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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 June 30, 1997
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) 692-0948
(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 August 12, 1997 is 9,148,210.
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National Quality Care, Inc.
Table of Contents
Page
----
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheets as
of June 30, 1997 and
December 31, 1996 4
Consolidated Statements of
Operations for the three months
ended June 30, 1997 and 1996 5
Consolidated Statements of
Operations for the six months
ended June 30, 1997 and 1996 6
Consolidated Statements of
Stockholders' Equity for the
six months ended June 30, 1997 7
Consolidated Statements of
Cash Flows for the six months
ended June 30, 1997 and 1996 8
Notes to Financial Statements 9
Item 2. Management's Discussion and
Analysis or Plan of Operation 12
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
3
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
ASSETS (NOTE 5)
June 30, December 31,
1997 1996
---------- ------------
Current assets
Cash and cash equivalents $ 136,384 $ 121,812
Accounts receivable, net of allowances for
doubtful accounts of $75,000 260,873 334,927
Note receivable-related parties (Note 3) 865,202 865,202
Supplies inventory 13,097 13,122
Other current assets 83,417 47,208
----------- -----------
Total current assets 1,358,973 1,382,271
Property and equipment, net (Note 4) 2,530,512 2,257,735
Deposits and other long-term assets 57,365 59,197
----------- -----------
Total assets $ 3,946,850 $ 3,699,203
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 524,039 448,521
Accrued expenses 157,655 303,597
Current portion of long-term debt (Note 5) 44,103 380,414
----------- -----------
Total current liabilities 725,797 1,132,532
Long-term debt, net of current portion (Note 5) 1,946,907 1,804,805
----------- -----------
Total liabilities 2,672,704 2,937,337
Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock, $.01 par value: 5,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.01 par value: 50,000,000 shares
authorized, 9,048,210 and 7,815,471 shares
issued and outstanding 90,481 78,154
Additional paid-in capital 1,889,744 1,508,009
Notes receivable from stockholder (Note 2) (122,593) (118,044)
Accumulated deficit (583,486) (706,253)
----------- -----------
Total stockholders' equity 1,274,146 761,866
----------- -----------
Total liabilities and stockholder's equity $ 3,946,850 $3,699,203
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------
1997 1996
---------- ----------
Income
Medical service revenue $ 786,778 $ 728,520
Rental income 67,925 32,428
---------- ----------
Total income 854,703 760,948
---------- ----------
Operating expenses
Cost of medical services 492,367 380,023
Selling, general, and administrative expenses 267,026 221,754
Rental expenses 22,042 11,670
---------- ----------
Total operating expenses 781,435 613,447
---------- ----------
Income from operations 73,268 147,501
Other income (expense)
Interest expense (57,191) (26,715)
Interest income 37,046 700
Other expense (199) -----
---------- ----------
Total other income (expense) (20,344) (26,015)
---------- ----------
Income before provision for income taxes 52,924 121,486
Provision for income taxes 6,834 ----
---------- ----------
Net income $ 46,090 $ 121,486
---------- ----------
---------- ----------
Net income per share $ 0.01 $ 0.03
---------- ----------
---------- ----------
Weighted average common shares outstanding 8,651,419 4,090,515
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------
1997 1996
------------ ------------
Income
Medical service revenue $ 1,635,374 $ 1,519,613
Rental income 135,850 32,427
------------ ------------
Total income 1,771,224 1,552,040
------------ ------------
Operating expenses
Cost of medical services 986,115 764,225
Selling, general, and administrative expenses 526,764 330,370
Rental expenses 33,198 11,670
------------ ------------
Total operating expenses 1,546,077 1,106,265
------------ ------------
Income from operations 225,147 445,775
Other income (expense)
Interest expense (106,619) (26,853)
Interest income 40,136 700
Other expense (28,263) ----
------------ ------------
Total other income (expense) (94,746) (26,153)
------------ ------------
Income before provision for income taxes 130,401 419,622
Provision for income taxes 7,634 ----
------------ ------------
Net income $ 122,767 $ 419,622
------------ ------------
------------ ------------
Net income per share $ 0.01 $ 0.16
------------ ------------
