1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3248917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
755 West Brandon Blvd., Brandon, Florida 33511
---------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (813) 661-9501
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Common Stock, No Par Value Outstanding at August 13, 1997: 4,538,035
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
Page 1 of 39
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NATIONAL DIAGNOSTICS, INC.
INDEX TO FORM 10-QSB
Page
Number
------
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1996 and June 30, 1997 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30,
1996 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the three and six months ended
June 30, 1996 and 1997 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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3
ITEM - 1.
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
December 31, 1997
1996 (Unaudited)
------------ ------------
Current assets:
Cash $ 104,335 $ 72,874
Accounts receivable, net of allowance of $664,402 in
1996 and $735,755 in 1997 2,131,284 2,339,010
Due from related party 23,819
Prepaid expenses and other current assets 220,864 138,332
Marketable securities 1,800,000
----------- ------------
Total current assets 2,456,483 4,374,035
----------- ------------
Property and equipment 9,481,198 9,981,296
Less: accumulated depreciation and
amortization (3,264,655) (3,925,262)
----------- ------------
Net property and equipment 6,216,543 6,056,034
----------- ------------
Other assets:
Excess of purchase price over net assets
acquired, net of accumulated amortization
of $61,274 in 1996 and $73,512 in 1997 428,187 415,949
Organization and start-up costs, net 47,444 51,526
Deposits 51,020 48,263
----------- ------------
Total other assets 526,651 515,738
----------- ------------
$ 9,199,677 $ 10,945,807
=========== ============
See Accompanying Notes.
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
December 31, 1997
1996 (Unaudited)
---------------- ---------------
Current liabilities:
Lines of credit $ 993,818 $ 1,224,654
Note payable 4,294 67,082
Note due related party 99,882 127,075
Current installments of long-term debt 105,410 105,000
Current installments of obligations under
capital leases 1,103,952 1,104,000
Accounts payable 1,080,236 1,269,393
Accrued radiologist fees 489,785 562,640
Accrued expenses other 738,687 528,199
----------- -----------
Total current liabilities 4,616,064 4,988,043
Long-term liabilities:
Long-term debt, excluding current installments 619,227 731,387
Obligations under capital leases, excluding
current installments 3,454,456 3,253,165
Deferred lease payments 236,912 207,217
----------- -----------
Total liabilities 8,926,659 9,179,812
----------- -----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000
shares authorized, no shares issued
and outstanding - -
Common stock, no par value, 9,000,000
shares authorized, 2,539,629 and 4,481,220 shares
issued and outstanding in 1996 and 1997 686 1164
Additional paid-in capital 2,320,497 4,591,143
Retained earnings (deficit) (2,048,165) (2,826,312)
----------- -----------
Net stockholders' equity 273,018 1,765,995
----------- -----------
$ 9,199,677 $10,945,807
=========== ===========
See Accompanying Notes.
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------- --------- --------- ---------
Revenue, net $2,293,429 $2,612,347 $4,483,135 $5,189,235
---------- ---------- ---------- ----------
Operating expenses:
Direct operating expenses 1,136,255 1,497,338 2,192,411 2,895,834
General and administrative 783,444 1,012,833 1,506,348 1,980,128
Depreciation and amortization 256,026 372,842 500,907 738,927
---------- ---------- ---------- ----------
Total operating expenses 2,175,725 2,883,013 4,199,666 5,614,889
---------- ---------- ---------- ----------
Operating income (loss) 117,704 (270,666) 283,469 (425,654)
Interest expense 116,093 188,528 213,930 358,274
Other income 9,183 299 41,625 5,781
---------- ---------- ---------- ----------
Income (loss) before income taxes 10,794 (458,895) 111,164 (778,147)
Income taxes - - -
---------- ---------- ---------- ----------
Net income (loss) $ 10,794 (458,895) $ 111,164 $ (778,147)
========== ========== ========== ==========
Net income (loss) per
common share $ - $ (.17) .04 $ (.29)
Weighted average number of common ---------- ---------- ---------- ----------
shares outstanding 2,551,758 2,714,341 2,545,694 2,671,696
---------- ---------- ---------- ----------
See Accompanying Notes.
