U. S. 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, 1999
[ ] 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 Identification No.)
incorporation or organization)
6800 NORTH DALE MABRY HIGHWAY, SUITE 100, TAMPA, FL 33514
--------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (813) 882-6567
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the past 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:
<TABLE>
<CAPTION>
<S> <C> <C>
Class: Common Stock, No Par Value Outstanding at December 31, 1999: 8,980,000
</TABLE>
Transitional Small Business Disclosure Format (check one) YES [ ] NO [X]
Page 1 of 16
<PAGE>
NATIONAL DIAGNOSTICS, INC.
INDEX TO FORM 10-QSB
PAGE
NUMBER
------
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1998 and September 30, 1999 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1998 and 1999 5
Condensed Consolidated Statements of Cash Flows
for the three and nine months ended September 30,
1998 and 1999 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 3. Defaults Upon Senior Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
ITEM - 1 FINANCIAL STATEMENTS
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
(UNAUDITED) (UNAUDITED)
------------ -------------
<S> <C> <C>
Current Assets:
Accounts receivable, net of allowance of $719,300 in 1998 $ 1,958,813 $ --
Related party receivable from accounts receivable financing -- 2,246,102
Due from related party -- 93,646
Prepaid expenses and other current assets 63,033 18,447
------------ ------------
Total current assets 2,021,846 2,358,195
------------ ------------
Property and equipment 10,023,116 9,485,290
Less: accumulated depreciation and
amortization (5,800,043) (6,170,368)
------------ ------------
Net property and equipment 4,223,073 3,314,922
------------ ------------
Other assets:
Excess of purchase price over net assets acquired,
net of accumulated amortization of $104,110 and
$96,360 in 1999 and 1998 respectively 323,567 307,817
Other 85,507 51,952
------------ ------------
Total other assets 409,074 359,769
------------ ------------
$ 6,653,993 $ 6,032,886
============ ============
</TABLE>
See Accompanying Notes.
3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
(UNAUDITED) (UNAUDITED)
------------ -------------
<S> <C> <C>
Current liabilities:
Line of credit, third party $ 1,130,863 $ --
Line of credit, related party -- 1,575,742
Note payable 1,633,511 1,633,511
Notes due to related parties 87,500 128,450
Current installments of long-term debt 686,085 187,474
Current installments of obligations
under capital leases 799,319 2,913,932
Accounts payable 1,863,185 2,105,728
Accrued expenses 1,266,456 1,930,618
Other current liabilities -- 92,376
------------ ------------
Total current liabilities 7,466,919 10,567,831
Long-term liabilities:
Obligations under capital leases,
excluding current installments 2,137,486 --
Deferred lease payments 113,360 --
------------ ------------
Total liabilities 9,717,765 10,567,831
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value, 1,000,000
shares authorized, 500,000 shares issued
and 368,815 shares outstanding 1,475,260 1,475,260
Common stock, no par value, 9,000,000
shares authorized, 8,880,000 shares
issued and outstanding 1,936 1,936
Additional paid-in capital 3,422,721 3,422,721
Note receivable from stockholder (1,326,000) (1,326,000)
Retained earnings (accumulated deficit) (6,637,689) (8,108,862)
------------ ------------
Total stockholders' (deficit) (3,063,772) (4,534,945)
------------ ------------
$ 6,653,993 $ 6,032,886
============ ============
</TABLE>
See Accompanying Notes.