------------ ------------
Weighted average common shares outstanding 8,327,036 2,553,795
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Receivable Accumulated Total
Shares Amount Paid-In From Deficit
Capital Stockholder
--------- --------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 7,815,471 $ 78,154 1,508,009 (118,044) (706,253) $ 761,866
ASSUMPTION OF NOTES RECEIVABLE
OPTIONS EXERCISED
For services rendered 1,009,739 10,097 169,825 179,922
For cash 23,000 230 3,910 4,140
CONVERSION OF DEBT TO EQUITY 200,000 2,000 208,000 210,000
INCREASE IN RECEIVABLE FROM STOCKHOLDER (INTEREST) (4,549) (4,549)
NET INCOME 122,767 122,767
--------- --------- ---------- ------------- ----------- ----------
BALANCE, JUNE 30, 1997 9,048,210 $90,481 $1,889,744 $(122,593) $(583,486) $1,274,146
--------- --------- ---------- ------------- ----------- ----------
--------- --------- ---------- ------------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 122,767 $ 58,504
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 49,759 38,803
Issuance of stock options for services rendered 179,922 -----
(Increase) decrease in
Accounts receivable 74,054 (71,788)
Supplies inventory 25 (9,640)
Other current assets (36,209) (51,948)
Increase (decrease) in
Accounts payable 75,518 65,442
Accrued expenses (135,942) (1,867)
---------- ----------
Net cash provided by operating activities 329,894 27,506
---------- ----------
Acquisition of Sargent, Inc. ----- 50,266
---------- ----------
Cash flows from investing activities
(Increase) decrease in deposits (1,300) 10,000
Increase in receivable from stockholder (interest) (4,549) -----
Purchase of property and equipment (319,404) 2,198,220
---------- ----------
Net cash used in investing activities (325,253) (2,188,220)
Cash flows from financing activities
Repayments of capital lease obligations (3,798) -----
Repayment of debt (188,462) (130,277)
Proceeds from long-term debt 198,051 2,396,504
Proceeds from exercise of stock options 4,140 -----
Due from affiliates ----- (47,854)
---------- ----------
Net cash provided by financing activities 9,931 (2,218,373)
---------- ----------
Net increase in cash during period 14,572 107,925
---------- ----------
Cash and equivalents, beginning of period 121,812 ----
---------- ----------
Cash and equivalents, end of period $ 136,384 $ 107,925
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS NATIONAL QUALITY CARE
June 30, 1997
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 six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
NOTE 2. NOTES RECEIVABLE FROM STOCKHOLDER
Notes receivable from stockholder are unsecured demand notes with no stated
maturity date and bear interest at 8% per annum. At June 30, 1997, these notes
receivable are presented as an offset to stockholders' equity due to the
relationship of the parties involved and the uncertainty of the repayment of the
notes.
NOTE 3. SALE OF ASSETS IN EXCHANGE FOR NOTES RECEIVABLE FROM RELATED PARTIES
The obligors on two (2) promissory notes payable to the Company, in
the aggregate principal amount of $865,000 (subject to certain adjustments),
assigned 630,201 of the shares of Company common stock to a third party, who
executed a promissory note payable to the Company in the principal amount of
$1,000,000, bearing interest at the rate of 10% PER ANNUM, and due and payable
on or before February 23, 1998. The promissory notes executed by the initial
obligors were canceled. The obligation owing to the Company on the $1,000,000
promissory note is secured by the 630,201 shares of common stock, which are held
in escrow.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1997 consist of the following:
Land $ 855,897
Building 1,338,710
Medical equipment 481,727
Leasehold improvement 94,483
Office furniture and equipment 33,478
-----------
2,804,295
Less accumulated depreciation and
amortization 273,783
-----------
Total $ 2,530,512
-----------
-----------
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NOTE 5. NOTES PAYABLE
Notes payable and long term debt at June 30, 1997 consist of the following:
Notes payable to bank collateralized by land, building and
equipment, and assignment of $2,000,000 in life
insurance of, and guaranteed by, two majority
stockholders. The notes are payable in monthly
installments of $20,293 including interest at prime
plus 2% per annum. Principal is due May 2006. $ 1,792,824
Capital lease obligations 198,186
-----------
1,991,010
Less current portion 44,103
-----------
Long-term portion $ 1,946,907
-----------
-----------
NOTE 6. COMMITMENTS AND CONTINGENCIES.
