<PAGE> 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 September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24696
NATIONAL DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3248917
------- (I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
737B West Brandon Blvd., Brandon, Florida 33511
- ----------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (813) 661-9501
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Common Stock, No Par Value Outstanding at November 6, 1996: 2,628,577
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
Page 1 of 19
<PAGE> 2
NATIONAL DIAGNOSTICS, INC.
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1995 and September 30, 1996 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1995 and 1996 5
Condensed Consolidated Statements of Cash Flows
for the three and nine months ended
September 30, 1995 and 1996 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
ITEM - 1
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
December 31, 1996
1995 (Unaudited)
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 128,094 $ 160,347
Accounts receivable, net of allowance of $342,900 in
1995 and $413,717 in 1996 1,500,841 2,082,447
Prepaid expenses and other current assets 301,761 158,049
------------- -------------
Total current assets 1,930,696 2,400,843
------------- -------------
Property and equipment 6,732,150 9,391,246
Less: accumulated depreciation and
amortization (2,197,420) (2,940,813)
------------- -------------
Net property and equipment 4,534,730 6,450,433
------------- -------------
Other assets:
Note receivable from related party - 87,674
Excess of purchase price over net assets
acquired, net of accumulated amortization
of $36,547 in 1995 and $55,155 in 1996 452,914 434,307
Organization and start-up costs, net 57,805 136,153
Deposits 53,115 60,654
------------- -------------
Total other assets 563,834 718,788
------------- -------------
$ 7,029,260 $ 9,570,064
============= =============
</TABLE>
See Accompanying Notes.
3
<PAGE> 4
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
December 31, 1996
1995 (Unaudited)
------------ ------------
<S> <C> <C>
Current liabilities:
Lines of credit $ 409,500 $ 895,097
Note payable 8,000 -
Note due related party 49,243 45,833
Current installments of long-term debt 100,487 89,000
Current installments of obligations under
capital leases 648,909 1,046,000
Accounts payable 604,479 991,574
Accrued radiologist fees 225,815 322,667
Accrued expenses other 411,262 476,606
Due to related party 57,231 216,976
------------ ------------
Total current liabilities 2,514,926 4,083,753
Long-term liabilities:
Long-term debt, excluding current installments 541,124 499,267
Obligations under capital leases, excluding
current installments 2,489,444 3,699,671
Deferred lease payments 210,335 250,578
------------ ------------
Total liabilities 5,755,829 8,533,269
------------ ------------
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 2,623,077
shares issued and outstanding in 1995 and 1996 668 685
Additional paid-in capital 2,079,267 2,304,024
Retained earnings (deficit) (806,504) (1,267,914)
------------ ------------
Net stockholders' equity 1,273,431 1,036,795
------------ ------------
$ 7,029,260 $ 9,570,064
============ ============
</TABLE>
See Accompanying Notes.
4
<PAGE> 5
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue, net $ 1,605,834 $ 2,123,105 $ 4,307,312 $ 6,606,240
------------ ------------ ------------ -----------
Operating expenses:
Direct operating expenses 921,957 1,211,186 2,370,481 3,403,597
General and administrative 697,412 981,830 1,834,269 2,488,178
Depreciation and amortization 226,551 353,747 633,359 854,654
------------ ------------ ------------ -----------
Total operating expenses 1,845,920 2,546,763 4,838,109 6,746,429
------------ ------------ ------------ -----------
Operating income (loss) (240,086) (423,658) (530,797) (140,189)
Interest expense 90,156 150,854 243,443 364,784
Other income 11,654 1,938 29,651 43,563
------------ ------------ ------------ -----------
Income (loss) before income taxes (318,588) (572,574) (744,589) (461,410)
Income taxes - - - -
Net income (loss) $ (318,588) $ (572,574) $ (744,589) $ (461,410)
============ ============ ============ ===========
Net income (loss) per
common share $ (.18) $ (.22) $ (.43) $ (.18)
------------ ------------ ------------ -----------
Weighted average number of common
shares outstanding 1,783,859 2,598,077 1,728,260 2,563,282
------------ ------------ ------------ -----------
</TABLE>
See Accompanying Notes.
