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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 June 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 August 14, 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
Independent Accountant's Report 4
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 5
Consolidated Income Statements
for the Three and Six Months Ended June 30, 2000
and 1999 6
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
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Independent Accountant's Report
Board of Directors and Shareholders
National Quality Care, Inc.
We have reviewed the accompanying consolidated balance sheet of National Quality
Care, Inc. and subsidiary as of June 30, 2000, and the related consolidated
statements of income and cash flows for the three and six month periods then
ended. 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 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.
Los Angeles, California
July 20, 2000
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NATIONAL QUALITY CARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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ASSETS
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 78,708 $ 60,814
Accounts receivable, net of allowance for doubtful accounts
of $200,000 663,477 721,118
Supplies inventory 73,242 101,702
Other 100,401 104,410
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Total current assets 915,828 988,044
PROPERTY AND EQUIPMENT, net 2,588,606 2,601,096
DEPOSITS AND OTHER LONG-TERM ASSETS 38,608 41,741
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Total assets $ 3,543,042 $ 3,630,881
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 843,709 $ 922,206
Accrued expenses 260,545 305,806
Notes payable and current portion of long-term debt 299,200 387,528
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Total current liabilities 1,403,454 1,615,540
LONG-TERM DEBT, NET OF CURRENT PORTION 1,906,718 1,910,788
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Total liabilities 3,310,172 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 (269,015) (266,703)
Accumulated deficit (1,774,670) (1,905,299)
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Total stockholders' equity 232,870 104,553
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Total liabilities and stockholders' equity $ 3,543,042 $ 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)
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<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Medical services $ 1,113,146 $ 1,068,030 $ 2,086,242 $ 1,992,844
Property rental 67,925 68,285 135,850 135,850
-------------- -------------- -------------- --------------
Total revenue 1,181,071 1,136,315 2,222,092 2,128,694
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Cost of medical services 774,163 728,211 1,461,949 1,360,586
Selling, general and administrative 261,880 288,714 471,219 526,635
Depreciation and amortization 33,977 31,064 66,720 61,732
Property rental expense and depreciation 20,558 22,056 38,980 33,212
-------------- -------------- -------------- --------------
Total operating expenses 1,090,578 1,070,045 2,038,868 1,982,165
Income from operations 90,493 66,270 183,224 146,529
OTHER INCOME (EXPENSE)
Interest expense (67,691) (70,204) (135,959) (133,199)
Interest income 1,178 7,494 2,332 9,942
Other expense, net (1,432) 7,627 (2,830) 7,627
-------------- -------------- -------------- --------------
Total other expense (67,945) (55,083) (136,457) (115,630)
-------------- -------------- -------------- --------------
Income before income taxes
and extraordinary item 22,548 11,187 46,767 30,899
PROVISION FOR INCOME TAXES 6,000 1,600 7,600 1,600
CURRENT BENEFIT OF NET OPERATING LOSS
CARRYFORWARD (6,000) - (6,000) -
-------------- -------------- -------------- --------------
Income before extraordinary item 22,548 9,587 45,167 29,299
Extraordinary Item-Gain from extinguishment of
debt (net of income taxes of $0.00) 85,462 - 85,462 -
-------------- -------------- -------------- --------------
NET INCOME $ 108,010 $ 9,587 $ 130,629 $ 29,299
============== ============== ============== ==============
BASIC AND DILUTED INCOME PER SHARE
Income before extraordinary item $ 0.00 $ 0.00 $ 0.00 $ 0.00
Extraordinary gain 0.01 - 0.01 -
-------------- -------------- -------------- --------------
Basic and diluted income per share $ 0.01 $ 0.00 $ 0.01 $ 0.00
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 9,890,000 9,842,900 9,890,000 9,828,966
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED) 10,159,000 9,842,900 10,177,000 9,828,966
============== ============== ============== ==============
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 SIX MONTHS ENDED JUNE 30,
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<CAPTION>
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,629 $ 29,299
Adjustments to reconcile net income to net cash
provided in operating activities:
Depreciation and amortization 85,900 80,912
Extraordinary item (85,462) -
Allowance for doubtful accounts - 10,000
Changes in assets and liabilities:
Accounts receivable 57,641 (150,322)
Supplies inventory 28,460 1,826
Other assets 7,142 (61,445)
Accounts payable 6,965 94,479
Accrued expenses (45,261) 17,691
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Net cash provided by operating activities 186,014 22,440
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CASH FLOWS FROM INVESTING ACTIVITIES
Changes in receivable from stockholder, net (2,312) 2,997
Purchase of Equipment (11,833) (6,277)
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Net cash used by investing activities (14,145) (3,280)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short and long-term borrowings - 75,000
Repayment of capital lease obligations (60,442) (52,827)
Repayment of short and long-term borrowings (93,533) (79,087)
Proceeds from exercise of stock options 15,000
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Net cash provided by financing activities (153,975) (41,914)
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NET INCREASE (DECREASE) IN CASH 17,894 (22,754)
CASH, beginning of period 60,814 22,754
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CASH, end of period $ 78,708 -
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest $ 134,040 $ 124,416
Income taxes $ 1,600 $ 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 $ (2,312) $ (3,525)
Equipment acquired under capital lease obligation $ 61,577 $ -
The accompanying notes are an integral part of these financial statements
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NATIONAL QUALITY CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 (consisting of
normal recurring adjustments and accruals) considered necessary for a fair
presentation have been included in the interim period. Operating results for the
six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
(2) STOCK OPTIONS
By a vote of stockholders at its 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.
