<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, 1999
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 10, 1999 is 9,814,878.
1
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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
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the Three Months Ended March 31, 1999
and 1998 5
Consolidated Statements of Stockholders'
Equity for the Three Months Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
3
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<TABLE>
<CAPTION>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------
ASSETS
March 31, December 31,
1999 1998
<S> <C> <C>
Current assets
Cash and cash equivalents $ ----- $ 27,754
Accounts receivable, net of allowance for
doubtful accounts of $180,000 and $170,000 620,741 651,354
Supplies inventory 74,771 54,539
Other current assets 99,529 50,521
------------ ------------
Total current assets 795,041 784,168
Property and equipment, net 2,673,543 2,713,800
Deposits and other long-term assets 55,883 64,006
------------ ------------
Total assets $ 3,524,467 $ 3,561,974
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 827,997 $ 998,561
Accrued expenses 210,405 266,374
Current portion of long-term debt 316,348 202,075
------------ ------------
Total current liabilities 1,354,750 1,467,010
Long-term debt, net of current portion 2,105,269 2,047,779
------------ ------------
Total liabilities 3,460,019 3,514,789
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, 9,814,878 shares issued and outstanding 98,148 98,148
Additional paid-in capital 2,163,407 2,163,407
Notes receivable from stockholders (271,472) (269,025)
Accumulated deficit (1,925,635) (1,945,345)
------------ ------------
Total stockholders' equity 64,448 47,185
------------ ------------
Total liabilities and stockholders' equity $ 3,524,467 $ 3,561,974
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
Income
Medical service income $ 924,814 $ 792,577
Rental income 67,565 67,925
------------ ------------
Total income 992,379 860,502
------------ ------------
Operating expenses
Cost of medical services 632,433 547,487
Selling, general, and administrative 237,864 287,780
Depreciation and amortization 30,668 22,140
Rent and other 11,156 11,156
------------ ------------
Total operating expenses 912,121 868,563
------------ ------------
Income (loss) from operations 80,258 (8,061)
Other income (expense)
Interest expense (62,995) (48,432)
Interest income 2,447 2,300
Other income ----- 1,709
------------ ------------
Total other expense (60,548) (44,423)
------------ ------------
Income (loss) before provision for income taxes 19,710 (52,484)
Provision for income taxes ------ -----
------------ ------------
Net income (loss) $ 19,710 $ (52,484)
============ ============
Basic and diluted income (loss) per share $ 0.00 $ (0.00)
============ ============
Weighted average shares outstanding 9,814,878 9,661,415
============ ============
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------------
<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, 1998 9,814,878 $ 98,148 $ 2,163,407 $ (269,025) $(1,945,345) 47,185
Increase in receivable from
stockholder (interest) (2,447) (2,447)
Net income 19,710 19,710
----------- ------------ ------------ ------------ ------------ ------------
Balance, March 31, 1998 9,814,878 $ 98,148 $ 2,163,407 $ (271,472) $(1,925,635) $ 64,448
=========== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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<TABLE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 19,710 $ (52,484)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 40,257 32,796
Increase in receivable from stockholder (interest) (2,447) (2,300)
Issuance of common stock and stock options for services ----- 40,000
(Increase) decrease in
Accounts receivable 30,613 (81,650)
Supplies inventory (20,232) (21,146)
Other current assets (49,008) (20,869)
Other assets 8,123 -----
Increase (decrease) in
Accounts payable 41,602 124,280
Accrued expenses (40,596) (15,634)
---------- ----------
Net cash provided by operating activities 30,469 5,293
---------- ----------
Cash flows from investing activities
Purchase of building and equipment ----- (17,460)
---------- ----------
Net cash used in investing activities ----- 17,460
Cash flows from financing activities
Repayments of capital lease obligations (23,410) (8,019)
Repayment of long-term debt (32,366) 16,734)
---------- ----------
Net cash used in financing activities (55,776) (24,753)
---------- ----------
Net decrease in cash during period (27,754) (39,220)
---------- ----------
Cash and equivalents, beginning of period 27,754 39,220
---------- ----------
Cash and equivalents, end of period $ ---- $ -----
========== ==========
Supplemental disclosures of cash information:
Interest paid 62,995 48,432
In February 1999, the Company signed a promissory note with Priority
Healthcare to convert $212,166 of accounts payable and $15,373 of accrued
service charges into a long-term note payable in 23 monthly installments
with interest upon the unpaid
principle balance at the rate of 10% 227,539 -----
Interest receivable from stockholder accrued but not received (2,447) (2,300)
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATIONAL QUALITY CARE
March 31, 1999
(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, 1998. 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, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999.
