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, 1999
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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
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(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
27 Miller Avenue, Lemoyne, Pennsylvania 17043
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(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 - 3,546,344 shares as of October 31, 1999.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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, 1999 and September 30, 1998
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, 1999 and September 30,
1998.
2) Consolidated Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
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,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Medical service revenue $ 1,551,894 $ 887,516 $ 4,174,208 $ 2,521,330
Interest and other income 89,220 111,275 279,641 351,590
----------- ----------- ----------- -----------
1,641,114 998,791 4,453,849 2,872,920
Cost and expenses:
Cost of medical services 1,045,224 639,615 2,930,547 1,821,792
Selling, general and administrative
expenses 628,569 469,430 2,065,166 1,390,942
Interest expense 17,302 19,310 50,887 58,837
----------- ----------- ----------- -----------
1,691,095 1,128,355 5,046,600 3,271,571
----------- ----------- ----------- -----------
Loss before income taxes (49,981) (129,564) (592,751) (398,651)
Income tax benefit (12,707) (97,363) (125,707) (187,363)
----------- ----------- ----------- -----------
Net loss $ (37,274) $ (32,201) $ (467,044) $ (211,288)
=========== =========== =========== ===========
Loss per share:
Basic $(.01) $(.01) $(.13) $(.06)
===== ===== ===== =====
Diluted $(.01) $(.01) $(.13) $(.06)
===== ===== ===== =====
</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,
1999 1998(A)
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,208,900 $ 5,366,837
Accounts receivable, less allowance of $211,000
at September 30, 1999; $144,000 at December 31, 1998 1,055,603 460,786
Inventories 244,885 179,189
Prepaid expenses and other current assets 203,410 52,934
----------- -----------
Total current assets 5,712,798 6,059,746
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,424,239 1,404,573
Machinery and equipment 1,699,024 1,381,460
Leasehold improvements 1,278,896 1,149,300
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4,750,517 4,103,691
Less accumulated depreciation and amortization 1,333,733 1,003,995
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3,236,784 3,099,696
Advances to parent 120,865
Deferred expenses and other assets 23,296 68,617
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$ 8,972,878 $ 9,348,924
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 285,367 $ 243,968
Accrued expenses 380,174 292,594
Current portion of long-term debt 195,833 175,902
Income taxes payable --- 232,306
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Total current liabilities 861,374 944,770
Long-term debt, less current portion 610,815 632,664
Advances from parent 37,203 ---
Minority interest in subsidiaries 2,080 ---
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares;
3,546,344 shares issued and outstanding at September 30, 1999;
3,751,344 shares issued and 3,546,344 shares outstanding at
December 31, 1998 35,463 37,513
Capital in excess of par value 3,971,514 4,044,154
Retained earnings 3,454,429 4,004,763
Treasury stock at cost; 205,000 shares --- (314,940)
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Total stockholders' equity 7,461,406 7,771,490
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$ 8,972,878 $ 9,348,924
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</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange
Commission in March 1999.
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,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (467,044) $ (211,288)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 330,004 236,252
Amortization 1,267 1,267
Bad debt expense 72,119 104,754
Stock option compensation 153,000 ---
Gain on sale of securities --- (12,780)
Increase (decrease) relating to operating activities from:
Accounts receivable (666,936) 83,843
Inventories (65,696) (22,652)
Prepaid expenses and other current assets (148,476) (52,084)
Accounts payable 41,399 (22,589)
Accrued expenses 87,580 (42,104)
Income tax payable (232,306) (1,655,164)
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Net cash used in operating activities (895,089) (1,592,545)
Investing activities:
Redemption of minority interest in subsidiaries --- (385,375)
Additions to property and equipment, net of minor disposals (326,492) (571,446)
Proceeds from sale of securities --- 252,780
Sale of minority interest in subsidiaries 4,040 ---
Deferred expenses and other assets 44,054 (6,482)
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Net cash used in investing activities (278,398) (710,523)
Financing activities:
Advances from parent 158,068 (158,859)
Repurchase of stock --- (63,605)
Payments on long-term debt (142,518) (115,118)
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Net cash provided by (used in) financing activities 15,550 (337,582)
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Decrease in cash and cash equivalents (1,157,937) (2,640,650)
Cash and cash equivalents at beginning of period 5,366,837 8,102,920
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Cash and cash equivalents at end of period $ 4,208,900 $ 5,462,270
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</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(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, collectively referred
to as the "Company." All material intercompany accounts and transactions
have been eliminated in consolidation. The Company is a 68% 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
restrictions. 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Rental income $ 38,446 $ 25,569 $ 106,848 $ 92,015
Interest income 46,853 68,268 148,350 235,299
Other income 3,921 17,438 24,443 24,276
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$ 89,220 $ 111,275 $ 279,641 $ 351,590
========= ========= ========= =========
</TABLE>
Earnings per Share
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market
price. No potentially dilutive securities were included in the diluted
earnings per share computation for the three months or nine months ended
September 30, 1999 or for the same periods of the preceding year, as a result
of exercise prices and the net loss, and to include them would be anti-
dilutive.