5
<PAGE> 6
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (318,588) $ (572,114) $ (744,589) $ (461,410)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Income taxes - - (11,000) -
Depreciation and amortization 225,713 346,114 632,521 847,021
Provision for Bad Debts 43,100 (3,283) 117,200 70,817
(Increase) decrease in accounts receivable (263,093) (4,149) (537,123) (652,423)
Loss on disposition of equipment - 346 - 5,217
(Increase) decrease in prepaid
expenses and other current assets (52,001) 10,935 (155,975) 65,808
Increase in organization & start-up costs (8,739) - (44,108) (134,728)
Increase (decrease) in accounts payable 196,866 (32,265) 106,747 387,095
Increase (decrease) in accrued radiologist fees 47,865 3,556 211,960 96,852
Increase (decrease) in other accrued expenses 95,636 72,958 137,873 65,344
Increase (decrease) in due to related parties - 107,282 - 107,282
Increase (decrease) in deferred lease payments 39,214 (15,343) 39,214 40,243
Value of warrants issued for services rendered - 8,000 - 8,000
----------- ----------- ------------ ------------
Net cash provided (used) by operating activities 5,973 (77,963) (247,280) 445,118
----------- ----------- ------------ ------------
Cash flows provided (used) by investing activities:
Purchases of property and equipment (400,155) (282,112) (792,065) (574,134)
Increase in goodwill - - (69,535) -
Increase in organization & start-up costs (17,536) - (67,250) -
----------- ----------- ------------ ------------
Net cash used by investing activities (417,691) (282,112) (928,850) (574,134)
----------- ----------- ------------ ------------
Cash flows provided (used) by financing activities:
Increase in line of credit 214,000 384,597 214,000 485,597
Proceeds from long-term borrowings - - 389,098 -
Repayment of long-term borrowings (29,047) (5,162) (363,617) (53,344)
Proceeds of borrowing from related parties - - - 16,255
Repayment of borrowings from related parties - (7,871) - (7,871)
Proceeds from other notes payable 1,137 - 110,970 -
Repayment from other notes payable (140,051) - (165,051) (8,000)
Principal payments under capital lease obligations (138,613) (138,117) (391,067) (413,304)
Decrease (Increase) in deposits 149,525 3,820 (34,225) (7,539)
Proceeds from issuance of common stock net - 149,475 - 149,475
----------- ----------- ------------ ------------
Net cash provided (used) by financing activities 56,951 386,742 (239,892) 161,269
----------- ----------- ------------ ------------
Net increase (decrease) in cash (354,767) 26,667 (1,416,022) 32,253
Cash at beginning of period 436,255 133,680 1,497,510 128,094
----------- ----------- ------------ ------------
Cash at end of period $ 81,488 $ 160,347 $ 81,488 $ 160,347
=========== =========== ============ ============
</TABLE>
See Accompanying Notes. (continued)
6
<PAGE> 7
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information - Interest paid $ 90,000 $ 102,000 $ 243,0000 $ 322,000
=========== ============= ============ ============
Stock issued as satisfaction for related party debt $ - $ - $ - $ 67,299
=========== ============= ============ ============
Asset added under capital lease $ 412,312 $ 1,331,285 $ 412,3122 $ 2,020,622
=========== ============= ============ ============
Note received for pre-opening costs $ - $ - $ - $ 77,904
=========== ============= ============ ============
Note received on disposal of equipment $ - $ 9,770 $ - $ 9,770
=========== ============= ============ ============
</TABLE>
See Accompanying Notes.
7
<PAGE> 8
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by National Diagnostics, Inc., and
Subsidiaries (the "Company") for quarterly financial reporting
purposes are the same as those disclosed in the Company's annual
financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments
(which consist only of normal recurring adjustments) necessary for a
fair presentation of the information presented.