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- --------- ----------
Cash flows from operating activities:
Net income (loss) $ 10,334 $(458,895) $ 110,704 $(778,147)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Income taxes - - - -
Depreciation and amortization 256,026 372,842 500,907 738,927
Provision for Bad Debts 51,700 80,872 74,100 71,353
(Increase) decrease in accounts receivable (274,567) (70,618) (648,274) (279,079)
Loss on disposition of equipment 494 - 4,871 2,770
(Increase) decrease in prepaid
expenses and other current assets 108,773 16,093 54,873 82,985
Increase (decrease) in accounts payable 354,852 169,072 419,360 340,405
Increase (decrease) in accrued radiologist fees 37,913 118,882 93,296 72,855
Increase (decrease) in other accrued expenses (35,507) (93,172) (7,614) (26,524)
Decrease in deferred lease payments (10,339) (14,251) 55,586 (29,695)
---------- --------- --------- ---------
Net cash provided (used) by operating activities 364,951 120,825 523,081 195,850
---------- --------- --------- ---------
Cash flows provided (used) by investing activities:
Purchases of property and equipment (273,095) (78,841) (292,022) (217,288)
Increase in deposits (11,359) (200) (11,359) (819)
Increase in organization & start-up costs (134,728) (3,403) (134,728) (66,588)
---------- --------- --------- ---------
Net cash used by investing activities (273,095) (82,444) (292,022) (284,695)
Cash flows provided (used) by financing activities: ---------- --------- --------- ---------
Increase in line of credit 60,000 178,100 101,000 230,836
Proceeds from long-term borrowings - 150,000 - 150,000
Repayment of long-term borrowings (24,985) (18,637) (48,182) (38,250)
Proceeds of borrowing from related parties (2,328) - 16,255 125,000
Repayment of borrowing from related parties - (2,001) - (6,167)
Proceeds from other notes payable - - - 205,000
Repayment of other notes payable (4,644) (93,165) (8,000) (142,212)
Principal payments under capital lease obligations (138,379) (331,773) (275,187) (466,823)
---------- --------- --------- ---------
Net cash used by financing activities (121,695) (117,476) (225,473) 57,384
---------- --------- --------- ---------
Net increase (decrease) in cash (29,839) (79,095) 5,586 (31,461)
Cash at beginning of period 163,519 151,969 128,094 104,335
---------- --------- --------- ---------
Cash at end of period $ 133,680 $ 72,874 $ 133,680 $ 72,874
========== ========= ========= =========
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
See Accompanying Notes. (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- --------- ---------
Supplemental disclosure of cash
flow information - Interest paid $ 134,000 $ 251,330 $ 220,000 $ 402,287
========== ============ ============ ============
Stock issued as satisfaction for trade $ - $ 175,520 $ - $ 175,520
creditor debt ========== ============ ============ ============
Stock issued for equipment acquisition $ - $ 20,000 $ - $ 20,000
========== ============ ============ ============
Stock issued as satisfaction of related $ - $ 275,604 $ - $ 275,604
party debt ========== ============ ============ ============
Stock issued in exchange for marketable $ - $ 1,800,000 $ - $ 1,800,000
securities ========== ============ ============ ============
Asset added under capital lease $ 66,214 $ 68,925 $ 689,337 $ 265,580
========== ============ ============ ============
Note received for pre-opening costs $ - $ - $ 77,904 $ -
========== ============ ============ ============
See Accompanying Notes.
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by National Diagnostics, Inc., and
Subsidiaries (the "Company") for quarterly financial reporting
purposes are the same as those disclosed in the Company's annual
financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments
(which consist only of normal recurring adjustments) necessary for a
fair presentation of the information presented.
The quarterly condensed consolidated financial statements herein
have been prepared by the Company without audit. Certain information
and footnote disclosures included in financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted. Although the Company management believes
the disclosures are adequate to make the information not misleading,
it is suggested that these quarterly condensed consolidated
financial statements be read in conjunction with the audited annual
financial statements and footnotes thereto.
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
MARKETABLE SECURITIES
Marketable Securities- Marketable securities (classified as
securities available for sale) are stated at fair value based on an
average quoted market value. The Company acquired on June 27, 1997,
127,773 shares of common stock (net of 14,197 shares given in
payment of commission) of Equisure, Inc. (American Stock Exchange:
EQE) from an investment trust in exchange for its own common stock.
The trust retains the right to buy back its shares during the course
of the one year agreement at the stated value of $20 per share.
There is an agreement in place with the trust that in the event the
market value of the shares go down, additional shares will be issued
to effectively eliminate the market risk. The exchange of shares may
be made quarterly though out the term of the agreement. Management
intends to utilize the securities to secure borrowings and intends to
sell the shares upon completion of the agreement term.
