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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________
Commission file number 0-8527
DIALYSIS CORPORATION OF AMERICA
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1757642
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1344 Ashton Road, Hanover, Maryland 21076
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(410) 694-0500
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
---------------------------------------------------------------
(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 - 3,912,844 shares as of July 31, 2001.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Statements of Operations (Unaudited) for the
three months and six months ended June 30, 2001 and June 30, 2000 include the
accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Operations for the three
months and six months ended June 30, 2001 and June 30, 2000.
2) Consolidated Condensed Balance Sheets as of June 30, 2001 and
December 31, 2000.
3) Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2001 and June 30, 2000.
4) Notes to Consolidated Condensed Financial Statements as of
June 30, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
PART II -- OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matter to a Vote of Security Holders
- ------ --------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
i
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
- ------ --------------------
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Medical service revenue $ 4,299,145 $ 2,073,719 $ 8,095,294 $ 3,765,229
Interest and other income 140,209 133,088 264,126 231,942
----------- ----------- ----------- -----------
4,439,354 2,206,807 8,359,420 3,997,171
Cost and expenses:
Cost of medical services 2,803,140 1,320,529 5,263,499 2,450,837
Selling, general and administrative expenses 1,407,867 890,517 2,619,724 1,746,265
Interest expense 58,842 18,772 97,754 35,269
----------- ----------- ----------- -----------
4,269,849 2,229,818 7,980,977 4,232,371
----------- ----------- ----------- -----------
Income (loss) before income taxes, minority interest
and equity in affiliate loss 169,505 (23,011) 378,443 (235,200)
Income tax provision 62,303 24,101 80,124 40,797
----------- ----------- ----------- -----------
Income (loss) before minority interest and equity in
affiliate loss 107,202 (47,112) 298,319 (275,997)
Minority interest in (income) loss of consolidated
subsidiaries (48,453) 14,218 (48,453) 14,218
Equity in affiliate loss (5,236) -- (46,391) --
----------- ----------- ----------- -----------
Net income (loss) $ 53,513 $ (32,894) $ 203,475 $ (261,779)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ .01 $ (.01) $ .05 $ (.07)
=========== =========== =========== ===========
Diluted $ .01 $ (.01) $ .05 $ (.07)
=========== =========== =========== ===========
See notes to consolidated condensed financial statements.
1
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000(A)
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,021,164 $ 793,666
Accounts receivable, less allowance
of $413,000 at June 30, 2001;
$306,000 at December 31, 2000 2,829,163 1,692,592
Notes receivable from parent -- 2,200,000
Inventories 468,670 334,127
Prepaid expenses and other current assets 380,956 468,001
------------ ------------
Total current assets 6,699,953 5,488,386
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,219,410 2,207,447
Machinery and equipment 3,130,170 2,914,010
Leasehold improvements 1,850,710 1,720,625
------------ ------------
7,576,501 7,218,293
Less accumulated depreciation and amortization 2,419,676 2,048,148
------------ ------------
5,156,825 5,170,145
Advances to parent 301,769 414,339
Deferred expenses and other assets 369,564 104,512
------------ ------------
$ 12,528,111 $ 11,177,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 475,731 $ 553,704
Accrued expenses 1,208,814 689,600
Current portion of long-term debt 370,435 295,031
Income taxes payable 76,291 81,451
------------ ------------
Total current liabilities 2,131,271 1,619,786
Long-term debt, less current portion 2,405,891 1,755,228
Minority interest in subsidiaries 51,513 3,060
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
3,912,844 shares at June 30, 2001 and
3,979,844 shares at December 31, 2000 39,128 39,798
Capital in excess of par value 5,220,908 5,283,585
Retained earnings 3,101,000 2,897,525
Notes receivable from options exercised (421,600) (421,600)
------------ ------------
Total stockholders' equity 7,939,436 7,799,308
------------ ------------
$ 12,528,111 $ 11,177,382
============ ============
(A) Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange Commission in
March 2001.
See notes to consolidated financial statements.