The quarterly condensed consolidated financial statements herein have
been prepared by the Company without audit. Certain information and
footnote disclosures included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. Although the Company management believes the
disclosures are adequate to make the information not misleading, it
is suggested that these quarterly condensed consolidated financial
statements be read in conjunction with the audited annual financial
statements and footnotes thereto.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, September 30, service
1995 1996 life (years)
-------------- ------------- ------------
<S> <C> <C> <C>
Land $ 85,000 $ 85,000
Buildings 253,041 253,041 39
Medical Equipment 5,200,475 7,387,685 7
Office furniture and equipment 477,739 645,415 7
Vehicles 483,353 226,815 5
Leasehold improvements 232,542 793,290 10
------------- ------------
$ 6,732,150 $ 9,391,246
============= ============
</TABLE>
(3) LINES OF CREDIT
The Company consolidated and refinanced its lines of credit with an
asset based lender. The lender has a first security interest on all
accounts receivable. The line has an interest rate of prime plus 1.6
percent (at September 30, 1996, 9.85%).
<TABLE>
<S> <C>
Line of credit limit $ 2,000,000
Qualifying borrowing base 913,015
Outstanding loan balance 891,007
</TABLE>
Payment and declaration of dividends are restricted. In accordance
with the loan agreement the Company may not pay or declare dividends.
No dividends have been paid or declared at September 30, 1996.
8
<PAGE> 9
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt is summarized as follows:
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Installment loans payable which consist of a
number of separate installment loan contracts
secured by equipment and vehicles. The loans
require monthly installments of principal and
interest over terms that vary from two to five
years. At September 30, 1996, the loans bear
interest at rates ranging from 9.5% to 12.25%. 346,334 295,755
Mortgage note payable in monthly installments
of $2,445.88 including interest at 8.75%;
maturing April, 2020; secured by
mortgaged real estate property. 295,277 292,512
---------- ----------
Total long-term debt 641,611 588,267
Less current installments of long-term debt 100,487 89,000
---------- -----------
Long-term debt, excluding current installments $ 541,124 $ 499,267
========== ===========
The aggregate principal payments of long-term debt required annually are:
Three months ending December 31: 1996 $ 25,194
Year ending December 31: 1997 88,908
1998 84,703
1999 74,940
2000 41,184
2001 5,657
Thereafter 267,682
----------
$ 588,268
==========
</TABLE>
9
<PAGE> 10
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(5) LEASES
The Company has entered into capital leases for medical equipment
which expire in 2002. The gross amount of equipment and related
accumulated amortization recorded under capital leases are as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Medical equipment $ 5,012,412 $ 5,933,089
Less accumulated amortization 2,045,692 2,013,297
------------ ------------
$ 2,966,720 $ 3,919,792
============ ============
</TABLE>
Amortization of assets held under capital lease is included with
depreciation expense.
The present value of future minimum capital lease payments is as
follows:
<TABLE>
<S> <C>
Three months ending December 31, 1996 $ 253,831
Year ending December 31: 1997 1,046,293
1998 1,206,163
1999 862,712
2000 630,581
2001 546,840
Thereafter 199,251
------------
Present value of minimum capital lease payments 4,745,671
Less current installments of obligations under capital leases 1,046,000
------------
Obligations under capital leases, excluding
current installments $ 3,699,671
============
</TABLE>
The Company is obligated under noncancellable operating leases that
expire through 2001.
Rental expense related to these noncancellable lease was
approximately $292,000 and $771,000 for the nine months ended
September 30, 1995 and 1996, respectively.
10
<PAGE> 11
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(6) NOTES PAYABLE TO RELATED PARTIES
Note payable to related parties is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ ------------
<S> <C> <C>
Note payable with interest at 8.5%, payable in
twelve monthly installments of $4,167 plus
interest commencing September 1996. $ 49,243 $ 45,833
============ ============
</TABLE>
Interest expense to related parties totaled $760 and $2,900 for the
nine months ended September 30, 1995 and 1996, respectively.
(7) OTHER NOTES PAYABLE
Other notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Note payable with interest at 9.5%, due
April, 1996; unsecured $ 8,000 $ -
============= =============
</TABLE>
(8) INCOME TAXES
The Company had no income tax expense for the nine months ended
September 30, 1995 and 1996.
