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UNITED STATES
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
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended September 30, 1996
Commission file number 0-19031
National Quality Care, Inc.
(EXACT NAME OF REGISTRANT)
Delaware 84-1215959
(State of Incorporation) (IRS Employer ID No.)
5901 W. Olympic Boulevard, Suite 109
Los Angeles, California 90036
(Address of Principal Executive Offices) (Zip Code)
(213) 930-6008
(Telephone Number)
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares of common stock outstanding
as of October 31, 1996 is 7,540,471.
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National Quality Care, Inc.
Table of Contents
Part I. Financial Information Page
----
Item 1. Financial Statements
Balance Sheets as of September
30, 1996 and December 31, 1995 3
Statements of Operations for
the three months ended September
30, 1996 and 1995 5
Statements of Operations for
the nine months ended September
30, 1996 and 1995 6
Statements of Cash Flows for
the nine months ended September
30, 1996 and 1995 7
Notes to Financial Statements 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures
2
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National Quality Care, Inc.
BALANCE SHEETS
September 30, December 31,
1996 1995
------------- -------------
(unaudited) (Predecessor)
ASSETS
Current Assets
Cash $ 36,408 $
Certificate of Deposit 20,000
Receivables 491,278 333,325
Inventories (Note 2) 133,907 21,771
Due from Affiliate (Note 5) 47,854
Prepaid Expenses 60,303
---------- ----------
Total Current Assets $ 789,750 $ 355,096
Property, Furniture &
Equipment (net) (Note 3) $2,271,228 $ 96,252
Deferred Charges 10,667
Assets held for Sale (Note 4 & 7) 1,745,371
Other Assets 17,358 461
---------- ----------
TOTAL ASSETS $4,823,707 $ 462,476
See accompanying notes to financial statements
3
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National Quality Care, Inc.
BALANCE SHEETS
September 30, December 31,
1996 1995
------------- -------------
(unaudited) (Predecessor)
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable - trade $ 832,164 $ 401,146
Accrued expenses payable (Note 5) 72,933 564,012
Notes payable 579,101
Current portion of long-term
debt 198,312 600,821
---------- ----------
Total Current Liabilities $1,682,510 $1,565,979
Long-term debt, less
current portion 1,847,232 3,645
---------- ----------
TOTAL LIABILITIES $3,529,742 $1,569,624
Net Liabilities of division (1,107,148)
STOCKHOLDERS' EQUITY 1,293,965
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $4,823,707 $ 462,476
See accompanying notes to financial statements.
4
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National Quality Care, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------- -------------
(A) (Predecessor)
Revenue $2,364,052 $1,927,290
------------- -------------
Cost and expenses
Compensation and related expenses 641,552 507,319
Medical supplies 576,656 426,677
Outside services 212,650 159,589
Rent expense 60,854 58,845
Insurance 18,661 27,582
General and administrative 366,773 44,201
Depreciation and amortization 68,209 51,314
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1,945,355 1,275,527
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Income from operations 418,697 651,763
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Other Income (expense)
Interest Income 1,451
Interest Expense (21,240) (43,561)
Merger Costs (275,000)
Assets disposition costs (54,649)
Net Rental Income 16,870
Other Income (Expense) (5,738)
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Total Other Income (Expense) (338,306) (43,561)
------------- -------------
Net Income 80,391 608,202
------------- -------------
Net Income per Share $ .02 $ .61
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Weighted Average Number of
Shares Outstanding 4,237,750 1,000,000
------------- -------------
See accompanying notes to financial statements.
(A) Predecessor 1/1/96 - 5/10/96
Combined with Company 5/11/96 - 9/30/96
5
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National Quality Care, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------- -------------
(Predecessor)
Revenue $ 814,095 $ 709,843
------------- -------------
Cost and expenses
Compensation and related expenses 246,183 161,070
Medical supplies 245,522 187,061
Outside services 60,917 56,871
Rent expense 20,285 14,018
Insurance 4,460 9,194
General and administrative 120,562 12,112
Depreciation and amortization 29,406 17,105
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727,335 457,431
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Income from operations 86,760 252,412
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Other Income (expense)
Interest Income 1,118
Interest Expense (16,512) (14,521)
Merger Costs
Assets disposition costs (46,478)
Net Rental Income 11,443
Other Income (expense) 8,894
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Total Other Income (Expense) (41,535) (14,521)
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Net Income 45,225 237,891
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Net Income per Share $ .01 $.24
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Weighted Average Number of
Shares Outstanding 7,473,347 1,000,000
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See accompanying notes to financial statements.
