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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 September 30, 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 November 13, 2000 is 9,889,878.
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National Quality Care, Inc.
Table of Contents
Page
Part I. Financial Information 3
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 2000 and December 31, 1999 4
Consolidated Condensed Income Statements for the Three
and Nine Months Ended September 30, 2000 and 1999 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,801 $ 60,814
Accounts receivable, net of allowance for
doubtful accounts of $200,000 791,246 721,118
Supplies inventory 82,468 101,702
Other 99,822 104,410
------------ ------------
Total current assets 975,337 988,044
PROPERTY AND EQUIPMENT, net 2,552,900 2,601,096
DEPOSITS AND OTHER LONG-TERM ASSETS 36,520 41,741
------------ ------------
Total assets $ 3,564,757 $ 3,630,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 42,359 $ -
Accounts payable 867,800 922,206
Accrued expenses 184,016 305,806
Notes payable and current portion of
long-term debt 304,537 387,528
------------ ------------
Total current liabilities 1,398,712 1,615,540
LONG-TERM DEBT, NET OF CURRENT PORTION 1,845,540 1,910,788
------------ ------------
Total liabilities 3,244,252 3,526,328
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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
Receivables from stockholders, net (270,218) (266,703)
Accumulated deficit (1,685,832) (1,905,299)
------------ ------------
Total stockholders' equity 320,505 104,553
------------ ------------
Total liabilities and stockholders' equity $ 3,564,757 $ 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 CONDENSED INCOME STATEMENTS (UNAUDITED)
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<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Medical services $ 1,099,148 $ 985,778 $ 3,185,389 $ 2,988,623
Property rental 67,925 67,925 203,775 203,775
-------------- -------------- -------------- --------------
Total revenue 1,167,073 1,053,703 3,389,164 3,192,398
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Cost of medical services 737,832 675,875 2,212,832 2,036,518
Selling, general and administrative 215,268 249,914 668,446 786,493
Depreciation and amortization 35,115 35,515 101,836 97,247
Property rental expense and depreciation 20,558 19,006 59,538 52,218
-------------- -------------- -------------- --------------
Total operating expenses 1,008,773 980,310 3,042,652 2,972,476
-------------- -------------- -------------- --------------
Income from operations 158,300 73,393 346,512 219,922
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (68,350) (71,599) (203,644) (204,797)
Interest income 1,214 1,983 3,546 13,501
Other expense, net (2,329) 3,385 (5,591) 9,435
-------------- -------------- -------------- --------------
Total other expense (69,465) (66,231) (205,689) (181,861)
-------------- -------------- -------------- --------------
Income before income taxes
and extraordinary item 88,835 7,162 140,823 38,061
PROVISION FOR INCOME TAXES (35,000) - (49,820) (1,600)
CURRENT BENEFIT OF NET OPERATING LOSS
CARRYFORWARD 35,000 - 43,000 -
-------------- -------------- -------------- --------------
Income before extraordinary item 88,835 7,162 134,003 36,461
Extraordinary Item-Gain from extinguishment of
debt (net of income taxes of $34,000) - - 51,462 -
Current benefit of net operating loss
carryforward - - 34,000 -
-------------- -------------- -------------- --------------
NET INCOME $ 88,835 $ 7,162 $ 219,465 $ 36,461
============== ============== ============== ==============
BASIC AND DILUTED INCOME PER SHARE
Income before extraordinary item $ 0.01 $ 0.00 $ 0.01 $ 0.00
Extraordinary gain - - 0.01 -
-------------- -------------- -------------- --------------
Basic and diluted income per share $ 0.01 $ 0.00 $ 0.02 $ 0.00
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 9,890,000 9,871,000 9,890,000 9,844,000
============== ============== ============== ==============
DILUTED 10,007,000 9,871,000 10,081,000 9,844,000
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
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<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 219,465 $ 36,461
Adjustments to reconcile net income to net cash
provided in operating activities:
Depreciation and amortization 130,083 122,639
Extraordinary item (85,462) -
Allowance for doubtful accounts - 10,000
Changes in assets and liabilities:
Accounts receivable (70,128) (58,997)
Supplies inventory 19,234 (2,767)
Other assets 9,809 (59,635)
Cash overdraft 42,359 -
Accounts payable 31,056 37,164
Accrued expenses (121,790) 52,160
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Net cash provided by operating activities 174,626 137,025
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CASH FLOWS FROM INVESTING ACTIVITIES
Changes in receivable from stockholder, net (3,515) 2,311
Purchase of Equipment (20,307) (47,430)
-------------- --------------
Net cash used by investing activities (23,822) (45,119)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short and long-term borrowings - 108,954
