FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
Florida 59-1757642
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
27 Miller Avenue, Lemoyne, Pennsylvania 17043
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(717) 730-6164
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
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] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value -3,556,344 shares as of October 31,
1998.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for
the three months and nine months ended September 30, 1998 and September
30, 1997 include the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three
months and nine months ended September 30, 1998 and September
30, 1997.
2) Consolidated Condensed Balance Sheets as of September 30, 1998
and December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and September 30, 1997.
4) Notes to Consolidated Condensed Financial Statements as of Sep-
tember 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
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PART II -- OTHER INFORMATION
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Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Medical service revenue $ 887,516 $1,280,083 $2,521,330 $3,360,537
Interest and other income 111,275 101,971 351,590 269,492
---------- ---------- ---------- ----------
998,791 1,382,054 2,872,920 3,630,029
Cost and expenses:
Cost of medical services 639,615 761,832 1,821,792 2,050,530
Selling, general and
administrative expenses 469,430 492,043 1,390,942 1,349,235
Interest expense 19,310 22,114 58,837 64,193
---------- ---------- ---------- ----------
1,128,355 1,275,989 3,271,571 3,463,958
---------- ---------- ---------- ----------
(Loss) income before income
taxes and minority interest (129,564) 106,065 (398,651) 166,071
Income tax (benefit) provision (97,363) 48,000 (187,363) 62,000
---------- ---------- ---------- ----------
Loss (income) before minority
interest (32,201) 58,065 (211,288) 104,071
Minority interest in earnings
of consolidated subsidiaries 5,646 9,267
---------- ---------- ---------- ----------
Net (loss) income $ (32,201) $ 52,419 $ (211,288) $ 94,804
========== ========== ========== ==========
(Loss) earnings per share:
Basic $(.01) $.02 $(.06) $.03
===== ==== ===== ====
Diluted $(.01) $.01 $(.06) $.03
===== ==== ===== ====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997(A)
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,462,270 $ 8,102,920
Marketable securities 443,936
Accounts receivable, less allowance
of $168,000 at September 30, 1998;
$52,000 at December 31, 1997 305,566 494,163
Inventories 136,467 113,815
Prepaid expenses and other current assets 172,843 156,823
----------- -----------
Total current assets 6,077,146 9,311,657
Property and Equipment:
Land 168,358 168,358
Buildings and improvements 1,404,573 1,402,319
Machinery and equipment 1,275,696 949,749
Leasehold improvements 870,207 442,464
----------- -----------
3,718,834 2,962,890
Less accumulated depreciation 916,120 679,870
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2,802,714 2,283,020
Deferred expenses and other assets 48,303 43,088
Advances from parent 30,132
----------- -----------
$ 8,958,295 $11,637,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 49,942 $ 72,531
Accrued expenses 312,995 370,099
Current portion of long-term debt 163,182 151,844
Income taxes payable 1,655,164
----------- -----------
Total current liabilities 526,119 2,249,638
Long-term debt, less current portion 622,717 564,673
Advances from parent 128,727
Minority interest in subsidiaries 645,809
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value, authorized 20,000,000
shares; 3,751,344 shares issued; shares
outstanding 3,591,344 at September 30, 1998 and
3,651,344 shares at December 31, 1997 37,513 37,513
Capital in excess of par value 4,044,154 4,008,720
Retained earnings 3,997,647 4,208,935
Accumulated other comprehensive income
(loss)-unrealized gain on marketable securities
for sale Treasury stock at cost; 160,000 shares (269,855) (206,250)
----------- -----------
Total stockholders' equity 7,809,459 8,048,918
----------- -----------
$ 8,958,295 $11,637,765
=========== ===========
</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and
Exchange Commission in March 1998.