(2) NOTES PAYABLE
<TABLE>
Notes payable and long term debt at March 31, 1999 consists of the
following:
<CAPTION>
<S> <C>
Notes payable in monthly installments of $20,293, including
interest at prime plus 2% (9.75% at March 31, 1999) 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 $ 1,713,094
Note payable, due in monthly installments of $858,
including interest at 10% with the unpaid balance
due August 2000, secured by equipment 13,552
Capital lease obligations, due in aggregate monthly
installments of $3,488, including interest at 12%,
due December 2001, collateralized by equipment 117,300
Capital lease obligations, due in monthly installments
of $6,894, including interest at 15%, due July 2002,
secured by equipment 219,890
Capital lease obligations, due in monthly installments
of $643, including interest at 13%, due October 2002,
secured by equipment 21,969
Term loan, due in monthly installments of $1,667 plus interest at
1.5% over the bank's index rate (9.25% at
March 31, 1999). Final installment due April 2003 83,330
Revolving line of credit, secured by accounts receivable and
personal guarantees by the Company's stockholders. The note is
payable in interest only payments at 1.5% over the bank's
index rate (9.25% at March 31, 1999).
Principal is due on April 30, 1999. 50,000
8
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Accounts payable of $212,166 plus $15,373 accrued service charges
were converted into a note payable in monthly payments of
$10,000 plus interest at 10%, through
December 2000. 207,540
-----------
$2,421,617
Less current portion 316,348
-----------
Long-term portion $2,105,269
===========
</TABLE>
(3) EARNINGS PER SHARE
Weighted average shares outstanding for both basic and diluted income
(loss) per share for the three months ended March 31, 1999 and March 31, 1998
were 9,815,000 and 9,661,000, respectively. The Company has not included the
dilutive effect of assumed conversions and exercises of stock options and
warrants for March 31, 1999 and 1998 since the effect of such an inclusion was
antidilutive.
Had the Company included the dilutive effect of assumed conversions and
exercises of stock options and warrants on the weighted average shares
outstanding, approximately zero (0) and 67,000 shares would have been included
in 1999 and 1998, respectively. All options outstanding as of March 31, 1999 had
a higher exercise price than the market price of the stock at that date.
Excluded from these totals were warrants to purchase 500,000 shares of common
stock at $3.50 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.
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 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, 1999 AND
MARCH 31, 1998. Total income for the three months ended March 31, 1999 increased
approximately 15% to $992,379 from $860,502 for the three months ended March 31,
1998. Medical service income for the three months ended March 31, 1999 increased
approximately 16% to $924,814 from $792,577 for the three months ended March 31,
1998. The increase resulted from higher volume of outpatient treatments, as well
as inpatient services.
Total operating expenses during the three months ended March 31, 1999
increased 5% to $912,121 from $868,563 during the three months ended March 31,
1998. Total operating expenses include (i) cost of medical services, (ii)
selling, general and administrative expenses, and (iii) rental expense, as
follows:
9
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Cost of medical services during the three months ended March 31, 1999
increased 15% to $632,433 from $547,487 during the three months ended March 31,
1998. This increase primarily resulted from the increase in prescribed usage of
medical supplies utilized in the Company's business operations and is in line
with the growth in revenues. 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, 1999
increased approximately 15% to $521,081 from $454,627 for the three months ended
March 31, 1998. The increase was primarily due to rising usage of medical
supplies prescribed due to increased outpatient and inpatient volume and the
leasing of replacement equipment in the Company's dialysis facilities. Outside
services for the three months ended March 31, 1999 increased approximately 23%
to $95,683 from $77,672 for the three months ended March 31, 1998. The increase
was directly attributable to the increase in volume of inpatient dialysis
services. The overall percentage increase in costs associated with inpatient
services exceeded the growth in revenues as the Company charged lower rates for
inpatient treatments, which were dictated by the market place.
Selling, general and administrative expenses during the three months
ended March 31, 1999 decreased to $237,864 from $287,780 during the three months
ended March 31, 1998. This decrease was primarily due to a decrease in
professional services fees.
Depreciation and amortization during the three (3) months ended March
31, 1999 increased 39% to $30,668 from $22,140 during the three (3) months ended
March 31, 1998 as a result of capital leases.
Rent and other expenses during the three (3) months ended March 31,
1999 and 1998 remained constant at approximately $11,000.
Other expenses increased during the three months ended March 31, 1999
to $62,995 from $48,432 during the three months ended March 31, 1998. This
increase in expenses between the respective periods is primarily due to an
increase in interest expense relating to capital lease obligations and notes.
As a result of the foregoing, the Company generated net income of
$19,710 during the three months ended March 31, 1999, as compared to a net loss
of $52,484 during the three months ended March 31, 1998. The Company generated
income from operations during the three months ended March 31, 1999 of $80,259,
as compared to a loss from operations of $8,061 during the three months ended
March 31, 1998. Management believes that the generation of income from
operations is part of a continuing trend, which began during the last six months
of 1998 and expects this trend to continue throughout 1999, although there can
be no assurances to that effect.
As of December 31, 1998, the Company had net operating loss
carryforwards totaling approximately $4,700,000 and $2,000,000 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, 1999, the ratio of
current assets to current liabilities was .58 to 1.00 compared to .53 at
December 31, 1998.