The income tax provision for 1995 and 1996 reconciled to the tax
computed at the statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
Income taxes (benefit) at statutory rate $ (25,000) $ (156,900)
State income taxes (3,000) (23,000)
Increase in valuation allowance 24,000 167,600
Nondeductible expenses 4,000 12,300
------------- --------------
$ - $ -
============= ==============
</TABLE>
11
<PAGE> 12
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
The deferred tax asset and liability consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------- -------------
<S> <C> <C>
Assets
Net operating loss carry forward $ 158,000 $ 317,800
Allowance for doubtful accounts 133,700 168,000
Deferred rents 75,800 97,700
Accrued compensation 18,600 -
Pre-opening costs 29,900 35,900
Acquisition basis difference 122,300 99,400
------------- -------------
538,300 718,800
Less: valuation allowance (310,900) (455,600)
------------- -------------
227,400 263,200
------------- -------------
Liabilities
Fixed assets 227,000 262,400
Goodwill 400 800
------------- -------------
227,400 263,200
------------- -------------
Deferred taxes $ - $ -
============= =============
</TABLE>
At September 30, 1996 approximately $815,000 in net operating carry
forwards remain which will begin to expire if not utilized by 2010.
(9) ORGANIZATION
The condensed consolidated financial statements include the accounts
of National Diagnostics, Inc. ("Company"), Alpha Associates, Inc.
("Associates"), Alpha Acquisitions Corp. ("Acquisitions"), SunPoint
Diagnostic Center, Inc. ("SunPoint"), National Diagnostics/Orange
Park, Inc. ("Orange Park"), National Diagnostics/Cardiology, Inc.
("Cardiology") and National Diagnostics/Riverside, Inc.
("Riverside"). Associates and Acquisitions hold 100% of the
partnership interests in Brandon Diagnostic Center, Ltd.
("Brandon"). National Diagnostics, Inc., is a holding company which
was formed in June, 1994. The Company, Associates, and Acquisitions
had common stockholders. In September, 1994, the stockholders
exchanged all of their shares of common stock of Associates and
Acquisitions for 1,200,000 shares of common stock and 1,200,000
common share purchase warrants exercisable at $7.20 per share of the
Company. The stock exchange resulted in a combination of entities
under common control and was accounted for by combining the
historical amounts of the companies (similar to a pooling of
interests).
Effective September 20, 1994, the Company completed an Initial Public
Offering (IPO) of 500,000 units wherein each unit consists of one
share of common stock and one common share purchase warrant
exercisable at $7.20 per share. The net proceeds from this sale were
approximately $2,400,000.
On November 7, 1994, the Company formed a wholly-owned subsidiary and
opened SunPoint Diagnostic Center, Inc. (SunPoint).
12
<PAGE> 13
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
On February 1, 1995, the Company formed a wholly-owned subsidiary,
National Diagnostics/Orange Park, Inc. (Orange Park) and purchased
the assets of a mobile company.
On July 15, 1996, the Company opened its fourth fixed site facility,
National Diagnostics/Riverside, Inc. ("Riverside") located in
Jacksonville, Florida.
The Company provides medical imaging services to patients in Brandon
(Brandon), Ruskin (SunPoint), and greater Jacksonville area (Orange
Park and Cardiology), Florida.
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The unaudited financial
statements and the related notes thereto for September 30, 1995 and
1996 include all normal and recurring adjustments which in the
opinion of management are necessary for a fair presentation and are
prepared on the same basis as the audited annual statements. The
interim results are not necessarily indicative of the results that
may be expected for the full fiscal year.
(10) LEGAL ACTION
On February 9, 1996 the East Pasco Radiologist physician group, which
in December, 1995 terminated its contract for reading services with
the Brandon and SunPoint centers, filed suit against the centers
alleging the centers materially breached the contract by failing to
pay physician fees timely and incorrectly billed certain procedures.
The Company denies any material breach of the contract. The court
has denied the plaintiff's motion for partial summary judgment for
$400,000 in damages. A resolve was not reached by way of mediation
and the case continues in the discovery stage. Management feels it
has reserved an adequate loss provision in the event of an adverse
outcome.
