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, 2000
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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 of incorporation (I.R.S. Employer
or organization) Identification No.)
27 Miller Street, 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 - 4,039,844 shares as of October 31, 2000
<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 Operation (Unaudited) for the
three months and nine months ended September 30, 2000 and September 30, 1999
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, 2000 and September 30,
1999.
2) Consolidated Condensed Balance Sheets as of September 30, 2000 and
December 31, 1999.
3) Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2000 and September 30, 1999.
4) Notes to Consolidated Condensed Financial Statements as of
September 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition
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and 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
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Item 1. Financial Statements
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Medical service revenue $2,267,691 $1,551,894 $6,032,920 $4,174,208
Interest and other income 124,056 89,220 355,998 279,641
---------- ---------- ---------- ----------
2,391,747 1,641,114 6,388,918 4,453,849
Cost and expenses:
Cost of medical services 1,445,669 1,045,224 3,896,506 2,930,547
Selling, general and administrative
expenses 904,186 628,569 2,650,451 2,065,166
Interest expense 19,080 17,302 54,349 50,887
---------- ---------- ---------- ----------
2,368,935 1,691,095 6,601,306 5,046,600
---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest 22,812 (49,981) (212,388) (592,751)
Income tax provision (benefit) 19,620 (12,707) 60,417 (125,707)
---------- ---------- ---------- ----------
Income (loss) before minority interest 3,192 (37,274) (272,805) (467,044)
Minority interest in loss of consolidated
subsidiaries --- --- (14,218) ---
---------- ---------- ---------- ----------
Net income (loss) $ 3,192 $ (37,274) $ (258,587) $ (467,044)
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ -- $(.01) $(.07) $(.13)
==== ===== ===== =====
Diluted $ -- $(.01) $(.07) $(.13)
==== ===== ===== =====
</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,
2000 1999(A)
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 411,097 $3,659,390
Accounts receivable, less allowance of $298,000 at
September 30, 2000; $237,000 at December 31, 1999 1,468,889 779,568
Note receivable from parent 2,200,000 ---
Inventories 278,744 219,623
Prepaid expenses and other current assets 611,984 397,361
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Total current assets 4,970,714 5,055,942
Property and equipment:
Land 376,211 168,358
Buildings and improvements 2,019,616 1,425,912
Machinery and equipment 2,220,965 2,051,803
Leasehold improvements 1,694,896 1,660,172
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6,311,688 5,306,245
Less accumulated depreciation and amortization 1,887,072 1,454,190
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4,424,616 3,852,055
Advances to parent 409,344 105,142
Deferred expenses and other assets 47,354 22,808
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$9,852,028 $9,035,947
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 385,703 $ 395,002
Accrued expenses 464,505 365,351
Income taxes payable 66,855 ---
Current portion of long-term debt 267,954 143,438
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Total current liabilities 1,185,017 903,791
Long-term debt, less current portion 741,089 869,985
Minority interest in subsidiaries 3,060 2,080
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares,
issued and outstanding 4,056,444 shares at September 30, 2000
and 3,546,344 shares at December 31, 1999 40,564 35,463
Capital in excess of par value 5,309,371 3,971,514
Retained earnings 2,994,527 3,253,114
Notes receivable from options exercised (421,600) ---
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Total stockholders' equity 7,922,862 7,260,091
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$9,852,028 $9,035,947
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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, 1999 filed with the Securities and Exchange
Commission in March 2000.
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,
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2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (258,587) $ (467,044)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 432,881 330,004
Amortization 1,749 1,267
Bad debt expense 143,465 72,119
Stock option compensation --- 153,000
Minority interest (14,218) ---
Increase (decrease) relating to operating activities from:
Accounts receivable (832,786) (666,936)
Inventories (59,121) (65,696)
Prepaid expenses and other current assets (74,623) (148,476)
Accounts payable (9,299) 41,399
Accrued expenses 99,153 87,580
Income tax payable 66,855 (232,306)
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Net cash used in operating activities (504,531) (895,089)
Investing activities:
Loan to parent (2,200,000) ---
Loan to MainStreet (140,000) ---
Additions to property and equipment, net of minor disposals (897,542) (326,492)
Sale of minority interest in subsidiaries 206,000 4,040
Deferred expenses and other assets (26,315) 44,054
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Net cash used in investing activities (3,057,857) (278,398)
Financing activities:
Advances (to) from parent (304,202) 158,068
Payments on long-term debt (112,280) (142,518)
Exercise of warrants and stock options 730,577 ---
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Net cash provided by financing activities 314,095 15,550
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Decrease in cash and cash equivalents (3,248,293) (1,157,937)
Cash and cash equivalents at beginning of period 3,659,390 5,366,837
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Cash and cash equivalents at end of period $ 411,097 $4,208,900
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(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 59.4% owned subsidiary of
Medicore, Inc. (the "Parent"). See Note 5.
