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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
[ ] TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
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 12, 2000 is 9,889,878
1
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National Quality Care, Inc.
Table of Contents
Page
Part I. Financial Information 3
Item 1. Financial Statements
Independent Accountant's Report 4
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 5
Consolidated Income Statements
for the Three Months Ended March 31, 2000
and 1999 6
Consolidated Statements of Stockholders'
Equity for the Three Months Ended March 31, 2000 7
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 8
Notes to Consolidated Financial Statements 9
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 12
Signatures 13
2
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
3
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Independent Accountant's Report
Board of Directors and Shareholders
National Quality Care, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
National Quality Care, Inc. and subsidiary as of March 31, 2000, and the related
condensed consolidated statements of income and cash flows for the three months
ended March 31, 2000. These financial statements are the responsibility of
National Quality Care, Inc. management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above in
order for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of National Quality Care, Inc. and
subsidiary as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended not
presented herein; and in our report dated March 14, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Moss Adams LLP
MOSS ADAMS LLP
Los Angeles, California
May 1, 2000
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
Current assets
Cash and cash equivalents $ 83,832 $ 60,814
Accounts receivable, net of allowance for
doubtful accounts of $200,000 591,616 721,118
Supplies inventory 67,587 101,702
Other current assets 129,751 104,410
------------ ------------
Total current assets 872,786 988,044
Property and equipment, net 2,570,594 2,601,096
Deposits and other long-term assets 40,175 41,741
------------ ------------
Total assets $ 3,483,555 $ 3,630,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 885,692 $ 922,206
Accrued expenses 248,960 305,806
Current portion of long-term debt 350,366 387,528
------------ ------------
Total current liabilities 1,485,018 1,615,540
Long-term debt, net of current portion 1,872,510 1,910,788
------------ ------------
Total liabilities 3,357,528 3,526,328
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,
9,889,878 shares issued and
outstanding 98,898 98,898
Additional paid-in capital 2,177,657 2,177,657
Notes receivable from stockholders (267,848) (266,703)
Accumulated deficit (1,882,680) (1,905,299)
------------ ------------
Total stockholders' equity 126,027 104,553
------------ ------------
Total liabilities and stockholders'
equity $ 3,483,555 $ 3,630,881
============ ============
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
For the Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000 1999
------------ ------------
Revenue
Medical services $ 973,095 $ 924,814
Property rental 67,925 67,565
------------ ------------
Total revenue 1,041,020 992,379
------------ ------------
Operating expenses
Cost of medical services 687,870 632,433
Selling, general, and administrative 209,254 237,864
Depreciation and amortization 32,743 30,668
Property rental expense and depreciation 18,422 11,156
------------ ------------
Total operating expenses 948,289 912,121
------------ ------------
Income from operations 92,731 80,258
Other income (expense)
Interest expense (68,268) (62,995)
Interest income 1,154 2,447
Other expense (1,398) -
------------ ------------
Total other expense (68,512) (60,548)
------------ ------------
Income before provision for income taxes 24,219 19,710
Provision for income taxes (1,600) -
------------ ------------
Net income $ 22,619 $ 19,710
============ ============
Basic and diluted income per share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding 9,890,000 9,815,000
============ ============
The accompanying notes are an integral part of these financial statements.