Repayment of capital lease obligations (83,998) (80,137)
Repayment of short and long-term borrowings (125,819) (128,659)
Proceeds from exercise of stock options - 15,000
-------------- --------------
Net cash used in financing activities (209,817) (84,842)
-------------- --------------
NET INCREASE (DECREASE) IN CASH (59,013) 7,064
CASH, beginning of period 60,814 27,754
-------------- --------------
CASH, end of period $ 1,801 34,818
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest $ 203,644 $ 204,797
Income taxes $ 6,820 $ 1,600
Non-cash investing and financing activities:
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 pricipal balance at the
rate of 10%. $ - $ 227,539
Interest receivable from stockholder accrued but not received $ (3,515) $ (4,719)
Equipment acquired under capital lease obligation $ 61,577 $ -
The accompanying notes are an integral part of these financial statements
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The accompanying notes are an integral part of these financial statements
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NATIONAL QUALITY CARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed 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, 1999. In the opinion of Management, all
adjustments (consisting of normal recurring adjustments and accruals) considered
necessary for a fair presentation have been included in the interim period.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
(2) STOCK OPTIONS
By a vote of stockholders at their annual meeting in June 2000, the
company canceled 637,500 stock options carrying exercise prices of $.20 and $.28
per share and re-issued 637,500 shares with an exercise price of $.10 per share.
In addition, the Company issued 370,000 new stock options in March 8, 2000 with
an exercise price of $.10 per share.
In March 2000, the FASB issued FIN 44, "Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25," which was effective July 1, 2000. This interpretation requires options that
have been canceled and reissued at lower prices to be accounted for as variable
awards in accordance with APB Opinion No. 25. Management believes that the
adoption of this interpretation has no significant effect on earnings or
financial position of the Company for the period ending September 30, 2000. The
potential future impact on the Company's operations will depend on market value
fluctuations of the Company's stock.
(3) EXTRAORDINARY GAIN
During the second quarter of 2000, the company settled certain debts at
discounts totaling $85,462. This results in a gain, which is presented as an
extraordinary item on the statement of income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE
STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS",
"BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF
AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER
"FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM
10-QSB ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S
RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
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The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
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.
GENERAL
During the three months ended September 30, 2000, the Company closed
its Olympic facility and transferred all of its patients to its La Cienega
facility. Management believes there will be certain economic benefits in the
consolidation of these facilities including; reduction in overhead, inventory
on-hand needs reduced and increased productivity from streamlining operations
within the La Cienega facility.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
2000 AND SEPTEMBER 30, 1999.
Total revenue for the three months ended September 30, 2000 increased
approximately 11% to $1,167,073 from $1,053,703 for the three months ended
September 30, 1999. For the first nine months of 2000, total revenue increased
approximately 6% to $3,389,164 from $3,192,398 for the first nine months of
1999. Medical service revenue for the three months ended September 30, 2000
increased approximately 12% to $1,099,148 from $985,778 for the three months
ended September 30, 1999. For the first nine months of 2000 medical service
revenue increased approximately 7% to $3,185,389 from $2,988,623 for the first
nine months of 1999. This increase resulted from growth in the inpatient and
outpatient volume.
Total operating expenses during the three months ended September 30,
2000 increased 3% to $1,008,773 from $980,310 during the three months ended
September 30, 1999. For the first nine months of 2000, total operating expenses
increased 2% to $3,042,652 from $2,972,476 for the first nine months of 1999.
Total operating expenses include (i) Cost of medical services, (ii) Selling,
general and administrative expenses, and (iii) Property rental expense, as
follows:
Cost of medical services during the three months ended September 30,
2000 increased 9% to $737,832 from $675,875 during the three months ended
September 30, 1999. For the first nine months of 2000, cost of medical services
increased 9% to $2,212,832 from $2,036,518 for the first nine months of 1999.
