<PAGE>
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
[ ] TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 1998
Commission file number 0-19031
National Quality Care, Inc.
(EXACT NAME OF REGISTRANT)
Delaware 84-1215959
(State of Incorporation) (IRS Employer ID No.)
1835 South La Cienega Boulevard, Suite 235
Los Angeles, CA 90035
(Address of Principal Executive Offices) (Zip Code)
(310) 280-2758
(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 May 6, 1998 is 9,788,523.
1
<PAGE>
National Quality Care, Inc.
Table of Contents
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Operations
for the Three Months Ended March 31, 1998
and 1997 5
Consolidated Statements of Stockholders'
Equity for the Three Months Ended March 31, 1998 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 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 14
Signatures 15
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
3
<PAGE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
ASSETS (NOTE 5)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ --- $ 39,220
Accounts receivable, net of allowances for
doubtful accounts of $75,000 422,147 340,497
Note receivable-related parties 641,790 ---
Supplies inventory 67,869 46,723
Other current assets 51,406 30,537
------------- -------------
Total current assets 1,183,212 456,977
Property and equipment, net (note 2) 2,547,240 2,561,510
Note receivable - related parties --- 641,790
Deposits and other long-term assets 53,165 54,231
------------- -------------
Total assets $ 3,783,617 $ 3,714,508
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Book overdraft 16,152 ---
Accounts payable 703,508 595,380
Accrued expenses 177,084 192,718
Current portion of long-term debt (note 3) 64,472 63,483
------------- -------------
Total current liabilities 961,216 851,581
Long-term debt, net of current portion (note 3) 1,844,452 1,870,194
------------- -------------
Total liabilities 2,805,668 2,721,775
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, 9,680,710 and 9,555,710 shares
issued and outstanding 96,806 95,556
Additional paid-in capital 2,125,144 2,086,394
Notes receivable from stockholder (118,922) (116,622)
Accumulated deficit (1,125,079) (1,072,595)
------------- -------------
Commitments and contingencies (note 4)
Total stockholders' equity 977,949 992,733
------------- -------------
Total liabilities and stockholder's equity $ 3,783,617 $ 3,714,508
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Income
Medical service income $ 792,577 $ 848,596
Rental income 67,925 67,925
------------- -------------
Total income 860,502 916,521
------------- -------------
Operating expenses
Cost of medical services 547,487 493,930
Selling, general, and administrative 287,780 249,795
Depreciation and amortization 22,140 9,761
Rent and other 11,156 11,156
------------- -------------
Total operating expenses 868,563 764,642
------------- -------------
Income (loss) from operations (8,061) 151,879
Other income (expense)
Interest expense (48,432) (49,427)
Interest income 2,300 3,090
Other income (expense) (note 4) 1,709 (28,064)
------------- -------------
Total other expense (44,423) (74,401)
------------- -------------
Income (loss) before provision for income taxes (52,484) 77,478
Provision for income taxes --- 800
------------- -------------
Net income (loss) $ (52,484) $ 76,678
------------- -------------
------------- -------------
Basic and diluted income (loss) per share $ (0.00) $ 0.01
------------- -------------
------------- -------------
Weighted average shares outstanding 9,661,415 7,999,049
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Receivable Accumulated Total
Shares Amount Paid-In From Deficit
Capital Stockholder
----------------------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,555,710 $ 95,556 $ 2,086,394 $ (116,622) $(1,072,595) 992,733
Options issued and exercised
For services rendered 125,000 1,250 38,750 40,000
Increase in receivable from
stockholder (interest) (2,300) (2,300)
Net loss (52,484) (52,484)
----------------------- ----------- ------------ ------------ ---------
Balance, March 31, 1998 9,680,710 $ 96,806 $ 2,125,144 $ (118,922) $(1,125,079) $ 977,949
----------------------- ----------- ------------ ------------ ---------
----------------------- ----------- ------------ ------------ ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <S>
Cash flows from operating activities
Net income (loss) $ (52,484) $ 76,678
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 32,796 22,483
Issuance of common stock and stock options for services 40,000 ---
(Increase) decrease in