Equisure, Inc. is a reinsurance company with shares outstanding
of approximately 11,000,000 with a public float of approximately
6,000,000 shares. Information taken from Equisure, Inc. audited
financial statements as of December 31, 1996, indicated: total
assets of approximately $76,692,000; shareholder equity of
$37,031,000; 1996 revenues of $13,265,000; and earnings per share of
$0.42. The financial statements contained an unqualified opinion by
the independent accountants. Based on the unaudited financial
statements for the quarter ending March 31, 1997 the financial
position did not change materially.
On August 4, 1997 the AMEX called a halt to trading EQE shares on
the AMEX. In its own investigation the Company has not received any
information to indicate there has been a permanent impairment of the
securities' valuation. However, as of August 4, 1997 the fair
value of the securities is uncertain.
OPERATIONAL MATTERS AND LIQUIDITY
The Company has a net loss for the quarter ending June 30, 1997 of
$458,895 and at June 30, 1997 has a working capital deficiency of
approximately $614,000. Prior to June 27, 1997 (the effective date
of the security transaction described under Marketable Securities),
the working capital deficiency approximated $2,414,000.
Collectively, these factors have resulted in late lease payments
which have payment acceleration provisions. 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
either the Company's ability to succeed in its future operations or
its ability to obtain additional funding. 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. The following commentary
addresses the Company's operations for the second quarter of 1997 and
its plan to improve future results.
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NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company attributes the loss in the second quarter primarily to
the effect the losses from its new start up facilities had on the
Company: Orange Park in its second full year of operation incurred a
second quarter loss of $61,000 and Riverside (opened July of 1996)
had a loss of $188,000, and a combined one time write-down of
approximately $100,000 experienced by the Companies two older
centers from a discontinued capitation contract (replaced by a fee
for service contract). 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 has received from its major lessor a waiver of default based
on the Company adhering to a workout schedule which will bring the
leases to current status by December, 1997. Other lessors have also
been cooperative with extended terms. The Company believes as the
increase in revenues for start ups continues and certain cost
cutting measures (estimated unaudited annual savings approximately
$134,000) take effect that the Company will return to a profitable
position though no absolute assurances can be given.
(2) NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No.
128. Earnings Per Share, which is effective for financial statements
issued after December 15,1997. Early adoption of the new standard is
not permitted. The new standard eliminates primary and fully diluted
earnings per share requires presentation of basic and diluted
earnings per share and requires presentation of basic and diluted
earnings per share together with disclosure of how the per share
amounts were computed. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per
share in the financial statements.
(3) LEGAL ACTION
In December of 1995, the physician group terminated its contract for
reading service 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
(balance due by August, 1997). 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. A motion by the
physicians for costs relating to the lawsuit (approximating $10,000)
was awarded by the Court to the physicians and was paid by the
Company.
On March 10, 1995 legal action was instituted against A.T. Brod &
Co., Inc. (a national stock brokerage firm) by a terminated
employee of A.T. Brod & Co., Inc. ("A.T. Brod"). A.T. Brod was a
major market maker for National Diagnostics, Inc. stock. The Company
was named in the suit entitled James I. Blackey vs. A.T. Brod & Co.,
Inc., Arthur 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 is Chairman, Chief Executive Officer and Director of
both A.T. Brod and the Company. 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 sought
compensatory and punitive damages of $2,830,000. In April of 1997
the Company reached a settlement for $5,000 which has been paid by
the Company.
(4) EXCHANGE AGREEMENT
On June 27, the Company exchanged 1,459,188 shares of restricted
Company Common Stock with Sud Afric Suisse Trustees (a foreign
trust) in exchange for 127,773 common shares of Equisure, Inc.
Common Stock (net of 14,197 shares given in payment of commission).
The exchange was valued at $2,000,000 less a ten percent commission
paid in Equisure, Inc. shares by the Company. The shares of Company
Common stock were issued by the Company pursuant to Regulation S
promulgated under the Securities Act of 1933, as amended. Sud Afric
Suisse Trustees purchased the Company's Common Stock subject to the
restriction that the "Purchaser" is precluded from offering and
selling to U.S. persons or the account or benefit of a U.S. person,
for a period of forty (40) days commencing with the date of the
exchange. The Exchange Agreement includes repurchase options in
favor of the Commpany and Sud Afric Suisse Trustees which are
exercisable during the first year after June 27, 1997 prusuant to
which the Company and Sud Afric Suisse Trustees retain the right to
re-purchase their respective shares. The shares may be repurchased
at the stated values of $1.6125 and $20.00 per share by the Company
and Sud Afric Suisse Trustees, respectively.
