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 June 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 July 31, 1999.
<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 six months ended June 30, 1999 and June 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 six months ended June 30, 1999 and June 30, 1998.
2) Consolidated Condensed Balance Sheets as of June 30, 1999 and December
31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and June 30, 1998.
4) Notes to Consolidated Condensed Financial Statements as of June 30,
1999.
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 4. Submission of Matters to a Vote of Security Holders
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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 Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Medical service revenue $1,454,959 $ 815,503 $2,622,314 $1,633,814
Interest and other income 102,652 113,588 190,421 240,315
---------- ---------- ---------- ----------
1,557,611 929,091 2,812,735 1,874,129
Cost and expenses:
Cost of medical services 1,019,413 596,101 1,885,323 1,182,177
Selling, general and
administrative expenses 845,237 465,622 1,436,597 921,512
Interest expense 16,559 20,295 33,585 39,527
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1,881,209 1,082,018 3,355,505 2,143,216
---------- ---------- ---------- ----------
Loss before income taxes (323,598) (152,927) (542,770) (269,087)
Income tax benefit (41,000) (51,000) (113,000) (90,000)
---------- ---------- ---------- ----------
Net loss $ (282,598) $ (101,927) $ (429,770) $ (179,087)
========== ========== ========== ===========
Loss per share:
Basic $(.08) $(.03) $(.12) $(.05)
===== ===== ===== =====
Diluted $(.08) $(.03) $(.12) $(.05)
===== ===== ===== =====
</TABLE<
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998(A)
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,547,485 $ 5,366,837
Accounts receivable, less allowance of $185,000 at
June 30, 1999; $144,000 at December 31, 1998 767,846 460,786
Inventories 182,729 179,189
Prepaid expenses and other current assets 187,915 52,934
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Total current assets 5,685,975 6,059,746
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,418,117 1,404,573
Machinery and equipment 1,623,409 1,381,460
Leasehold improvements 1,237,278 1,149,300
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4,447,162 4,103,691
Less accumulated depreciation and amortization 1,222,737 1,003,995
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3,224,425 3,099,696
Advances to parent 13,090 120,865
Deferred expenses and other assets 23,718 68,617
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$ 8,947,208 $ 9,348,924
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 162,183 $ 243,968
Accrued expenses 480,334 292,594
Current portion of long-term debt 153,639 175,902
Income taxes payable --- 232,306
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Total current liabilities 796,156 944,770
Long-term debt, less current portion 650,292 632,664
Minority interest in subsidiaries 2,080
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares;
3,546,344 shares issued and outstanding at June 30, 1999;
3,751,344 shares issued and 3,546,344 shares outstanding at
December 31, 1998 35,463 37,513
Capital in excess of par value 3,971,514 4,044,154
Retained earnings 3,491,703 4,004,763
Treasury stock at cost; 205,000 shares --- (314,940)
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Total stockholders' equity 7,498,680 7,771,490
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$ 8,947,208 $ 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>
Six Months Ended
June 30,
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1999 1998
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<S> <C> <C>
Operating activities:
Net loss $ (429,770) $ (179,087)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 219,008 140,314
Amortization 845 845
Bad debt expense 45,173 56,709
Stock option compensation 153,000 --
Increase (decrease) relating to operating activities from:
Accounts receivable (352,233) 94,447
Inventories (3,540) (14,660)
Prepaid expenses and other current assets (132,981) 20,311
Accounts payable (81,785) 95,052
Accrued expenses 187,740 16,301
Income tax payable (232,306) (1,630,000)
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Net cash used in operating activities (626,849) (1,399,768)
Investing activities:
Redemption of minority interest in subsidiaries (385,375)
Additions to property and equipment, net of minor disposals (254,637) (429,606)
Sale of minority interest in subsidiaries 4,040
Deferred expenses and other assets 44,054 10,153
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Net cash used in investing activities (206,543) (804,828)
Financing activities:
Advances from parent 107,775 165,429
Payments on long-term debt (93,735) (77,568)
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Net cash provided by financing activities 14,040 87,861
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Decrease in cash and cash equivalents (819,352) (2,116,735)
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 $ 4,547,485 $ 5,986,185
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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
June 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 restric-
tions. Although the Company is not aware of any future rate changes, sig-
nificant changes in reimbursement rates could have a material effect on the
Company's operations. The Company believes that it is presently in compli-
ance with all applicable laws and regulations.
