lease Agreement dated November 18, 1991 by and between
Brandon Diagnostic Center, Ltd. and Siemens Credit Corporation and
supplements thereto relating to the Company's nuclear medicine
equipment. (Exhibit 10.9 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.19 Lease Agreement dated September 1, 1994 by and between Highland
Properties of Gulf Coast, Ltd. and Brandon Diagnostic Center, Ltd.
relating to the Company's Brandon, Florida facility. (Exhibit 10.21 to
Amendment No. 3 to the Company's Form SB-1 Registration Statement (Reg.
No. 33-80612 is incorporated by reference herein).
10.20 Asset Purchase Agreement effective November 1, 1993 by and between
Alpha Acquisitions Corp. and Equipment Company of Brandon, Inc.
pertaining to the acquisition by Alpha Acquisitions Corp. of the 40%
limited partnership interest in Brandon Diagnostic Center, Ltd.
(Exhibit 10.22 to Amendment No. 3 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
10.21 Unit Purchase Option dated September 27, 1994 relating to 50,000 Units
(Exhibit 4.5 to Amendment No. 2 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.22 Equipment Lease Agreement dated July 19, 1994 by and between Medical
Consultants of Middleburg, Inc. and Copelco Capital Corporation
relating to Orange Park's ultrasound equipment. (Exhibit 10.17 to the
Company's Form 10-KSB for December 31, 1994 is incorporated by
reference herein).
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.23 Master Lease Agreement dated June 27, 1994 by and between Alpha
Associates, Inc. d/b/a Brandon Diagnostic Center and Copelco Leasing
Corporation and schedules thereto relating to SunPoint's diagnostic
imaging equipment. (Exhibit 10.18 to the Company's Form 10-KSB for
December 31, 1994 is incorporated by reference herein).
10.24 Equipment Lease Agreement dated August 1, 1994 by and between Brandon
Diagnostic Center, Ltd. and Siemens Credit Corporation relating to
SunPoint's diagnostic imaging equipment. (Exhibit 10.19 to the
Company's Form 10- KSB for December 31, 1994 is incorporated by
reference herein).
10.25 Asset Purchase Agreement, dated February 6, 1995 and effective as of
January 31, 1995, as amended, by and among Middleburg Medical Imaging
Consultants, Inc. (renamed National Diagnostics/Orange Park, Inc.),
Medical Consultants of Middleburg, Inc. and Medical Imaging
Consultants, Inc. (Exhibit 10.20 to the Company's Form 10- KSB for
December 31, 1994 is incorporated by reference herein).
10.26 Employment Contract, dated February 6, 1995 and effective as of January
31, 1995, by and between Ronald D. Baugh and Middleburg Medical Imaging
Consultants, Inc. (Exhibit 10.21 to the Company's Form 10-KSB for
December 31, 1994 is incorporated by reference herein).
10.28 Professional Services Agreement, dated November 30, 1994, by and
between the Company and Drs. Hurt, Isaacs, Johnston and Cranford, P.A.
(Exhibit 10.23 to the Company's Form 10-KSB for December 31, 1994 is
incorporated by reference herein).
10.29 Services Agreement, dated November 17, 1994, by and between Diagnostic
Cardiology Associates, P.A. and the Company. (Exhibit 10.24 to the
Company's Form 10-KSB for December 31, 1994 is incorporated by
reference herein).
10.30 Term Loan Agreement and Revolving Loan Agreement, both dated March 6,
1994, by and between Brandon Diagnostic Center, Ltd. and SouthTrust
Bank of West Florida, and related Notes and Security Agreements
(Exhibit 10.25 to the Company's Form 10-KSB for December 31, 1994 is
incorporated by reference herein).
10.31 Lease Agreement dated August 15, 1995 between National
Diagnostics/Riverside, Inc. ("Riverside") and Sundance Partners II
relating to the Company's Riverside fixed site facility. (Exhibit 10.33
to the Company's 10-QSB for June 30, 1996 is incorporated by reference
herein).
10.32 Equipment Lease Agreement dated July 15, 1996 between National
Diagnostics/Riverside, Inc. and Siemens Credit Corporation relating to
Riverside's computer tomography equipment. (Exhibit 10.34 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.33 Equipment Lease Agreement dated August 12, 1996 between National
Diagnostics/Riverside, Inc. and Siemens Credit Corporation relating to
the Riverside's ultrasound equipment. (Exhibit 10.35 to the Company's
10-QSB for September 30, 1996 is incorporated by reference herein).
10.34 Promissory Note and Business Loan Agreement dated September 9, 1996
between Brandon Diagnositc Center, Ltd. and South Hillsborough
Community Bank related to equipment refinancing. (Exhibit 10.36 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.35 Equipment Lease Agreement dated September 11, 1996 between National
Diagnostics/Riverside, Inc. ("Riverside") and Siemens Credit
Corporation relating to Riverside's Sireskop C. (Exhibit 10.37 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.36 Loan and Security Agreement dated September 13,1996 between National
Diagnostics, Inc. and DVI Business Credit Corporation relating to the
Company's line of credit. (Exhibit 10.38 to the Company's 10-QSB for
September 30, 1996 is incorporated by reference herein).
</TABLE>
56
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<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
10.37 Promissory Note and Business Loan Agreement dated December 23, 1996
between Brandon Diagnostic Center, Ltd. and South Hillsborough
Community Bank related to the purchase of Stereotactic Mammography
equipment. (Exhibit 10.37 to the Company's Form 10-KSB for December 31,
1996 is incorporated by reference herein).
10.38 Equipment Lease Agreement dated January 22, 1997 between Brandon
Diagnostic Center, Ltd. ("Brandon") and Siemens Credit Corporation
relating to Brandon's Sireskop CX. (Exhibit 10.38 to the Company's Form
10-KSB for December 31, 1996 is incorporated by reference herein).
10.39 Professional Service Agreement, effective February 1, 1997, by and
between SunPoint Diagnostic Center, Inc. and TeleQuest, Inc. (Exhibit
10.39 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.40 Professional Service Agreement, effective February 1, 1997, by and
between National Diagnostics/Orange Park, Inc. and TeleQuest, Inc.
(Exhibit 10.40 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.41 Professional Service Agreement, effective February 1, 1997, by and
between Brandon Diagnostic Center, Ltd. and TeleQuest, Inc. (Exhibit
10.41 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.42 Promissory Note and Security Agreement dated February 18, 1997 between
National Diagnostics, Inc. and DVI Business Credit Corporation relating
to the Company's installment loan. (Exhibit 10.42 to the Company's Form
10- KSB for December 31, 1996 is incorporated by reference herein).
10.43 Exchange Agreement, dated June 27, 1997 by and between National
Diagnostics, Inc. and Sudafric Suisse Trustees. (Exhibit 10.43 to the
Company's Form 8-K dated July 22, 1997 is incorporated by reference
herein).
10.44 Professional Services Agreement, dated May 15, 1997 by and between
National Diagnostics, Inc. and University of Florida, for and on behalf
of the Board of Regents of the State of Florida, for the Benefit of the
Department of Radiology/UFHSCJ, College of Medicine, University of
Florida. (Exhibit 10.44 to the Company's Form 10-QSB for June 30, 1997
is incorporated by reference herein.)