LEASES.
The Company subleases certain facilities for its corporate office and
dialysis unit under a long-term lease agreement from a related party. Minimum
annual rental commitments under this lease are as follows:
Year Ending
December 31,
--------------
1997 $ 81,144
1998 81,144
1999 81,144
2000 54,096
----------
TOTAL $ 297,528
----------
----------
OTHER AGREEMENTS.
During 1996, the Company purchased a building for $200,000 in cash and
notes payable of $2,050,000. The Company has assigned the Master Lease and rents
to an unrelated third party who facilitated the purchase (the "Facilitator") and
who is responsible for paying the expenses and debt service of the property, and
retains
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certain rights to sell the property. The term of the agreement is 30 years.
As compensation, the Facilitator receives $1,000 per year payable in arrears.
Any rental income exceeding the payment of the expense is to be held by the
Facilitator as a reserve deposit. If the rental income is less than the
expenses, the Company is required to reimburse the Facilitator for the
difference. The Company recognizes the rental income and expenses in the
Company's statement of operations. At June 30,1997, the net reserve deposit
held by the Facilitator is $13,942 which has been included in Other current
assets.
The lease agreement for the building provides for minimum rental income of
$22,642 per month through 1999. The rental income is subject to annual increases
based on the consumer price index. Minimum annual rental income under this lease
is as follows:
Year Ending
December 31,
--------------
1997 $ 271,700
1998 271,700
1999 271,700
----------
TOTAL $ 815,100
----------
----------
NEW DIALYSIS FACILITY.
Construction for the new dialysis unit began in March 1997, and the
Company is in the final stages of negotiating the construction agreement with
the contractor. Management expects that the total cost of building and equipment
the unit will be approximately $640,000.
In March 1997, the Company entered into a firm purchase agreement for
dialysis products with a vendor. The term of the agreement is three years and is
subject to cancellation after the first year by either party or in the event of
default under the agreement. During each year of the agreement, the Company
agrees to purchase virtually all of its dialysis equipment and dialysis supplies
from the vendor. In exchange the vendor agrees to provide discounted pricing.
LITIGATION.
On July 3, 1997, Midway Hospital Medical Center, Inc. filed an unlawful
detainer action against the Company and Medipace Medical Group, Inc.
("Medipace"), an affiliate of certain of the Company's officers, directors and
principal stockholders, in the Superior Court for the County of Los Angeles,
California (Case No. BC174096). The unlawful detainer action relates to the
premises for the Company's existing dialysis unit in Los Angeles, California.
The Company has been and continues to be
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current in its rent and does not believe that it is in any way in default on
this lease. The default alleged by the landlord relates to business issues
between the landlord and Medipace. As a result, the Company has filed a
separate action against the landlord for breach of contract, constructive
eviction, breach of covenant of quite enjoyment and declaratory relief. The
Company intends to vigorously defend itself in the unlawful detainer action
and vigorously to prosecute its action against the landlord, and anticipates
not being required to vacate its current dialysis unit premises. However, no
assurance to that effect can be given. Management believes that the Company
has adequate capacity at the new dialysis unit to transfer all of the
Company's existing patients and to accommodate a significant increase in new
patients. Therefore, the Company does not anticipate an interruption or
reduction in revenue or services as a result or in the event of an
unsuccessful defense of this litigation.
The Company believes that it is not in default of any obligations to either
Medipace or Midway. The Company also believes that should Midway try to evict it
from its office space, Midway will be unsuccessful. Therefore, the Company's
basis is that: (i) Midway consented to the Sublease, (ii) the Sublease provides
that if the Master Lease terminates before the expiration of the Sublease, the
Company will attorn to Midway at Midway's option, without right of the Company,
to terminate the Sublease or to surrender possession of the premises, (iii)
Midway has billed the Company directly and separately for the rent on its office
space, (iv) the Company has paid the rent on its office space directly to
Midway, and (v) the Company is current on the rent on its office space.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW OF PRESENTATION. On May 11, 1996, the Company entered into an
Agreement for Exchange of Stock (the "Share Exchange Agreement") with Los
Angeles Community Dialysis, Inc., a California corporation ("LOS ANGELES
COMMUNITY DIALYSIS, INC."), Victor Gura, M.D., Avraham H. Uncyk, M.D. and Ronald
P. Lang, M.D., pursuant to which the Company issued an aggregate of 4,234,128
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock") in exchange for 100% of the issued and outstanding shares of common
stock of LOS ANGELES COMMUNITY DIALYSIS, INC.. In connection with the closing of
the Share Exchange Agreement, LOS ANGELES COMMUNITY DIALYSIS, INC. became the
principal; operating subsidiary of the Company. On May 28, 1996, the Company
changed its name to "National Quality Care, Inc."