2
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
2001 2000
---- ----
Operating activities:
Net income (loss) $ 203,475 $ (261,779)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 371,526 286,930
Amortization 1,744 1,166
Bad debt expense 195,053 100,298
Equity in affiliate loss 46,391 --
Minority interest 48,453 (14,218)
Increase (decrease) relating to operating activities from:
Accounts receivable (1,331,624) (647,158)
Inventories (134,543) (62,152)
Prepaid expenses and other current assets (57,262) 9,459
Accounts payable (77,973) (46,593)
Accrued expenses 519,214 88,333
Income tax payable (5,160) 47,236
----------- -----------
Net cash used in operating activities (220,706) (498,478)
Investing activities:
Additions to property and equipment, net of minor disposals (285,306) (465,193)
Decrease (increase) in notes receivable from parent 2,200,000 (2,000,000)
Decrease in loan to subsidiary medical director practice 5,000 --
Investment in affiliate (152,810) --
Sale of minority interest in subsidiaries -- 206,000
Deferred expenses and other assets (9,498) 9,938
----------- -----------
Net cash provided by (used in) investing activities 1,757,386 (2,249,255)
Financing activities:
Decrease (increase) in advances to parent 112,570 (181,843)
Repurchase of stock (63,347) --
Long-term borrowings 787,500 --
Payments on long-term borrowings (134,333) (83,721)
Exercise of warrants and stock options -- 730,577
Deferred financing costs (11,572) --
----------- -----------
Net cash provided by financing activities 690,818 465,013
----------- -----------
Increase (decrease) in cash and cash equivalents 2,227,498 (2,282,720)
Cash and cash equivalents at beginning of period 793,666 3,659,390
----------- -----------
Cash and cash equivalents at end of period $ 3,021,164 $ 1,376,670
=========== ===========
See notes to consolidated condensed financial statements.
3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(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 61.6% 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:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Rental income $ 41,540 $ 39,815 $ 83,085 $ 78,307
Interest income from Medicore 58,984 52,571 117,681 80,759
Other interest income 2,896 29,746 16,081 56,986
Management fee income 31,834 -- 38,248 --
Other income 4,955 10,956 9,031 15,890
-------- -------- -------- --------
$140,209 $133,088 $264,126 $231,942
======== ======== ======== ========
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 six months ended June 30,
2001 or for the same periods of the preceding year, as a result of exercise
prices, and for 2000 the net loss, and to include them would be anti-dilutive.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ 53,513 $ (32,894) $ 203,475 $ (261,779)
========== ========== ========== ==========
Weighted average shares 3,912,844 3,996,164 3,920,540 3,789,464
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ .01 $ (.01) $ .05 $ (.07)
========== ========== ========== ==========
Diluted $ .01 $ (.01) $ .05 $ (.07)
========== ========== ========== ==========
The Company has various potentially dilutive securities, including
stock options and warrants. See Notes 6 and 7.
4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) for the three
months and six months ended June 30, 2001, and for the same periods of the
preceding year.
Revenue Recognition
The Company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB101). Medical service
revenues are recorded as services are rendered.
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. Since the Company
does not presently utilize derivative financial instruments, the adoption of FAS
133 has had no effect on its results of operations, financial position or cash
flows.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and six months ended June
30, 2001 and June 30, 2000 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 and six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2001.
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, 2000.
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 $77,000 and $93,000 at June 30, 2001 and December 31,
2000, 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 $97,000 and $117,000 at June 30, 2001 and December 31, 2000,
respectively.
The Company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development and equipment
line of credit with interest at 8.75% which is secured by the acquired 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 only through December
2001 with monthly payments thereafter of principal and interest totaling $6,186
with any remaining balance due September 2, 2003. This loan had an outstanding
principal balance of $700,000 at June 30, 2001 and December 31, 2000.
5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(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 10.48%
pursuant to various schedules extending through August 2005. Additional
financing of $73,000 and $34,000 during the six months ended June 30, 2001 and
June 30, 2000, respectively, represents a noncash financing activity which is a
supplemental disclosure required by FAS 95, "Statement of Cash Flows." The
remaining principal balance under this agreement amounted to approximately
$1,119,000 and $1,140,000 at June 30, 2001 and December 31, 2000, respectively.
In April 2001, the Company obtained a $788,000 five-year mortgage
through April 2006 on its building in Valdosta, Georgia with interest at 8.29%.
Payments are $6,800 including principal and interest commencing May, 2001, with
a balloon payment and any unpaid interest due April 2006. This mortgage is
guaranteed by the Company's Parent. The remaining principal balance under this
mortgage amounted to approximately $784,000 at June 30, 2001.
The prime rate was 6.75% as of June 30, 2001 and 9.5% as of December
31, 2000.