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<TABLE>
NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
For the Three Months Ended March 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Common stock Receivables Total
---------------------------- Paid-in from Accumulated Stockholders'
Shares Amount Capital Stockholders Deficit Equity
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1999 9,889,878 $ 98,898 $ 2,177,657 $ (266,703) $ (1,905,299) $ 104,553
Change in receivables
from stockholders - - - (1,145) - (1,145)
Net income - - - - 22,619 22,619
------------- ------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2000 9,889,878 $ 98,898 $ 2,177,657 $ (267,848) $ (1,882,680) $ 126,027
============= ============= ============= ============= ============= =============
</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 (UNAUDITED)
For the Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000 1999
------------ ------------
Cash flows from operating activities
Net income $ 22,619 $ 19,710
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 42,333 40,257
Increase in receivable from stockholder
(interest) (1,145) (2,447)
Allowance for doubtful accounts - 10,000
(Increase) decrease in
Accounts receivable 129,502 20,613
Supplies inventory 34,115 (20,232)
Other current assets (25,341) (49,008)
Other assets 1,566 8,123
Increase (decrease) in
Accounts payable (36,514) 41,602
Accrued expenses (56,846) (40,596)
------------ ------------
Net cash provided by operating activities 110,289 28,022
------------ ------------
Cash flows from investing activities
Purchase of building and equipment (11,831) -
------------ ------------
Cash flows from financing activities
Repayments of capital lease obligations (29,095) (23,410)
Repayment of long-term debt (46,345) (32,366)
------------ ------------
Net cash used in financing
activities (75,440) (55,776)
------------ ------------
Net increase (decrease) in cash 23,018 (27,754)
------------ ------------
Cash and equivalents, beginning of period 60,814 27,754
------------ ------------
Cash and equivalents, end of period $ 83,832 $ -
============ ============
Supplemental disclosures of cash information:
Interest paid 68,268 62,995
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 (1,145) (2,447)
The accompanying notes are an integral part of these financial statements.
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NATIONAL QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB. They have been
reviewed by the Company's independent auditors in accordance with the
professional standards and procedures as set forth in Statement of Auditing
Standards No. 71 (SAS 71). SAS 71 procedures for conducting a review of interim
financial information generally are limited to inquiries and analytical
procedures concerning significant accounting matters relating to the financial
information to be reported. 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, 1999. 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, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000.
(2) EARNINGS PER SHARE
Weighted average shares outstanding for both basic and diluted income
per share for the three months ended March 31, 2000 and March 31, 1999 were
9,890,000 and 9,815,000, respectively. The Company has not included the dilutive
effect of assumed conversions and exercises of stock options and warrants for
March 31, 2000 and 1999 since the effect of such an inclusion was antidilutive.
The Board of Directors agreed on March 8, 2000 to cancel the 637,500
options granted and unexercised, and to reissue 637,500 shares at an exercise
price of $0.10. This proposal will be voted on by the Company's shareholders at
the Company's Annual Meeting of Stockholders on June 21, 2000.
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, 2000 AND
MARCH 31, 1999. Total revenue for the three months ended March 31, 2000
increased approximately 5% to $1,041,020 from $992,379 for the three months
ended March 31, 1999. Medical service revenue for the three months ended March
31, 2000 increased approximately 5% to $973,095 from $924,814 for the three
months ended March 31, 1999. The increase resulted from higher volume of
outpatient treatments.
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Total operating expenses during the three months ended March 31, 2000
increased 4% to $948,289 from $912,121 during the three months ended March 31,
1999. 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, 2000
increased 9% to $687,870 from $632,433 during the three months ended March 31,
1999. 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, 2000
increased approximately 10% to $592,542 from $536,750 for the three months ended
March 31, 1999. The increase was primarily due to rising usage of medical
supplies prescribed due to increased outpatient volume, the unexpected 3.9%
increase in the wholesale acquisition price of Epogen on February 24, 2000 and
the leasing of additional equipment in the Company's dialysis facilities.
Outside services for the three months ended March 31, 2000 slightly decreased to
$95,328 from $95,683 during the three months ended March 31, 1999.
Selling, general and administrative expenses during the three months
ended March 31, 2000 decreased 12% to $209,254 from $237,864 during the three
months ended March 31, 1999.
Depreciation and amortization during the three months ended March 31,
2000 increased 7% to $32,743 from $30,668 during the three months ended March
31, 1999 as a result of capital leases.
Rent and other expenses during the three months ended March 31, 2000
increased to $18,422 from $11,156 during the three months ended March 31, 1999.
This increase is primarily due to increase in real estate property taxes.