10.45 Consulting Agreement, dated May 27, 1997 by and between National
Diagnostics, Inc. and Capital Access Bureau, Inc. (Exhibit 10.45 to the
Company's Form 10-QSB for June 30, 1997 is incorporated by reference
herein).
10.46 Funding Agreement, dated May 27, 1997 by and between National
Diagnostics, Inc. and Capital Access Bureau, Inc. (Exhibit 10.46 to the
Company's Form 10-QSB for June 30, 1997 is incorporated by reference
herein).
10.47 Professional Services Agreement dated August 1, 1997 by and between
National Diagnostics, Inc. and Nancy C. Lawhon, M.D., P.C. (Exhibit
10.47 to the Company's Form 10-QSB for June 30, 1997 is incorporated by
reference herein).
10.48 Loan and Security Agreement, dated October 3, 1997 by and between
National Diagnostics, Inc., SunPoint Diagnostic Center, Inc., National
Diagnostics/Orange Park, Inc., National Diagnostics/Riverside, Inc.,
Alpha Associates, Inc., Alpha Acquisitions, Inc., Brandon Diagnostic
Center, Ltd., and HealthCare Financial Partners Funding, Inc. (Exhibit
10.48 to the Company's Form 10-QSB for September 30, 1997 is
incorporated by reference herein).
10.49 Merger Agreement dated February 23, 1998 by and between National
Diagnostics, Inc., a Florida Corporation, and American Enterprise
Solutions, Inc., a Florida Corporation. (Exhibit 10.49 to the Company's
Form 8-K dated March 10, 1998 is incorporated by reference herein).
</TABLE>
57
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<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.50 Stock Purchase Agreement dated March 17, 1998 by and between National
Diagnostics, Inc., a Florida Corporation and American Enterprise
Solutions, Inc., a Florida Corporation. (Exhibit 10.50 to the Company's
Form 8-K dated April 10, 1998 is incorporated by reference herein).
10.51 Professional Services Agreement dated October 13, 1997 by and between
National Diagnostics, Inc. and Lisa Porter- Grenn, M.D.
10.52 Second Amendment to Merger Agreement by and between National
Diagnostics, Inc. and American Enterprise Solutions, Inc. effective
April 29, 1998.
20.1 National Diagnostics, Inc. Offer to Exchange dated July 6, 1995.
(Exhibit 20.1 to the Company's Form 10-QSB for the period ended June
30, 1995 is incorporated by reference herein).
21 Subsidiaries of Registrant
23.1 Consent of Independent Certified Public Accountants-Grant Thornton LLP
24 Powers of Attorney (included on signature page) (Exhibit 24 of the
Company's Form 10-KSB for the period ended December 31, 1995 filed on
April 1, 1996 is incorporated by reference herein).
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No Form 8-K was filed by the Company in the fourth quarter of 1997.
The Company filed on March 10, 1998, a Form 8-K indicating a Merger
Agreement dated February 23, 1998 by and between National Diagnostics,
Inc., a Florida Corporation, and American Enterprise Solutions, Inc., a
Florida Corporation.
The Company filed on April 10, 1998, a Form 8-K indicating a private
placement valued at $2,000,000 wherein National Diagnostics, Inc.
issued 500,000 shares of Series A Preferred Stock of NATD to American
Enterprise Solutions, Inc. ("AES") in exchange for 8,000,000 shares of
Common Stock of Halis, Inc. (OTCBB:HALIS). On March 27, 1998, AES
exercised its right to convert 131,185 shares of Series A Preferred
Stock for 5,786,570 shares of Common Stock of the Company. After
conversion, AES holds 65% of the total 8,880,000shares of Common Stock
outstanding.
58
<PAGE> 59
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) 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: May 18, 1998 NATIONAL DIAGNOSTICS, INC.
By: /s/ Curtis Alliston
-------------------------------
Curtis L. Alliston
President and Chief Operating
Officer
By: /s/ Dennis Hult
-------------------------------
Dennis C. Hult
Comptroller
59
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EXHIBIT INDEX
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3.1 Articles of Incorporation of the Company (Exhibit 3.1 to the Company's
Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
3.2 By-laws of the Company (Exhibit 3.2 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
3.3 Articles of Amendment to Articles of Incorporation (Exhibit 10.50,
pages 11-15 of Exhibit B to the Company's Form 8-K dated April 10, 1998
is incorporated by reference herein).
4.1 1995 Employee Stock Option Plan. (Exhibit 4.1 of Company's Form S-8
Registration No.33-80293 is incorporated by reference herein).
4.2 1995 Non-Employee Director Stock Option Plan. (Exhibit 4.2 of Company's
Form S-8 Registration No. 80293 is incorporated by reference herein).
4.3 Warrants Agreement (Exhibit 4.4 to Amendment No. 3 to the Company's
Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
10.3 Lease Agreement dated April 1, 1995 by and between National
Diagnostics/ Orange Park, Inc. and Sundance Partners. (Exhibit 10.3 of
Company's Form 10-QSB for the period ended March 31, 1995 is
incorporated by reference herein).
10.4 Brandon Diagnostic Center, Ltd.'s Revolving Note dated May 30, 1995.
(Exhibit 10.1 of Company's Form 10-QSB for the period ended June 30,
1995 is incorporated by reference herein.)
10.5 Employment Agreement by and between the Company and Curtis L. Alliston
dated November 10, 1995. (Exhibit 10.1 of Company's Form 10-QSB for the
period ended September 30, 1995 is incorporated by reference herein).
10.6 Employment Agreement by and between the Company and Jugal K. Taneja
dated November 10, 1995. (Exhibit 10.2 of Company's Form 10-QSB for the
period ended September 30, 1995 is incorporated by reference herein).
10.7 Lease Agreement dated July 12, 1995 between National Diagnostics/Orange
Park, Inc. and Siemens Medical Systems, Inc. effective September 14,
1995. (Exhibit 10.3 of Company's Form 10-QSB for the period ended
September 30, 1995 is incorporated by reference herein).
</TABLE>
60
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10.8 Professional Services Agreement dated December 21, 1995 between Brandon
Diagnostic Center, Ltd., SunPoint Diagnostic Center, Inc. and Robert D.
Marshall, M.D., P.A. (Exhibit 10.8 of Company's Form 10-KSB for the
period ended December 31, 1995 filed on April 1, 1996 is incorporated
by reference herein).
10.9 Purchase Agreement dated February 19, 1996 between National
Diagnostics, Inc., National Diagnostics/Orange Park, Sundance Partners,
and partners. (Exhibit 10.9 of the Company's Form 10-KSB for the period
ended December 31, 1995 filed on April 1, 1996 is incorporated by
reference herein).
10.10 Agreement of Partnership of Sundance Partners (a Florida partnership)
dated March 1, 1995. (Exhibit 10.10 of the Company's Form 10-KSB for
the period ended December 31, 1995 filed on April 1, 1996 is
incorporated by reference herein).
10.11 Lease Agreement dated September 3, 1991 and modification thereto dated
August 8, 1992 by and between Brandon Diagnostic Center, Ltd. and Bay
Land Investment, Inc. relating to a portion of the Company's Brandon,
Florida facility. (Exhibit 10.2 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.12 Lease Agreement dated February 1, 1992 and modification thereto dated
August 8, 1992 by and between Brandon Diagnostic Center, ltd. and Bay
Land Investment, Inc. relating to a portion of the Company's Brandon,
Florida facility. (Exhibit 10.3 to the Company's Form SB-1 Registration
Statement Reg. No. 33-80612) is incorporated by reference herein).