Accounts receivable (81,650) 59,413
Supplies inventory (21,146) 25
Other current assets (20,869) (17,700)
Increase (decrease) in
Accounts payable 108,128 (69,003)
Accrued expenses (15,634) 13,965
Book overdraft 16,152 ---
---------- ----------
Net cash provided by operating activities 5,293 85,861
---------- ----------
Cash flows from investing activities
Increase in receivable from stockholder (interest) (2,300) (2,262)
Purchase of building and equipment (17,460) (20,001)
---------- ----------
Net cash used in investing activities (19,760) (22,263)
Cash flows from financing activities
Repayments of capital lease obligations (8,019) ---
Repayment of long-term debt (16,734) (109,401)
Proceeds from exercise of stock options --- 4,140
---------- ----------
Net cash used in financing activities (24,753) (105,261)
---------- ----------
Net decrease in cash during period (39,220) (41,663)
---------- ----------
Cash and equivalents, beginning of period 39,220 121,812
---------- ----------
Cash and equivalents, end of period $ --- $ 80,149
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATIONAL QUALITY CARE
March 31, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB. 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. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997. In the opinion of Management, all adjustments considered
necessary for a fair presentation have been included in the interim period.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
(2) PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 855,897
Building 1,338,710
Medical equipment 503,795
Leasehold improvement 158,372
Office furniture and equipment 58,228
-----------
2,915,002
Less accumulated depreciation and
amortization 367,762
-----------
Total $ 2,547,240
-----------
-----------
</TABLE>
(3) NOTES PAYABLE
Notes payable and long term debt at March 31, 1998 consist of the following:
Notes payable in monthly installments of $20,293,
including interest at prime plus 2% (10.25% at
March 31, 1998) per annum, through May 2006,
collateralized by land, building and equipment
and assignment of $2,000,000 in life insurance of,
and guaranteed by, two majority stockholders $ 1,743,523
Note payable, due in monthly installments of $858,
including interest at 10% with the unpaid balance
due August 2000, secured by equipment 22,030
8
<PAGE>
Capital lease obligations, due in aggregate monthly
installments of $3,488, including interest at 12%,
due December 2001, collateralized by equipment $ 143,371
------------
1,908,924
Less current portion 64,472
------------
Long-term portion $ 1,844,452
------------
------------
(4) COMMITMENTS AND CONTINGENCIES
LEASE AND SUBLEASE AGREEMENTS
During 1996, the Company purchased land and building of approximately $2,195,000
by issuing notes payable of $2,055,000 and the balance in cash. The property
was assigned under a 30-year master lease to a third party who subleases the
building and is responsible for paying expenses and servicing the debt
associated with the property. The master lease provides minimum rental income
of $22,642 per month through 1999. The third party receives $1,000 per year
from the Company as compensation, payable in arrears. Rental income exceeding
the expenses is held as a reserve deposit, while the Company is responsible for
any shortfall. The Company recognizes the rental income and expenses.
The carrying value of the land and building was $2,111,037 and $2,123,000 March
31, 1998 and December 31, 1997, respectively. Depreciation expense of $11,156
was included in rent and other expenses at March 31, 1998 and 1997. The net
reserve deposit included in other assets was $16,585 and $11,894 at March 31,
1998 and December 31, 1997, respectively.
ASSET PURCHASE AGREEMENT
In December 1997, the Company entered into an asset purchase agreement, whereby
the Company agreed to purchase substantially all the assets other than land and
building of an organization engaged in a similar line of business. As
consideration for the asset purchase, the Company will pay $875,000 in cash and
assume liabilities of $375,000. It is the intent of the selling organization to
retain the rights to the land and the building and lease such facilities to the
Company. The expected closing date is May 1998.
(5) EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (EPS) (SFAS No. 128). SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options. Diluted
earnings per share is very similar to the previously reported primary earnings
per share. All earnings per share amounts for all periods have been restated to
conform to SFAS No. 128 requirements.