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net (loss) income $ (211,288) $ 94,804
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities:
Depreciation 236,252 204,244
Amortization 1,267 9,715
Bad debt expense 104,754 31,210
Gain on sale of securities (12,780)
Minority interest 9,267
Increase (decrease) relating to operating
activities from:
Accounts receivable 83,843 (396,121)
Inventories (22,652) 9,375
Prepaid expenses and other current assets (52,084) 35,106
Accounts payable (22,589) 4,959
Accrued expenses (42,104) 92,137
Income tax payable (1,655,164) 51,664
----------- -----------
Net cash (used in) provided by
operating activities (1,592,545) 146,360
Investing activities:
Redemption of minority interest in subsidiaries (385,375)
Additions to property and equipment, net of
minor disposals (571,446) (610,005)
Proceeds from sale of securities 252,780
Deferred expenses and other assets (6,482) (11,402)
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Net cash used in investing activities (710,523) (621,407)
----------- -----------
Financing activities:
Increase (decrease) in advances from parent (158,859) (242,634)
Repurchase of stock (63,605) (206,250)
Payments on long-term debt (115,118) (100,141)
Dividend payments to minority shareholder (3,966)
----------- -----------
Net cash used in financing activities (337,582) (552,991)
----------- -----------
Decrease in cash and cash equivalents (2,640,650) (1,028,038)
Cash and cash equivalents at beginning of period 8,102,920 4,717,169
----------- -----------
Cash and cash equivalents at end of period $ 5,462,270 $ 3,689,131
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of
Dialysis Corporation of America ("DCA") and its subsidiaries, collec-
tively referred to as the "Company". All material intercompany accounts
and transactions have been eliminated in consolidation. The Company is
a 67.1% owned subsidiary of Medicore, Inc. (the "Parent"). See Note 5.
Government Regulation
Most of the Company's revenues are attributable to payments received
under Medicare, which is supplemented by Medicaid or comparable benefits in
the states in which the Company operates. Reimbursement rates under these
programs are subject to regulatory changes and governmental funding restric-
tions. Although the Company is not aware of any future rate changes,
significant changes in reimbursement rates could have a material effect on
the Company's operations. The Company believes that it is presently in
compliance with all applicable laws and regulations.
Interest and Other Income
Interest and other income is comprised as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
Rental income $ 25,569 $ 31,925 $ 92,015 $ 88,792
Interest income 68,268 45,822 235,299 145,462
Other income 17,438 24,224 24,276 35,238
--------- --------- --------- ---------
$ 111,275 $ 101,971 $ 351,590 $ 269,492
========= ========= ========= =========
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
FAS 128, "Earnings Per Share", which was adopted on December 31, 1997
requiring a change in the method previously used for computing earnings
per share and restatement of all prior periods. The new requirements for
calculating basic earnings per share exclude the dilutive effect of stock
options and warrants. Earnings per share under the diluted computation
required under FAS 128 includes stock options and warrants using the
treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and
diluted computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (32,201) $ 52,419 $(211,288) $ 94,804
Weighted average shares-
denominator basic computation 3,648,083 3,488,844 3,650,245 3,545,987
Effect of dilutive stock
options:
Stock options granted November
1995 43,888 83,809
--------- --------- --------- ---------
Weighted average shares, as
adjusted-denominator diluted
computation 3,648,083 3,532,732 3,650,245 3,629,796
========= ========= ========= =========
(Loss) earnings per share:
Basic $(.01) $.02 $(.06) $.03
===== ==== ===== ====
Diluted $(.01) $.01 $(.06) $.03
===== ==== ===== ====
</TABLE>
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
No potentially dilutive securities were included in the diluted
earnings per share computation for the three months and nine months ended
September 30, 1998. Since there was a loss, to include them would be
anti-dilutive.
In addition to the dilutive stock options included in the reconcil-
iation above, which have an exercise price of $1.50 per share, there were
10,000 medical director options, 2,300,000 common stock purchase warrants
and underwriter options to purchase 100,000 shares of common of common
stock and 200,000 common stock purchase warrants which have not been
included in the diluted earnings per share computation for the three
months or nine months ended September 30, 1997 since they were anti-
dilutive.
Comprehensive Income
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) in 1998 which is required by FAS 130 for fiscal years beginning
after December 15, 1997. FAS 130 requires the presentation of compre-
hensive income and its components in the financial statements and the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity section
of the balance sheet. The adoption of FAS 130 has no impact on the
Company's net income (loss) or stockholders' equity. The only component
of other comprehensive income in the Company's balance sheet is the
unrealized gain on marketable securities, which even prior to adoption
of FAS 130 would have been separately reported in stockholders' equity.