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 September 30, 2000 increased approximately 4% to
$599,032 from $574,001 for the three months ended September 30, 1999. For the
first nine months of 2000, Medical services and supplies increased 6% to
$1,824,604 from $1,719,719 for the first nine months of 1999. The increase was
primarily due to rising usage of medical supplies prescribed, resulting from
increased business volume. Outside services for the three months ended September
30, 2000 increased 36% to $138,800 from $101,874 for the three months ended
September 30, 1999. For the first nine months of 2000, outside services
increased 22% to $388,228 from $316,799 for the first nine months of 1999. This
increase was directly attributable to the increased volume of inpatient
services.
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Selling, general and administrative expenses during the three months
ended September 30, 2000 decreased 14% to $215,268 from $249,914 during the
three months ended September 30, 1999. For the first nine months of 2000,
selling, general and administrative expenses decreased 15% to $668,446 from
$786,493 for the first nine months of 1999. This decrease is primarily due to a
reduction in administrative payroll of $95,400 and professional fees of $74,230
offset by an increase in facility rent of $6,900, increase in computer hardware
and services, in connection with the Company's upgrade of its billing system, of
$8,200 and miscellaneous expenses of $36,530.
Depreciation and amortization expense during the three months ended
September 30, 2000 decreased 1% to $35,115 from $35,515 during the three months
ended September 30, 1999. Depreciation and amortization expenses during the nine
months ended September 30, 2000 increased 5% to $101,836 from $97,247 during the
nine months ended September 30, 1999. This increase in expenses is a result of
capitalized medical equipment leases.
Other expenses increased from $66,231 to $69,465 for the three months
ended September 30, 2000 and September 30, 1999. Other expenses increased during
the nine months ended September 30, 2000 to $205,689 from $181,861 during the
nine months ended September 30, 1999.
The Company realized extraordinary income of $85,462 during the second
quarter arising from an agreement with a former medical supplier to extinguish
outstanding debt.
As a result of the foregoing, the Company generated income of $88,835
during the three months ended September 30, 2000, as compared to a net income of
$7,162 during the three months ended September 30, 1999. For the first nine
months of 2000, the Company experienced net income of $219,465, as compared to
net income of $36,461 for the first nine months of 1999. The Company experienced
income from operations during the three months ended September 30, 2000 of
$158,300 compared to an income from operations of $73,393 during the three
months ended September 30, 1999. For the first nine months of 2000, the Company
experienced income from operations of $346,512 compared to an income from
operations of $219,922 for the first nine months of 1999. Management believes
that income from operations primarily resulted from an increase in inpatient and
outpatient services and from the streamlining of operations.
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. At September 30, 2000, the ratio of
current assets to current liabilities was .70 to 1.00 compared to .61 to 1.00 at
December 31, 1999.
The Company's cash flow needs for the nine months ended September 30,
2000 were primarily provided from operations and existing cash. The Company had
a working capital deficit of approximately $423,375 at September 30, 2000. The
working capital deficit at December 31, 1999 was approximately $627,500.
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Cash and cash equivalents were $1,801 as of September 30, 2000, as
compared to $60,814 as of December 31, 1999. As of September 30, 2000, the
Company has a cash overdraft of $42,359. During the nine months of 2000, the net
cash provided by operating activities was $174,626. During the nine months ended
September 30, 2000, net cost used in investing activities was $23,822. The
primary use of cash was for $20,307 in equipment purchases. During the nine
months ended September 30, 2000, the net cash used by financing activities was
$209,817, which consisted of $83,998 to repay certain capital lease obligations
and $125,819 to repay certain long-term debt obligations.
As of September 30, 2000, the Company had long-term borrowings in the
aggregate amount of $2,150,077, the current portion of which was $304,537. As of
December 31, 1999, the Company had aggregate long-term borrowings of $2,298,316.
During February 1999, the Company converted certain accounts payable into a note
with monthly payments of $10,000 plus interest, to be paid in 23 installments.
The Company is currently in negotiations to sell a building with a
carrying value of approximately $2,000,000 and associated debt of approximately
$1,667,000. The Company believes that the sales price will be sufficient to
satisfy the debt obligations.
As of September 30, 2000, the Company had a note receivable including
accrued interest in the amount of $60,520 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, and a lease receivable of $66,907
from the same group.
In the second quarter of 1999, a lease receivable from an affiliate 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 $719,000 against the note. The note has
been recorded as an offset to stockholders' equity.
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.
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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 June 30, 2000.
(b) Exhibit
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27. Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized on the dates
indicated.
Dated: November 15, 2000 NATIONAL QUALITY CARE, INC.
By: /S/ Victor Gura
----------------------------
Victor Gura
Chief Executive Officer
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