On March 10, 1995 legal action was instituted against A.T. Brod &
Co., Inc. (a national stock brokerage firm) by a terminated employee
of A.T. Brod & Co., Inc. ("A.T. Brod"). A.T. Brod was a major market
maker for National Diagnostics, Inc. stock. The action alleges
wrongful discharge, breach of contract, defamation of character,
conspiracy and tortious interference with a contract arising out of
the alleged wrongful termination of the plaintiff by A.T. Brod. The
Company was named in the suit. Compensatory and punitive damages of
$2,830,000 are sought. On June 14, 1995, a motion was made under the
rules of the National Association of Dealers to compel arbitration of
the matter and to stay the action in entirety against the Company
pending the outcome of the arbitration. Upon receiving the motion,
the plaintiff's attorney indicated he agreed with the defendants'
position, consenting to arbitration and to stay the action pending
the outcome of that arbitration. Through November 1, 1996, the
plaintiff's attorney has taken no steps to progress his claim in
arbitration. Based upon information available to defendants' counsel
through this date, counsel indicates the claim appears to be not
meritorious. The Company feels the suit is without merit and intends
to vigorously defend itself. The ultimate outcome of this legal
matter cannot be determined at this time, and accordingly, no
adjustments have been made to the consolidated financial statements.
13
<PAGE> 14
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(11) SUBSEQUENT EVENT
The Company has entered into lease commitments for medical equipment
it will utilize in its new Riverside center and other existing
centers. Cost of the equipment approximates $1,231,130 which will be
financed with 60-70 month leases to be accounted for as capital
leases. Payments will be made in monthly installment of
approximately $24,000. Future minimum lease payments are as follows:
FUTURE LEASE PAYMENTS
<TABLE>
<S> <C>
1996 $ 5,000
1997 145,000
1998 181,000
1999 202,000
2000 224,000
2001 239,000
Thereafter 235,000
</TABLE>
14
<PAGE> 15
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 nine months ended September 30, 1996 were $6,606,240
compared to $4,307,312 for the same period in 1995, representing a 53%
increase. The increase is primarily attributable to an increase in the volume
of procedures performed. The Company generated year to date net revenues of
$1,977,701 in 1996 as a result of the addition of the National
Diagnostics/Orange Park, Inc ("Orange Park") in February 1995, National
Diagnostics/Cardiology, Inc. ("Cardiology") in September 1995 and National
Diagnostics/Riverside, Inc. in July 1996. Net revenues for the three months
ending September 30, 1996 were down 7% from the preceding quarter which
management attributes to a seasonal fluctuation.
Direct operating expenses for the nine months ended September 30, 1996 were
$3,403,597 compared to $2,370,481 for the same period in 1995, representing a
44% increase. The increase in direct operating expenses was primarily due to
the addition of Orange Park, Cardiology and Riverside. Direct operating
expenses as a percentage of net revenue decreased to 51.5% from 55.0% for the
nine months ended September 30, 1996 and 1995, respectively. The decrease of
direct costs as a percent of net revenue was a result of certain cost cutting
measures taken by the Company in December 1995 including obtaining more
favorable contracts for radiology reading fees.
General and administrative expenses for the nine months ended September 30,
1996 were $2,488,178 compared to $1,834,269 for the same period in 1995,
representing a 26.3% increase. The increase is primarily attributable to the
addition of the Orange Park, Cardiology and Riverside facilities and additional
personnel costs. Personnel were added in response to the increase volume of
procedures performed overall and the expansion of facilities. General and
administrative expenses increased as a percent of net revenues to 46.2% for the
nine months ending September 30, 1996 compared to 43.4% for the same period in
1995 as a result of the new Riverside facility coming on line.
The increase in net revenues over that experienced in 1995 (a 32% or $517,000
increase in revenues over the quarter ending September 30, 1995) was offset by
a greater increase in operating expenses which resulted in a loss of $572,574.
Approximately 46% of the loss is attributable to the new Riverside facility
coming on line. The remainder is attributable largely to the seasonal downturn
in revenues experienced by the Company during summer months. Net income for
the Brandon Diagnostic Center ("Brandon"), the Company's most mature center,
was $174,355 on revenues of $1,212,579 for the three months ended September 30,
1996 from a loss of ($89,701) on revenues of $955,217 for the three months
ended September 30, 1995. A net loss for the SunPoint Diagnostic Center, Inc.