Since approximately May, 1996, the focus of the Company's principal
business operations has been the providing of high-quality integrated dialysis
services for patients suffering from End Stage Renal Disease ("ESRD").
The financial statements of the Company included in this Report have been
presented, for accounting purposes, as a recapitalization of LOS ANGELES
COMMUNITY DIALYSIS, INC., with LOS ANGELES COMMUNITY DIALYSIS, INC. as the
acquiror of the Company. For purposes of clarity in this section, the term
"Company" reflects the financial condition and results of operations of LOS
ANGELES
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COMMUNITY DIALYSIS, INC. and the combined operations of the parent holding
company and LOS ANGELES COMMUNITY DIALYSIS, INC. following the completion of
the Share Exchange Agreement.
This report, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and/or
uncertainties. When used herein, the terms "anticipates," "expects,"
"estimates," "believes" and similar expressions, as they relate to the
Company or its management, are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements may
differ materially from those expressed or implied by such forward-looking
statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
1997 AND JUNE 30, 1996. Total income for the three months ended June 30, 1997
increased approximately 12% to $854,703 from $760,948 for the three months ended
June 30, 1996. For the first six months of 1997, total income increased
approximately 14% to $1,771,224 from $1,552,040 for the first six months of
1996. Medical service revenue for the three months ended June 30, 1997 increased
approximately 8% to $786,778 from $728,520 for the three months ended June 30,
1996. For the first six months of 1997, medical service revenue increased
approximately 8% to $1,635,374 from $1,519,613 for the first six months of 1996.
This increase primarily resulted from an increase in volume of inpatient and
home dialysis care. In addition, the Company received rental income of $135,850
during the six months ended June 30, 1997 from certain real property owned by
the Company in Los Angeles, California utilized by a non-affiliate as a hospital
facility.
Total operating expenses during the three months ended June 30, 1997
increased 27% to $781,435 from $613,447 during the three months ended June 30,
1996. For the first six months of 1997, total operating expenses increased 40%
to $1,546,077 from $1,106,265 for the first six months of 1996. Total operating
expenses include: (i) cost of medical services, (ii) selling, general and
administrative expenses, and (iii) rental expenses, as follows:
Cost of medical services during the three months ended June 30, 1997
increased 30% to $492,367 from $380,023 during the three months ended June 30,
1996. For the first six months of 1997, cost of medical services increased 29%
to $986,115 from $764,225 for the first six months of 1996. This increase
primarily resulted from the increase in medical supplies utilized in the
Company's business operations due to the corresponding increase in volume of
inpatient and home dialysis care. Cost of medical services primarily consist of
two (2) categories: (i) medical services and supplies, and (ii) outside
services. Medical services and supplies for the three months ended June 30, 1997
increased approximately 15% to $223,593 from $193,857 for the three months ended
June 30, 1996. For the first six months of 1997, Medical services and supplies
increased 34% to $441,887 from $329,899 for the first six months of 1996. The
increase was primarily due to rising usage of medical supplies prescribed, which
in turn resulted in higher revenues. Outside services for the three months ended
June 30, 1997 decreased approximately 1% to $93,238 from $94,078 for the three
months ended June 30, 1996. For the first six months of 1997, Outside services
decreased 4% to $215,463 from $224,733 for the first six months of 1996.
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Selling, general and administrative expenses during the three months ended
June 30, 1997 increased to $267,026 from $221,754 during the three months ended
June 30, 1996. For the first six months of 1997, Selling, general and
administrative expenses increased 59% to $526,724 from $330,370 for the first
six months of 1996. This increase primarily related to ongoing legal and
accounting and consulting fees related to the development of the Company's
business plan and acquisition strategy.