10.13 Lease Agreement dated January 15, 1993 by and between Brandon
Diagnostic Center, Ltd. and Bay Land Investment, Inc. relating to a
portion of the Company's Brandon, Florida facility. (Exhibit 10.4 to
the Company's Form SB-1 Registration Statement (Reg. no. 33-80612) is
incorporated by reference herein).
10.14 Lease Agreement dated May 4, 1994 by and between Alpha Associates, Inc.
and Sun Point Associates, Inc. and Sun Point Associates relating to the
Company's Ruskin, Florida facility. (Exhibit 10.5 to the Company's for
SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
reference herein).
10.15 Equipment Lease Agreement dated September 11, 1991 by and between
Brandon Diagnostic Center, ltd. and Siemens Credit Corporation and
supplements thereto relating to the Company's magnetic resonance
imaging equipment. (Exhibit 10.6 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
</TABLE>
61
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10.16 Equipment Lease Agreement dated September 11, 1991 by and between
Brandon Diagnostic Center, Ltd. and Siemens Credit Corporation and
supplement thereto relating to the Company's computer tomography
equipment. (Exhibit 10.7 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.17 Equipment Lease Agreement dated November 18, 1991 by and between
Brandon Diagnostic Center, Ltd. and Siemens Credit Corporation and
supplements thereto relating to the Company's nuclear medicine
equipment. (Exhibit 10.9 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.19 Lease Agreement dated September 1, 1994 by and between Highland
Properties of Gulf Coast, Ltd. and Brandon Diagnostic Center, Ltd.
relating to the Company's Brandon, Florida facility. (Exhibit 10.21 to
Amendment No. 3 to the Company's Form SB-1 Registration Statement (Reg.
No. 33-80612 is incorporated by reference herein).
10.20 Asset Purchase Agreement effective November 1, 1993 by and between
Alpha Acquisitions Corp. and Equipment Company of Brandon, Inc.
pertaining to the acquisition by Alpha Acquisitions Corp. of the 40%
limited partnership interest in Brandon Diagnostic Center, Ltd.
(Exhibit 10.22 to Amendment No. 3 to the Company's Form SB-1
Registration Statement (Reg. No. 33-80612) is incorporated by reference
herein).
10.21 Unit Purchase Option dated September 27, 1994 relating to 50,000 Units
(Exhibit 4.5 to Amendment No. 2 to the Company's Form SB-1 Registration
Statement (Reg. No. 33-80612) is incorporated by reference herein).
10.22 Equipment Lease Agreement dated July 19, 1994 by and between Medical
Consultants of Middleburg, Inc. and Copelco Capital Corporation
relating to Orange Park's ultrasound equipment. (Exhibit 10.17 to the
Company's Form 10-KSB for December 31, 1994 is incorporated by
reference herein).
10.23 Master Lease Agreement dated June 27, 1994 by and between Alpha
Associates, Inc. d/b/a Brandon Diagnostic Center and Copelco Leasing
Corporation and schedules thereto relating to SunPoint's diagnostic
imaging equipment. (Exhibit 10.18 to the Company's form 10-KSB for
December 31, 1994 is incorporated by reference herein).
10.24 Equipment Lease Agreement dated August 1, 1994 by and between Brandon
Diagnostic Center, ltd. and Siemens Credit Corporation relating to
SunPoint's diagnostic imaging equipment. (Exhibit 10.19 to the
Company's Form 10-KSB for December 31, 1994 is incorporated by
reference herein).
</TABLE>
62
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10.25 Asset Purchase Agreement, dated February 6, 1995 and effective as of
January 31, 1995, as amended, by and among Middleburg Medical Imaging
Consultants, Inc. (renamed National Diagnostics/Orange Park, Inc.),
Medical Consultants of Middleburg, Inc. and Medical Imaging
Consultants, Inc. (Exhibit 10.20 to the Company's form 10-KSB for
December 31, 1994 is incorporated by reference herein).
10.26 Employment Contract, dated February 6, 1995 and effective as of January
31, 1995, by and between Ronald D. Baugh and Middleburg Medical Imaging
Consultants, Inc. (Exhibit 10.21 to the Company's Form 10-KSB for
December 31, 1994 is incorporated by reference herein).
10.28 Professional Services Agreement, dated November 30, 1994, by and
between the Company and Drs. Hurt, Isaacs, Johnston and Cranford, P.A.
(Exhibit 10.23 to the Company's Form 10-KSB for December 31, 1994 is
incorporated by reference herein).
10.29 Services Agreement, dated November 17, 1994, by and between Diagnostic
Cardiology Associates, P.A. and the Company. (Exhibit 10.24 to the
Company's Form 10-KSB for December 31, 1994 is incorporated by
reference herein).
10.30 Term Loan Agreement and Revolving Loan Agreement, both dated March 6,
1994, by and between Brandon Diagnostic Center, Ltd. and SouthTrust
Bank of West Florida, and related Notes and Security Agreements.
(Exhibit 10.25 to the Company's Form 10-KSB for December 31, 1994 is
incorporated by reference herein).
10.31 Lease Agreement dated August 15, 1995 between National
Diagnostics/Riverside, Inc. ("Riverside") and Sundance Partners II
relating to the Company's Riverside fixed site facility. (Exhibit 10.33
to the Company's 10-QSB for June 30, 1996 is incorporated by reference
herein).
10.32 Equipment Lease Agreement dated July 15, 1996 between National
Diagnostics/ Riverside, Inc. and Siemens Credit Corporation relating to
Riverside's computer tomography equipment. (Exhibit 10.34 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.33 Equipment Lease Agreement dated August 12, 1996 between National
Diagnostics/Riverside, Inc. and Siemens Credit Corporation relating to
the Riverside's ultrasound equipment. (Exhibit 10.35 to the Company's
10-QSB for September 30, 1996 is incorporated by reference herein).
</TABLE>
63
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10.34 Promissory Note and Business Loan Agreement dated September 9, 1996
between Brandon Diagnositc Center, Ltd. and South Hillsborough
Community Bank related to equipment refinancing. (Exhibit 10.36 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.35 Equipment Lease Agreement dated September 11, 1996 between National
Diagnostics/Riverside, Inc. ("Riverside") and Siemens Credit
Corporation relating to Riverside's Sireskop CX. (Exhibit 10.37 to the
Company's 10-QSB for September 30, 1996 is incorporated by reference
herein).
10.36 Loan and Security Agreement dated September 13,1996 between National
Diagnostics, Inc. and DVI Business Credit Corporation relating to the
Company's line of credit. (Exhibit 10.38 to the Company's 10-QSB for
September 30, 1996 is incorporated by reference herein).
10.37 Promissory Note and Business Loan Agreement dated December 23, 1996
between Brandon Diagnostic Center, Ltd. and South Hillsborough
Community Bank related to the purchase of Stereotactic Mammography
equipment. (Exhibit 10.37 to the Company's Form 10-KSB for December 31,
1996 is incorporated by reference herein.)