("SunPoint") facility decreased to $23,312 on revenues of $291,746 for the
three months ended September 30, 1996 from a loss of $(81,565) on revenues of
$230,142 for the same period in 1995 as a result of increased revenues and
decreased expenses. National Diagnostics/Orange Park, Inc. ("Orange Park") did
not become a full fixed site facility until midway into the 3rd quarter of
1995. However, Orange Park realized a loss of $(293,851) on revenues of
$542,168 for the quarter ending September 30, 1996 compared to the preceding
quarter's loss of $(43,225) on revenues of $779,580. National
Diagnostics/Cardiology, Inc. ("Cardiology") was not operational until the 3rd
quarter of 1995 and was merged into Orange Park in May 1996. The preceding
Orange Park analysis contains the pro forma merged operations. National
Diagnostics, Inc. ("Parent") company which provides executive management,
billing and accounting functions for its subsidiaries realized a loss of
$(175,667) on management fees of $163,774 for the quarter ending September 30,
1996 compared to a loss of $(106,763) on management fees of $134,347 for the
same period in 1995. The management fees charged to its subsidiaries are
eliminated upon consolidation. The billing services and costs did not commence
until the 3rd quarter of 1995.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company used $78,000 for operations in the 3rd quarter 1996 compared to the
same period in 1995 when operations generated $6,000. Investing activities
used $282,000 for the acquisition of equipment. Financing activities generated
$387,000; approximately $151,000 was used toward debt retirement offset by
approximately $389,000 of proceeds from additional borrowing and $149,000 from
the issue of common stock. The Company increased its net cash balance after
the above transactions by approximately $27,000. The Company attributes the
loss performance experienced in the third quarter to the start up of its fourth
fixed site facility coupled with a seasonal dampening in revenues experienced
in the summer months.
The Company secured a $2,000,000 line of credit in September with DVI Business
Credit with a qualified borrowing base of approximately $913,000 to be used
toward financing current operations. Approximately 57% of the loan proceeds
were used to payoff existing lines of credit with banking institutions. In
September, 1996, Brandon Diagnostic Center, Ltd. secured refinancing with
South Hillsborough Community Bank of West Florida for an existing equipment
loan, consisting of a $216,000 four-year term loan. Interest on loan is
payable at prime plus one percent. However, due to the rapid expansion of
facilities and increase in additional personnel and related costs the Company
has continued to experience difficulty in meeting timely its current
obligations. The Company believes additional capital is needed to reduce the
cash flow pressures the Company is experiencing. Additionally, the Company
foresees the possibility of a competing out patient clinic in its Brandon
location in early 1997. Pursuant to these factors the Company is exploring
various alternatives which may allow the Company to satisfy its working capital
shortage. ( See also the Company's growth strategy below). There is no
assurance that these short-term needs can be met.
Medical equipment, capital improvements, acquisitions and new center
development historically have been funded through the Company's initial public
offering in September 1994, third party capital lease and debt obligations and
internally generated cash flow. The leases are generally secured by the
equipment, and sometimes other assets, of particular facilities. Interest
rates in connection with the leases and borrowings range from fixed rates of up
to 12.25% to a variable rate equal to the bank prime rate plus 1%.
The Company's remaining growth strategies will require additional funds. In
the event the Company proceeds with the establishment of additional facilities,
or encounter favorable acquisition opportunities in the near future, the
Company may incur, from time to time, additional indebtedness and attempt to
issue equity or debt securities in public or private transactions. The Company
entered into a contract effective April 1, 1996 with financial consultants.
They will assist in the formulation and execution of the Company's continued
acquisition and financing program. As partial compensation the Company intends
to issue warrants to purchase 40,000 common shares exercisable at $2.50 per
share and 40,000 common shares exercisable at $3.00 per share. Additionally,
the Company entered into a consulting contract effective April 1, 1996 to
structure the Company's management and financial information systems for future
expansion. As partial compensation on July 25, 1996 the Company issued
warrants to purchase 100,000 shares, exercisable at $3.00 per share.