(5) SUBSEQUENT EVENT
On August 18, 1997 the Company was notified by The Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company's securities would be
de-listed from the Nasdaq Small Cap Market (SM) effective with the
close of business on August 18, 1997. The Company had previously
announced it was in discussions with Nasdaq concerning the Nasdaq
listing requirements and the Company's capital surplus. Nasdaq took
this action as a result of the Equisure, Inc. shares carried on the
Company's balance sheet and the uncertainty created by the action
taken by the American Stock Exchange on August 4, 1997 to call an
indefinite halt to trading Equisure, Inc. securities on the AMEX.
The Company is currently evaluating its position in light of this
decision by Nasdaq.
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ITEM- 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
Net revenues for the six months ended June 30, 1997 were $5,189,235 compared to
$4,483,135 for the same period in 1996, representing a 16% increase. The
increase is primarily attributable to an increase in the volume of procedures
performed. The Company generated net revenues of $473,000 in the first half of
1997 as a result of the addition of the National Diagnostics/Riverside
("Riverside").
Direct operating expenses for the six months ended June 30, 1997 were
$2,895,834 compared to $2,192,411 for the same period in 1996, representing a
32% increase. Approximately 46% of the increase in direct costs is directly
attributable to the addition of Riverside. The balance of the increase is the
result of higher medical supply costs experienced in each center, maintenance
contracts and repair costs in the Company's most mature and productive center,
and higher reading fee costs experienced in the National Diagnostics/Orange
Park, Inc. ("Orange Park") facility. Management believes it can obtain more
favorable medical supply costs if working capital were sufficient to meet vendor
terms.
General and administrative expenses for the six months ended June 30, 1997 were
$1,980,128 compared to $1,012,833 for the same period in 1996, representing a
31% increase. The increase is primarily attributable to the addition of the
Riverside facility and additional personnel costs. Personnel were added in
response to the increase volume of procedures performed overall and the
expansion of facilities.
The 47% increase in depreciation and amortization costs for the first six
months of 1997 over that for the same period in the preceding year is primarily
attributable to the additional equipment acquired for the Riverside facility
and the nearly fully amortized start-up costs of Riverside (approximately
$54,000 in first six months).
The increased revenues over the revenues experienced in the same period in 1996
were offset by the 34% increase in operating expenses resulting in a net loss
of $270,666 and $425,654 for the quarter ending and six month period ending
June 30, 1997, respectively. Net revenues for the Brandon Diagnostic Center
("Brandon"), the Company's most mature center, were down by one half percent
after a one time write down of approximately $60,000 for a terminated
capitation contract. The contract has been replaced with fee for service
contracts which the Company feels will allow for a more timely realization of
receipts. The slight decline in revenue coupled with increased costs for
maintenance contracts and medical supplies resulted in a second quarter profit
of $31,000 compared to $181,000 in the same quarter of 1996. Sunpoint
Diagnostic Center ("Sunpoint") experienced a net loss of approximately $22,000
on revenues of $332,000 compared to a net loss of $18,000 on revenues of
$311,000 in the same quarter of 1996. This resulted primarily from a one time
writedown of approximately $38,000 for a terminated capitation contract. The
contract has been replaced with fee for service contracts which the Company
feels will allow for a more timely realization of receipts. Also, Sunpoint
experienced an increase in equipment repair costs and personnel costs. Orange
Park experienced a loss of $61,000 on revenues of $876,000 for the quarter
ending June 30, 1997 compared to a loss of $43,000 on revenues of $780,000 for
the same quarter in 1996. This is the result of higher personnel costs due to
the increased volume and higher reading fees. Riverside, which started up in
the third quarter of 1996, experienced a $188,000 loss on revenues of $263,000
compared to a $195,000 loss on revenues of $211,000 in the preceding quarter.
Management expects the Riverside facility to experience a positive ramp up
after entering into a temporary six month contract (while a permanent contract
is negotiated) for services with the University of Florida.