10.38 Equipment Lease Agreement dated January 22, 1997 between Brandon
Diagnostic Center, Ltd. ("Brandon") and Siemens Credit Corporation
relating to Brandon's Sireskop CX. (Exhibit 10.38 to the Company's Form
10-KSB for December 31, 1996 is incorporated by reference herein).
10.39 Professional Service Agreement, effective February 1, 1997, by and
between SunPoint Diagnostic Center, Inc. and TeleQuest, Inc. (Exhibit
10.39 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.40 Professional Service Agreement, effective February 1, 1997, by and
between National Diagnostics/Orange Park, Inc. and TeleQuest, Inc.
(Exhibit 10.40 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.41 Professional Service Agreement, effective February 1, 1997, by and
between Brandon Diagnostic Center, Ltd. and TeleQuest, Inc. (Exhibit
10.41 to the Company's Form 10-KSB for December 31, 1996 is
incorporated by reference herein).
10.42 Promissory Note and Security Agreement dated February 18, 1997 between
National Diagnostics, Inc. and DVI Business Credit Corporation relating
to the Company's installment loan. (Exhibit 10.39 to the Company's Form
10-KSB for December 31, 1996 is incorporated by reference herein).
</TABLE>
64
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10.43 Exchange Agreement, dated June 27, 1997 by and between National
Diagnostics, nc. and Sudafric Suisse Trustees. (Exhibit 10.43 to the
Company's Form 8-K dated July 22, 1997 is incorporated by reference
herein).
10.44 Professional Services Agreement, dated May 15, 1997 by and between
National Diagnostics, Inc. and University of Florida, for and on behalf
of the Board of Regents of the State of Florida, for the Benefit of the
Department of Radiology/ UFHSCJ, College of Medicine, University of
Florida. (Exhibit 10.44 to the Company's Form 10-QSB for June 30, 1997
is incorporated by reference herein.)
10.45 Consulting Agreement, dated May 27, 1997 by and between National
Diagnostics, Inc. and Capital Access Bureau, Inc. (Exhibit 10.45 to the
Company's Form 10-QSB for June 30, 1997 is incorporated by reference
herein).
10.46 Funding Agreement, dated May 27, 1997 by and between National
Diagnostics, Inc. and Capital Access Bureau, Inc. (Exhibit 10.46 to the
Company's Form 10-QSB for June 30, 1997 is incorporated by reference
herein).
10.47 Professional Services Agreement dated August 1, 1997 by and between
National Diagnostics, Inc. and Nancy C. Lawhon, M.D., P.C. (Exhibit
10.47 to the Company's Form 10-QSB for June 30, 1997 is incorporated by
reference herein).
10.48 Loan and Security Agreement, dated October 3, 1997 by and between
National Diagnostics, Inc., SunPoint Diagnostic Center, Inc., National
Diagnostics/Orange Park, Inc., National Diagnostics/Riverside, Inc.,
Alpha Associates, Inc., Alpha Acquisitions, Inc., Brandon Diagnostic
Center, Ltd., and HealthCare Financial Partners Funding, Inc. (Exhibit
10.48 to the Company's Form 10-QSB for September 30, 1997 is
incorporated by reference herein).
10.49 Merger Agreement dated February 23, 1998 by and between National
Diagnostics, Inc., a Florida Corporation, and American Enterprise
Solutions, Inc., a Florida Corporation. (Exhibit 10.49 to the Company's
Form 8-K dated March 10, 1998 is incorporated by reference herein).
10.50 Stock Purchase Agreement dated March 17, 1998 by and between National
Diagnostics, Inc., a Florida Corporation and American Enterprise
Solutions, Inc., a Florida Corporation. (Exhibit 10.50 to the Company's
Form 8-K dated April 10, 1998 is incorporated by reference herein).
10.51 Professional Services Agreement dated October 13, 1997 by and between National 67
Diagnostics, Inc. and Lisa Porter-Grenn, M.D.
10.52 Second Amendment to Merger Agreement by and between National Diagnostics, Inc. 68
and American Enterprise Solutions, Inc. effective April 29, 1998.
</TABLE>
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20.1 National Diagnostics, Inc. Offer to Exchange dated July 6, 1995.
(Exhibit 20.1 to the Company's Form 10-QSB for the period ended June
30, 1995 is incorporated by reference herein).
21 Subsidiaries of Registrant 72
23.1 Consent of Independent Certified Public Accountants-Grant Thornton LLP 74
24 Powers of Attorney (included on signature page) (Exhibit 24 of the
Company's Form 10-KSB for the period ended December 31, 1995 filed on
April 1, 1996 is incorporated by reference herein).
27.1 Financial Data Schedule 76
</TABLE>
(b) Reports on Form 8-K.
No Form 8-K was filed by the Company in the fourth quarter of 1997.
The Company filed on March 10, 1998, a Form 8-K indicating a Merger
Agreement dated February 23, 1998 by and between National Diagnostics,
Inc., a Florida Corporation, and American Enterprise Solutions, Inc., a
Florida Corporation.
The Company filed on April 10, 1998, a Form 8-K indicating a private
placement valued at $2,000,000 wherein National Diagnostics, Inc.
issued 500,000 shares of Series A Preferred Stock of NATD to American
Enterprise Solutions, Inc. ("AES") in exchange for 8,000,000 shares of
Common Stock of Halis, Inc. (OTCBB:HALIS). On March 27, 1998, AES
exercised its right to convert 131,185 shares of Series A Preferred
Stock for 5,786,570 shares of Common Stock of the Company. After
conversion, AES holds 65% of the total 8,880,000shares of Common Stock
outstanding.
66
<PAGE> 1
EXHIBIT 10.51
RADIOLOGY SERVICES AGREEMENT
THIS RADIOLOGY SERVICES AGREEMENT ("Agreement") is made this 13th day of October
, 1997, by and between BRANDON DIAGNOSTIC CENTER, LTD/SUNPOINT DIAGNOSTIC
CENTER, a corporation incorporated under the laws of the State of Florida
("Corporation"), and LISA PORTER-GRENN, M.D., Physician ("Physician").
WITNESSETH
WHEREAS, Corporation requires the services of a radiologist licensed to practice
medicine in the State of Florida; and
WHEREAS, Physician is organized to engage in the practice of medicine,
specializing in radiology; and
WHEREAS, Physician desires to provide radiology services to Corporation; and
WHEREAS, Physician desires to contract with Corporation upon the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
Section 1. Term.
The initial term of this Agreement shall be for a period of three (3) years
commencing on January 1, 1998, (the "Commencement Date") and shall be
automatically renewed for an additional three (3) year term, unless Physician's
services are terminated sooner pursuant to the provisions of Section 7 hereof.
Section 2. Services.