Subsequently, in the third quarter 50,000 of the warrants were exercised at
$3.00 in exchange for 50,000 common shares. There is no assurance that the
Company will be successful in securing additional financing or capital through
equity or debt securities.
The Company has over the last few years experienced increased pressures on
reimbursement from third parties. The Company expects such pressures to cause
reduced pricing in the aggregate for diagnostic procedures in the future. Due
primarily from the Company's revenue mix the effects of reduced pricing have
been minimized . Approximately 47% of which has been derived from private
insurance carriers, individuals, worker's compensation and other sources that
have not experienced reimbursement pressures characteristic of managed care
providers, Medicare and Medicaid. Additionally, the Company has entered into
certain capitation contracts with minimum flooring reimbursements which the
Company believes will ultimately bring new found business to the Centers.
The capitation contracts are fixed fee arrangements made with HMO's wherein the
Company receives a fixed fee per HMO participant regardless of whether the
participant receives patient services or not. A minimum floor reimbursement
(example: 65% of the Medicare allowable rate) is agreed to which serves to
minimize the risk to the Company should an excess number
16
<PAGE> 17
of participants require patient services. The advantage to the Company results
when the aggregated fixed fee per HMO participant exceeds the fees earned from
actual HMO participant patient services rendered. Additionally, the Company
may obtain regular fee for service revenues from referred HMO participants for
services not covered under the capitation contract.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The "East Pasco Radiologists" legal action described in Note 10 to
the financial statements and more fully described in Part I Item 3 of
Form 10-KSB for the year ending December 31, 1995 is in the discovery
stage. The court recently denied the plaintiff's motion for partial
summary judgment for $400,000 damages and a resolve of the case was
not achieved in recent mediation.
There has been no material developments in the "Blackey" legal action
described in Note 10 to the financial statements and more fully
described in Part I Item 3 of Form 10-KSB for the year ending
December 31, 1995.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.34 Equipment Lease Agreement dated July 15, 1996 between National
Diagnostics/Riverside, Inc. and Siemens Credit Corporation
relating to Riverside's computer tomography equipment.
10.35 Equipment Lease Agreement dated August 12, 1996 between
National Diagnostics/Riverside, Inc. and Siemens Credit
Corporation relating to the Riverside's ultrasound equipment.
10.36 Promissory Note and Business Loan Agreement dated September 9,
1996 between Brandon Diagnostic Center, Ltd. and South
Hillsborough Community Bank related to equipment refinancing.
10.37 Equipment Lease Agreement dated September 11, 1996 between
National Diagnostics/Riverside, Inc. ("Riverside") and
Siemens Credit Corporation relating to Riverside's Sireskop
CX.
10.38 Loan and Security Agreement dated September 13, 1996 between
National Diagnostics, Inc. and DVI Business Credit Corporation
relating the Company's line of credit.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1996.
18
<PAGE> 19
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: November 12, 1996
NATIONAL DIAGNOSTICS, INC.
/s/ Curtis L. Alliston
-------------------------------------
Curtis L. Alliston
President and Chief Operating Officer
/s/ Dennis C. Hult
-------------------------------------
Dennis C. Hult
Comptroller
19
<PAGE> 20
NATIONAL DIAGNOSTICS, INC.
EXHIBIT INDEX TO FORM 10-QSB
Exhibits
10.34* Equipment Lease Agreement dated July 15, 1996 between National
Diagnostics/Riverside, Inc. and Siemens Credit Corporation
relating to Riverside's computer tomography equipment.
10.35* Equipment Lease Agreement dated August 12, 1996 between
National Diagnostics/Riverside, Inc. and Siemens Credit
Corporation relating to the Riverside's ultrasound equipment.
10.36* Promissory Note and Business Loan Agreement dated September 9,
1996 between Brandon Diagnostic Center, Ltd. and South
Hillsborough Community Bank related to equipment refinancing.
10.37* Equipment Lease Agreement dated September 11, 1996 between
National Diagnostics/Riverside, Inc. ("Riverside") and
Siemens Credit Corporation relating to Riverside's Sireskop
CX.