Interest and Other Income
Interest and other income is comprised as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental income $ 35,915 $ 34,073 $ 68,402 $ 66,446
Interest income 49,506 75,138 101,497 167,031
Other income 17,231 4,377 20,522 6,838
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$ 102,652 $ 113,588 $ 190,421 $ 240,315
========= ========= ========= =========
</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 six months ended June 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 Six Months Ended
June 30, June 30,
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1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(282,598) $(101,927) $(429,770) $(179,087)
========= ========= ========= =========
Weighted average shares 3,546,344 3,651,344 3,546,344 3,651,344
========= ========= ========= =========
(Loss) earnings per share:
Basic $(.08) $(.03) $(.12) $(.05)
===== ===== ===== =====
Diluted $(.08) $(.03) $(.12) $(.05)
===== ===== ===== =====
</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)
June 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 six months ended June 30, 1999, and for the same period of the preceding
year included the net loss and an unrealized securities gain.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(282,598) $(101,927) $(429,770) $(179,087)
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax 26,063 40,699
--------- --------- --------- ---------
Comprehensive loss $(282,598) $ (75,864) $(429,770) $(138,388)
========= ========= ========= =========
</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 six months ended June
30, 1999 and June 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 ended June 30, 1999 are not neces-
sarily 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)
June 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 $141,000 and $160,000 at June 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 $177,000 and $200,000 at June 30, 1999 and December
31, 1998, respectively.
The Company has an 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 February 2005.
Additional financing of $90,000 and $185,000 during the six months ended
June 30, 1999 and June 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 approxi-
mately $486,000 and $449,000 at June 30, 1999 and December 31, 1998,
respectively.
The prime rate was 7.75% as of June 30, 1999 and December 31, 1998.
Interest payments on long-term debt amounted to approximately $16,000
and $31,000 for the three months and six months ended June 30, 1999 and
$17,000 and $34,000 for the same periods of the preceding year.
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differ-
ences 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 (refunds) amounted to $(4,000) and $212,000 for
the three months and six months ended June 30, 1999 and $1,540,000 for
the six months ended June 30, 1998 with no such payments or refunds for
the three months ended June 30, 1998.
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 $100,000 for the three months and six months ended
June 30, 1999, and $60,000 and $120,000 for the same periods of the preceding
year.
The Company has an intercompany advance receivable from the Parent of
approximately $13,000 and $121,000 at June 30, 1999 and December 31, 1998,
respectively, which bears interest at the short-term Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approxi-
mately $500 and $1,500 for the three months and six months ended June 30,
1999 and interest expense on an intercompany advance payable to the Parent
amounted to approximately $3,000 and $5,000 for the three months and six
months ended June 30, 1998. Interest on intercompany balances is included
in the intercompany advance balance. The Company has agreed not to require
repayment of the intercompany advance receivable balance prior to July 1,
2000; therefore, the advance has been classified as long-term at June 30,
1999.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 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 365,000
options exercisable through April 20, 2000 and 435,000 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 June 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 June 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
October 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 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 contri-
butions under this plan as of June 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)
June 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 June 4, 1999, the Company entered into a letter of intent with its
Parent and MainStreet IPO, LLC, a newly organized company which is developing
a central website to provide companies with the tools to perform self-under-
written offerings of their securities.
The letter of intent provides for several simultaneous transactions. One,
the merger of MainStreet into the Company, which will be the surviving company
and will change its name to MainStreet IPO.com or such name as new management
will choose and with the MainStreet shareholders to own approximately 80% of
the Company. Another simultaneous transaction is the sale of the Company's
assets to its Parent in consideration for approximately 90% of the Parent's
ownership in the Company, the Parent's assumption of all of the Company's
long-term debt and liabilities up to the closing date of the merger, and the
Parent's waiver of any cash proceeds assuming exercise of the underwriters'
purchase option (assuming full exercise for the common stock and the warrants,
see Note 7, represents a potential aggregate of $1,530,000) and upon exercise
of the Company's 2,300,000 outstanding warrants (assuming full exercise
represents $10,350,000 before expenses or commissions), provided the Parent
is entitled to 20% of the net warrant proceeds but not more than $1,000,000.
A third simultaneous transaction is the acquisition by the Company of The CEO
Letter, LLC, an affiliate of MainStreet, for 1,000,000 shares of DCA common
stock of which 750,000 shares are to be held in escrow subject to certain
earnings and revenues performance formulas for The CEO Letter.
The proposed merger and acquisition transactions are subject to a
variety of contingencies, including, among others, the negotiation and
completion of merger and acquisition agreements, and shareholder approval
exclusive of any vote of Medicore's 68% equity ownership of DCA.