Government Regulation
A majority 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,
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2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental income $ 40,943 $ 38,446 $ 119,251 $ 106,848
Interest income from Medicore 57,460 51 138,219 1,498
Other interest income 18,054 46,802 75,039 146,852
Other income 7,599 3,921 23,489 24,443
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$ 124,056 $ 89,220 $ 355,998 $ 279,641
========= ========= ========= =========
</TABLE>
Earnings (Loss) per Share
Diluted earnings (loss) 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, 2000 or for the same period of the preceding year, as a result
of net losses and/or exercise prices, 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,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 3,192 $ (37,274) $ (258,587) $ (467,044)
Weighted average shares-denominator
basic computation 4,056,444 3,546,344 3,879,107 3,546,344
Effect of dilutive securities:
Stock options 105,395 --- --- ---
---------- ---------- ---------- ----------
Weighted average shares, as
adjusted-denominator diluted computation 4,161,839 3,546,344 3,879,107 3,546,344
========== ========== ========== ==========
Earnings (loss) per share:
Basic $-- $(.01) $(.07) $(.13)
=== ===== ===== =====
Diluted $-- $(.01) $(.07) $(.13)
=== ===== ===== =====
</TABLE>
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 2000
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The Company has various potentially dilutive securities, including stock
options and warrants, with the remaining outstanding publicly traded warrants
having expired June 30, 2000. See Notes 6 and 7.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income for the three months
ended September 30, 2000 and net losses for the three months ended September
30, 1999 and the nine months ended September 30, 2000 and September 30, 1999.
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
quarters of 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, 2000 and September 30, 1999 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,
2000 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2000.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the Company's audited financial statements for
the year ended December 31, 1999.
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 $101,000 and $125,000 at September 30,
2000 and December 31, 1999, 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 $127,000 and $157,000 at September 30,
2000 and December 31, 1999, respectively.
The Company through its subsidiary, DCA of Vineland, LLC, pursuant to
a December 3, 1999 loan agreement obtained a $700,000 development and equip-
ment line of credit with interest at 8.75% which is secured by the assets of
DCA of Vineland and a second mortgage on the Company's real property in Easton,
Maryland on which an affiliated bank holds the first mortgage. Outstanding
borrowings are subject to monthly payments of interest and principal with any
remaining balance due September 1, 2003. There were no outstanding borrowings
under this line of credit as of September 30, 2000 or December 31, 1999.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 2000
(Unaudited)
NOTE 3--LONG-TERM DEBT--Continued
The Company has an equipment purchase agreement for kidney dialysis
machines at its facilities with interest at rates ranging from 4.14% to 11.84%
pursuant to various schedules extending through August 2005. Additional
financing of $108,000 and $141,000 during the nine months ended September 30,
2000 and September 30, 1999, 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
$781,000 and $731,000 at September 30, 2000 and December 31, 1999, respec-
tively.
The prime rate was 9.5% as of September 30, 2000 and 8.5% as of December
31, 1999.
Interest payments on long-term debt amounted to approximately $9,000 and
$30,000 for the three months and nine months ended September 30, 2000 and
$9,000 and $40,000 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 (refunds) amounted to $3,000 and ($106,000) for the
three months and nine months ended September 30, 2000, and $11,000 and
$223,000 for the three months and nine months ended September 30, 1999.
NOTE 5--TRANSACTIONS WITH PARENT
The Parent provides certain financial and administrative services to the
Company. Central operating costs are charged 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, 2000, and for the same
periods of the preceding year.
The Company had an intercompany advance receivable from the Parent of
approximately $409,000 and $105,000 at September 30, 2000 and December 31,
1999, respectively, which bears interest at the short-term Treasury Bill
rate. Interest income on the intercompany advance receivable amounted to
approximately $4,200 and $7,800 for the three months and nine months ended
September 30, 2000 and $100 and $1,500 for the same periods of the preceding
year. Interest is included in the intercompany advance balance. The Company
has agreed not to require repayment of the intercompany advance receivable
balance prior to October 1, 2001; therefore, the advance has been classified
as long-term at September 30, 2000.