The Company's cash flow needs for the three months ended March 31, 1999
were primarily provided from operations and existing cash. The Company had a
working capital deficit of approximately $559,700 at March 31, 1999, which
represents an improvement over a deficit of approximately $682,800 at March 31,
1998.
Cash and cash equivalents were zero as of March 31, 1999, as compared
to $27,754 as of December 31, 1998. During the first quarter, the Company
generated $30,469 from operations, and used $55,776 to repay long-term debt.
Accounts receivable provided $30,603 in cash, which was partially offset by a
$20,232 increase in inventory.
As of March 31, 1999, the Company had long-term borrowings in the
aggregate amount of $2,421,617, the current portion of which was $316,348. As of
December 31, 1998, the Company had aggregate long-term borrowings of $2,249,854
including a current portion of $202,075. The Company converted certain accounts
payable into a note with monthly payments of $10,000 plus interest, to be paid
in 22 installments.
10
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The Company has a note receivable including accrued interest in the
amount of $128,683 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 shares of Common Stock. The third party
executed an additional $135,000 non-interest bearing note to the Company, which
is fully reserved. Both notes are due February, 2000 and are secured by
approximately 570,000 shares. During 1997, 60,000 shares of Common Stock 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 $719,000 on the $861,790 of notes to reserve for the difference
between the approximate fair value of the collateral and the book value of the
notes.
The Company's cash flow needs for the three months ended March 31, 1999
were provided from operations and cash on hand. Management believes that, as of
March 31, 1999, 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
does not currently generate sufficient cash flow to finance any such expansion
plans rapidly. 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.
------------------------------------------
FASB recently issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted as of
December 31, 1999. SFAS No. 133 establishes standards for reporting financial
and descriptive information regarding derivatives and hedging activity. Since
the Company does not have any derivative instruments, this standard will have no
impact on the Company's financial position or results of operations.
The American Institute of Certified Public Accountants ("AICPA")
recently issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which provides guidance
concerning recognition and measurement of costs associated with developing or
acquiring software for internal use. In 1998, the AICPA also issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which provides
guidance concerning the costs of start-up activities. For accounting purposes,
start-up activities are defined as one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory or with a new class of customer, initiating a new process in an
existing facility, or commencing some new operation. Both pronouncements are
effective for financial statements of years beginning after December 15, 1998,
with earlier adoption encouraged. Management does not believe the adoption of
these pronouncements will have a material impact on the financial statements.
11
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YEAR 2000
The Company has developed plans to address issues related to the impact
on its computer systems for the Year 2000. The Company has established a task
force with representatives from its operating units and financial management.
Financial and operational systems have been assessed and plans have been
developed to address systems modification requirements.
The accounting systems will require only minor changes, which have
already been identified and assessed. The major suppliers of the Company's
operations hardware and software equipment have provided information that the
systems and embedded technology are Year 2000 compliant. The financial impact of
making the required systems changes is not expected to be material to the
Company's consolidated financial position, liquidity and results of operations.
The Company is currently in the process of assessing the systems of its other
vendors. The Company intends to develop alternative plans for the vendors that
will not appear to be Year 2000 compliant in the second quarter of 1999.
The Company's business relies heavily upon its ability to obtain
reimbursement from third party payors, including Medicare, Medicaid and private
insurers. The Health Care Financing Administration ("HCFA") has testified to a
committee of the U.S. House of Representatives that it is far behind in
remedying Year 2000 problems. The failure of HCFA, Medicare intermediaries,
Medicaid payors or any of the Company's other significant third party payors to
remedy Year 2000 related problems could result in a delay in the Company's
receipt of payments for services, which could have a material adverse impact on
the Company's earnings, financial condition and business. Furthermore, a delay
in receiving supplies from certain vendors could hinder the Company's ability to
provide services to patients, which could have a material adverse impact on the
Company's earnings, financial condition and business. Presently, the Company
cannot assess whether these governmental agencies will be prepared for the Year
2000. This may result in a material impact to the Company. The Company will
assess the capabilities of its non-governmental customers in the second quarter
of 1999 with continued follow up thereafter.
The Company is aware that its dialysis and other medical systems may
include imbedded chips that process dates and date-sensitive material. These
imbedded chips are both difficult to identify in all instances and difficult to
repair. Often, total replacement of the chips is necessary. The manufacturer of
the majority of this equipment has certified it to be Year 2000 compliant. If
such systems should fail, there could be a material adverse impact on the
Company's earnings, financial condition and business.
12
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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, 1999.
(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: May 12, 1999 NATIONAL QUALITY CARE, INC.
By: /s/ Ron Berkowitz
---------------------------------
Ron Berkowitz
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 620,741
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 795,041
<PP&E> 2,673,543
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,524,467
<CURRENT-LIABILITIES> 1,354,750
<BONDS> 0
0
0
<COMMON> 98,148
<OTHER-SE> (33,700)
<TOTAL-LIABILITY-AND-EQUITY> 3,524,467
<SALES> 992,379
<TOTAL-REVENUES> 992,379
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 912,121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,995
<INCOME-PRETAX> 19,710
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,710
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