Predecessor 1/1/96 - 5/10/96
Combined with Company 5/11/96 - 9/30/96
6
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National Quality Care, Inc.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Cash flows from operating activities:
Net income $ 80,391
Adjustments to reconcile net income to
net cash provided by operating activities:
Stock issued for compensation 26,800
Depreciation 55,193
Amortization 10,667
(Increase) Decrease in:
Accounts receivable (135,520)
Inventory (21,203)
Prepaid expenses (38,801)
Other assets (6,811)
Deposits 10,000
Increase in:
Accounts payable 339,573
Accrued expenses and other liabilities (131,019)
------------
Net cash provided by operating activities 189,270
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Cash flows from investing activities:
Cash retained by former affiliate (312,637)
Acquisition of Sargent, Inc., net of cash acquired 50,266
Purchase of furniture and equipment (2,008,220)
Notes receivable 182,940
------------
Net cash used in investing activities: (2,087,651)
Cash flows from financing activities:
Proceeds from notes payable 1,850,000
Repayments on notes payable (320,521)
Due from affiliates (47,854)
Proceeds from issuance of stock 453,164
------------
Net cash provided in financing activities 1,934,789
Net increase in cash 36,408
Cash, beginning of year -0-
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Cash, end of year $ 36,408
------------
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7
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National Quality Care, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB. Therefore, they do not include
all information and footnotes necessary for a fair presentation of financial
position and results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of Management, all adjustments
considered necessary for a fair presentation have been included in the interim
period. Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
NOTE 2. INVENTORIES
Inventories consist primarily of processing and warehouse supplies used in
processing potatoes and are stated at the lower of cost or market on a first-in,
first-out basis. (See Note 7 - Subsequent Events). In addition, inventories
represents medical supplies and medication.
NOTE 3. PROPERTY, FURNITURE AND EQUIPMENT
Property, Furniture and Equipment consist of the following at September 30,
1996:
Medical equipment $ 244,572
Buildings and Improvements 2,194,607
Office and Equipment 49,713
------------
2,488,892
Less Accumulated Depreciation (217,664)
------------
2,271,228
------------
On September 16, 1995, the Company entered a into a Lease Agreement with
Sargent Potato Company, which is composed of two of the principals of former
management of Sargent, Inc. (Richard L. Messick and Richard A. Messick) ("SPC")
to lease the packaging facility wherein the Company leased to SPC the warehouse
for a monthly rental of $15,172 for one year beginning September 16, 1995, with
an option to renew or purchase the packaging facility. The Company also agreed
to maintain deposits with Perishable Agricultural Commodity Act (PACA) and the
Colorado Department of Agriculture for the term of the lease (See Note 7 -
Subsequent Events.)
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NOTE 4. ASSETS FOR RESALE
The Messicks have agreed to purchase a Ford Pickup truck, Ford Bronco and a
Bobcat from the Company for an aggregate purchase price of $14,900. (See Note 7
- - Subsequent Events).
NOTE 5. DUE FROM AFFILIATE
In May, 1996, the Company loaned the sum of $47,854 to Medipace Medical
Group, Inc. which is controlled by the three directors and largest shareholders
of the Company. There is in place a demand note at 8%. (See Note 7 - Subsequent
Events).
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company was a co-defendant, along with American Securities Transfer,
Incorporated ("AST"), the Company's transfer agent, in a law suit filed by
Carolyn K. Combs and Medica Financial Corp. ("Combs and Medica"), Case No. 93 CV
23 in the District Court, County of Rio Grande, State of Colorado (Carolyn K.
Combs and Medica Financial Corp. vs. Sargent, Inc. and American Securities
Transfer Incorporated). Judgement was rendered against the Company, Richard A.
Messick, Richard L. Messick, Douglas G. Messick and AST for damages of
$128,515.63 plus interest accrued at the legal rate from March 26, 1993 and
exemplary damages in the amount of $64,100.
In September of 1995, Combs and Medica instituted another civil action [No.
95-CV-36] in the court, seeking to collect upon their Judgment under theories of
breach of contract and unjust enrichment. The parties settled these two matters
by agreeing to dismiss the prejudice civil action No. 95-CV-36 upon written
assurance and admission by Sargent to Combs and Medica that the second civil
action is unnecessary for them to execute upon their Judgment. A payment
schedule called for the Company to make payment on November 15, 1995 of
$11,437.62, which was paid in full. The amount due and owing to Medica in the
amount of $24,589 is being paid in monthly installments of $6,249.97 over a
remaining period of three months beginning on December 15, 1995 and ending on
September 15, 1996. Within ten days after the final payment, Medica has agreed
to file with the Court in 95-CV-36 a Satisfaction of Judgment. (See Note 7 -
Subsequent Events).