Rental expenses during the three months ended June 30, 1997 were $22,042,
as compared to $11,670 for the three months ended June 30, 1996. These rental
expenses related to the hospital building purchased by the Company in May, 1996.
Other expenses increased during the six months ended June 30, 1997 to
$94,746 from $26,153 during the six months ended June 30, 1996. This increase in
expenses between the respective periods resulted primarily from: (i) certain
non-recurring expenses of $42,750 in 1997 which were not incurred in the prior
year, related to a joint venture with respect to a potato harvester related to
the Company's prior business operations; (ii) increased interest expenses to
$106,619 from $26,853, primarily arising from interest expenses relating to the
mortgage on the hospital facility; and, (iii) accrued interest income to $40,136
from $700.
As a result of the foregoing, the Company experienced net income of $46,090
during the three months ended June 30, 1997, as compared to net income of
$121,486 during the three months ended June 30, 1996. For the first six months
of 1997, the Company experienced net income of $122,767 as compared to $419,622
for the first six months of 1996. The Company also experienced income from
operations during each of the three months ended June 30, 1997 and 1996.
However, income from operations during the three months ended June 30, 1997
decreased to $73,268 from $147,501 during the three months ended June 30, 1996.
For the first six months of 1997, income from operations decreased to $225,147
from $445,775 for the first six months of 1996. Management believes that this
decrease in income from operations primarily resulted from medical services,
supplies, and legal as described above. The Company believes there can be no
assurances that comparable amounts of legal expenses may not arise in connection
with the development of the Company's proposed business plan, particularly as
may relate to any financings, acquisitions or development which may occur.
However, the Company's proposed business plan contemplates the growth of
revenues in connection with the Company's expansion strategy. There can be no
assurance that the Company's acquisition strategy will create operating
synergies with any acquired proposed acquisition or development target or result
in profitable operations. See "Liquidity and Capital Resources."
As of December 31, 1996, the Company had net operating loss carryforwards
totalling approximately $670,000 and $335,000 for federal and state income tax
purposes, respectively. Utilization of the Company's net operating loss may be
subject to limitations under certain circumstances.
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LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1997, the ratio of current
assets to current liabilities was 1.87 to 1.00. The inventory consists of
medical supplies and medications.
The Company has historically financed its operations through the use of
working capital and loans to the Company.
Cash and cash equivalents were $136,384 as of June 30, 1997, as compared to
$121,812 as of December 31, 1996.
As of June 30, 1997, the Company had long-term borrowings in the aggregate
amount of $1,991,010, the current portion of which was $44,103. As of December
31, 1996, the Company had long-term borrowings of $1,804,805.
As of June 30, 1997, the Company had no short-term borrowings compared to
$361,074 as of December 31, 1996. The decrease was primarily attributable to
the payoff of the Corporate Funding Inc. ("Orion") working capital loan due
on June 30, 1997. The amount owed to Orion was secured by the accounts
receivable of the Company, and the subject of a limited guaranty by Dr. Gura.
The Company has reached an agreement and completed the conversion of the
$200,000 note into Common Stock. In addition, $19,640 of the current portion
of long-term debt will be payable during the year ending December 31, 1997.
The Company has demand note receivables including accrued interest in the
amounts of $70,502 and $52,091 from Medipace Medical Group, Inc., an
affiliate of each of the Company's three (3) directors and largest
stockholders, which are the subject of demand promissory notes dated October
31, 1996 and May 22, 1996 respectively, each bearing interest at the rate of
8% PER ANNUM.
The obligors on two (2) promissory notes payable to the Company, in the
aggregate principal amount of $865,000 (subject to certain adjustments),
assigned 630,201 of the shares of Common Stock to a third party, who executed a
promissory note payable to the Company in the principal amount of $1,000,000,
bearing interest at the rate of 10% PER ANNUM, and due and payable on or before
February 23, 1998. The promissory notes executed by the initial obligors were
canceled The obligation owing to the Company on the $1,000,000 promissory note
is secured by the 630,201 shares of Common Stock, which are held in escrow.