4
<PAGE>
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,
1999 1999 1998 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue, net $ 1,717,524 $ 1,702,087 $ 6,835,818 $ 5,428,473
------------ ------------ ------------ ------------
Operating costs and expenses:
Direct operating expenses 1,337,359 977,703 3,962,567 3,091,332
General and administrative 1,097,235 827,056 3,173,690 2,778,736
Depreciation and amortization 326,252 249,707 1,012,361 785,737
------------ ------------ ------------ ------------
Total operating costs and expenses 2,760,846 2,054,466 8,148,618 6,655,805
------------ ------------ ------------ ------------
Operating loss (1,043,322) (352,379) (1,312,800) (1,227,332)
Interest expense 146,869 163,244 475,054 551,378
Interest income -- 23,205 -- 125,893
Other income (loss) 45,474 (33,916) 126,948 181,644
------------ ------------ ------------ ------------
(Loss) before income taxes (1,144,717) (526,334) (1,660,906) (1,471,173)
-- -- -- --
------------ ------------ ------------ ------------
Income taxes
Net (loss) (1,144,717) (526,334) (1,660,906) (1,471,173)
------------ ------------ ------------ ------------
Dividends to preferred shareholders (intrinsic value of
beneficial conversion features - see Note 2) -- -- (25,473,612) --
------------ ------------ ------------ ------------
Net (loss) available to common shareholders $ (1,144,717) $ (526,334) $(27,134,518) $ (1,471,173)
============ ============ ============ ============
Net (loss) per common share $ (.13) $ (.06) $ (4.40) $ (.17)
============ ============ ============ ============
Weighted average number of common
shares outstanding 8,880,000 8,880,000 6,162,550 8,880,000
============ ============ ============ ============
</TABLE>
See Accompanying Notes.
5
<PAGE>
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,
1998 1999 1998 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows provided (used) by operating activities:
Net loss $(1,144,717) $ (426,334) $(1,660,906) $(1,371,173)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Income taxes -- -- -- --
Depreciation and amortization 326,252 249,657 1,012,361 785,737
Provision for Bad Debts 40,604 -- (292,640) 120,700
Increase in other assets (35,000) -- (35,000) --
(Increase) decrease in accounts receivable 333,430 -- 206,602 (305,356)
Decrease in related party receivable from
accounts receivable financing -- (254,968) -- (102,633)
Increase in due from related party -- (145,933) -- (93,646)
Loss on disposition of property -- 34,952 -- 34,952
(Increase) decrease in prepaid
expenses and other current assets 63,999 33,193 71,068 63,846
Increase (decrease) in accounts payable 568,988 190,075 1,057,638 242,543
Increase (decrease) in other accrued expenses 113,412 512,794 212,008 650,959
Increase (decrease) in deferred lease payments (11,490) (2,715) (42,377) (33,603)
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 255,478 190,721 528,754 (107,674)
----------- ----------- ----------- -----------
Cash flows provided (used) by investing activities:
Purchases of property and equipment (7,588) (100,523) (9,437) (139,272)
Disposal of property and equipment -- 3,091 -- 114,314
Increase in deposits (85) -- (247) --
----------- ----------- ----------- -----------
Net cash used by investing activities (7,673) (97,432) (9,684) (24,958)
----------- ----------- ----------- -----------
Cash flows provided (used) by financing activities:
Increase (decrease) in line of credit, third party (61,174) -- (261,483) 90,137
Increase (decrease) in line of credit, related party -- (49,925) -- 354,742
Proceeds from long-term borrowings -- -- -- --
Repayment of long-term borrowings (168,805) (24,683) (271,817) (90,261)
Proceeds of borrowing from related parties -- -- 181,000 50,250
Repayment of borrowings from related parties (3,000) -- (3,000) (9,300)
Principal payments under capital lease obligations (14,826) (18,681) (163,770) (262,936)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities (247,805) (93,289) (519,070) 132,632
----------- ----------- ----------- -----------
Net increase (decrease) in cash -- -- -- --
Cash at beginning of period -- -- -- --
----------- ----------- ----------- -----------
Cash at end of period $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes.
6
<PAGE>
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,
1998 1999 1998 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Income Taxes $ -- $ -- $ -- $ --
------- ----------- ---------- ----------
Interest paid $95,648 $ 21,568 $ 271,548 $ 227,265
======= =========== ========== ==========
Preferred stock issued for non-cash item $ -- $ -- $2,000,000 $ --
======= =========== ========== ==========
</TABLE>
In January of 1999 the Company acquired from a newly acquired subsidiary of
American Enterprise Solutions, Inc. approximately $266,000 of medical equipment
principally by assuming capital lease obligations.
In February of 1999 the Company refinanced its line of credit approximating
$1,210,000 with a new line from AES Funding, Inc. (a company wholly owned by
American Enterprise Solutions, Inc.) collateralized by accounts receivable (see
Note 4).
See Accompanying Notes.
7
<PAGE>
NATIONAL DIAGNOSTICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF 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 results of operations
for the three and nine months ended September 30, 1999, are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire year ending December 31, 1999.