2.1 Physician and Physician Duties. During the term of this Agreement,
Physician shall deliver professional radiology services (the "Services") on
behalf of Corporation. Physician agrees that, as Corporation may require and to
the extent permissible by law, shall (a) devote such time and effort as is
required to perform the duties required of the radiologist by the Medical
Director and Corporation; (b) provide the Services at locations approved by the
Medical Director and Corporation; (c) participate in managed care arrangements
entered into by Corporation and affiliated parties; (d) cooperate with,
participate in, and comply with, the quality assurance, risk management and peer
review programs, grievance procedures and utilization control mechanisms
implemented by Corporation and its respective affiliates; (e) participate in the
Medicare and Medicaid programs and to provide nondiscriminatory medical
treatment for Medicare and Medicaid patients; (f) provide medical care in a
nondiscriminatory manner to charity and indigent patients of Corporation in
accordance with the policies and guidelines established by Corporation; (g)
promote and market the services of Corporation; and (h) perform such other
duties relating to the provision of services as may be requested from time to
time by the Chief Executive Officer ("CEO") of Corporation.
2.2 On-Call Scheduling. Corporation and Medical Director shall use its
best efforts to take into account the input of Physician in developing an
on-call schedule.
2.3 Services Provided. Corporation and Medical Director shall determine
which radiological activities shall be undertaken by Physician on behalf of
Corporation.
2.4 Physician Coverage. Corporation and Medical Director shall provide,
on a periodic basis, a c overage schedule, which may include Saturday coverage,
detailing times Physician shall provide the Services. Physician shall receive 30
days advance notice of each coverage schedule. Physician shall be subject to
providing additional coverage as needed on a non-discriminatory basis with other
physicians providing professional radiology services for Corporation.
<PAGE> 2
Section 3. Professional Income.
To the extent permitted by law, Physician hereby assigns all charges and income
derived from the Services accepted or undertaken by Physician on behalf of
Corporation at Corporation's diagnostic imaging facility during the term of this
Agreement. Charges, fee schedules, and coding for the Services rendered to
patients by Physician shall be established by Corporation. Physician shall
record, daily and accurately, the Services rendered by Physician and the charges
therefor on forms supplied by Corporation. Corporation shall be responsible for
all billing and collection activities relating to the Services performed by
Physician pursuant to this Agreement.
Physician agrees that all fees and charges arising out of Physician's Services
on behalf of Corporation during the term of the Agreement, as well as payments
for services rendered to the patients of the Corporation prior to the
commencement date hereof for which Physician has not yet been compensated are
hereby assigned by Physician to Corporation. Physician hereby assigns and
transfers to Corporation all right, title and interest of Physician to any fees
or charges (whether in cash, accounts, goods or other property of value)
resulting from or incident to Physician's provision of Services pursuant to the
Agreement and Physician does hereby appoint Corporation as Physician's agent and
attorney-in-fact to bill and collect the same.
Section 4. Physician Warranties.
Physician represents and warrants to Corporation that Physician is duly licensed
to practice medicine in the State of Florida. Physician further represents and
warrants to Corporation that (i) Physician's license to practice medicine in any
state (and Physician's permit to dispense or prescribe drugs and other
controlled substances) has never been suspended, restricted or revoked (ii)
Physician has never been reprimanded, sanctioned or disciplined by any
government entity, licensing board or state or local medical society or
specialty board; (iii) Physician has never been denied membership or
reappointment of membership on the medical staff of any hospital, that no
hospital medical staff membership or clinical privileges of Physician have ever
been suspended, curtailed or revoked, and that Physician has never voluntarily
withdrawn an application for appointment or reappointment to the medical staff
of any hospital ; (iv) all information provided by Physician to Corporation and
all information contained in any application for clinical privileges at the
Corporation's diagnostic center or other health care provider is true and
correct; (v) no application of Physician for professional liability insurance or
renewal thereof has ever been denied, and so such insurance policy has ever been
terminated; and (vi) Physician has never been convicted of or pled guilty,
including, but not limited to, a plea of nolo contendere, to a crime except for
minor traffic offenses. Physician shall update all such information as needed to
maintain its accuracy when and if any change to such information occurs.
Section 5. Performance Standards.
In performing Services under this Agreement, Physician agrees that Physician
shall (i) use diligent efforts and professional skill and judgement; (ii)
perform professional services in accordance with recognized standards of the
medical professional, (iii) act in a manner consistent with the Principles of
Medical Ethics of the American Medical Association; (iv) comply with the
by-laws, policies, rules and regulations of Corporation; (v) comply with
applicable standards of the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"); and (vi) comply with all applicable federal, state and
local laws and regulations. Notwithstanding the foregoing, Physician shall
exercise independent professional judgement in performing medical services
related to the medical condition of patients, and Physician shall be solely
responsible for the provision of medical services to patients in accordance with
the standard of practice of the community in which Physician renders medical
services and in a manner that will assure quality of care and treatment. Nothing
in this Agreement shall be construed as giving Corporation control over the
professional, clinical judgement of Physician.
Section 6. Compensation.
6.1 Compensation.
(i) Compensation. Physician shall be compensated in the amount
of $170,000.00 annually during the term of the Agreement.
<PAGE> 3
(ii) CME Allowance Annually. Physician shall receive $5,000.00 during
the term of the Agreement.
(iii) Health, Disability and Life Insurance Allowance Annually.
Physician shall receive $5,000.00 allowance to help defray cost of health,
disability and life insurance coverage.
(iv) Moving Expense Allowance. Physician shall receive $10,000.00
moving allowance to be paid at a rate of $2,000.00 per month beginning January
1998 through May 1998.
(v) Malpractice Insurance Allowance Annually. Physician shall receive
$10,000.00 for malpractice insurance.
6.2 Office Space. During the term of this Agreement, Corporation shall
provide Physician with professional office space at no cost to Physician, which
Physician may use for the performance of its duties hereunder.
6.3 Equipment and Supplies. During the term of this agreement,
Corporation shall provide expendable and non-expendable medical equipment,
drugs, supplies, furniture, and fixtures which Corporation determines, in its
sole discretion, to be necessary for the proper operation of the Corporation's
diagnostic center.
6.4 Utilities and Support Services. Corporation shall provide all
utilities, housekeeping, laundry and other non-medical support services as may
be required, in the discretion of Corporation, for the proper operation of the
Corporation's diagnostic center.
6.5 Vacation, Sick and Continuing Education Leave. Corporation agrees
that Physician will have six (6) weeks of vacation, sick and continuing medical
education leave during each year of this Agreement. Physician agrees that unused
leave may not be carried forward from one year to the next by physician without
the specific permission of Medical Director and Corporation. During Physician's
vacation, sick or continuing education leave, Medical Director or Corporation
shall arrange for coverage of the Corporation's diagnostic center. Physician
agrees to provide Medical Director and Corporation with at least 30 days advance
notice of impending vacation or continuing medical education leave by Physician.
6.6 Malpractice Insurance. During the Term of this Agreement, Physician
shall maintain, at its expense, professional malpractice liability insurance
covering Physician for services rendered on behalf of Corporation pursuant to
this Agreement in an amount not less than $1,000,000.00 per claim, $3,000,000.00
in the aggregate (the "Insurance Limits"). Physician shall furnish proof of such
coverage prior to the furnishing of Services pursuant to this Agreement, and
agrees to immediately provide Medical Director and Corporation with notice of
any termination, modification, or amendment of such coverage. If the
professional malpractice insurance provided by Physician pursuant to this
Section 6.6 is a "claims-made" policy, then, upon termination of this Agreement,
unless Physician obtains a new professional malpractice liability insurance
policy which includes coverage for acts occurring during the term hereof and
maintains such policy in full force and effect for a period following
termination of this Agreement equal to the statute of limitations for medical
malpractice actions then applicable in the State of Florida, Physician shall
purchase and maintain reporting endorsement ("tail") coverage for its acts, and
the acts of Physician, while performing services pursuant to this Agreement;
provided, however, that in the event this Agreement is terminated by Corporation
without case, or by Physician for cause, then Corporation shall purchase and
maintain such reporting endorsement ("tail") coverage.