(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
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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.
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This report, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and/or uncertainties.
When used herein, the terms "anticipates," "expects," "estimates," "believes"
and similar expressions, as they relate to the Company or its management, are
intended to identify such forward-looking statements. The Company's actual
results, performance or achievements may differ materially from those expressed
or implied by such forward-looking statements.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE
30, 2000 AND JUNE 30, 1999. Total revenue for the three months ended June 30,
2000 increased approximately 4% to $1,181,071 from $1,136,315 for the three
months ended June 30, 1999. For the first six months of 2000, total revenue
increased approximately 4% to $2,222,092 from $2,128,694 for the first six
months of 1999. Medical service revenue for the three months ended June 30, 2000
increased approximately 4% to $1,113,146 from $1,068,030 for the three months
ended June 30, 1999. For the first six months of 2000 medical service revenue
increased approximately 5% to $2,086,242 from $1,992,844 for the first six
months of 1999. This increase resulted from growth in the inpatient and
outpatient business of the Company.
Total operating expenses during the three months ended June 30, 2000
increased 2% to $1,090,578 from $1,070,045 during the three months ended June
30, 1999. For the first six months of 2000, total operating expenses increased
3% to $2,038,868 from $1,982,165 for the first six 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 June 30, 2000
increased 6% to $774,163 from $728,211 during the three months ended June 30,
1999. For the first six months of 2000, cost of medical services increased 7% to
$1,461,949 from $1,360,586 for the first six 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 June 30, 2000 increased approximately 5% to $640,582 from $609,169
for the three months ended June 30, 1999. For the first six months of 2000,
Medical services and supplies increased 8% to $1,233,043 from $1,145,662 for the
first six 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 June 30, 2000 increased 12% to $133,581 from
$119,042 for the three months ended June 30, 1999. For the first six months of
2000, outside services increased 7% to $228,906 from $214,924 for the first six
months of 1999. This increase was directly attributable to the increased volume
of inpatient services.
Selling, general and administrative expenses during the three months
ended June 30, 2000 decreased 9% to $261,880 from $288,714 during the three
months ended June 30, 1999. For the first six months of 2000, selling, general
and administrative expenses decreased 11% to $471,219 from $526,635 for the
first six months of 1999. This decrease is primarily due to a reduction in
administrative payroll of $63,600 and professional fees of $39,800 offset by an
increase in facility rent of $4,600, increase in computer hardware and services,
in connection with the Company's upgrade of its billing system, of $8,200 and
miscellaneous expenses of $36,451.
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Depreciation and amortization during the six months ended June 30, 2000
increased 8% to $66,720 from $61,732 during the six months ended June 30, 1999.
This increase in expenses is a result of capitalized medical equipment leases.
Other expenses increased from $55,083 to $67,945 for the three months
ended June 30, 2000 and June 30, 1999. Other expenses increased during the six
months ended June 30, 2000 to $136,457 from $115,630 during the six months ended
June 30, 1999.
The Company realized extraordinary income of $85,462 arising from an
agreement with a former medical supplier to extinguish outstanding debt.
As a result of the foregoing, the Company generated net income of
$108,010 during the three months ended June 30, 2000, as compared to a net
income of $9,587 during the three months ended June 30, 1999. For the first six
months of 2000, the Company experienced net income of $130,629, as compared to
net income of $29,299 for the first six months of 1999. The Company experienced
income from operations during the three months ended June 30, 2000 of $90,493
compared to an income from operations of $66,270 during the three months ended
June 30, 1999. For the first six months of 2000, the Company experienced income
from operations of $183,224 compared to an income from operations of $146,529
for the first six 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 June 30, 2000, the ratio of current
assets to current liabilities was .65 to 1.00 compared to .61 to 1.00 at
December 31, 1999.
The Company's cash flow needs for the six months ended June 30, 2000
were primarily provided from operations and existing cash. The Company had a
working capital deficit of approximately $487,600 at June 30, 2000. The working
capital deficit at December 31, 1999 was approximately $627,500.
Cash and cash equivalents were $78,708 as of June 30, 2000, as compared
to $60,814 as of December 31, 1999. During the first six months of 2000, the net
cash provided by operating activities was $186,014. During this period, the
Company also secured $61,577 in long-term equipment financing. The primary use
of funds was to repay $153,975 in long-term debt and $11,833 to purchase new
equipment.
As of June 30, 2000, the Company had long-term borrowings in the
aggregate amount of $2,205,918, the current portion of which was $299,200. 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 22 installments.
The Company is current in its obligation under this agreement.
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As of June 30, 2000, the Company had a note receivable including
accrued interest in the amount of $59,318 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
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The Company filed no report on a Form 8-K during the Quarterly Period
ended June 30, 2000.
(b) Exhibit
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: August 14, 2000 NATIONAL QUALITY CARE, INC.
By: /s/ Victor Gura, M.D.
-------------------------------
Victor Gura
Chief Executive Officer
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