Below is a detail of comprehensive income (loss) for the three months
and nine months ended September 30, 1998 and September 30, 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (32,201) $ 52,419 $(211,288) $ 94,804
Other comprehensive income
(loss), net of tax:
Unrealized holding gain (loss)
arising during period, net
of tax -- -- 40,699 --
Less: reclassification adjustment,
net of tax, for gain included
in net income (40,699) -- (40,699) --
--------- --------- --------- ---------
Total other comprehensive
income (loss) (40,699) -- -- --
--------- --------- --------- ---------
Comprehensive (loss) income $ (72,900) $ 52,419 $(211,288) $ 94,804
========= ========= ========= =========
</TABLE>
Segment Reporting
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) in 1998 which is required
by FAS 131 for fiscal years beginning after December 15, 1997. FAS 131
establishes standards for reporting information about operating segments
in annual financial statements with operating segments representing
components of an enterprise evaluated by the enterprise's chief operating
decision maker for purposes of making decisions regarding resource allo-
cation and performance evaluation. FAS 131 also requires that certain
segment information be presented in interim financial statements.
Interim information is not required in the first year of implementation;
however, in subsequent years in which the first year of implementation
is a comparative year, any required interim information for the initial
year of implementation must be presented. The Company does not believe
that adoption of FAS 131 will significantly change its segment reporting
disclosures.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1998
(Unaudited)
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and nine months ended
September 30, 1998 and September 30, 1997 are unaudited and include, in
the opinion of management of the Company, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the earnings for
such periods. Operating results for the three months and nine months
ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1998.
While the Company believes that the disclosures presented are ade-
quate to make the information not misleading, it is suggested that
these Consolidated Condensed Financial Statements be read in conjunction
with the financial statements and notes included in the Company's audited
financial statements for the year ended December 31, 1997.
NOTE 3--LONG TERM DEBT
In December 1988, the Company obtained a $480,000 fifteen-year
mortgage through November 2003 on its building in Lemoyne, Pennsylvania
with interest at 1% over the prime rate. The remaining principal balance
under this mortgage amounted to approximately $168,000 and $192,000 at
September 30, 1998 and December 31, 1997, respectively. Also in December
1988, the Company obtained a $600,000 mortgage on its building in Easton,
Maryland on the same terms as the Lemoyne property. The remaining
principal balance under this mortgage amounted to approximately $210,000
and $240,000 at September 30, 1998 and December 31, 1997, respectively.
The Company has an equipment purchase agreement for certain kidney
dialysis machines at its facilities with interest at rates ranging from
5.4% to 11.8% pursuant to various schedules extending through June 2002.
Additional financing of $185,000 during 1998 represents a noncash
financing activity which is a supplemental disclosure required by FAS 95.
The remaining principal balance under this agreement amounted to approxi-
mately $408,000 and $285,000 at September 30, 1998 and December 31, 1997,
respectively.
The prime rate was 8.5 % as of September 30, 1998 and December 31,
1997.
Interest payments on long-term debt amounted to approximately $15,000
and $49,000 for the three months and nine months ended September 30, 1998
and $21,000 and $58,000 for the same periods of the preceding year.
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Income tax payments amounted to $21,000 and $1,561,000 for the three
months and nine months ended September 30, 1998 and $12,000 for the three
months and nine months ended September 30, 1997.
NOTE 5--TRANSACTIONS WITH PARENT
The Parent provides certain administrative services to the Company
including office space and general accounting assistance the costs of
which are allocated on the basis of direct usage, when identifiable, or
on the basis of time spent. The amount of expenses allocated by the
Parent totaled approximately $60,000 and $180,000 for the three months
and nine months ended September 30, 1998, and for the same periods of
the preceding year.