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,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (37,274) $ (32,201) $ (467,044) $ (211,288)
=========== =========== =========== ===========
Weighted average shares 3,546,344 3,648,083 3,546,344 3,650,245
========= ========= ========= =========
Loss per share:
Basic $(.01) $(.01) $(.13) $(.06)
===== ===== ===== =====
Diluted $(.01) $(.01) $(.13) $(.06)
===== ===== ===== =====
</TABLE>
The Company has various potentially dilutive securities, including stock
options and warrants. See Notes 6 and 7.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board State-
ment No. 130, "Reporting Comprehensive Income" (FAS 130). This statement
establishes rules for the reporting of comprehensive income (loss) and its
components. Comprehensive loss consists of the net loss for the three
months and nine months ended September 30, 1999, and for the same period of
the preceding year included the net loss and an unrealized securities gain
and related reclassification adjustments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net loss $ (37,274) $ (32,201) $ (467,044) $ (211,288)
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 $ (37,274) $ (72,900) $ (467,044) $ (211,288)
========== ========== ========== ==========
</TABLE>
Reclassifications
Certain reclassifications have been made to the 1998 financial state-
ments to conform to the 1999 presentation.
New Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for
fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities
and requires, among other things, that all derivatives be recognized as
either assets or liabilities in the statement of financial position and that
these instruments be measured at fair value. The Company is in the process
of determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and nine months ended
September 30, 1999 and September 30, 1998 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, 1999 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1999.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consoli-
dated 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, 1998.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
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 $133,000 and $160,000 at September 30,
1999 and December 31, 1998, 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 $167,000 and $200,000 at
September 30, 1999 and December 31, 1998, respectively.
The Company has equipment purchase agreement for certain kidney dialysis
machines at its facilities with interest at rates ranging from 4.13% to
11.84% pursuant to various schedules extending through May 2005. Additional
financing of $141,000 and $185,000 during the nine months ended September 30,
1999 and September 30, 1998, respectively, represents a noncash financing
activity which is a supplemental disclosure required by FAS 95. The
remaining principal balance under this agreement amounted to approximately
$507,000 and $449,000 at September 30, 1999 and December 31, 1998, respec-
tively.
The prime rate was 8.25% as of September 30, 1999 and 7.75% as of
December 31, 1998.
Interest payments on long-term debt amounted to approximately $9,000
and $40,000 for the three months and nine months ended September 30, 1999
and $15,000 and $49,000 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. For financial
reporting purposes, a valuation allowance has been recognized to offset
deferred tax assets.
Income tax payments amounted to $11,000 and $223,000 for the three
months and nine months ended September 30, 1999 and $21,000 and $1,561,000
for the same period of the preceding year.
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 $50,000 and $150,000 for the three months and nine months ended
September 30, 1999, and $60,000 and $180,000 for the same periods of the
preceding year.
The Company has an intercompany advance payable to the Parent of
approximately $37,000 at September 30, 1999 and had an intercompany advance
receivable from the Parent of approximately $121,000 at December 31, 1998,
with intercompany advance balances bearing interest at the short-term
Treasury Bill rate. Interest income on net intercompany advances amounted
to approximately $1,500 for the nine months ended September 30, 1999 and
interest expense on net intercompany advances amounted to approximately
$1,000 and $6,000 for the three months and nine months ended September 30,
1998. Interest on intercompany balances is included in the intercompany
advance balance. The Parent has agreed not to require repayment of the
intercompany advance payable balance prior to October 1, 2000; therefore,
the advance has been classified as long-term at September 30, 1999.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 6--STOCK OPTIONS
In April 1999, the Company adopted a stock option plan pursuant to which
the board of directors granted 800,000 options exercisable at $1.25 per share
to certain of its officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. The Company recorded expense of $153,000 on 340,000
of these options pursuant to FAS 123 and APB 25.