The Company paid Seaboard Surety Company ("Seaboard") the $110,000 due this
quarter in accordance with the terms and conditions of the settlement.
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In November of 1995, M&I agreed to extend its lease agreement with the
Company. The Company paid the amount in arrears of $57,000 plus a refinance
charge of $20,000. Additional payments of $57,000 are due on December 15, 1996,
March 15, 1997, December 15, 1997, and March 15, 1998.
The Company entered into a joint venture with a related party in which the
Company contributed the lease and any proceeds of the transaction on May 11,
1996, over $1,250,000 after full payment of all accounts payable up to $228,000.
The related party pledged 50,000 options as security for this transaction.
NOTE 7. SUBSEQUENT EVENTS
On October 18, 1996 the Company completed the sale of certain real estate
and other assets to a former affiliate for $1,415,000 -- $550,000 in cash and
promissory notes in the amounts of $615,000 (subject to certain adjustments) and
$250,000. The lease agreement referenced in Note 3 was terminated as a result of
the sale of the "Warehouse Assets." On October 18, 1996, the Company paid the
remaining balance of $12,487.90 owed to Combs and Medica as a result of the sale
of the "Warehouse Assets" referenced in Item 2 - Liquidity and Capital
Resources. The warehouse supplies referenced in Note 2 were included in the sale
of the Warehouse Assets. The Company loaned $66,811.76 to Medipace Medical
Group, Inc. ("Medipace") from the proceeds of the sale of the Warehouse Assets.
The affiliate executed a demand note bearing an interest rate of 8%.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in this report.
The Company's primary source of revenue is outpatient kidney dialysis
services through a dialysis center and inpatient services contracted with local
hospitals through a visiting nurse program. These services were in operation for
the entire period reported.
RESULTS OF OPERATIONS.
Revenues in the third quarter of 1996 increased to $814,095 from $709,843
in the third quarter of 1995. For the first nine months of 1996 revenues
increased approximately 23% to $2,364,052 from $1,927,290 for the same period of
1995. This increase is primarily the result of higher inpatient and home care.
10
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Medical supplies in the third quarter of 1996 were $245,522 compared with
$187,061 in the third quarter of 1995. For the first nine months of 1996 cost of
medical supplies increased approximately 35% to $576,676 from $426,677 for the
same period of 1995. The increase is due to rising usage of medical supplies
prescribed which in turn resulted in higher revenues.
Outside services expenses in the third quarter of 1996 were $60,917
compared with $56,871 in the third quarter of 1995. For the first nine months of
1996 outside services increased approximately 33% to $212,650 from $159,589 for
the same period of 1995. The primary increase was directly attributed to the
rise of inpatient services.
General and administrative expenses in the third quarter of 1996 were
$120,562 compared with $12,112 in the third quarter of 1995. For the first nine
months of 1996 General and administrative services were $366,773 compared with
$44,201 in the first nine months of 1995. The increase is directly related to
requisite professional fees incurred after the stock exchange of May 11, 1996.
Interest expense in the third quarter of 1996 was $16,512 as compared with
$14,521 in the third quarter of 1996. For the first nine months of 1996 Interest
expense was $21,240 compared with $43,561 in the first nine months of 1995. The
decrease is a result of extinguishment of debt as the result of the stock
exchange of May 11, 1996.
Merger costs in the first quarter of 1996 of $275,000 represent
professional fees related to the stock exchange of May 11, 1996.
Assets disposition costs of $46,478 in the third quarter of 1996 represent
professional fees related to the sale of property, plant and equipment as
referenced in Note 4.
As a result of the foregoing, the third quarter reflects income of $45,225
as compared with net income of $244,753 in the third quarter of 1995. For the
first nine months of 1996 net income was $80,391 as compared with net income of
$608,502 in 1995.
The proforma and historical representation of net income reflects activity
of Los Angeles Community Dialysis (predecessor) before the stock exchange of May
11, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the ratio of current assets to current liabilities
was .47 to 1.00 compared to .21 to 1.00 at December 31, 1995. The inventory
consists of bags and packaging supplies which will be purchased by SPC as they
are used and medical
11
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supplies and medications. The Company has historically financed its
operations through the use of working capital and loans to the Company.