Interest payments on long-term debt amounted to approximately $44,000
and $86,000 for the three months and six months ended June 30, 2001 and $11,000
and $21,000 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 approximately $86,000 and
$87,000 for the three months and six months ended June 30, 2001 and ($109,000)
for the six months ended June 30, 2000 with no payments or refunds during the
second quarter of 2000.
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 $100,000 for the three
months and six months ended June 30, 2001, and for the same periods of the
preceding year.
The Company had an intercompany advance receivable from the Parent of
approximately $302,000 and $414,000 at June 30, 2001 and December 31, 2000,
respectively, which bears interest at the short-term Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approximately
$4,000 and $9,000 for the three months and six months ended June 30, 2001 and
$3,000 and $4,000 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 July
1, 2002; therefore, the advance has been classified as long-term at June 30,
2001.
On January 27, 2000, the Company's Parent acquired a 6% interest in
Linux Global Partners ("LGP"), a private holding company investing in Linux
software companies, and loaned LGP $1,500,000 with a 10% annual interest rate.
The Parent obtained an option to acquire an additional 2% interest in
conjunction with loaning $500,000 more to LGP, which 2% interest it acquired and
additional loan it made on March 27, 2000. The loans were originally scheduled
to mature January 26, 2001. On August 9, 2000, the Parent loaned LGP an
6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 5--TRANSACTIONS WITH PARENT--Continued
additional $200,000 with an annual interest rate of 10% originally scheduled to
mature in 30 days with the maturity having been extended. To assist LGP in
achieving its long-term investment objectives, the Company's Parent agreed to
extend the maturity of its notes receivable from LGP to June 30, 2001 for
additional consideration consisting of 400,000 additional shares of LGP stock
and the right to convert all or part of the loans into Convertible Preferred A
shares of LGP with the same terms and conditions as a private placement of its
securities in process by LGP. The Company's Parent transferred 100,000 of the
additional shares of LGP stock to the Company which increased the Company's
ownership in LGP to 400,000 shares. Additionally, LGP agreed to repay all monies
owed to the Parent prior to any other use of its private placement proceeds if
the Parent chooses not to convert the loans. The Parent borrowed the funds it
utilized for the loans from the Company with an annual interest rate of 10%. The
maturity of the Company's notes receivable from the Parent were also extended to
June 30, 2001. Interest income on the notes receivable from the Parent, which
have the same terms as the Parent's loans to LGP, amounted to approximately
$55,000 and $109,000 for the three months and six months ended June 30, 2001 and
$50,000 and $77,000 for the same periods of the preceding year. Interest
receivable on the note from the Parent of approximately $186,000 at December 31,
2000 was included in prepaid expenses and other current assets at December 31,
2000. In January 2000, the Parent issued options to purchase 150,000 shares of
its common stock as a finder's fee in conjunction with the Parent's investment
in LGP. In May 2001, our Parent received $215,500 from LGP as repayment of the
$200,000 loan with $15,500 of accrued interest, which the Parent repaid to us.
In June 2001, our Parent repaid to us the remaining outstanding loan of
$2,000,000 and accrued interest of $279,000.
NOTE 6--STOCK OPTIONS
In June, 1998, an option was granted under a now expired 1995 Stock
Option Plan 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. In April 2000, the 340,000 one-year options
were exercised for which the Company received cash payment of the par value and
the balance in three-year promissory notes with the interest at 6.2%. On January
2, 2001 the Company's board of directors granted to the Company's president a
five-year option for 165,000 shares exercisable at $1.25 per share with 33,000
options vested January 2001 and 33,000 options vesting January 1 for each of the
next four years.
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 2,300,000 redeemable common stock purchase warrants to
purchase one common share each at an exercise price of $4.50 originally
exercisable through April 16, 1999 and extended to June 30, 2000, at which time
the remaining options expired. During 2000, approximately 170,000 warrants were
exercised with net proceeds to the Company of approximately $765,000. The
underwriters received options to purchase 100,000 units each consisting of one
share of common stock and two common stock purchase warrants, for a total of
100,000 shares of common stock and 200,000 common stock purchase warrants, with
the options exercisable at $4.50 per unit through their expiration April 16,
2001 with the underlying warrants being substantially identical to the public
warrants except that they were exercisable at $5.40 per share. The underwriters'
options expired unexercised.
7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 8--REPURCHASE OF COMMON STOCK
In September 2000, the Company announced its intent to repurchase up to
an additional 300,000 shares of its common stock at current market prices. The
Company repurchased and cancelled approximately 77,000 shares in the fourth
quarter of 2000 with a repurchase cost of approximately $65,000 and repurchased
and cancelled an additional 67,000 shares in the first quarter of 2001 at a cost
of approximately $63,000.