The Company's cash flow needs for the three months ended June 30, 1997 were
provided from operations.
Management believes that, as of June 30, 1997, and for the foreseeable
future, the Company will be able to finance costs of current levels of
operations from revenues, including the payment of the obligations on the
hospital facility and the note payable to Orion.
The Company's current business plan includes a strategy to expand as a
provider of dialysis services through the development of new dialysis facilities
and the
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acquisition of additional facilities and other strategically related health
care services in selected markets. The market for such acquisition prospects
is highly competitive and management expects that certain potential acquirors
will have significantly greater capital than the Company. 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 rapidly. In order to finance more rapid expansion plans,
the Company will require financing from external sources. 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. In the event the Company cannot obtain such
additional financing, the Company may be unable to achieve its proposed
expansion strategy.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which is
effective for financial statements issued for periods ending after December 31,
1997. SFAS No. 128 requires public companies to present basic earnings per share
and, if applicable, diluted earnings per share, instead of primary and fully
diluted earnings per share. The Company has not yet determined the effect of
adopting SFAS No. 128.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income," which is required to be adopted for
financial statements issued for periods beginning after December 15, 1997.
This statement establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as
revenue, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive but excluded from net income (such
as extraordinary and non-recurring gains and losses). SFAS No. 130 requires
that items of other comprehensive income be classified separately in the
financial statements. The statement also requires that the accumulated
balance of other comprehensive income items be reported separately from
retained earnings and paid-in capital in the equity section of the balance
sheet. SFAS No. 130 is not expected to have a material effect on the
Company's financial position or results of operations.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
required to be adopted for financial statements issued for periods beginning
after December 15, 1997. SFAS No. 131 is not required to be applied to interim
financial statements in the initial year of application. This statement requires
that financial and descriptive information about operating segments be reported.
Generally, financial information will be required to be reported on the basis
that it is used internally for evaluating segment performance and deciding how
to allocate resources to segments. SFAS No. 131 will not have any effect on the
Company's financial position or results of operations.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 3, 1997, Midway Hospital Medical Center, Inc. filed an unlawful
detainer action against the Company and Medipace Medical Group, Inc.
("Medipace"), an affiliate of certain of the Company's officers, directors and
principal stockholders, in the Superior Court for the County of Los Angeles,
California (Case No. BC174096). The unlawful detainer action relates to the
premises for the Company's existing dialysis unit in Los Angeles, California.
The Company has been and continues to be current in its rent and does not
believe that it is in any way in default on this lease. The default alleged by
the landlord relates to business issues between the landlord and Medipace. As a
result, the Company has filed a separate action against the landlord for breach
of contract, constructive eviction, breach of covenant of quite enjoyment and
declaratory relief. The Company intends to vigorously defend itself in the
unlawful detainer action and vigorously to prosecute its action against the
landlord, and anticipates not being required to vacate its current dialysis unit
premises. However, no assurance to that effect can be given. Management believes
that the Company has adequate capacity at the new dialysis unit to transfer all
of the Company's existing patients and to accommodate a significant increase in
new patients. Therefore, the Company does not anticipate an interruption or
reduction in revenue or services as a result or in the event of an unsuccessful
defense of this litigation.
The Company believes that it is not in default of any obligations to either
Medipace or Midway. The Company also believes that should Midway try to evict it
from its office space, Midway will be unsuccessful. Therefore, the Company's
basis is that: (i) Midway consented to the Sublease, (ii) the Sublease provides
that if the Master Lease terminates before the expiration of the Sublease, the
Company will attorn to Midway at Midway's option, without right of the Company,
to terminate the Sublease or to surrender possession of the premises, (iii)
Midway has billed the Company directly and separately for the rent on its office
space, (iv) the Company has paid the rent on its office space directly to
Midway, and (v) the Company is current on the rent on its office space.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS OF FORM 8-K.
The Company filed a report on Form 8-K on April 28, 1997, during the
Quarterly Period ended June 30, 1997.
(b) EXHIBIT.
27. Financial Data Schedule
17
<PAGE>
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: August 12, 1997 NATIONAL QUALITY CARE, INC.
By: /s/ Ron Berkowitz
------------------------
Ron Berkowitz
Chief Financial Officer
18
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