On January 27, 2000, the Company's Parent acquired a 6% interest in Linux
Global Partners, a private holding company investing in Linux software
companies, and loaned Linux Global Partners $1,500,000 with a 10% annual
interest rate. The Parent obtained an option to acquire an additional 2%
interest in and to loan $500,000 more to Linux Global Partners, which 2%
interest it acquired and additional loan it made on March 27, 2000. The
loans mature January 26, 2001. On August 9, 2000, the Parent loaned Linux
Global Partners an additional $200,000 with an annual interest rate of 10%
initially for 30 days, with the maturity having been extended. The Parent
borrowed the funds it utilized for the loans from the Company with an annual
interest rate of 10%. Interest income on the notes receivable from the Parent,
which have the same maturities as the Parent's loans to Linux Global Partners,
amounted to approximately $53,000 and $130,000 for the three months and nine
months ended September 30, 2000. Interest receivable on the note from the
Parent amounted to approximately $130,000 at September 30, 2000 and is included
in prepaid expenses and other current assets. The Parent issued options to
purchase 150,000 shares of its common stock to MainStreetIPO.com Inc. and two
of its officers in January 2000 as a finder's fee in conjunction with the
Parent's investment in Linux Global Partners. See Note 9.
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 2000
(Unaudited)
NOTE 6--STOCK OPTIONS
In November 1995, the Company adopted a stock option plan for up to
250,000 options with 4,500 options remaining outstanding at September 30,
2000. These options were 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 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 it 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 in the second
quarter of 1999 on 340,000 of these options pursuant to FAS 123 and APB 25.
In April 2000, the 340,000 one-year options were exercised for which DCA
received cash payment of the par value and the balance in three-year recourse
promissory notes with interest at the short term treasury rate.
NOTE 7--COMMON STOCK
Pursuant to the Company's 1996 public offering, 2,300,000 redeemable
common stock purchase warrants were issued to purchase one common share each
with an exercise price of $4.50 originally exercisable through April 16, 1999
and extended to June 30, 2000 at which time the remaining outstanding warrants
expired. During the first half of 2000, approximately 170,000 warrants were
exercised with net proceeds to the Company of approximately $727,000. 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 substan-
tially identical to the public warrants except that they are exercisable at
$5.40 per share. See Note 9.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has 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, 2000.
NOTE 9--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger with MainStreet IPO.com Inc. ("MainStreet") and its wholly-owned
subsidiary, MainStreet Acquisition Inc. In August 2000, the Company terminated
the proposed merger as a result of MainStreet's failure to satisfy conditions
contemplated by the merger agreement.
NOTE 10--LOAN TO MAINSTREET
In July 2000, the Company loaned $140,000 to MainStreet pursuant to a one
year convertible promissory note secured by 300,000 shares of Linux Global
Partners owned by MainStreet. The note is included in prepaid expenses and
other current assets on the Company's balance sheet. The note bore interest at
prime plus 1/2% payable at the earlier of failure of the Company's shareholders
to approve its proposed merger with MainStreet before November 1, 2000 or at
maturity on July 11, 2001. Since the proposed merger with MainStreet
terminated (see Note 9), the $140,000 loan with $4,356 of accrued interest to
November 1, 2000 matured on that date. MainStreet defaulted in payment and the
Company acquired the 300,000 shares of Linux Global Partners which secured the
loan.
NOTE 11-REPURCHASE OF COMMON STOCK
In September 2000, the Company announced its intent to repurchase up to
approximately 300,000 shares of its outstanding trading common stock. As of
September 30, 2000, the Company had made no repurchases, but did repurchase
16,000 shares in October, 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
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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
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, our
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
our statements regarding liquidity, anticipated cash needs and availability,
and anticipated expense levels. 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 our operations, and other factors discussed periodi-
cally in the Company's filings. Many of the foregoing factors are beyond our
control. 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 S-3,
as filed with the Securities and Exchange Commission, 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 are affected by potential
legislation relating to reimbursement rates. The proposed "Beneficiary
Improvement and Protection Act of 2000," if passed into law, will increase
dialysis rates an additional 1.2% in fiscal 2001. Operating costs tend to
increase over the years without comparable increases in the prescribed
dialysis treatment reimbursement rates. 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 we have never been challenged under these
regulations and we believe we comply in all material respects with such laws
and regulations, there can be no assurance that there will not be unantici-
pated changes in healthcare programs or laws or that we will not be required
to change our practices 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 or divisions of public companies,
have many more centers, physicians and financial resources than we do, and by
virtue of such have a significant advantage in competing for acquisitions of
dialysis facilities in areas targeted by us.
Our future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate areas, and our
ability to compete with larger companies with greater personnel and financial
resources to develop these new potential dialysis centers at costs within our
budget. Our 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 main-
tenance entities. We opened our sixth center in Vineland, New Jersey in
February 2000, our seventh center in Homerville, Georgia in October, 2000,
and our eighth dialysis facility in Valdosta, Georgia in November, 2000. We
anticipate opening a ninth dialysis center in Bowling Green, Ohio in the
fourth quarter of 2000. We have a 40% interest in that center. 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. Additional acute in-hospital
services were initiated in Vineland, New Jersey and in Harrisburg, Pennsyl-
vania in October, 2000.