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, directors,
employees and consultants of which 4,500 options were outstanding at Sep-
tember 30, 1999. These options are 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 a five-year non-qualified stock option 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, 1999. 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
Pursuant to a 1996 public 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 originally exercisable through April 16, 1999 and extended to
March 31, 2000. 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 through April 16, 2001.
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, 1999.
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. In February 1998, the
Company acquired, in a transaction accounted for as a purchase, the remaining
20% minority interests in two of the subsidiaries 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.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
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 $206,000. The Company
repurchased 105,000 shares for approximately $109,000 during 1998. The
Company did not repurchase any additional shares during the first half of
1999. All treasury shares were cancelled during the second quarter of 1999
resulting in reductions of $2,050 in common stock, $229,560 in capital in
excess of par value and $83,290 in retained earnings.
NOTE 11--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger with MainStreet IPO.com, Inc. ("MSI") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet"). The merger will be effected by
MainStreet merging into DCA with DCA surviving, changing its name to
MainStreet, and becoming a wholly-owned subsidiary of MSI. The company's
shareholders will receive, on a one-for-one basis, shares of common stock of
MSI, which company is in the process of preparing a registration statement
for filing with the SEC covering the issuance of approximately 1,396,000
shares of its common stock, plus an indeterminate number of shares for resale
by certain affiliates of the Company, MSI and certain private investors of
MSI. The registration statement is to be filed in the near future in
conjunction with the Company's proxy statement seeking its shareholder
approval of the merger and related transactions.
Immediately prior to the proposed merger, the Company will be selling
all of its assets to Dialysis Acquisition Corp., a wholly-owned subsidiary
of its parent, Medicore, Inc., with this subsidiary also assuming all
liabilities of the Company. The proposed sale of assets and merger trans-
actions are subject to a variety of contingencies, most importantly
shareholder approval. Should the Company's shareholders approve the
transactions, Medicore will own 100% of the dialysis operations, and the
Company's shareholders will become shareholders of MSI.
MSI is a recently established company which has developed a central
website to provide business entities with the necessary tools to perform
direct public offering of their securities. Another company, CEO Letter,
LLC, which will become a wholly-owned subsidiary of MSI at the time of the
merger, provides chief executive officers of public companies the forum to
discuss their companies to the multitude of potential internet investors.
<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 Securities Exchange
Act of the 1934. The Private Securities Litigation Reform Act of 1995
contains certain safe harbors for forward-looking statements. Certain of
the forward-looking statements include management's expectations, intentions,
beliefs and strategies regarding the future of the Company's growth and
operations, the character and development of the dialysis industry,
anticipated revenues, the Company's need for and sources of funding for
expansion opportunities and construction, expenditures, costs and income and
similar expressions concerning matters that are not considered historical
facts. Forward-looking statements also include the Company's statements
regarding liquidity, anticipated cash needs and availability, and anticipated
expense levels in "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Such forward-looking statements are subject to
substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including the
general economic, market and business conditions, opportunities pursued or
not pursued by the Company, competition, changes in federal and state laws
or regulations affecting the Company, and other factors discussed periodically
in the Company's filings. Many of the foregoing factors are beyond the
control of the Company. Among the factors that could cause actual results to
differ materially are the factors detailed in the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement Form SB-2,
as filed with the Securities and Exchange Commission (effective April 17,
1996), and Form S-3, effective July 1, 1999, and as amended or supplemented.
Accordingly, readers are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date made and which
the Company undertakes no obligation to revise to reflect events after the
date made.