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, these quarterly condensed consolidated financial
statements should 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.
(2) MERGER AGREEMENT WITH AMERICAN ENTERPRISE.COM
In February 1998, the Company signed a definitive merger agreement with American
Enterprise.com (AESI), (formerly American Enterprise Solutions, Inc.), a private
company recently formed in August 1997 to acquire and develop community health
care enterprises. In conjunction with the merger agreement, the parties in March
1998 executed a stock purchase agreement whereby AESI acquired 500,000 shares of
the Company's preferred stock for consideration valued at $2,000,000. Holders of
the preferred stock voting as a separate class have a right to 8 votes per
share. In March 1998, AESI converted 131,185 shares of the preferred stock into
approximately 65% of the company's outstanding shares of common stock. As part
of the merger, the remaining 368,815 shares of preferred stock, representing
100% of the outstanding preferred stock will be converted so that 22,057,407 in
total common stock would be issued. AESI will then own approximately 85% of the
Company. In March 1998 AESI's current C.E.O. and board member and another AESI
approved board member were appointed to the Company's Board of Directors filling
two of the three positions of the Board. In April 1998, the Board of Directors
of the Company approved the merger with AESI whereby AESI is the acquiror for
accounting purposes. Upon merger, the Company will be the survivor and will
change its name to American Enterprise.com. In order to affect the merger, the
Company's authorized shares of common stock will be increased. AESI, owning
approximately 65% of the outstanding shares of the Company's common stock and
100% of the outstanding preferred stock has provided written consent and
approval of the merger which under Florida Business Corporation Act precludes
the need for further stock holder approval. The closing date of the merger was
extended in December 1999 to occur no later than December 2000 upon the
satisfaction of the closing conditions.
8
<PAGE>
(3) CASH MANAGEMENT
Effective January 1, 1999, the Company entered into agreements with AES Service
Group, Inc. (a wholly owned subsidiary of AESI) to provide billing, collection
and other cash management services. Accordingly, the Company does not maintain
its own separate operating cash accounts for cash receipts and disbursements.
Cash receipts and disbursements received and paid respectively, on behalf of the
Company by AESI are accounted for by inter-company accounts (due to/from). There
is no actual Company cash in flow/out flow. For statement of cash flow purposes
changes in operating assets/liabilities such as accounts receivable, accounts
payable, accrued expenses, and due to/from related party are accounted for as
cash items to reflect the Company's operating and financing activities.
(4) ACCOUNTS RECEIVABLE FINANCING
In February 1999 the Company's accounts receivable financing (line of credit)
with its lender totaling $1,221,000 was fully repaid. The arrangement was
terminated and replaced through AESI's accounts receivable financing with
another lender. AESI established a subsidiary, AES Funding, Inc. (Funding), to
service the new financing. Under the financing agreement, certain AESI
subsidiaries, including the Company, transfer all of their customer accounts to
Funding to collateralize the debt. The transfer is recorded at book value, gross
account balance less estimated allowance for contractual adjustments and bad
debt provisions. The accounts receivable are divided into two categories,
eligible and ineligible as defined by the financing agreement with the lender,
indicating which accounts receivable are used to determine Funding's borrowing
base. In accordance with the financing agreement the eligible accounts, which
represent a substantial portion of all accounts are sold (as defined by SFAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities") to Funding, and the ineligible accounts are
contributed as capital to Funding. If the cash collected on the ineligible
accounts is not required to pay down Funding's outstanding debt then the cash is
remitted to the respective company. This occurs when the eligible accounts
provide the lender sufficient coverages. Since inception of the financial
program, ineligible accounts collateralized have not been needed to reduce
outstanding debt. The ineligible accounts receivable contributed to Funding in
essence are reflected in the Company's records as an investment in Funding,
which is subsequently reduced by collection of these accounts (i.e., recognized
as a return of capital). As actual cash is not remitted to the Company, the
corresponding effect is to increase the amount due from related party.
At September 30, 1999, approximately $200,000 of net ineligible accounts
receivables, were contributed to Funding and have not yet been collected. The
Company and Funding fully expect that these accounts will be substantially
collected and such collections will be applied to the due from related party
account.