<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, inten-
tions, 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 reduc-
tions 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 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 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 in New Jersey is in the planning and architectural stage, with
a medical director agreement having been executed. 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 is currently being tested and cost, for equipment, software
and training, 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 operations
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>
Another area that could significantly impact our operations in
providing dialysis treatment to patients relates to third-party providers,
specifically, 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 land-
lords 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. Al-
though 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 operations 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 $639,000 (78%) and
$989,000 (61%) during the three months and six months ended June 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 $489,000 and $753,000 for the three months and six months
ended June 30, 1999, including revenues of approximately $203,000 and
$347,000 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 $150,000 and $236,000 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 $11,000 and $50,000
for the three months and six months ended June 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 70% and 72% for the three
months and six months ended June 30, 1999 compared to 73% and 72% for the
same periods of the preceding year reflecting improvements at existing
centers which offset higher costs at the Company's new dialysis centers
which are still in their developmental stage.
Selling, general and administrative expenses increased approximately
$380,000 and $515,000 for the three months and six months ended June 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, and 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 Financial Statements."
Interest expense decreased approximately $4,000 and $6,000 for the
three months and six months ended June 30, 1999 compared to the same periods
of the preceding year, which included reductions in interest expense to
Medicore of $3,000 and $5,000.
<PAGE>
Liquidity and Capital Resources
Working capital totaled $4,890,000 at June 30, 1999, which reflected a
decrease of approximately $225,000 during the six months ended June 30, 1999.
Included in the changes in components of working capital was a decrease in
cash and cash equivalents of $819,000, which included net cash used in
operating activities of $627,000, net cash used in investing activities of
$207,000 (including additions to property and equipment of $255,000,
primarily related to new centers), and net cash provided by financing
activities of $14,000 (including a decrease in the advances to the Parent of
$108,000 and debt repayments of $94,000).
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 $318,000 and
$360,000 at June 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
$486,000 and $449,000 at June 30, 1999 and December 31, 1998, respectively,
which included additional equipment financing of approximately $90,000 and
$185,000 during the six months ended June 30, 1999 and June 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 in the planning and architectural
stage and the professional corporation providing medical director services
to the Carlisle and Chambersburg, Pennsylvania facilities have a 20% interest
in those subsidiaries. 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.
Proposed Merger and Acquisition
On June 4, 1999, the Company and its Parent entered into a letter of
intent 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 approxi-
mately 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, although the Company has experienced increased costs of health-
care salaries and supply costs.
<PAGE>
A substantial portion of the Company's revenue is subject to reimburse-
ment 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 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On June 9, 1999, the annual meeting of shareholders was held to elect
four members to the board of directors to serve until the next annual
meeting in 2000. Each nominee, Messrs. Thomas K. Lanbein, Bart Pelstring,
Dr. Herbert I. Soller and Robert Trause, was elected by a vote of 2,536,122
shares for and no votes against. There were no abstentions and no broker
non-votes due to no proxy solicitation since the Parent owns approximately
68% of the voting equity of the Company. Ernst & Young LLP, the Company's
independent accountants, were not ratified as the Company's independent
accountants for 1999, with no votes for ratification, 68,000 against, and
2,468,122 abstentions. As of August 6, 1999, the Company replaced Ernst &
Young LLP with new independent auditors, Wiss & Company, LLP.
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
(10) None
(b) Reports on Form 8-K
There were no reports on Form 8-K for the quarter ended June 30, 1999.
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: August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,547,485
<SECURITIES> 0
<RECEIVABLES> 767,846
<ALLOWANCES> 0
<INVENTORY> 182,729
<CURRENT-ASSETS> 5,685,975
<PP&E> 4,447,162
<DEPRECIATION> 1,222,737
<TOTAL-ASSETS> 8,947,208
<CURRENT-LIABILITIES> 796,156
<BONDS> 650,292
0
0
<COMMON> 35,463
<OTHER-SE> 7,463,217
<TOTAL-LIABILITY-AND-EQUITY> 8,947,208
<SALES> 2,622,314
<TOTAL-REVENUES> 2,812,735
<CGS> 1,855,323
<TOTAL-COSTS> 1,855,323
<OTHER-EXPENSES> 1,436,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,585
<INCOME-PRETAX> (542,770)
<INCOME-TAX> (113,000)
<INCOME-CONTINUING> (429,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (429,770)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
<FN>
<F1> Accounts receivable are net of allowance of $185,000 at June 30, 1999.
</FN>
</TABLE>