Essential to the Company is Medicare reimbursement which is a fixed rate
determined by the Health Care Financing Administration ("HCFA"). The level
of the Company's revenues and profitability 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 dialysis industry is highly competitive and subject to extensive
regulation. There are a variety of anti-kickback regulations, extensive
prohibitions relating to self-referrals, violations of which are punishable
by criminal or civil penalties, including exclusion from Medicare and other
governmental programs. Although the Company has never been challenged under
these regulations and believes it complies in all material respects with
such laws and regulations, there can be no assurance that there will not be
unanticipated changes in healthcare programs or laws or that it will not be
required to change its practice or experience material adverse effects as a
result of any such challenges or changes. 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 main source of patients for
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 to negotiate 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 center in Carlisle, Pennsylvania in July 1997. It opened
its fourth center in Manahawkin, New Jersey and received regulatory approval
as a Medicare provider during the fourth quarter of 1998 and opened its
fifth center in Chambersburg, Pennsylvania during the first quarter of 1999.
Another center being developed in New Jersey is expected to commence
operations in the first quarter of 2000. There is no certainty as to when
the new center will commence operations, or the number of stations or
patient treatments which will result, or if the new center will ultimately
be profitable. Newly established dialysis centers, although contributing
to increased revenues, initially adversely affect results of operations due
to start-up costs and expenses with a smaller developing patient base.
<PAGE>
Year 2000 Readiness
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized informa-
tion systems to properly recognize date sensitive information, with which
many companies, public and private, are faced to ensure continued proper
operations and reporting of financial condition. Failure to correct and
comply with the Year 2000 change may cause systems that cannot recognize the
new date and millenium information to generate erroneous data or to fail to
operate. Management is fully aware of the Year 2000 issues, has made its
assessments, which included testing each component of software and hardware
systems to insure each component operates properly with the date advanced to
the year 2000, developing awareness and educating employees and patients
regarding the Year 2000 issue and advising them of contingency plans, in case
of total operating failure, which would include transferring the patients to
our backup hospitals or referring to other non-affiliated dialysis centers.
The education phase will be ongoing to assure staff and patients of the nature
of the Year 2000 issue and the contingency plans then available.
We have recently installed a new Year 2000 compliant accounting package,
providing us with our own independent system of bookkeeping, accounting and
financial records and reducing our reliance on our Parent's system and staff.
This new system's cost for equipment, software and training was approximately
$40,000.
We believe that our operations and systems are currently Year 2000
compliant.
One of the most significant risks in our operations with respect to the
upcoming millenium change relates to billing and collection from third-party
payors, and, in particular, Medicare. We receive a substantial portion of our
revenues from Medicare for treatment of dialysis patients and related
services. HCFA, through whom the Medicare program and payments are effected,
has indicated it has done and continues to accomplish all it can to insure
the Medicare ESRD program continues operating smoothly and that dialysis
providers, like the Company, may continue to timely bill electronically for
patient services with Medicare payments to be made timely. In 1998, we
installed a new electronic billing software program that was developed
according to Medicare's compliance guidelines, which guidelines require not
only system but also Year 2000 compatibility. The software designer has
successfully tested the software for Year 2000 compliance and we initiated
electronic Medicare billing in January, 1999 without any problems. Other
third-party payors, such as insurance companies, are presently and will
continue to be billed with hard copy. The costs of the software modifica-
tions have been minimal, approximately $1,000, and we do not anticipate that
any costs involved in any future Year 2000 compliance will be material or
that they will have a material adverse effect on our business.
With respect to non-information technology systems, which typically
include embedded technology, such as microcontrollers, the major equipment
used in patient dialysis treatment is not date sensitive and should not pose
any threat of a system breakdown due to the Year 2000 issue. Most of our
dialysis equipment is new. We retain technicians who test and maintain
dialysis operations equipment.
In addition to addressing our own internal software system and equip-
ment, we have communicated with all of our suppliers, service providers and
other key third parties, including banks, hospitals, insurance companies,
drug and medical equipment and soft good suppliers, utilities, waste removal
and water and sewer services with whom we deal to determine the extent of
their Year 2000 compliance, what actions they are taking to assess and
address that issue, and whether they will be compliant by the end of 1999.
To the extent such third parties are materially adversely affected by the
Year 2000 issue and their problem has not been timely corrected, our opera-
tions could be affected. We have received written assurance from most of
these third parties indicating that they are Year 2000 compliant or are
working on it and expect to be by the end of 1999.