Under the financing program, Funding's outstanding debt is allocated to AESI's
participating subsidiaries, such as the Company, based on their relative
borrowing base. At September 30, 1999, the Company's balance sheet reflects a
related party financing obligation of $1,575,742.
The initial term of Funding's and AESI's agreement with its lender is through
January 2002, with automatic annual extensions unless terminated by either
party. The interest rate is prime (Citibank N.A.'s prime rate) plus 1.5%. At
September 30, 1999, Funding and AESI are not in compliance with certain loan
covenants of the financial agreement. In this event, the lender has the right to
call the loan. AESI is not aware of the intent of the lender to exercise the
right and is currently striving to achieve compliance. The Company's allocation
of the debt of $1,575,742 is classified on the balance sheet as a current
liability due to the non-compliance issue.
(5) OBLIGATIONS UNDER CAPITAL LEASES
In November 1998, the Company refinanced with its major lessor its major medical
lease obligations. The Company fell behind in its lease obligations and in March
1999, the Company entered into another agreement with its major lessor, which
would allow the Company to make installments through September 1999, for its
arrearages. The Company has fallen behind in its payments in accordance with the
latest agreement. At September 30, 1999, the Company is in arrears
9
<PAGE>
approximately $330,000. The other lessors have also been cooperating with the
Company; generally not allowing not more than 60 days past due on lease
payments. Generally, while in default, the lessor may accelerate the lease
obligation. Since the Company has not obtained a waiver of default, the Company
has reclassified its long-term lease obligations, approximating $1,849,000, to
current. On behalf of the Company, AESI has earmarked funds for the satisfaction
of the arrearages and expects to negotiate additional refinancing of its major
lease obligation in the first quarter of year 2000.
The Company converted a portion of their lease obligations in 1998 to a term
loan with a maturity date of June 1999. The Company is discussing alternatives
with its major lessor to cure the matured and unpaid note.
(6) LONG-TERM DEBT
At September 30, 1999, the Company was in default of certain loan covenants due
to late payments of approximately $11,000. Generally, when in default, the
lender may accelerate the loan. The Company has not received a waiver of default
from its lenders and has, therefore, reclassified the long-term portion of debt
approximating $39,000 to short-term.
(7) INTRINSIC VALUE OF BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK
In March, 1997, the Securities and Exchange Commission (SEC) announced its
position on accounting for the issuance of convertible preferred stock with a
nondetachable conversion feature that is deemed "in the money" at the date of
issue (a "beneficial conversion feature"). The beneficial conversion feature is
initially recognized and measured by allocating a portion of the preferred stock
proceeds equal to the intrinsic value of that feature to additional paid-in
capital. This initial value is calculated at the date of issue as the difference
of the conversion price and the quoted market price of the company's common
stock into which the security is convertible, multiplied by the number of shares
into which the security is convertible. The discount resulting from the
allocation of proceeds in the beneficial convertible feature is treated as
dividend and is recognized as a return to the preferred shareholder over the
minimum period in which the preferred shareholders can realize that return (i.e.
from the date the securities are issued to the date they are first convertible).
The accounting for the beneficial conversion feature requires the use of an
unadjusted quoted market price (i.e., no valuation discounts allowed) as the
full value used in order to determine the intrinsic value dividend. The
intrinsic value of the dividends to the preferred shareholder is deducted from
the net income before calculating the net loss per common share. The intrinsic
value of beneficial conversion features to preferred shareholders is
$25,568,750.
(8) LEGAL ACTION
On March 14, 1999, Carnegie Capital, Ltd. ("Carnegie Capital") was awarded a
final judgement of foreclosure on the Company's Orange Park facility due to
arrearages. Carnegie Capital agreed to stay its foreclosure action until June
11, 1999, pending a sale of the property by the Company. Due to a technical
defect in the title, the sale did not occur and in July the property was
foreclosed.
In November 1999, X-Ray Equipment Company, Inc. filed suit to take back certain
medical equipment valued at approximately $1,125,000 allegedly sold to Trinity
Diagnostic Imaging, Inc. (a wholly owned subsidiary of AESI) and to be used by
the Company's subsidiaries. In January of 2000, the Company entered into a
stipulated agreement to pay X-Ray Equipment Company $250,000 toward the purchase
of the equipment, the balance to be paid by March 15, 2000. Both parties agree
to work to arrange third party financing for the balance due March 15, 2000.