LIQUIDITY AND CAPITAL RESOURCES
Due to the rapid expansion of facilities and increase in additional personnel
and related costs the Company has continued to experience difficulty in meeting
timely its current obligation to its vendors and lessors. Throughout all but a
few days of the 2nd quarter the Company had a working capital deficiency of
more than $2,000,000. Due to late payments in the first quarter of 1997 the
Company was in default of its capital leases. In April the Company received a
conditional waiver of
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default from its major lessor. The conditional waiver of default from its major
lessor contains a work out schedule where in all leases will be brought to a
current status by December 31, 1997. The agreement was predicated upon the
Company making a $200,000 payment toward arrearage by April 25, 1997. The
Company paid the $200,000, a portion of which came out of proceeds from a
second mortgage note given on its Sundance property and is currently in
compliance with the work out agreement. The other lessors (approximately 17% of
the total loans outstanding at June 30, 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 quarter
ending June 30, 1997 approximated $151,000.
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. This amount was borrowed from DVI in 1997 at an interest
rate of "base" plus 3% (at June 30, 1997 11.5%). The loan calls for 28 weekly
payments of $7,500; the balance to be paid in full by August 29, 1997. The loan
is secured by accounts receivable and is being paid out of current collections.
The Company is current with its payments.
The Company has a $2,000,000 line of credit with DVI Business Credit
Corporation ("DVI", a lender specializing in medical receivables). The lender
has a first security interest on all accounts receivable. Interest is a prime
plus 1.6%. At June 30, 1997 the line availability and loan balance approximated
$300 and $1,224,881, respectively. At August 12, 1997 the line availability and
loan balance approximated $300 and $1,147,000, respectively.
The Company issued 114,583 shares of common stock in satisfaction of trade
creditor debt; 278,872 shares of common stock in satisfaction of related party
debt; and 1,459,188 common shares in exchange for 127,773 shares of Equisure,
Inc. common stock (American Stock Exchange: EQE). The transactions were
intended to improve the operating and financial flexibility of the Company.
Contained in the exchange agreement with Sud Afric Suisse Trust is a provision
that effectively eliminates any market risk with the exchanged shares.
Quarterly, throughout the one year term of the agreement where there is a
market drop in the value of the securities, additional shares will be exchanged
wherein the market disparigy will be eliminated and returned to that which was
in existence in the initial exchange. On August 4, 1997, the AMEX called a
halt to the trading of EQE shares on the AMEX. In its own investigation the
Company has not received any information to indicate there has been a permanent
impairment of the asset. As of August 4, 1997, the fair value of the
securities is uncertain.
On August 18, 1997 the Company was notified by The Nasdaq Stock Market, Inc.
("Nasdaq") that the Company's secutities would be de-listed from the Nasdaq
effective with the close of business on August 18, 1997. The Company had
previously announced it was in discussions with Nasdaq concerning the Nasdaq
listing requirements and the Company's capital surplus. Nasdaq took this
action as a result of the Equisure, Inc. shares carried on the Company's
balance sheet and the uncertainty created by the action taken by the American
Stock Exchange on August 4, 1997 to call an indefinite halt to trading
Equisure, Inc. securities on the AMEX. The Company is currently evaluating its
position in light of this decision by Nasdaq.
In the quarter ending June 30, 1997 the company decreased its cash by
approximately $79,000. Operations contributed $121,000 of the total increases.
Purchases of equipment and a minor increase in other assets contributed $82,000
to the cash reduction. Financing activities used $117,000. Equipment acquired
through capital leasing approximated $69,000.
In May of 1997, the Company entered into a Consulting Agreement with Capital
Access Bureau, Inc. ("CABI") for investor and public relations services. CABI
will receive as compensation $350,000 recognizable and payable over the one
year term of the agreement in common shares of the Company. The Company will
also issue six incentive stepped options of 75,000 shares each step beginning
at $1.50 per share which approximates the value of the stock at date of grant
and stepped in fifty cent increments. CABI agrees to execute any in the money
options quarterly throughout the term of the agreement. If the Company stock
were to reach a level of $4.00 per share within the term of the agreement, this
wold bring in approximately $1,237,000 to the Company.
The Company intends to curtail further external expansion (new start-ups or
acquisitions) until the Company's current new start-ups achieve acceptable
levels of operation, and/or the Company achieves additional capital infusion.
The Company is currently considering different alternatives which includes but
are not limited to capital infusion and/or merger or sale of the Company.
The Company entered into a temporary six-month contract that is expected to
accelerate the ramp up of its newest start-up facility. The contract could
result in an estimated increase in net revenues of approximately $500,000 to
$800,000. As a result of the Company acquiring $1.8 million in securities,
increasing revenues coupled with an accelerated ramp up of its newest start-ups
in 1995 and 1996, satisfaction of its property and equipment needs for current
operations, and if the Company's vendors and
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lessors continue to allow a grace period of sixty to ninety days, the Company
believes that its presently anticipated short-term needs for operation, capital
repayments and capital expenditures for its current operations can be satisfied
through internally generated funds, existing credit facilities with DVI, and
funds obtained by leveraging its securities. The Company feels that its ability
in the short-term to improve its working capital is reasonably attainable.