NOTE 9--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 June
30, 2001.
8
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 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 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 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 our
operations, and other factors discussed periodically in the Company's filings.
Many of the foregoing factors are beyond our control. These cautionary
statements are being made pursuant to the provisions of the Reform Act with the
intention of the Company obtaining the benefits of the safe harbor provisions of
the Reform Act. 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, but have increased minimally in 2001. 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 unanticipated
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
companies 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 the Company.
Our 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 maintenance
entities. We opened our sixth center in Vineland, New Jersey in February, 2000
and two centers in Georgia in November 2000. We commenced treating patients in
our new dialysis center in Fitzgerald, Georgia the first week in August, 2001,
with full operations subject to receipt of our Medicare provider number. We are
developing an additional center in Valdosta, Georgia, which is expected to open
in the third quarter of 2001. We are in the planning stages for an additional
9
Pennsylvania center. A center in Ohio which we manage and in which we hold a
minority interest (40%) opened in February 2001. There is no certainty as to
when the new centers will commence operations, or the number of stations or
patient treatments which will result, or if the centers 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.
Results of Operations
Medical service revenues increased approximately $2,225,000 (107%) and
$4,330,000 (115%) for the three months and six months ended June 30, 2001
compared to the same periods of the preceding year. This increase reflects
increased revenues of our Pennsylvania dialysis centers of approximately
$361,000 and $742,000, increased revenues of approximately $484,000 and
$1,114,000 for our New Jersey centers, and revenues of approximately $1,380,000
and $2,474,000 for our new Georgia centers in Valdosta and Homerville. Although
the operations of new centers have resulted in additional revenues, some are
still in the developmental stage and, accordingly, their operating results will
adversely affect results of operations until they achieve a sufficient patient
count to cover fixed operating costs.
Interest and other income increased by approximately $7,000 and $32,000
for the three months and six months ended June 30, 2001 compared to the same
periods of the preceding year. This increase includes increases of $6,000 and
$37,000 in interest from our Parent, including interest on a note receivable and
an advance receivable, net decreases in other interest income of $27,000 and
$41,000 as a result of a reduction in invested funds and management fee income
of $32,000 and $38,000 pursuant to a Management Services Agreement with to the
Company's 40% owned Toledo, Ohio affiliate. See Note 1 to "Notes to Consolidated
Condensed Financial Statements."
Cost of medical services sales as a percentage of sales remained
relatively stable amounting to 65% for the three months and six months ended
June 30, 2001 compared to 64% and 65% for the same periods of the preceding
year.
Selling, general and administrative expenses increased by approximately
$517,000 (58%) and $873,000 (50%) for the three months and six months June 30,
2001 compared to the same periods of the preceding year. This increase reflected
operations of our new dialysis centers in Georgia, as well as increased support
activities resulting from expanded operations. Selling general and
administrative expenses as a percent of medical service revenues amounted to 33%
and 32% for the three months and six months ended June 30, 2001, and 43% and 46%
the same periods for the preceding year.
Interest expense increased by approximately $40,000 and $62,000 for the
three months and six months ended June 30, 2001 compared to the same periods of
the preceding year primarily as a result of additional equipment financing
agreements, the Vineland loan and the April 2001 Georgia mortgage.
Liquidity and Capital Resources
Working capital totaled $4,569,000 at June 30, 2001, which reflected an
increase of approximately $700,000 (18%) during the six months ended June 30,
2001. Included in the changes in components of working capital was an increase
in cash and cash equivalents of $2,227,000, which included net cash used in
operating activities of $221,000, net cash provided by investing activities of
$1,757,000 (including additions to property and equipment of $285,000,
investment in the Company's 40% owned Ohio affiliate of $153,000 and repayment
to us by our Parent of $2,200,000 in loans), and net cash provided by financing
activities of $691,000 (including a decrease in advances to our Parent of
$113,000, debt repayments of $134,000, repurchases of stock of $63,000 and
proceeds from our new Georgia mortgage of $788,000).
We opened our sixth center in Vineland, New Jersey in February, 2000,
our seventh and eighth centers in Georgia in November, 2000, and our ninth
center in Fitzgerald, Georgia in August, 2001 (waiting for Medicare provider
number to allow for full operations). In the third quarter of 2001, we are
planning to open our tenth center, which is located inValdosta, Georgia, which
is our second Valdosta center. We are in the planning stages for a center in
Mechanicsburg, Pennsylvania. A center in Ohio which we manage and in which we
hold a minority interest (40%), opened in February, 2001.