(9) OPERATIONAL MATTERS AND LIQUIDITY
The Company has a net loss for the quarter ending September 30, 1999, of
$526,000 and at September 30, 1999, has a working capital deficiency of
approximately $8,210,000 after reclassification of the Company's major long-term
lease commitments to current (more fully discussed below) and at September 30,
1999, the Company had a deficiency of net
10
<PAGE>
assets of ($4,535,000). Collectively, these factors have resulted in the Company
being in default of its major lease and loan 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 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 third quarter of 1999 and its plan to improve
future results.
The Company attributes the loss in the third quarter primarily to the Company's
Jacksonville facilities (Orange Park and Riverside). The sale of the Company's
Orange Park facility, which was shut down in the second quarter, did not close
as anticipated due to a technical default in the title (subsequently cured). The
facility was then foreclosed on by a mortgage holder and the Company realized a
loss from foreclosure of approximately $35,000. The third quarter operating loss
is attributable primarily to the Riverside facility. The Company continues to
review and initiate cost cutting measures in its Jacksonville facilities, and
identify and initiate ways to increase revenues.
The Company remains in arrears with its major lessors. Although the Company is
in discussion with its major equipment lessor regarding the cure of its
arrearages, no waiver of default has been obtained from the lessor. The
long-term capital lease obligations have been re-classified to current due to
acceleration clauses contained in the contract. The Company is also discussing
alternatives with the lender to satisfy a $1,633,000 term loan which matured in
June, 1999.
The Company is continuing with its merger plans with American Enterprise
Solutions, Inc. ("AES") and expects to complete the merger process in the first
quarter of year 2000. The Company believes that a successful conclusion to its
financing arrangements and an increase in revenues will strengthen its financial
condition, though no absolute assurances can be given.
(10) SUBSEQUENT EVENT
In December 1999, the Company issued 100,000 shares of common stock valued at
its approximate market value of $202,000 (also approximates value of services
provided). The stock was issued as payment for services rendered by the
Company's legal counsel to both the Company and its parent company AESI.
Approximately $94,000 relates to a previously contested balance, which the
Company took as a one-time charge to operations in the fourth quarter. The
remaining balance had been previously accrued for.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for historical information, this Quarterly Report on Form 10-QSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding our anticipated costs and expenses, revenue
mix, product and service development, relationships with strategic partners and
plans for addressing Year 2000 issues. These forward-looking statements include,
among others, those statements including the words "expects", "anticipates",
"intends", "believes" and similar language. Our actual results may differ
materially from those projected in the forward-looking statements. You should
carefully review the risks described in other documents we file from time to
time with the Securities and Exchange Commission, including our Annual Report on
Form 10-K for the year ended December 31, 1998. You are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date of this Quarterly Report on form 10-QSB. We undertake no obligation to
publicly release any revisions to the forward-looking statements or reflect
events or circumstances after the date of this document.
The following discussion and analysis of the Company's financial condition and
results of operations also should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
Net revenues for the third quarter ended September 30, 1999 were $1,702,000
compared to $1,718,000 for the same period in 1998 representing a 1% decrease.
This increase is net of the lost revenues from the Orange Park facility closed
in the second quarter. (In the third quarter of 1998, Orange Park generated
approximately $407,000 of revenue).
Direct operating expenses for the quarter ended September 30, 1999 were $978,000
compared to $1,337,000 for the same period in 1998, representing a 27% decrease.
Excluding the effects of the closed Orange Park facility, direct costs actually
increased $67,000 or 7% but declined as a percent of revenue from 69% to 57%.
The Company believes that the level of direct costs to revenue will continue
similar to its current level.
General and administrative expenses for the third quarter ended September 30,
1998 were $827,000 compared to $1,097,000 for the same period in 1998,
representing an 25% decrease. Excluding the effects of the closed Orange Park
facility, general and administrative costs declined $74,000 or 8%. This is
primarily attributable to a decrease in personnel costs due to personnel
reductions. Depreciation and amortization decreased to $250,000 from $326,000
for the quarters ending September 30, 1999 and 1998, respectively. This is
primarily attributable to costs being fully amortized and disposed of property.