10.38 Loan and Security Agreement dated September 13, 1996 between
National Diagnostics, Inc. and DVI Business Credit Corporation
relating the Company's line of credit.
--------------------------
* - To be filed by amendment.
20
<PAGE> 1
EXHIBIT 10.38
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated as of September 13,
1996 by and between DVI Business Credit Corporation, a Delaware corporation
("Lender"), and National Diagnostics, Inc., a Florida corporation, Brandon
Diagnostic Center, Ltd., a Florida Limited Partnership, National
Diagnostics/Riverside, Inc., a Florida corporation, National Diagnostics/Orange
Park, Inc., a Florida corporation, and Sunpoint Diagnostic Center, Inc., a
Florida corporation ("collectively and individually referred to as "Borrower").
SECTION 1
DEFINITIONS
SECTION 1.1. SPECIFIC DEFINITIONS. The following definitions shall apply:
(a) "Account Debtors" shall mean Borrower's customers and all other persons
who are obligated or indebted to Borrower in any manner, whether directly or
indirectly, primarily or secondarily, contingently or otherwise, with respect to
Accounts.
(b) "Accounts" shall mean all accounts, accounts receivable, monies and
debt obligations in any form owing to Borrower (whether arising in connection
with contracts, contract rights, instruments, general intangibles or chattel
paper) arising out of the rendition of services by Borrower whether or not
earned by performance; all deposit accounts, credit insurance, guaranties,
letters of credit, advises of credit and other security for any of the above;
Borrower's Books relating to any of the foregoing.
(c) "Advance" shall mean an advance of loan proceeds constituting all or a
part of the Loan.
(d) "Borrower's Books" shall mean all of Borrower's books and records
including but not limited to: minute books, ledgers; records indicating,
summarizing or evidencing Borrower's assets, liabilities and the Accounts; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disk or tape files, printouts, runs and other
computer-prepared information and the equipment containing such information;
provided, however, that confidential patient records shall not be included
therein, except to the extent otherwise provided by law.
(e) "Prime Rate" shall mean the rate of interest announced publicly by Bank
of America from time to time as its prime rate.
(f) "Borrowing Base" shall mean, on the date of determination thereof, an
amount equal to the sum of eighty percent (80%) of the Net Collectible Value for
each type of Eligible Account; provided, however, that workers compensation lien
and personal injury claims may never exceed twenty percent (20%) of the
Borrowing Base.
(g) "Closing Date" shall mean the date of the first Advance of the Loan.
(h) "Collateral" shall have the meaning specified in Section 3.1 hereof.
(i) "Commitment Amount" shall have the meaning set forth in Section 2.1.
(j) "Distribution" shall mean, with respect to any shares of capital stock
or any warrant or right to acquire shares of capital stock or any other equity
security, (i) the retirement, redemption, purchase or other acquisition,
directly or indirectly, for value by the issuer of any such security, except to
the extent that the consideration therefor consists of shares of stock, (ii) the
declaration or (without duplication) payment of any dividend in cash, directly
or indirectly, on or with respect to any such security, (iii) any investment in
the holder of five percent (5%) or more of any such security if a purpose of
such investment is to avoid characterization of the transaction as a
Distribution, and (iv) any other cash payment constituting a distribution under
applicable laws with respect to such security.
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-QSB FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 160,347
<SECURITIES> 0
<RECEIVABLES> 2,496,164
<ALLOWANCES> 413,717
<INVENTORY> 0
<CURRENT-ASSETS> 2,400,843
<PP&E> 9,391,246
<DEPRECIATION> 2,940,813
<TOTAL-ASSETS> 9,570,064
<CURRENT-LIABILITIES> 4,083,753
<BONDS> 4,198,938
0
0
<COMMON> 685
<OTHER-SE> 1,036,110
<TOTAL-LIABILITY-AND-EQUITY> 9,570,064
<SALES> 0
<TOTAL-REVENUES> 6,606,240
<CGS> 0
<TOTAL-COSTS> 3,403,597
<OTHER-EXPENSES> 3,342,832
<LOSS-PROVISION> 70,817
<INTEREST-EXPENSE> 364,784
<INCOME-PRETAX> (461,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (461,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (461,410)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