However, the Company is currently discussing capital infusion alternatives
which may consist of selling additional stock. Should the above possibilities
not materialize and to assure continued operations the Company is prepared to
sell off certain assets that have not yet matured sufficiently to allow a
positive return. There is no assurance that these short-term needs can be met.
The Company's long term growth strategies will require additional funds. In the
event that the Company proceeds with the establishment of additional
facilities, or encounters favorable acquisition opportunities in the near
future, the Company may incur, from time to time, additional indebtedness and
attempt to issue equity or debt securities in public or private transactions.
There is no assurance that the Company will be successful in securing
additional financing or capital through equity or debt securities.
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company's independent certified public
accountant's report on the Company's 1996 Financial Statements contained in the
Company's Annual Form 10-KSB included a going concern qualification. The
information contained in Note 2 to the Financial Statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996 remains relevant related to the status of certain of the Company's
operational and funding matters and, accordingly, should be referred to in
conjunction with this Form 10-QSB.
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
In December of 1995, the physician group terminated its contract for reading
service 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 (balance due by August, 1997). 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. A motion by the
physicians for costs relating to the lawsuit (approximating $10,000) was
awarded by the Court and paid by the Company.
On March 10, 1995 legal action was instituted against A.T. Brod & Co., Inc. (a
national stock brokerage firm) by a terminated employee of A.T. Brod & Co., Inc.
("A.T. Brod"). A.T. Brod was a major market maker for National Diagnostics,
Inc. stock. The Company was named in the suit entitled James I. Blackey vs. A.T.
Brod & Co., Inc., Arthur 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 is Chairman, Chief Executive Officer and Director of both A.T. Brod and
the Company. 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 sought compensatory and punitive damages of $2,830,000. In April of 1997
the Company reached a settlement for $5,000 which has been paid by the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.
10.45 Consulting Agreement, dated May 27, 1997 by and between
National Diagnostics, Inc. and Capital Access Bureau, Inc.
10.46 Funding Agreement, dated May 27, 1997, by and between National
Diagnostics, Inc. and Capital Access Bureau, Inc.
10.47 Professional Services Agreement dated August 1, 1997 by and
between National Diagnostics, Inc. and Nancy C. Lawhon, M.D.,
P.C.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company filed on July 22, 1997, a Form 8-K indicating the
private placement with Sud Afric Suisse Trust in exchange for
Equisure, Inc. Common Shares valued at $1.8 million and debt to
equity conversions approximating $471 thousand.
The following financial statements were filed in the Form 8-K:
Condensed consolidated balance sheet as of March 31,
(historical and proforma) and May 31, 1997 (proforma).
Condensed consolidated statements of operations for year ended
December 31, 1996 and May 31, 1997 (proforma).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 1997
NATIONAL DIAGNOSTICS, INC.
/s/ Jugal K. Tanega
-------------------------------------
Jugal K. Tanega
Chairman and Chief Executive Officer
/s/ Dennis C. Hult
-------------------------------------
Dennis C. Hult
Comptroller
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NATIONAL DIAGNOSTICS, INC.
EXHIBIT INDEX TO FORM 10-QSB
Exhibit
Number Description of Document
- ------ -----------------------
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.
10.45 Consulting Agreement, dated May 27, 1997 by and between National Diagnostics,
Inc. and Capital Access Bureau, Inc.
10.46 Funding Agreement dated May 27, 1997 by and between National Diagnostics, Inc.
and Capital Access Bureau, Inc.
10.47 Professional Services Agreement dated August 1, 1997 by and between National
Diagnostics, Inc. and Nancy C. Lawhon, M.D., P.C.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed on July 22, 1997, a Form 8-K indicating the
private placement with Sud Afric Suisse Trust in exchange for
Equisure, Inc. Common Shares valued at $1.8 million and debt to
equity conversions approximating $471 thousand.
The following financial statements were filed in the Form 8-K:
Condensed consolidated balance sheet as of March 31, (historical and
proforma) and May 31, 1997 (proforma).
Condensed consolidated statements of operations for year ended
December 31, 1996 and May 31, 1997 (proforma).
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