Interest expense increase to $163,000 from $147,000 for the quarters ending
September 30, 1999 and 1998, respectively. This is due primarily from the
increase in the line of credit.
The increase in revenue and decrease in costs were not sufficient to make the
Company profitable in the third quarter. The Company incurred a loss of $526,000
compared to $1,145,000 for the quarters ending September 30, 1999 and 1998,
respectively; a reduction of $619,000 or 54% from the same period in the prior
year.
The Company has experienced a decrease of approximately $1,400,000 or 20% in
year-to-date revenues from that of the same nine month period of 1998. The
Company is unable to determine if this trend will continue. Year-to-date direct
operating costs were reduced by $871,000 or 22% from the same nine month period
of the prior year. Also, a favorable reduction of direct costs as a percent of
net revenue was made by approximately 1%. General and administrative expenses
for the nine month period ending September 1999 compared to 1998 were reduced
approximately $395,000 or 12% due to cost cutting measures. Depreciation and
amortization decreased from $1,012,000 to $786,000 or 22%. This is the combined
result of fully
12
<PAGE>
depreciated or amortized costs and the disposal of certain equipment.
Year-to-date, the decrease in costs has not been sufficient to offset the
decrease in revenues resulting in a net loss of $1,471,000 compared to
$1,661,000 for the same nine month period of the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company has a working capital deficiency of
approximately $8,210,000 after the reclassification of its major long-term lease
obligations to current (more fully discussed below) and a deficiency of net
assets of approximately $4,535,000. Collectively, these factors have resulted in
the Company being in default of its major lease and loan agreements. The Company
is discussing with its major lessor alternatives to cure defaults of the
Company's lease obligations and an unpaid $1,633,000 term loan which matured in
June of 1999. During this period, the Company has not received a waiver of
default and therefore, has reclassified its long-term lease obligation to
short-term. At September 30, 1999, excluding the defaulted mortgages (see Note 3
to the financial statements), the Company was in arrears approximately $11,000
with certain bank debt. Generally, the banks have been cooperating with the
Company during this delinquency period. No wavier of default has been obtained
and therefore the Company has reclassified its long-term debt to current.
In an agreement entered into with AES Funding Corporation ("AES Funding", a
wholly owned subsidiary of American Enterprise Solutions, Inc.), the Company
sells its accounts receivables to AES Funding in exchange for an amount equal to
the eligible receivables net of an allowance for doubtful accounts. AES Funding
funds its purchase of the receivables with a $5 million dollar loan agreement it
has with Healthcare Capital Resources (agent) and HCR Pool III Funding Corp.
(lender). Interest is at the rate of Prime plus 1.5%. The Company is not in
compliance with certain loan covenants. In this event, the lender has the right
to call the loan. However, the Company is not aware of the intent of the lender
to exercise this right and is currently striving to achieve compliance. At
September 30, 1999, the Company has borrowed $1,576,000 on the line with no
additional availability.
In the quarter ending September 30, 1999, the Company's cash position remained
unchanged. Cash from operating activities provided approximately $191,000.
Investing activities utilized approximately $98,000. Financing activities
utilized approximately $93,000.
The Company closed its Orange Park operations due to continued losses and either
integrated the Orange Park equipment into other operations or sold it (see Note
9 to the financial statements). In July, the mortgage on the facility was
foreclosed on. As a result, the remaining assets and liabilities are not
material and are recorded at values expected to be realized in the normal course
of business.
In August of 1999, the Company opened a new 1,500 square foot fixed site
location ("Long Lake") in Tampa, Florida, as a branch of the Brandon Diagnostic
Center, Ltd. A five (5) year lease with two (2) optional five (5) year terms was
entered into effective May 15, 1999. The net lease calls for monthly payments of
$1,250 plus sales tax. Medical modalities include general radiology,
mammography, ultrasound, and bone densitomitry studies. The equipment came from
the closed Orange Park facility. The location is staffed by two technicians and
two support persons.
The Company is continuing the merger process with American Enterprise.Com
("AES", formerly American Enterprise Solutions, Inc.) which owns 100% of the
Company's outstanding Preferred Stock and 65% of the outstanding Common Stock.