The Company has an intercompany advance receivable from the Parent
of approximately $30,000 at September 30, 1998 and an intercompany
advance payable to the Parent of approximately $129,000 at December 31,
1997, respectively, which bears interest at the short-term Treasury Bill
rate. Interest expense on the net intercompany advance amounted to
approximately $1,000 and $6,000 for the three months and nine months
ended September 30, 1998 and $2,000 and $6,000 for the same periods of
the preceding year, which is included in the intercompany advance payable.
The Company has agreed not to require repayment of the intercompany
advance receivable balance prior to October 1, 1999; therefore, the ad-
vances have been classified as long-term at September 30, 1998.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1998
(Unaudited)
NOTE 6--STOCK OPTIONS
In November 1995, the Company adopted a stock option plan for up to
250,000 options. Pursuant to this plan, in November, 1995, the board
of directors granted 210,000 options to certain of its officers, direc-
tors, employees and consultants of which 8,000 options are currently
outstanding and exercisable for a period of five years through November
9, 2000 at $1.50 per share. On June 10, 1998 the board of directors
granted an option under the 1995 Plan to a new board member for 5,000
shares exercisable at $2.25 per share through June 9, 2003.
In August 1996, the Board of Directors granted 15,000 options to the
medical directors at its three kidney dialysis centers of which 10,000
options were outstanding at September 30, 1998. These options were
originally exercisable for a period of three years through August 18,
1999 at $4.75 per share with the exercise price for 5,000 of the options
having been reduced to $2.25 per share on June 10, 1998.
NOTE 7--COMMON STOCK
The Company completed a public offering of common stock and warrants
during the second quarter of 1996, providing it with net proceeds, in-
cluding the exercise of the underwriters' overallotment option, of
approximately $3,445,000.
Pursuant to the offering 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters'
overallotment option, and there are 2,300,000 redeemable common stock
purchase warrants to purchase one common share each with an exercise
price of $4.50 exercisable through April 16, 1999. The underwriters
received options to purchase 100,000 shares of common stock and 200,000
common stock purchase warrants, with the options exercisable at $4.50
per unit through April 16, 2001 with the underlying warrants being
substantially identical to the public warrants except that they are
exercisable at $5.40 per share.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Effective January 1, 1997 the Company established a 401(k) savings
plan (salary deferral plan) with an eligibility requirement of one year
of service and a 21 year old age requirement. The Company has made no
contributions under this plan as of September 30, 1998.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of its
Florida operations consisting of the assets of two subsidiaries and an
inpatient agreement of another subsidiary pursuant to an Asset Purchase
Agreement. Consideration for the assets sold was $5,065,000 consisting
of $4,585,000 in cash and $480,000 of the purchaser's common stock which
the purchaser agreed to register within one year. These shares were
carried at their market value of approximately $444,000 at December 31,
1997 with the difference between the guaranteed value of $480,000 and
the market value reflected as a receivable from the purchaser. In
February 1998, the Company acquired, in a transaction accounted for as
a purchase, the remaining 20% minority interests in two of the subsidi-
aries whose assets were sold for an aggregate of $625,000, which
included one-half of the common shares originally received as part of
the consideration of the Sale. The remaining shares were sold in
September 1998 for approximately $253,000 resulting in a gain of
approximately $13,000.
The pro forma consolidated condensed financial information presented
below reflects the Sale as if it had occurred on January 1, 1997. For
purposes of pro forma statement of operations information, no assumption
has been made that expenses have been eliminated which were included in
corporate expense allocations by the Company and its Parent, to the
business operations sold and which were included in the actual results
of operations of these businesses. Such expenses amounted to approxi-
mately $105,000 for the nine months ended
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1998
(Unaudited)
NOTE 9--SALE OF SUBSIDIARIES' ASSETS--Continued
September 30, 1997. No assumption has been included in the pro
forma information as to investment income to be realized from
investment of the proceeds of the sale.
The summary pro forma information is not necessarily representative
of what the Company's results of operations would have been if the Sale
had actually occurred as of January 1, 1997 and may not be indicative of
the Company's operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Nine Months Ended
September 30, 1997
------------------
Total revenue $2,114,000
==========
Net loss $ (148,000)
==========
Loss per share:
Basic $(.04)
=====
Diluted $(.04)
=====
NOTE 10--REPURCHASE OF COMMON STOCK
In September 1998, the Company announced its intent to repurchase
up to an additional 300,000 shares of its common stock at current market
prices after having acquired 100,000 shares in June 1997 for $206,250.