Other expenses increased during the three months ended March 31, 2000
to $68,512 from $60,548 during the three months ended March 31, 1999. 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
$22,619 during the three months ended March 31, 2000, as compared to net income
of $19,710 during the three months ended March 31, 1999. The Company generated
income from operations during the three months ended March 31, 2000 of $92,731,
as compared to income from operations of $80,258 during the three months ended
March 31, 1999. Management believes that the increase of income from operations
is part of a continuing trend, which began during the last six months of 1999
and expects this trend to continue throughout 2000, although there can be no
assurances to that effect. The improvement in income is a result of the
continued growth in the sale of company services while at the same time there is
an actual decrease in company overhead.
As of December 31, 1999, the Company had net operating loss
carryforwards totaling approximately $5,000,000 and $700,000 for federal and
state income tax purposes, respectively. The Federal net operating loss
carryforwards include $3,700,000 which are limited by IRC Section 382; however,
such annual limitations have not been determined.
LIQUIDITY AND CAPITAL RESOURCES. The ratio of current assets to current
liabilities decreased to to .59 to 1.00 as of March 31, 2000 from .61 to 1.00 as
of December 31, 1999.
The Company's cash flow needs for the three months ended March 31, 2000
were primarily provided from operations and existing cash. The Company had a
working capital deficit of approximately $612,200 at March 31, 2000, which
represents an improvement over a deficit of approximately $627,500 at December
31, 1999.
Cash and cash equivalents were $83,832 as of March 31, 2000, as
compared to $60,814 as of December 31, 1999. During the first quarter, the
Company generated $110,289 from operations, used $75,440 to repay long-term debt
and $11,800 to purchase new equipment. Accounts receivable provided $129,502 in
cash.
10
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As of March 31, 2000, the Company had aggregate long-term borrowings of
$2,222,876 including a current portion of $350,366. As of December 31, 1999, the
Company had aggregate long-term borrowings of $2,298,316 including a current
portion of $387,528. In February 1999, the Company converted certain accounts
payable into a note with monthly payments of $10,000 plus interest, to be paid
in 22 installments.
The Company has a note receivable including accrued interest in the
amount of $58,151 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. In the second quarter of 1999, a lease receivable from
Medipace was entered into which reduced an existing note from the affiliate for
a like amount. The Company received $75,000 in consideration for a lease payable
for the same amount. Both leases are identical in terms. These leases are
classified as capital leases in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases". For accounting purposes,
the Company has treated this transaction as a financing arrangement. Payments
are due in installments through March 2004. Medipace has been in default on its
payment to the Company since October 1999.
The Company has two non-interest bearing notes resulting from the sale
of property and equipment to a former affiliate in 1996. The notes, secured by
570,000 shares of the Company's common stock, were due but not paid in February
2000. The notes were further extended through February 2001. The Company has
provided for a valuation allowance of $719,00 against the note. The note has
been recorded as an offset to stockholders' equity.
The Company's cash flow needs for the three months ended March 31, 2000
were provided from operations and cash on hand. Management believes that as of
March 31, 2000 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.
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, 2000.
(b) Exhibit
27. Financial Data Schedule
11
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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, 2000 NATIONAL QUALITY CARE, INC.
By: /s/ Victor Gura, M.D.
---------------------------
Victor Gura, M.D.
Chief Executive Officer
12
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 83,832
<SECURITIES> 0
<RECEIVABLES> 591,616
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 872,786
<PP&E> 2,570,594
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,483,555
<CURRENT-LIABILITIES> 1,485,018
<BONDS> 0
0
0
<COMMON> 98,898
<OTHER-SE> 27,129
<TOTAL-LIABILITY-AND-EQUITY> 3,483,555
<SALES> 973,095
<TOTAL-REVENUES> 1,041,020
<CGS> 687,870
<TOTAL-COSTS> 948,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,268
<INCOME-PRETAX> 24,219
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 22,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,619
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