9
<PAGE>
Weighted average shares outstanding for both basic and diluted income (loss) per
share for the three months ended March 31, 1998 and March 31, 1997 were
9,661,000 and 7,999,000, respectively. The Company has not included the
dilutive effect of assumed conversions and exercises of stock options and
warrants for March 31, 1998 since the effect of such an inclusion would be
antidilutive due to the Company's net loss in 1998.
Had the Company included the dilutive effect of assumed conversions and
exercises of stock options and warrants on the weighted average shares
outstanding, approximately 67,000 and 193,000 shares would have been included
in 1998 and 1997, respectively. Excluded from these totals were warrants to
purchase 500,000 shares of common stock at $1.75 that were granted on May 12,
1996. These options and warrants were not included in the computation
because their exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
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 comprehensive income be classified separately in the financial
statements. SFAS No. 130 also requires that the accumulated balance of
comprehensive income items be reported separately from retained earnings and
paid-in capital in the equity section of the balance sheet. The adoption of
SFAS No. 130 did not require additional reporting from that stated on the
Company's financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF PRESENTATION. Since approximately May 1996, the focus of the
Company's principal business operation has been to provide high-quality
integrated dialysis services for patients suffering from End Stage Renal Disease
("ESRD").
The Company conducts its business through its wholly-owned operating
subsidiary, Los Angeles Community Dialysis, Inc. For purposes of clarity in
this section, the term "Company" reflects the financial condition and results
of operations of Los Angeles Community Dialysis, Inc. and the combined
operations of the parent holding company and Los Angeles Community Dialysis,
Inc.
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
10
<PAGE>
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 ENDED MARCH 31, 1998 AND MARCH
31, 1997. Total revenue for the three months ended March 31, 1998 decreased
approximately 6% to $860,502 from $916,521 for the three months ended March 31,
1997. Medical service revenue for the three months ended March 31, 1998
decreased approximately 7% to $792,577 from $848,596 for the three months ended
March 31, 1997. The decrease primarily resulted from an industry-wide decrease
in pricing of inpatient dialysis services and a decrease in the number of
inpatient treatments. The decrease in the number of inpatient treatments is not
expected to continue.
Total operating expenses during the three months ended March 31, 1998
increased 14% to $868,563 from $764,642 during the three months ended March 31,
1997. Total operating expenses include (i) Cost of medical services, (ii)
Selling, general and administrative expenses, and (iii) Rental expense, as
follows:
Cost of medical services during the three months ended March 31, 1998
increased 11% to $547,487 from $493,930 during the three months ended March 31,
1997. This increase primarily resulted from the increase in prescribed usage of
medical supplies utilized in the Company's business operations. Cost of medical
services primarily consists of two (2) categories: (i) Medical services and
supplies, and (ii) Outside services. Medical services and supplies for the
three months ended March 31, 1998 increased approximately 20% to $454,627 from
$380,043 for the three months ended March 31, 1997. The increase was primarily
due to rising usage of medical supplies prescribed due to increased outpatient
volume, the leasing of replacement equipment in the Company's dialysis
facilities and the depreciation of new equipment for a dialysis facility opened
by the Company in September 1997, which has not reached a patient count
sufficient to generate profitable operations. Outside services for the three
months ended March 31, 1998 decreased approximately 26% to $77,672 from $105,534
for the three months ended March 31, 1997. The decrease was directly
attributable to the decreased volume of inpatient services. This decrease in
volume is not expected to continue due to the addition of hospitals as well as
health factors of the patient base.
Selling, general and administrative expenses during the three months ended
March 31, 1998 increased to $287,780 from $249,795 during the three months
,ended March 31, 1997. 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.
Other expenses decreased during the three months ended March 31, 1998 to
$44,423 from $74,401 during the three months ended March 31, 1997. This
decrease in expenses between the respective periods resulted primarily from:
(i) certain non-recurring expenses of $42,750 in 1997 related to the Company's
prior business operations.
As a result of the foregoing, the Company experienced a net loss of $52,484
during the three months ended March 31, 1998, as compared to net income of
$76,678
11
<PAGE>
during the three months ended March 31, 1997. The Company experienced a loss
from operations during the three months ended March 31, 1998 of $8,061
compared to income from operations of $151,879 during the three months ended
March 31, 1997. Management believes that this loss from operations primarily
resulted from the decline in inpatient services and slight compression in
profit margin for inpatient services, partially offset by increased revenues
from the freestanding dialysis units. Management believes that the decline
in inpatient services is temporary.