As of September 30, 1996 the Company had long-term borrowings in the
aggregate amount of $1,847,232, the current portion of which was $198,312. The
long-term debt was substantially utilized to purchase the real property located
at 6000 San Vicente Boulevard and is secured by deed of trust on said property.
The remainder comprises debt carry forward from the Company's former potato
warehouse operations.The Company reduced its long-term and short-term borrowings
by approximately $48,000 and $51,000, respectively, during the third quarter of
1996. The reduction in debt was serviced through a use of working capital.
As of October 18, 1996, the Company completed the sale of certain real
estate and other assets related to the operation of a potato warehouse (the
"Warehouse Assets") in Monte Vista, Colorado to certain former affiliates of the
Company for the purchase price of approximately $1,415,000. The purchase price
was paid in the form of $550,000 in cash and promissory notes in the amounts of
$250,000 and approximately $615,000 (subject to certain adjustments), due and
payable on or before December 15, 1996. The obligations owing to the Company are
non-recourse to the obligors, but are secured by 648,206 shares of common stock
of the Company which are held in escrow.
There can be no assurances that the escrowed shares, if liquidated, will be
sold for an amount at least equal to the remaining obligation, and if not, the
Company will not be able to recover the balance of the remaining obligation
owing to the Company.
In connection with the sale of the Warehouse Assets, the Company paid
certain obligations which were secured by the Warehouse Assets, including John
B. Milne ($225,520.84), Combs and Medica ($12,487.90), and Orion Corporate
Funding Inc., ("Orion") an affiliate of Douglas Nutt, ($188,312.51). The
payments resulted in a reduction of approximately $315,000 in short-term
borrowing. The Company also loaned the sum of $66,811.76 to Medipace Medical
Group, Inc. ("Medipace"), an affiliate of each of the Company's three (3)
directors and largest stockholders, which is the subject of a demand promissory
note payable by Medipace bearing interest at the rate of 8% per annum.
Further, the Company agreed to pay to Orion, the amount of approximately
$183,000, on or before January 15, 1997. The amount owing to Orion is secured by
the accounts receivable of the Company, and the subject of a limited guaranty by
Dr. Gura. The Company also has extended its promissory note in the amount of
$200,000 payable to Aegis Medical Systems, Inc. ("Aegis") to
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December 15, 1996. The failure of the Company to pay such obligations in a
timely manner could have a material adverse effect on the financial condition of
the Company.
Except for the payment of the two (2) promissory notes, management believes
that cash flows from operations will be sufficient to service cash requirements
for the foreseeable future.
The Company plans to acquire additional dialysis centers through purchase
and joint venture with physician groups. The Company currently experiences
profitable operations and positive cash flow. However, the Company does not
currently generate sufficient cash flow to finance any such expansion plans and
may not be able to repay the two (2) promissory notes in the aggregate amount of
$383,000 in full in a timely manner from current cash flow. In order to finance
any such expansion plans, the Company will require financing from external
sources and may require external financing in order to repay the promissory
notes. The Company does not have any commitment for such financing and there can
be no assurances that the Company will be able to obtain any such financing on
terms favorable to the Company or at all.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS OF FORM 8-K.
The Company filed no reports on Form 8-K during the Quarterly Period ended
September 30, 1996.
(b) EXHIBIT.
27. Financial Data Schedule
13
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized on the dates
indicated.
Dated November 14, 1996 NATIONAL QUALITY CARE, INC.
By: /s/Victor Gura, M.D.
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Victor Gura, M.D., President
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 0 36,408
<SECURITIES> 0 0
<RECEIVABLES> 333,325 491,278
<ALLOWANCES> 0 0
<INVENTORY> 21,771 133,907
<CURRENT-ASSETS> 335,096 789,750
<PP&E> 258,722 2,488,892
<DEPRECIATION> 162,470 217,664
<TOTAL-ASSETS> 462,476 4,823,707
<CURRENT-LIABILITIES> 1,565,979 1,682,510
<BONDS> 3,645 1,847,232
0 0
0 0
<COMMON> 0 75,305
<OTHER-SE> 0 1,218,660
<TOTAL-LIABILITY-AND-EQUITY> 462,476 4,823,707
<SALES> 0 0
<TOTAL-REVENUES> 0 2,364,052
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 2,262,421
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 21,240
<INCOME-PRETAX> 0 80,391
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 80,391
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 80,391
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