<PAGE>
Results of Operations
Medical service revenues increased approximately $716,000 (46%) and
$1,859,000 (45%) for the three months and nine months ended September 30, 2000
compared to the same periods of the preceding year. This increase reflects
increased revenues for those periods of our Pennsylvania dialysis centers of
approximately $174,000 and $749,000, increased revenues of approximately
$58,000 and $113,000 for our Manahawkin, New Jersey center, and revenues of
approximately $484,000 and $997,000 for our Vineland, New Jersey center which
commenced operations in February, 2000.
Interest and other income increased by approximately $35,000 and $76,000
for the three months and nine months ended September 30, 2000 compared to the
same periods of the preceding year. This increase includes increases in
interest from our Parent of $57,000 and $138,000 for the three months and nine
months ended September 30, 2000, including interest on a note receivable and
an advance receivable, and decreases in interest from liquid investments of
$29,000 and $73,000 as a result of a reduction in invested funds.
Cost of medical services sales as a percentage of sales amounted to 64%
and 65% for the three months and nine months ended September 30, 2000
compared to 67% and 70% for the same periods of the preceding year, reflecting
a decrease in both supply costs and healthcare salaries as a percentage of
sales.
Selling, general and administrative expenses increased by approximately
$276,000 (44%) and $585,000 (28%) for the three months and nine months ended
September 30, 2000 compared to the same periods of the preceding year. This
increase reflects operations of our new dialysis center in Vineland, New
Jersey, as well as increased support activities resulting from expanded
operations. Selling general and administrative expenses as a percent of
medical service revenues amounted to 40% and 44% for the three months and nine
months ended September 30, 2000, and 41% and 49% for the same periods of the
preceding year.
Although operations of new centers result in additional revenues, while
they are in the developmental stage their operating results adversely affect
results of operations. As a result of having centers in the developmental
stage which have not achieved a sufficient patient count to sustain profit-
able operations, we have continued to experience operational losses.
Interest expense increased by approximately $2,000 and $3,000 for the
three months and nine months ended September 30, 2000 compared to the same
periods of the preceding year as a result of additional equipment financing
agreements.
Liquidity and Capital Resources
Working capital totaled $3,786,000 at September 30, 2000, which reflected
a decrease of approximately $366,000 during the nine months ended September 30,
2000. Included in the changes in components of working capital was a decrease
in cash and cash equivalents of $3,248,000, which included net cash used in
operating activities of $505,000, net cash used in investing activities of
$3,058,000 (including $2,200,000 loans to our Parent; a $140,000 loan to
MainStreet; additions to property and equipment of $898,000, primarily relating
to new centers; and $206,000 proceeds from the sale of minority interests in
subsidiaries), and net cash provided by financing activities of $314,000
(including advances to our Parent of $304,000, debt repayments of $112,000 and
net proceeds from option and warrant exercises of $731,000).
Approximately 170,000 of our 2,300,000 publicly traded redeemable common
stock purchase warrants were exercised with net proceeds to the Company of
approximately $727,000, with the balance of these warrants having expired on
June 30, 2000. See Note 7 to "Notes to Consolidated Condensed Financial
Statements."
<PAGE>
We have mortgages on two of our buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of approximately
$228,000 at September 30, 2000 and $282,000 at December 31, 1999. See Note 3
to "Notes to Consolidated Condensed Financial Statements."
We have an equipment financing agreement for kidney dialysis machines
for our facilities, which had an outstanding balance of approximately
$781,000 at September 30, 2000 and $731,000 at December 31, 1999. Through
our subsidiary, DCA of Vineland, LLC, we have a $700,000 development and
equipment line of credit secured by the acquired assets of DCA of Vineland
and a second mortgage on our real property in Easton, Maryland. There were
no outstanding borrowings under this line of credit as of September 30, 2000
or December 31, 1999. See Note 3 to "Notes to Consolidated Condensed
Financial Statements."
In January, 2000, we loaned $1,500,000 to our Parent, Medicore, at an
annual interest rate of 10%, with the loan and accrued interest to be repaid
by our Parent on January 26, 2001. Our Parent utilized this loan to fund a
loan by it to Linux Global Partners, which invests in Linux software companies,
in conjunction with which our Parent acquired a 6% ownership interest in Linux.