As of December 31, 1997, the Company had net operating loss carryforwards
totaling approximately $4,200,000 and $1,700,000 for federal and state income
tax purposes, respectively. Utilization of the Company's net operating loss may
be subject to limitations under certain circumstances.
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1998, the ratio of current
assets to current liabilities was 1.23 to 1.00 compared to .54 at December 31,
1997. The change was due to the maturity of the net note receivable of $642,000
in February 1999. 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. The Company's cash flow needs for the
three months ended March 31, 1998 were primarily provided from operations and
existing cash. The Company had working capital of approximately $222,000 at
March 31, 1998. A net note receivable of $642,000 on the Company's financial
statements was re-classified as a long-term asset due to its maturity in
February 1999. The working capital deficit at March 31, 1997 was approximately
$395,000.
Cash and cash equivalents were zero as of March 31, 1998, as compared to
$39,220 as of December 31, 1997. This decrease was primarily attributable to
the expenditure of funds in connection with the new dialysis facility, which was
opened in September 1997. The Company is currently in discussion with various
financial intermediaries in order to raise debt and equity.
As of March 31, 1998, the Company had long-term borrowings in the aggregate
amount of $1,908,924, the current portion of which was $64,472. As of December
31, 1997, the Company had aggregate long-term borrowings of $1,933,677.
The Company has a note receivable including accrued interest in the amount
of $124,151 from Medipace Medical Group, Inc., an affiliate of two of the
Company's four (4) directors and largest stockholders, bearing interest at the
rate of 8% PER ANNUM.
During 1996, the Company sold certain assets for no gain or loss to former
affiliates for $71,219 of cash, net of encumbrances paid on those assets of
$78,781 and promissory notes totaling $865,202 that bore 8% interest and were
due September 1996. The notes were collateralized by approximately 648,000
shares of the Company's common stock and were in default at December 31, 1996.
Subsequently, the notes were assumed by a third party, who purchased, from the
affiliate, approximately 630,000 of the common shares. The third party executed
an additional $135,000 non-interest bearing note to the Company, which is fully
reserved. Both notes are due February 1999 and are secured by the common
shares. During 1997, 60,000
12
<PAGE>
common shares were sold and the proceeds were applied to reduce principal and
accrued interest by $3,412 and $73,388, respectively. The Company has
provided for a valuation allowance of $220,000 on the $861,790 note to
reserve for the difference between the approximate fair value of the
collateral and the book value of the note.
The Company's cash flow needs for the three months ended March 31, 1998
were provided from operations. Management believes that, as of March 31, 1998,
and for the foreseeable future, the Company will be able to finance costs of
current levels of operations from cash flow generated from operations.
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 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
acquirers will have significantly greater capital than the Company. The Company
currently experiences negative operations. Management believes this situation
is temporary and expects to continue expansion of the Company and to achieve
profitable operations in the future, however, there can be no assurances to that
effect. The Company experienced an unusually low number of treatments, however,
the Company expects normal activity for the year. In order to finance
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 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. The adoption of SFAS No. 131
did not have any effect on the Company's financial position or results of
operations.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
The Company filed no report on a Form 8-K during the Quarterly Period ended
March 31, 1998.
(b) Exhibit
27. Financial Data Schedule
14
<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: May 6, 1998 NATIONAL QUALITY CARE, INC.
By: /s/ Ron Berkowitz
-----------------------
Ron Berkowitz
Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 497147
<ALLOWANCES> 0
<INVENTORY> 67869
<CURRENT-ASSETS> 1183212
<PP&E> 2915002
<DEPRECIATION> 367762
<TOTAL-ASSETS> 3783617
<CURRENT-LIABILITIES> 961216
<BONDS> 1844452
0
0
<COMMON> 96806
<OTHER-SE> 881143
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 860502
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 864554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48432
<INCOME-PRETAX> (52484)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52484)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