10
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 revenue generating operation. We presently plan to
expand our operations through construction of new centers, rather than
acquisition. Development of a dialysis facility to initiate operations takes
four to six months and usually 12 months or longer to generate income. We are
seeking to expand our outpatient dialysis treatment facilities and inpatient
dialysis care. Such expansion requires capital. We are presently in different
phases of negotiations with physicians for additional outpatient centers. No
assurance can be given that we will be successful in implementing our growth
strategy or that financing will be available to support such expansion.
In January 2000, we loaned $1,500,000 to our Parent, at an annual
interest rate of 10%, with the loan and accrued interest originally scheduled to
be repaid 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,
which increased to 8% in March, 2000, for which increase 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, which additional funds it
loaned to Linux Global Partners on the same terms. Medicore extended the
maturity of the loans to Linux Global Partners to June 30, 2001 for additional
consideration from Linux Global Partners. The maturity of the company's loans to
our Parent were similarly extended. On May 14, 2001, Medicore received from
Linux Global Partners $215,500 as repayment of the $200,000 loan with accrued
interest, which our Parent repaid to us. In June 2001, our Parent repaid the
remaining $2,000,000 in loans it owed to us along with approximately $279,000
accrued interest. 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 September, 2000, we announced our intent to repurchase up to
approximately 300,000 of our outstanding shares. As of June 30, 2001,
approximately 144,000 shares have been repurchased for cancellation at a cost of
$128,000. See Note 8 to "Notes to Consolidated Condensed Financial Statements."
We have mortgages on two of our buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of approximately
$174,000 at June 30, 2001 and $210,000 at December 31, 2000. In April 2001, we
obtained a $788,000 five-year mortgage on our building in Valdosta, Georgia
which had an outstanding principal balance of $784,000 at June 30, 2001. We have
an equipment financing agreement for kidney dialysis machines for our
facilities, which had an outstanding balance of approximately $1,119,000 at June
30, 2001 and $1,140,000 at December 31, 2000. Through our subsidiary, DCA of
Vineland, LLC, we have a $700,000 development and equipment loan secured by the
acquired assets of DCA of Vineland and a second mortgage on our real property in
Easton, Maryland. This loan had an outstanding balance of $700,000 as of June
30, 2001 and December 31, 2000. See Note 3 to "Notes to Consolidated Condensed
Financial Statements."
Inflation
Inflationary factors have not had a significant 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
voluntarily 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.
11
PART II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
We held our annual meeting of stockholders on May 23, 2001 in Hialeah,
Florida relating to two matters, the election of six directors and approval of
the amendment of our 1999 Stock Option Plan to increase the number of shares
reserved for issuance. Proxies were not solicited, since our Parent, Medicore,
Inc., owns 2,410,622 shares (61.6%) of our voting equity. Each nominee, Messrs.
Thomas K. Langbein, Bart Pelstring, Stephen W. Everett, Robert W. Trause,
Alexander Bienenstock, and Dr. David L. Blecker, were elected by a vote of
2,822,122 shares for and no votes withheld. The proposal to amend our 1999 Stock
Option Plan to increase the number of shares reserved under that Plan from
800,000 to 1,500,000 was approved by a vote of 2,822,122 votes for and no votes
against and no abstentions.
Item 6. Exhibits and Reports on Form 8-K.
- ------ ---------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(10) Material Contracts
(i) Lease between the Company and
Commons Office Research dated June
11, 2001.
(ii) Lease between DCA of Mechanicsburg,
LLC(1) and Pinnacle Health
Hospitals dated July 24, 2001.
- ----------
(1) Wholly-owned subsidiary.
(b) Reports on Form 8-K
A Current Report was filed on June 14, 2001 with respect to
"Item 5, Other Events," concerning a commercial loan
agreement, promissory note and guarantee by our Parent.
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
By: /s/ DANIEL R. OUZTS
-------------------------------------
DANIEL R. OUZTS, Vice President/Finance
Controller and Chief Financial Officer
Dated: August 13, 2001
12
EXHIBIT INDEX
(10) Material Contracts
(i) Lease between the Company and Commons Office Research dated
June 11, 2001.
(ii) Lease between DCA of Mechanicsburg, LLC and Pinnacle Health
Hospitals dated July 24, 2001.
13