Our Parent had an option to increase its ownership to 8%, which it exercised
in March, 2000, in conjunction with which our Parent borrowed an additional
$500,000 from us on the same terms as the original loan to fund a loan of the
same amount to Linux Global Partners. On August 9, 2000, our Parent borrowed
an additional $200,000 at 10% interest initially for 30 days which has been
extended, which funds it loaned to Linux Global Partners on the same terms.
See Note 5 to "Notes to Consolidated Condensed Financial Statements." Thomas
K. Langbein, Chairman of the Board and CEO of our Company and our Parent, of
which company he is also the President, is a director of Linux Global Partners.
In July 2000, the Company loaned $140,000 to MainStreet pursuant to a one
year secured convertible promissory note upon which MainStreet defaulted in
payment on November 1, 2000, resulting in the Company obtaining 300,000 shares
of Linux Global Partners, the collateral securing the MainStreet loan. See
Notes 9 and 10 to "Notes to Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment
and initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would
provide us with an immediate ongoing operation, which most likely would be
generating income. Development of a dialysis facility to initiate operations
usually takes approximately four to six months and at least an additional 12
months to generate income. We consider our Manahawkin, New Jersey center and
our recently initiated dialysis facilities in Georgia to be in the develop-
mental stage, since they have not developed a patient base sufficient to
generate and sustain earnings.
We have entered into lease and medical director agreements and are in the
construction of a new center in Ohio in which the Company holds a minority
ownership interest of 40%, with that center expected to commence operations in
the fourth quarter of 2000. We are presently in different phases of
negotiations with physicians for additional outpatient centers in various
parts of the country. No assurance can be given that we will be successful
in implementing our growth strategy or that our available funds will be
adequate to finance such expansion.
In September 2000, the Company announced its intent to repurchase up to
approximately 300,000 of its outstanding shares. No repurchases were made as
of September 30, 2000, with 16,600 shares repurchased in October, 2000. See
Note 11 to "Notes to Consolidated Condensed Financial Statements."
We believe that current levels of working capital and available credit
facilities will enable us to meet our liquidity demands for at least the next
12 months, as well as expand our dialysis facilities and thereby our patient
base.
<PAGE>
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 reorganized as
either assets or liabilities in the statement of financial position and that
these instruments be measured at fair value. We are in the process of
determining the impact that the adoption of FAS 133 will have on our
consolidated financial statements.
Proposed Merger Terminated
On October 20, 1999, we entered into an Agreement and Plan of Merger
pursuant to which MainStreet would merge with us and own approximately 80% of
the Company. The proposed merger was terminated in August 2000. See Note 9
to "Notes to Consolidated Condensed Financial Statements."
Inflation
Inflationary factors have had an effect on our operations. A substantial
portion of our 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 voluntary
increased to keep pace with increases in nursing and other patient care costs.
Increased operating costs without a corresponding increase in reimbursement
rates may adversely affect our earnings in the future.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(10) Material Contracts
(i) Management Services Agreement between the Company and
DCA of Homerville, LLC(1) dated September, 2000(2).
(ii) Medical Director Agreement between DCA of So. Ga.,
LLC(3) and South Georgia Nephrology, P.C. dated July 21,
2000.
(iii) Medical Director Agreement between DCA of Homerville,
LLC(1) and South Georgia Nephrology, P.C. dated October
25, 2000.
(b) Reports on Form 8-K
(i) Item 5, "Other Events" re: loan to MainStreet IPO.com Inc.
filed July 19, 2000.
(ii) Item 5, "Other Events" re: Loan and Security Agreement with
South Georgia Nephrology, P. C.; $200,000 loan to parent,
Medicore, Inc. and termination of proposed merger with
MainStreet IPO.com, Inc. filed August 21, 2000.
(iii) Item 5, "Other Events" re: Company's plan to acquire up to
approximately 300,000 shares of its outstanding training
stock filed September 12, 2000.
(iv) Item 5, "Other Events" re: resignation of Dr. Herbert I.
Soller as a director on September 13, 2000 filed September
25, 2000.
---------------
(1) 100% owned subsidiary.
(2) Each subsidiary has substantially similar Management Services Agreements as
previously filed (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999, Part IV, Item 14(c)
(10)(xxviii).
(3) 70% owned subsidiary.
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 14, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
No.
-------
Part II Exhibits
(i) Management Services Agreement between the Company and DCA of
Homerville, LLC dated September, 2000.
(ii) Medical Director Agreement between DCA of So. Ga., LLC and South
Georgia Nephrology, P.C. dated July 21, 2000.
(iii) Medical Director Agreement between DCA of Homerville, LLC and South
Georgia Nephrology, P.C. dated October 25, 2000.