In September 1998, the Company repurchased 60,000 shares for approxi-
mately $64,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that
are not historical are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securi-
ties Exchange Act of 1934, including statements regarding management's
expectations, intentions, beliefs, or strategies regarding the future.
Forward looking statements also include the Company's statements
regarding liquidity, anticipated cash needs and availability, and anti-
cipated expense levels in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including anticipated
development and acquisition of dialysis centers, new facility comple-
tions and related anticipated costs. All forward looking statements
included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to
update any such forward looking statement. It is important to note that
the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks dis-
cussed in the "Risk Factors" section included in the Company's Registra-
tion Statement Form SB-2, as filed with the Securities and Exchange
Commission (effective on April 17, 1996) and as may be amended and
supplemented. Accordingly, readers are cautioned not to place undue
reliance on such forward looking statements.
Essential to the Company is Medicare reimbursement which is a fixed
rate determined by HCFA. The level of the Company's revenues and profita-
bility may be adversely affected by potential legislation resulting in
rate cuts. Additionally, operating costs tend to increase over the years
without any comparable increases, if any, in the prescribed dialysis
treatment reimbursement rates, which usually remain fixed and have
decreased over the years. There also may be reductions in commercial
third-party reimbursement rates. The Company bills Medicare, Medicaid
and private third-party payors and handles its records of such
reimbursements electronically.
The dialysis industry is highly competitive and subject to extensive
regulation, including the limitation on fees for dialysis treatment and
services. Significant competitive factors include quality of care and
service, convenience of location and pleasant environment. Additionally,
there is intense competition for retaining qualified nephrologists who
normally are the sole source of patient referrals and are responsible
for the supervision of the dialysis centers. There is also substantial
competition for obtaining qualified nurses and technical staff. Major
companies, some of which are public companies or divisions of public
companies, have many more centers, physicians and financial resources
than does the Company, and by virtue of such have a significant advantage
in competing for acquisitions of dialysis facilities in areas targeted by
the Company.
The Company's future growth depends primarily on the availability of
suitable dialysis centers for acquisition or development in appropriate
and acceptable areas, and the Company's ability to compete with larger
companies with greater personnel and financial resources to develop these
new potential dialysis centers at costs within the budget of the Company.
Its ability to retain qualified nephrologists, nursing and technical staff
at reasonable rates is also a significant factor. Management continues in
negotiations with nephrologists for the acquisition or development of new
dialysis facilities, as well as with hospitals and other health care
maintenance entities. The Company opened a new center in Carlisle,
Pennsylvania in July 1997 and its fourth center in Manahawkin, New Jersey
in July, 1998. Two additional centers, one in Pennsylvania and one in
New Jersey, are under construction. There is no certainty as to when any
new centers or service contracts will be implemented, or the number of
stations, or patient treatments such may involve, or if such will ulti-
mately be profitable. Newly established dialysis centers, although
contributing to increased revenues, also adversely affect results of
operations due to start-up costs and expenses with a smaller developing
patient base.
The year 2000 computer information processing challenge associated
with the upcoming millennium change, with which all companies, public
and private, are faced to ensure continued proper operations and
reporting of financial condition, has been assessed by management and
is being addressed. The singular area impacting the Company is in its
electronic billing. With respect to any financial impact in view of
electronic billing and maintenance of receivables, management has
evaluated its computer systems and discussed the year 2000 issue with
its computer software provider, which has modified the software to
alleviate any interruptions in electronic billing and is currently being
tested. The cost of the software modifications to date have been
minimal and the Company does not anticipate that there will be any
additional material costs involved.