Assuming a worse case scenario that our critical suppliers have a
millenium problem and limit, delay or are unable to deliver supplies for
patient treatment, which could have a material adverse impact on our business
and financial condition, we are identifying other sources of supplies and,
if necessary, will overstock certain critical supplies, as well as order
several more weeks in advance, request major suppliers to carry more
inventory earmarked for us, and maintain specific contacts with those
suppliers.
<PAGE>
Year 2000 Readiness (continued)
Another area that could significantly impact our operations in providing
dialysis treatment to patients relates to third-party providers, specif-
ically, the utility companies providing water, a necessary resource for
dialysis treatments, and electricity. These providers and services are
beyond our control, and we do not have a separate generator for electricity
nor other sources for water. Should any of these utilities fail to provide
services, such would seriously adversely impact our operations and our
patients in such affected areas. Our continuing plans to reduce the impact
of such utility shortages or outages includes notification to our utilities
companies of our dialysis center locations, schedules and emergency services
required and a 24-hour contact as well as notification to each of our
landlords to assure access to the facility for our staff and key service
providers.
We may experience material unanticipated negative consequences beginning
in the Year 2000 due to Year 2000 problems that have gone undetected. Although
we believe our assessment and implementation of our Year 2000 issues have been
satisfactorily completed, there are many uncertainties involved, which include
two primary areas. One is our ability to deal with Year 2000 contingencies
that may arise that we were unaware of, and second is how third parties with
whom we deal have dealt with the Year 2000 issue. Accordingly, the results of
our Year 2000 program and the extent of any impact on our results of opera-
tions could vary materially from what we have disclosed. The complexity of
the Year 2000 issues does not allow us the ability to predict with any
significant accuracy or to qualify its impact upon us for the following
reasons:
o third party systems, whether suppliers, utilities or others, are
beyond our control, although critical to our operations, such as
water and electrical supply and governmental (HCFA) payors
o complexity of testing interconnected systems and networks that depend
on third-party systems
o uncertainty of costs we might incur as a result of Year 2000 failures
that occur despite implementation of our program to deal with the
issues
Results of Operations
Medical service revenue increased approximately $664,000 (75%) and
$1,653,000 (66%) during the three months and nine months ended September 30,
1999 compared to the same periods of the preceding year. This increase
reflected increased revenues of the Company's Pennsylvania dialysis centers
of approximately $468,000 and $1,222,000 for the three months and nine months
ended September 30, 1999, including revenues of approximately $230,000 and
$578,000 for the Company's Chambersburg, Pennsylvania dialysis center which
commenced operations in January 1999. Also included in the increase in
revenues are revenues of approximately $196,000 and $431,000 from the
Manahawkin, New Jersey center which commenced operations in the fourth
quarter of 1998. Although the operations of the new centers have resulted
in additional revenues, they are in the developmental stage and, accordingly,
their operating results will adversely affect the Company's results of
operations until they achieve a sufficient patient count to cover fixed
operating costs.
Interest and other income decreased approximately $22,000 and $72,000
for the three months and nine months ended September 30, 1999 compared to
the same periods of the preceding year largely due to a decrease in interest
earned as a result of a decrease in invested funds.
Cost of medical services sales amounted to 67% and 70% for the three
months and nine months ended September 30, 1999 compared to 72% for the
same periods of the preceding year with improvements at existing centers
more than offsetting higher costs at the Company's new dialysis centers which
are still in their developmental stage.
Selling, general and administrative expenses increased approximately
$159,000 and $674,000 for the three months and nine months ended September 30,
1999 compared to the same periods of the preceding year. This increase
reflected the commencement of operations at the Company's new dialysis
centers, costs in the second quarter of 1999 of approximately $93,000
associated with the Company's decision not to go through with plans to
construct a facility in New Jersey, and $153,000 in compensation expense
in issuance of stock options in April, 1999 (see Note 6 to "Notes to
Consolidated Condensed Financial Statements"). Selling general and admin-
istrative expenses as a percent of medical services revenue amounted to 41%
and 49% for the three months and nine months ended September 30, 1999
compared to 53% and 55% for the same periods of the preceding year.
<PAGE>
Results of Operations (continued)
Interest expense decreased approximately $2,000 for the three months
ended September 30, 1999 and decreased approximately $8,000 for the nine
months ended September 30, 1999 compared to the same periods of the preceding
year, which included reductions in interest expense to Medicore of $1,000 and
$6,000. The overall decrease included increases in interest on equipment
financing obligations, which were more than offset by decreases in interest
on other debt agreements due to decreases in average outstanding borrowings.