In December 1999 AES raised $2 million with the issue of convertible securities.
A portion of the proceeds are to be used in bringing the Company's lease
obligations current. AES has also received an engagement agreement from a
tier-one investment banking firm to make a $25 million Private Placement; and is
currently discussing a $15 million debt refinancing arrangement for all
subsidiary companies.
The Company believes that it can increase revenues and return to profitability,
if it maintains the current cost cutting program, contains overhead expenses,
continues to receive cooperation from vendors, and receives continued financial
support from American Enterprise.com. The Company further believes that it
currently has adequate capital to satisfy
13
<PAGE>
its anticipated short-terms obligations, capital repayments and capital
expenditures. The Company reasonably expects to improve its working capital in
the near term future. However, no assurance can be given that the short-term
needs will be satisfied.
The Company's long term growth strategies will require additional funds. The
Company feels that the financial resources will be more easily attainable
subsequent to the merger. In the event that the Company develops 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 issuing 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 1998 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,
1998 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.
YEAR 2000 ISSUES
The Company makes use of information systems in the operations of its various
businesses, including the exchange of financial data and other information with
patients, physicians, suppliers, and other counter parties. The Company also
uses software and information systems provided by third parties in its
accounting, business, and investment systems.
The Year 2000 risk, as it is commonly known, is the result of computer programs
being written using two digits, rather than four, to define the applicable year.
Any of the Company's computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in systems failures or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send billing notices, make payments to suppliers or engage in
other normal business activity.
The Company has identified the following areas wherein the Y2K problems could
affect the Company's billing, accounting, payroll, and accounts receivable
financing. The Company has completed its compliance plan in these areas.
The Company performs radiological diagnostic procedures and bills insurance
providers and patients for its services. The Company's current billing software
and hardware is Y2K compliant. In addition, the Company in early 1999 began
contracting its billing and collection processes with a Company that specializes
in medical billing. The billing company's software is also Y2K compliant. In the
process of conducting its Year 2000 review, the Company identified certain
computers that were not Year 2000 compliant. The Company performed all necessary
upgrades to such computers in order to satisfy its Year 2000 compliance
procedures.
The Company finances its receivables with a lender specializing in medical
receivables. The reports required to process the loan transactions are generated
by the billing company mentioned above.
The Company, effective January 1, 1999, began outsourcing its accounting
function. The service company providing this service represented that all
software and hardware used in executing this accounting function are Year 2000
compliant.
The Company, effective January 1, 1999, began utilizing a human resource leasing
firm. The leasing firm represented that it has completed the implementation of
its Year 2000 compliance program.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1999, X-Ray Equipment Company, Inc. filed suit in the
Circuit Court of the Thirteenth Judicial Circuit of Hillsborough County,
Florida, to take back certain medical equipment valued at approximately
$1,125,000 allegedly sold to Trinity Diagnostic Imaging, Inc. (a wholly owned
subsidiary of AESI) and to be used by the Company's subsidiaries. In January of
2000, the Company entered into a stipulated agreement to pay X-Ray Equipment
Company $250,000 toward the purchase of the equipment, the balance to be paid by
March 15, 2000. Both parties agree to work to arrange third party financing for
the balance due March 15, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company defaulted on a second mortgage note for its fixed site
Orange Park Facility. The property was foreclosed for arrearages of
approximately $126,000 in July of 1999.
The Company is in default of its major lease commitments due to
arrearages. Total in default approximates $2,914,000 at September 30, 1999, with
arrearages approximating $340,000. The Company is in discussion with its major
lessor to cure the default.
The Company is in default of a Term loan of approximately $1,634,000
due June 1, 1999, to its major lessor. The Company is in discussion with its
major lessor to cure the default.
The Company is in technical default of certain covenants concerning
its credit line and is working toward curing these defaults. The credit line
approximates $1,507,000 as of January 4, 2000.
ITEM 6. EXHIBITS
(a) EXHIBITS FILED AS PART OF THIS REPORT:
--------------------------------------
10.51 Fourth Amendment to Merger Agreement by and between National
Diagnostics, Inc. and American Enterprise.com, Corp. (formerly:
American Enterprise Solutions, Inc.) effective December 27, 1999.