The Company has communicated with its suppliers and other key third
parties with whom it deals to determine the extent of their year 2000
problem and what actions they are taking to assess and address that
issue. Substantial revenues are derived from Medicare reimbursement
and the Company has recently been advised by the Health Care Financing
Administration that it is working diligently to insure Medicare's
computer systems and networks are year
<PAGE>
Forward-Looking Information-Continued
2000 compliant and that billing systems interface and work properly
with no interruptions in claims and payment processing. The
Company's equipment suppliers have also indicated the year 2000 issue
will not affect performance so that the Company may continue to
provide proper patient care. To the extent other third parties are
materially adversely affected by the year 2000 issue which is not
timely corrected, that could disrupt the Company's relationship with
such parties and its operations. No assurance can be given that the
modifications of the Company's software system or those of its key
suppliers and payors will be successful and that any such year 2000
compliance failures will not have a material adverse effect on the
Company's business or results of operations.
Results of Operations
Medical service revenue decreased approximately $392,000 (31%) and
$839,000 (25%) for the three months and nine months ended September 30,
1998 compared to the same periods of the preceding year. This decrease
reflected lost revenues of approximately $515,000 and $1,507,000 for the
three months and nine months ended September 30, 1998 compared to the
same periods of the preceding year resulting from the sale of the
Company's Florida dialysis operations on October 31, 1997 which were
offset to some degree by increased revenues of the Company's Pennsyl-
vania dialysis centers of approximately $103,000 and $648,000 for the
three months and nine months ended September 30, 1998 including
revenues of approximately $107,000 and $535,000 for the three months
and nine months ended September 30, 1998 from a new dialysis center
located in Carlisle, Pennsylvania, which commenced operations in July
1997. Although the operations of the new Carlisle center have resulted
in additional revenues, it is in the developmental stage and, accordingly,
its operating results will adversely affect the Company's results of
operations until it achieves a sufficient patient count to cover fixed
operating costs.
Interest and other income increased approximately $9,000 and $82,000
for the three months and nine months ended September 30, 1998 compared to
the same periods of the preceding year largely due to interest earned on
proceeds invested from the October 1997 sale of the Company's Florida
dialysis operations.
Cost of medical services sales increased to 72% for the three months
and nine months ended September 30, 1998 compared to 60% and 61% for the
same periods of the preceding year reflecting increases in healthcare
salaries and supply costs as a percentage of sales, including the
operations of the Company's new Carlisle center which is still in its
developmental stage. The preceding year included higher hospital
treatment revenues, which have a substantially lower cost of sales, with
the Company's Florida hospital operations having been sold on October 31,
1997.
Selling, general and administrative expenses decreased approxi-
mately $23,000 for the three months ended September 30, 1998 and
increased approximately $42,000 for the nine months ended September
30, 1998 compared to the same periods of the preceding year. The
increase for the nine months ended September 30, 1998 reflected the
commencement of operations at the new dialysis center in Carlisle,
Pennsylvania, expenses in connection with the startup of a new dialysis
center in Manahawkin, New Jersey and two other centers presently under
construction, and the cost of increased support functions offset by
cost decreases resulting from the sale of the Florida dialysis opera-
tions.
Interest expense decreased approximately $3,000 and $5,000 for
the three months and nine months ended September 30, 1998 compared to
the same periods of the preceding year largely as a result of reduced
average outstanding borrowings.
Liquidity and Capital Resources
Working capital totaled $5,551,000 at September 30, 1998, which
reflected a decrease of approximately $1,511,000 during the nine months
ended September 30, 1998. Included in the changes in components of
working capital was a decrease in cash and cash equivalents of $2,641,000,
which included net cash used in operating activities of $1,593,000
(including a decrease in income taxes payable of $1,655,000 primarily
resulting from tax payments on the gain on the sale of the Florida
dialysis operations), net cash used in investing activities of $711,000
(including additions to property and equipment of $571,000 primarily
related to new centers, funds used for redemption of minority interest
in subsidiaries of $385,000 and proceeds from a sale of securities of
$253,000) and net cash used in financing activities of $338,000
(including a decrease in the advances from the Parent of $159,000,
repurchase of stock of $64,000 and debt repayments of $115,000).
<PAGE>
Liquidity and Capital Resources--Continued
During 1988, the Company obtained mortgages totaling $1,080,000 on
its two buildings, one in Lemoyne, Pennsylvania and the other in Easton,
Maryland. The mortgages had a combined remaining balance of $378,000
and $432,000 at September 30, 1998 and December 31, 1997, respectively.