Liquidity and Capital Resources
Working capital totaled $4,851,000 at September 30, 1999, which
reflected a decrease of approximately $264,000 during the nine months ended
September 30, 1999. Included in the changes in components of working capital
was a decrease in cash and cash equivalents of $1,158,000, which included net
cash used in operating activities of $895,000, net cash used in investing
activities of $278,000 (including additions to property and equipment of
$326,000, primarily related to new centers), and net cash provided by
financing activities of $16,000 (including an increase in advances from
Parent of $158,000 and debt repayments of $142,000).
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 $300,000 and $360,000 at
September 30, 1999 and December 31, 1998, 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 $507,000
and $449,000 at September 30, 1999 and December 31, 1998, respectively, which
included additional equipment financing of approximately $141,000 and $185,000
during the nine months ended September 30, 1999 and September 30, 1998,
respectively. See Note 3 to "Notes to Consolidated Condensed Financial
Statements."
The Company believes that current levels of working capital, 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. The Company opened its fifth center in
Chambersburg, Pennsylvania in January 1999. The professional corporation
providing medical director services to the Manahawkin, New Jersey center,
the professional association which is to provide medical director services
to another New Jersey center presently being developed and the professional
corporation providing medical director services to the Carlisle and
Chambersburg, Pennsylvania facilities have a 20% interest in those subsidi-
aries. No assurance can be given that the Company will be successful in
implementing its growth strategy or that remaining funds from its securities
offering and Florida dialysis operations sale will be adequate or that
sufficient outside financing would be available to fund expansion. See
Notes 7 and 9 to "Notes to Consolidated Condensed Financial Statements."
New Accounting Pronouncement
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for
fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that these instruments be measured at fair value. The Company
is in the process of determining the impact that the adoption of FAS 133
will have on its consolidated financial statements.
<PAGE>
Proposed Merger and Acquisition
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger pursuant to which another company would merge into the Company and
own approximately 80% of the Company which also provides for a simultaneous
sale of the Company's assets to its Parent in consideration for approximately
90% of the Parent's ownership on the Company, the Parent's assumption of the
Company's long-term debt and other liabilities, and the Parent's waiver of
most proceeds from the potential exercise of outstanding warrants and
underwriters' options. See Note 11 to "Notes to Consolidated Condensed
Financial Statements."
Impact of Inflation
Inflationary factors have not had a significant effect on the Company's
operations. 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 adjustments
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 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
(i) Item 4, "Changes in Registrant's Certifying Accountant,"
filed August 13, 1999
(ii) Amendment to Item 4, "Changes in Registrant's Certifying
Accountant," filed August 27, 1999
(iii) Item 5, "Other Events," re: extension of warrant exercise
period and letter of intent for sale of assets and proposed
merger, filed September 10, 1999
(iv) Item 5, "Other Events," re: execution of Agreement and Plan
of Merger and Asset Purchase Agreement filed on October, 21,
1999
No financial statements were filed with any of the current reports
on Form 8-K.
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 12, 1999
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,208,900
<SECURITIES> 0
<RECEIVABLES> 1,055,603
<ALLOWANCES> 0
<INVENTORY> 244,885
<CURRENT-ASSETS> 5,712,798
<PP&E> 4,750,517
<DEPRECIATION> 1,333,733
<TOTAL-ASSETS> 8,972,878
<CURRENT-LIABILITIES> 861,374
<BONDS> 610,815
0
0
<COMMON> 35,463
<OTHER-SE> 7,425,943
<TOTAL-LIABILITY-AND-EQUITY> 8,972,878
<SALES> 4,174,208
<TOTAL-REVENUES> 4,453,849
<CGS> 2,930,547
<TOTAL-COSTS> 2,930,547
<OTHER-EXPENSES> 2,065,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,887
<INCOME-PRETAX> (592,751)
<INCOME-TAX> (125,707)
<INCOME-CONTINUING> (467,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (467,044)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
<FN>
<F1> Accounts receivable are net of allowance of $211,000 at September 30,
1999.
</FN>
</TABLE>