Section 7. Termination.
7.1 Automatic Termination. This Agreement shall automatically
terminate upon the death or permanent disability of the Physician. As used
herein, the term "permanent disability" shall mean a physical or mental
impairment which either (a) satisfies the requirements for instituting payment
under any disability insurance policy covering the Physician; or (b) renders the
Physician incapable, in the judgement of an independent licensed physician
selected by the Corporation, of providing substantially the Services required of
the Physician hereunder for a period in excess of thirty (30) days.
7.2 Termination for Cause by Corporation. Corporation shall have
the right to terminate Physician's services
<PAGE> 4
under this Agreement immediately, with cause, upon written notice to Physician
if:
(i) Physician's license to practice medicine (or permit or license to
dispense or prescribe drugs or controlled substances) in any state shall have
been revoked, suspended or restricted; or
(ii) Physician fails to become credentialed in accordance with
Corporation policy; or
(iii) Physician's right to participate in the Medicare or Medicaid
programs shall have been revoked, suspended, or restricted; or
(iv) Physician is found to have engaged in unprofessional conduct by
any governmental entity or professional organization; or
(v) Physician breaches a warranty contained in this Agreement; or
(vi) Physician makes a material misrepresentation or omission of
information in an application for employment or staff privileges with any
hospital, physician hospital organization, or any other health care provider; or
(vii) Physician has been adjudicated or pled guilty (by a plea of nolo
contendere or otherwise) of criminal charges filed against her which related to
her professional activities; provided, however, Physician shall be suspended
from her duties hereunder, without pay, so long as such criminal charges are
pending; or
(viii) Physician shall commit an act or omit to take an act that in the
good faith and reasonable belief of Corporation, jeopardized, or could have
jeopardized, patient health or safety; or
(ix) Physician becomes ineligible for professional liability insurance
coverage sufficient to meet the terms of Paragraph 6.6; or
(x) Physician materially breaches this Agreement and fails to cure
the same within ninety (90) days after written notice from Corporation
specifying the breach and requesting that it be cured; or
(xi) Physician possesses, uses, or is under the influence of alcohol
during working time; illegally uses controlled substances; or if Physician's use
of controlled substances or alcohol, legal or illegal, impairs her ability to
perform her duties hereunder as determined by an examination of an independent
licensed physician selected by the Corporation. Physician agrees that Physician
shall submit to a medical examination upon the reasonable suspicion of the
Corporation.
7.3 Termination for Cause by Physician. Physician shall have the right
to terminate Physician's services under this Agreement, immediately, with cause,
upon written notice to Corporation if;
(i) Corporation's right to participate in the Medicare or Medicaid
programs shall have been revoked, suspended, or restricted; or
(ii) Corporation materially breaches this Agreement and fails to cure
the same within ninety (90) days after written notice to Corporation specifying
the breach and requesting that it be cured.
7.4 Termination Without Cause. Physician's services under this
Agreement may be terminated without cause if;
(i) Corporation and Physician mutually agree in writing; or
(ii) either Corporation or Physician gives the other ninety (90) days
prior written notice of its intent to terminate Physician's services, or
<PAGE> 5
(iii) either Corporation or Physician gives the other written notice no
later than ninety (90) days prior to the end of the initial or any renewal term.
7.5 Effect of Termination. Except as expressly provided otherwise
elsewhere in this Agreement, upon the effective date of termination of
Physician's services under this Agreement for any reason or Physician's failure
or refusal to perform services hereunder, all obligations of Corporation to make
payments to Physician of any form or nature shall cease (except for obligations
to make payments to Physician for services performed or reimbursable expenses
incurred prior to the effective date of such termination of Physician's
services). The provisions of Section 9 and the other provisions of this
Agreement relating to the interpretation and application of such Section shall
expressly survive termination of Physicians's services under this Agreement, as
will Physician's assignment of payments for any services rendered to the
patients of the Corporation prior to the Commencement Date hereof for which
Physician has not yet been compensated by Corporation.
Section 8. Independent Contractor.
Physician understands and agrees that Physician shall not be considered
to be an employee of the Corporation; during the term of this Agreement,
Physician shall be classified as an independent contractor; and Physician shall
be wholly and exclusively responsible and shall pay when due any and all taxes,
fees, and assessments (and all interest and penalties thereon) of every kind and
nature arising by reason of, or in connection with, Physician's performance
hereunder, it being the intention of the parties that the Corporation shall not
be responsible or charged for any such sums whatsoever. Without limiting the
generality of the preceding sentence, and taxes or contribution Act, Federal
Unemployment Tax Act, federal and state withholding, and similar taxes and
withholding, shall be paid by and shall be the exclusive liability of Physician
and shall in no way be chargeable to the Corporation. Except for the payments
provided herein, Physician shall not be eligible for any other payments or
benefits that are or may be provided to Corporation's employees. Physician shall
be wholly and exclusively responsible for Physician's medical, life, and other
insurance coverages.
Section 9 Covenants.
Physician acknowledges that Corporation may assign this Agreement
pursuant to the terms of Paragraph 10, including the covenants contained in
Paragraphs 9.1, 9.2, and 9.3, and that such assignee is hereby expressly
authorized to enforce these covenants.
9.1 Covenant Not to Compete. Physician acknowledges and agrees that
this covenant is intended to protect the investment Corporation has made and
will make in the Corporation's radiology business, and that should Physician
offer radiology services during the period of time and in the geographic area
hereinafter set forth, such activity shall be harmful to Corporation and shall
cause Corporation irreparable damage and injury.
Physician covenants and agrees that for a period of one (1) year
following the termination of Physician's services under this Agreement by
Corporation pursuant to Paragraph 7.2, or by Physician pursuant to Paragraph
7.4, PA shall not engage in the provision of radiology services within a
territory defined as a five (5) mile radius surrounding Corporation (Brandon
Diagnostic Center/SunPoint Diagnostic Center) where Physician will engage in the
provision of radiology services), without the prior written consent of
Corporation.
Physician acknowledges that this covenant is critical to the success of
Corporation's radiology business, and that violation of this covenant would
immeasurably damage Corporation's radiology business.
9.2 Covenant Not To Solicit Patients or Customers. Physician covenants
and agrees that, during the term of this Agreement and for a period of two (2)
years immediately following the date of cessation of Physician's provision of
services hereunder, Physician shall not, on Physician's own behalf or on behalf
of any person, firm, partnership, association, corporation, or business
organization, entity, or enterprise engaged in the provision of radiology
services ( a "Competitive Business"), divert, solicit, appropriate, or attempt
to divert, solicit, or appropriate any Patient or Customer for whom Physician
provided services pursuant to this Agreement.