The bank has liens on the real and personal property of the Company,
including a lien on all rents due and security deposits from the rental
of these properties. See Note 3 to "Notes to Consolidated Condensed
Financial Statements".
The Company has an equipment purchase agreement for kidney dialysis
machines for its dialysis facilities which had a remaining balance of
$408,000 and $285,000 at September 30, 1998 and December 31, 1997,
respectively, which includes additional equipment financing of approxi-
mately $185,000 during the nine months ended September 30, 1998. See
Note 3 to "Notes to Consolidated Condensed Financial Statements".
In September 1998, the Company repurchased 60,000 shares of its
outstanding common stock for approximately $64,000. See Note 10 to
"Notes to Consolidated condensed Financial Statements".
The Company believes that current levels of working capital,
including the proceeds of its 1996 securities offering and the sale of
its Florida dialysis operations in October, 1997 will enable it to
successfully meet its liquidity demands for at least the next twelve
months.
The Company, having operated on a larger scale in the past, is
seeking to expand its outpatient dialysis treatment facilities and
inpatient dialysis care. Such expansion, whether through acquisitions
of existing centers, or the development of its own dialysis centers,
requires capital, which was the basis for the Company's security
offering in 1996 and sale of its Florida dialysis operations in 1997.
No assurance can be given that the Company will be successful in imple-
menting its growth strategy or that the funds from its securities
offering and Florida dialysis operations sale will be adequate to
finance such expansion. See Notes 7 and 9 to "Notes to Consolidated
Condensed Financial Statements".
The Company's fourth center in Manahawkin, New Jersey has
initiated patient treatment and is awaiting final regulatory approval
as a Medicare provider. The Company is constructing two new dialysis
centers, one in New Jersey and one in Pennsylvania. The professional
corporation providing medical director services to both the
Manahawkin, New Jersey center and the other New Jersey center
presently under construction has a 20% interest in those subsidi-
aries.
Impact of Inflation
Inflationary factors have not had a significant effect on the
Company's operations, although the Company has experienced increased
costs of healthcare salaries and supply costs.
A substantial portion of the Company's revenue is subject to
reimbursement rates established and regulated by the federal government.
These rates do not automatically adjust for inflation. Any rate adjust-
ments relate to legislation and executive and Congressional budget
demands, and have little to do with the actual cost of doing business.
Therefore, dialysis services revenues cannot be voluntarily increased
to keep pace with increases in supply costs or nursing and other patient
care costs.
<PAGE>
PART II -- OTHER INFORMATION
------- -----------------
Item 5. Other Information
- ------ -----------------
A new Vice President of the Company has been retained to supervise
and assist in operations management, undertake responsibilities for new
business planning and development and assume overall strategic respon-
sibilities. The new Vice President has 18 years experience in the
healthcare industry.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
/s/ DANIEL R. OUZTS
By:-------------------------------
DANIEL R. OUZTS, Vice
President/Finance, Controller
and Chief Financial Officer
Dated: November 13, 1998
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,462,270
<SECURITIES> 0
<RECEIVABLES> 305,566<F1>
<ALLOWANCES> 0
<INVENTORY> 136,467
<CURRENT-ASSETS> 6,077,146
<PP&E> 3,718,834
<DEPRECIATION> 916,120
<TOTAL-ASSETS> 8,958,295
<CURRENT-LIABILITIES> 526,119
<BONDS> 622,717
0
0
<COMMON> 37,513
<OTHER-SE> 7,771,946
<TOTAL-LIABILITY-AND-EQUITY> 8,958,295
<SALES> 2,521,330
<TOTAL-REVENUES> 2,872,920
<CGS> 1,821,792
<TOTAL-COSTS> 1,821,792
<OTHER-EXPENSES> 1,390,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,837
<INCOME-PRETAX> (398,651)
<INCOME-TAX> (187,363)
<INCOME-CONTINUING> (211,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (211,288)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
<FN>
<F1> Accounts receivable are net of allowance of $168,000 at
September 30, 1998.
</FN>
</TABLE>