27.01 Financial Data Schedule (for EDGAR only).
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: January 13, 2000
NATIONAL DIAGNOSTICS, INC.
/s/ CURTIS L. ALLISTON /s/ CHUCK BROES
------------------------------------- ---------------------------------
Curtis L. Alliston Chuck Broes
President and Chief Operating Officer Chief Executive Officer
/s/ DENNIS C. HULT /s/ ANTHONY F. MANISCALCO
------------------------------------- ---------------------------------
Dennis C. Hult Anthony F. Maniscalco
Comptroller Executive Vice President, Finance
American Enterprise.Com
16
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.51 Fourth Amendment to Merger Agreement by and between National
Diagnostics, Inc. and American Enterprise.com, Corp.
(formerly: American Enterprise Solutions, Inc.) effective
December 27, 1999.
27.01 Financial Data Schedule (for EDGAR only).
EXHIBIT 10.51
<PAGE>
FOURTH AMENDMENT
This Fourth Amendment (the "4th Amendment") is made and entered into as
of this 27th day of December 1999 by and between NATIONAL DIAGNOSTICS, INC., an
Florida corporation ("NDI") and American Enterprise.com, Corp., formerly known
as American Enterprise Solutions, Inc., a Florida corporation ("AESI").
RECITALS
WHEREAS, NDI and AESI have entered into that certain Merger Agreement
dated February 23, 1998 as amended by that certain First Amendment dated March
17, 1998 and that certain Second Amendment dated April 29, 1998 and that Third
Amendment dated July 24, 1998 (the "Agreement") pursuant to which it is
contemplated with AESI will be merged (the "Merger") with and into NDI under the
terms and conditions specified in the Agreement; and
WHEREAS, Section 4.1 of the Agreement currently provides, among other
things, that the Closing of the Merger shall occur on July 31, 1998, or as soon
as practicable after all conditions to Closing shall have been satisfied or
waived, or at such other time and date as NDI and AESI may mutually agree; and
WHEREAS, AESI and NDI have mutually agreed that the date of Closing the
Merger shall be on or before December 31, 2000, or as soon as practicable after
all conditions to Closing shall have been satisfied or waived, or at such other
time and date as NDI and AESI may mutually agree; and
WHEREAS, Section 13.1(ii) of the Agreement currently provides, among
other things, that AESI (acting through its board of directors) shall have the
right to terminate the Agreement if the Closing shall not have occurred by
December 31, 1998; and
<PAGE>
WHEREAS, AESI and NDI have mutually agreed that Section 13.1(ii) of the
Agreement should be amended to reflect the fact that AESI (acting through its
board of directors) shall have the right to terminate the Agreement if the
Closing has not occurred by December 31, 2000.
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:
Section 4.1 of the Agreement is hereby amended to read as follows:
4.1 PLACE AND DATE OF CLOSING. Delivery of the stock
certificates referred to in Section 3 above, and
consummation of the other transactions contemplated by
this Agreement (hereinafter referred to as the
"Closing") shall take place at the offices of AESI, 6800
N. Dale Mabry, Suite 100, Tampa, Florida 33614 (or at
such other location as may be agreed upon by AESI and
NDI) on or before December 31, 2000, or as soon as
practicable after all conditions to Closing shall have
been satisfied or waived, or at such other time and date
as NDI and AESI may mutually agree, which date shall be
referred to as the "Closing Date."
Section 13.1(ii) of the Agreement is hereby amended to read as follows:
(ii) by AESI (acting through its board of directors) if the
transactions contemplated by this Agreement to take
place at the Closing shall not have been consummated by
December 31, 2000, unless the failure of such
transaction s to be consummated is due to the willful
failure of such transactions to be consummated is due to
the willful failure of AESI to perform any of its or his
obligations under this Agreement to the extent required
to be performed by it prior to or on the Closing Date:
or
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first written above.
NATIONAL DIAGNOSTICS, INC.
BY: /s/ CURTIS L. ALLISTON
--------------------------------
Name: Curtis L. Alliston
Title: President & Director
AMERICAN ENTERPRISE.COM, CORP.
BY: /s/ CARDWELL C. NUCKOLS, PH.D.
-------------------------------
Name: Cardwell C. Nuckols, Ph.D.
Title: President & Director
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