<PAGE> 6
9.3 Covenant Not to Disclose. Independently from the covenants set
forth in Paragraph 9.1 and 9.2, above, Physician covenants as follows:
(i) Trade Secrets. Physician covenants and agrees that from the date
hereof and for all time Physician shall treat as confidential and shall not use,
disclose, or divulge (except in connection with Physician's performance of its
duties to Corporation), any and all trade secret information concerning
Corporation or its business obtained by Physician during the term of this
Agreement. For lists of actual or potential customers, patients, and referral
sources, lists of actual or potential suppliers, technical and nontechnical
data, formulae, patterns, complications, programs, devices, methods, techniques,
drawings, processes, financial data, financial plans, and product plans, which
information is known only to Corporation and those of its employees ir
independent contractors in whom the trade secret must be confided in order to
apply the trade secret to its intended use and from which Corporation derives
actual or potential economic value from he nondisclosure of such information to
persons who can obtain economic value from its disclosure or use.
(ii) Other Information. Physician covenants and agrees that, during
the term of this Agreement and for a period of two (2) years immediately
following the date of cessation of Physician's services under this Agreement,
Physician shall treat as confidential and shall not use, disclose, or divulge
(except in connection with Physician's performance of Physician's duties to
Corporation), any confidential business information regarding Corporation that
does not fall within the definition of "trade secret information" as defined
above.
(iii) Return of Information. Physician shall, immediately upon
termination of this Agreement, return to Corporation any and all books, paper,
documents, or other embodiments of trade secret information or other
information, tangible or intangible, of Corporation in the possession or withing
the reasonable control of Physician, including any and all copies thereof and on
any medium stored, and shall execute under oath a statement verifying that such
material has been returned to Corporation.
9.4 Remedies. Physician acknowledges that covenants 9.1, 9.2, and 9.3
are critical to the success of Corporation's radiology business, and that
violation of the covenants would immeasurable damage Corporation's radiology
business. Physician acknowledges and agrees that, by virtue of the duties and
responsibilities attendant to Physician's provision of services to Corporation
and the special knowledge of Corporation's affairs, business, patients, and
operations that Physician has and will have as a consequence of this
relationship, and breach or violation of the covenants contained in Paragraphs
9.1, 9.2 and 9.3 hereof would cause irreparable loss or damage to Corporation
that may not be issued by any court of competent jurisdiction enjoining and
restraining Physician from committing any violation or threatened violation of
this Agreement.
9.5 Severability. The covenants set forth in Paragraphs 9.1, 9.2, and
9.3 of this Agreement shall be construed to be separate and distinct from each
other and every other provision set forth in this Agreement. In the event that
any court of competent jurisdiction shall declare any covenant invalid,
prohibited, or unenforceable, the remaining covenants and obligations shall
remain independent, divisible, and enforceable. Any such unenforceable or
prohibited provision or provisions may be modified in a court of law to the
fullest extent allowed by the law of such jurisidiction so as to allow such
provision or provisions to be written in such a manner and to such an extent as
to be enforceable in such jurisdiciton under the circumstances. Without
limitation of the foregoing, with respect to Paragraphs 9.1, 9.2, and 9.3, if it
is determined that any restriction contained in such provision is excessive as
to duration or scope, it is intended that such restriction be enforced for such
shorter duration or with such narrower scope as will render it endorceable.
Section 10. Compliance with Corporation Rules and Regulations.
In fulfilling its duties hereunder, Physician shall, in every respect,
comply with the policies and procedures of Corporation, and Physician shall
insure the compliance of Physician with the policies and procedures of
Corporation. During the term of this Agreement and upon termination hereof for
any reason, all patient records, including, but not limited to, x-rays, charts,
and billing records of any patient attended by Physician shall be and remain the
property of Corporation to the extent permitted by law. Physician shall maintain
all patient records in accordance with all applicable laws and regulations
pertaining to the confidentiality thereof.
<PAGE> 7
Section 11. Renegotiation.
If Corporation's legal counsel determines that payments or
reimbursements to Corporation or Physician, or the ability of the parties
hereoto to fulfill their obligations hereunder, are (or are likely to be)
adversely impacted by any federal, state or local law, rules, regulations, or
published official interpretation of any of the foregoing, as applied to theis
Agreement in a manner which will, if possible, avoid such adverse impact while
maintained the eessential economic benefits intended to be conferred hereby. If
this Agreement is not so amended prior to the effective date of such requirement
or within thirty (30) days after Corporation's notice to negotiate under this
Section, whichever shall first occur, then this Agreement shall terminate, at
the option of Corporation, as of such date and shall be construed as a
termination without cause.
Section 12. Access to Records.
Until the expiration of four (4) years after the furnishing of services
hereunder, Physician shall make available, upon written request, to the
Secretary of Health and Human Services, or upon written request, to the
Comptroller General of the United States, or any of their duly authorized
representatives, this Agreement, including all amendments hereto, and books,
documents and records of Physician that are necessary to certify the nature and
extens of costs for services provided hereunder.
Section 13. Miscellaneous.
13.1 Successors. All the provisions herein contained shall be binding
upon and inure to the benefit of the respective heirs, personal representatives,
successors and assigns of Corporation and of Physician; provided, however, that
nothing contained in this Section 14.1 shall be construed as a consent by
corporation to an assignment of this Agreement or of any interest herein by
Physician except as provided in Section 10 above.
13.2 Headings. The headings to the various sections of this Agreement
have been inserted for convenience of reference only and shall not modify,
define, limit or expand the express provisions of this Agreement.
13.3 Counterparts. This agreement may be executed in any number of
counterparts, each of which shall be an original, and each of such counterparts
shall together constitute but one and the same agreement.
13.4 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been received by the
person to whom it is addressed when delivered if delivered in person or five (5)
days after it is deposited in the United States mail, if mailed by certified or
registered mail, postage prepaid and addressed as follows:
If to Physician: Lisa Porter-Grenn, M.D.
735 Fairfax
Birmingham, MI 48009
If to Corporation: Brandon Diagnostic Center
SunPoint Diagnostic Center
c/o National Diagnostics, Inc.
Attn: Mr. Curtis Alliston, President
755 W. Brandon Blvd.
Brandon, FL 33511
or to such other person and address as either party may designate in writing.
13.5 Effect of Invalidity. Should any part or provision of this
Agreement, for any reason, be declared invalid or illegal, such invalidity or
illegality shall not affect the validity of any remaining portion, which
remaining portion shall remain in force and effect as if this Agreement had been
executed with the invalid or illegal portions thereof eliminated.
<PAGE> 8
13.6 Applicable Law: Rights Cumulative. This Agreement shall be
construed in accordance with the laws of the State of Florida. All rights of the
parties hereunder shall be cumulative with all rights which the parties hereto
may have at law or in equity.
13.7 Amendments. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. Any
amendments to this Agreement shall be in writing and signed by an authorized
representative of Corporation and Physician.
13.8 Confidentiality. Except as otherwise required by law, Physician
agrees to keep this Agreement and its contents confidential and not to disclose
the same to any third party, except their respective legal or accounting
representatives. With respect to information provided by Corporation in
connection with this Agreement, Physician agrees to keep all such information
which in not in the public domain confidential, exercising the same care in
handling such information as he would his own, subject to the provisions of
applicable law.
13.9 No Waiver. No waiver of any provision of this Agreement shall be
effective against either party hereto unless it is in writing and signed by the
party granting the waiver. No waiver of any provision hereof shall be deemed a
continuing waiver or a waiver of any other provision hereof.
13.10. Survival. All obligations of the parties which have accrued as
of termination of this Agreement shall survive any termination of this
Agreement. In addition, the provisions of Sections 9 and 13 shall survive any
termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
CORPORATION:
BRANDON DIAGNOSTIC CENTER
SUNPOINT DIAGNOSTIC CENTER
By: /s/ Curtis L. Alliston
----------------------------------
Curtis L. Alliston, President
PHYSICIAN:
LISA PORTER-GRENN, M.D.
By:/s/ Lisa Porter-Grenn, M.D.
----------------------------------
Lisa Porter-Grenn, M.D.
<PAGE> 1
EXHIBIT 10.52
SECOND AMENDMENT
TO
MERGER AGREEMENT
BY AND BETWEEN
NATIONAL DIAGNOSTICS, INC.,
A FLORIDA CORPORATION
AND
AMERICAN ENTERPRISE SOLUTIONS, INC.,
A FLORIDA CORPORATION
EFFECTIVE APRIL 29, 1998
A-63
<PAGE> 2
SECOND AMENDMENT
This Second Amendment (the "2nd Amendment") is made and entered into as
of this 29th day of April, 1998 by and between NATIONAL DIAGNOSTICS, INC., a
Florida corporation ("NDI" or the "Company") and AMERICAN ENTERPRISE SOLUTIONS,
INC., a Florida corporation ("AES").
RECITALS
WHEREAS, NDI and AES have entered into that certain Merger Agreement
dated February 23, 1998, as amended by that certain First Amendment dated March
17th, 1998 (the "Agreement"), pursuant to which it is contemplated that AES will
be merged (the "Merger") with and into NDI under the terms and conditions
specified in the Agreement; and
WHEREAS, AES and NDI have mutually agreed to proceed with the Merger
via the implementation and effectuation of the terms and conditions set forth
hereinbelow.
NOW, THEREFORE, in consideration of the premises set forth herein, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto, intending to be legally bound,
agree that the Agreement is hereby amended to incorporate and reflect the
following facts, terms and conditions:
AES currently owns an aggregate of 5,786,570 shares of Company
Common Stock and 368,815 shares of Company Preferred Stock. Each share
of Company Preferred Stock is convertible into 44.11 shares of Company
Common Stock. An additional 3,093,430 shares of Company Common Stock
are owned by stockholders other than AES. Therefore, at the present
time, an aggregate of 8,880,000 shares of Company Common Stock are
issued and outstanding. In conjunction with the Merger, the
A-64
<PAGE> 3
Company proposes to issue a stock dividend to holders of Company Common
Stock based on the following formula:
x = $3.50 - y
---------
y
where x = the dividend (i.e., the number of additional
shares of Company Common Stock to be issued on each
outstanding share of Company Common Stock).
$3.50 = the valuation of each share of Company Common Stock,
based on projected revenues for 1998.
y = the average market price of each share of Company
Common Stock during the 5 business days immediately
preceding the closing date.
For example, if y = $1.125, each outstanding share of Company Common Stock will
receive a dividend of [3.50 - 1.125] = 2.11 shares of Company Common Stock.
------------
1.125
The declaration and payment of such a dividend will require
the availability of approximately 18,745,680 additional shares of
Company Common Stock. However, because the Company's Articles of
Incorporation currently provide for the issuance of a maximum of
9,000,000 shares of Company Common Stock, of which amount a total of
8,880,000 shares have already been issued and are currently
outstanding, at the present time the Company can only issue an
additional 120,000 shares of Company Common Stock. It will therefore be
necessary to amend the Company's Articles of Incorporation to, among
other things, provide for the issuance of at least an additional
18,625,680 shares of Company Common Stock.
After payment of the contemplated stock dividend, a total of
27,505,680 shares of Company Common Stock will be issued and
outstanding; 18,002,019 of these shares
A-65
<PAGE> 4
(approximately 65%) will be owned by AES, and the remaining 9,623,661
shares (approximately 35%) will be owned by other stockholders of NDI.
Shortly after payment of the stock dividend described above,
but before the closing of the Merger, the Company will effect a stock
combination transaction of all issued and outstanding Company Common
Stock in accordance with the provisions of Section 607.10025 and
607.1003 of the Florida Business Corporation Act (the "FBCA") such that
AES will own approximately 2,000,000 shares of Company Common Stock and
the other stockholders of NDI will own approximately 1,000,000 shares
of Company Common Stock.
In conjunction with the Merger, the approximately 2,000,000
shares of Company Common Stock and 368,815 shares of Company Preferred
Stock owned by AES will be canceled.
It is anticipated that on the date of closing the Merger,
there will be approximately 6,000,000 shares of AES Common Stock issued
and outstanding. In conjunction with and upon consummation of the
Merger, each outstanding share of AES Common Stock will be exchanged
for one share of Company Common Stock. As a result of the Merger, the
AES stockholders will own approximately 6,000,000 shares (85.7%) of the
issued and outstanding Company Common Stock, while other NDI
stockholders will own approximately 1,000,000 (14.3%) of the issued and
outstanding Company Common Stock.
A-66
<PAGE> 5
This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute but
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first written above.
NATIONAL DIAGNOSTICS, INC.
By:
------------------------------
Name: Curtis L. Alliston
Title: President
AMERICAN ENTERPRISE SOLUTIONS, INC.
By:
------------------------------
Name: Charles Broes
Title: Chief Executive Officer
A-67
<PAGE> 1
Exhibit 21
NATIONAL DIAGNOSTICS, INC. AND SUBSIDIARIES
Schedule of Subsidiaries*
Alpha Associates, Inc.
Alpha Acquisitions, Inc.
SunPoint Diagnostic Center, Inc.
National Diagnostics/Orange Park, Inc
National Diagnostics/Riverside, Inc.
*All incorporated in the State of Florida
Partnerships owned 100%:
Brandon Diagnostic Center, Ltd. (a Florida limited partnership)
Sundance Partners (a Florida general partnership)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report, dated April 30, 1998, accompanying the consolidated
financial statements included in the Annual Report of National Diagnostics, Inc.
and Subsidiaries, on Form 10-KSB for the year ended December 31, 1997. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of National Diagnostics, Inc. and Subsidiaries on Form S-8 (File No.
33-80293, effective December 11, 1995).
GRANT THORNTON LLP
Tampa, Florida
April 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NATIONAL DIAGNOSTICS FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,070,589
<ALLOWANCES> 1,011,942
<INVENTORY> 0
<CURRENT-ASSETS> 2,207,550
<PP&E> 9,974,924
<DEPRECIATION> 4,574,173
<TOTAL-ASSETS> 8,108,847
<CURRENT-LIABILITIES> 8,398,026
<BONDS> 769,200
0
0
<COMMON> 779
<OTHER-SE> (1,059,158)
<TOTAL-LIABILITY-AND-EQUITY> 8,108,847
<SALES> 0
<TOTAL-REVENUES> 9,942,050
<CGS> 0
<TOTAL-COSTS> 5,331,362
<OTHER-EXPENSES> 5,851,467
<LOSS-PROVISION> 347,540
<INTEREST-EXPENSE> 694,575
<INCOME-PRETAX> (1,910,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,910,131)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
