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 March 31, 2000
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
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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 Avenue, Lemoyne, Pennsylvania 17043
- --------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(717) 730-6164
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| or No |_|
Common Stock Outstanding
Common Stock, $.01 par value - 3,716,444 shares as of April 30, 2000.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
The Consolidated Condensed Statements of Operations (Unaudited) for the
three months ended March 31, 2000 and March 31, 1999 include the accounts of the
Registrant and its subsidiaries.
ITEM 1. Financial Statements
1) Consolidated Condensed Statements of Operations for the three
months ended March 31, 2000 and March 31, 1999.
2) Consolidated Condensed Balance Sheets as of March 31, 2000 and
December 31, 1999.
3) Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and March 31, 1999.
4) Notes to Consolidated Condensed Financial Statements as of March
31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PART II -- OTHER INFORMATION
ITEM 2. CHANGES ON SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
Revenues:
Medical service revenue $ 1,691,510 $ 1,167,355
Interest and other income 98,854 87,769
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1,790,364 1,255,124
Cost and expenses:
Cost of medical services 1,130,308 865,910
Selling, general and administrative expenses 855,748 591,360
Interest expense 16,497 17,026
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2,002,553 1,474,296
------------ ------------
Loss before income taxes (212,189) (219,172)
Income tax provision (benefit) 16,696 (72,000)
------------ ------------
Net loss $ (228,885) $ (147,172)
============ ============
Loss per share:
Basic $(.06) $(.04)
===== =====
Diluted $(.06) $(.04)
===== =====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999(A)
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,896,353 $ 3,659,390
Accounts receivable, less allowance
of $269,000 at March 31, 2000;
$237,000 at December 31, 1999 804,595 779,568
Note receivable from parent 2,000,000 -
Inventories 225,103 219,623
Prepaid expenses and other current assets 240,369 397,361
------------ ------------
Total current assets 5,166,420 5,055,942
Property and equipment:
Land 376,211 168,358
Buildings and improvements 1,430,162 1,425,912
Machinery and equipment 2,090,287 2,051,803
Leasehold improvements 1,707,429 1,660,172
------------ ------------
5,604,089 5,306,245
Less accumulated depreciation and amortization 1,596,866 1,454,190
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4,007,223 3,852,055
Advances to parent 181,100 105,142
Deferred expenses and other assets 22,475 22,808
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$ 9,377,218 $ 9,035,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 256,902 $ 395,002
Accrued expenses 408,021 365,351
Current portion of long-term debt 159,708 143,438
------------ ------------
Total current liabilities 824,631 903,791
Long-term debt, less current portion 807,086 869,985
Minority interest in subsidiaries 2,080 2,080
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
3,712,944 shares at March 31, 2000 and
3,546,344 shares at December 31, 1999 37,129 35,463
Capital in excess of par value 4,682,063 3,971,514
Retained earnings 3,024,229 3,253,114
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Total stockholders' equity 7,743,421 7,260,091
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$ 9,377,218 $ 9,035,947
============ ============
(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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
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Operating activities:
Net loss $ (228,885) $ (147,172)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 142,675 109,891
Amortization 583 422
Bad debt expense 42,531 20,368
Increase (decrease) relating to operating activities from:
Accounts receivable (67,558) (147,433)
Inventories (5,480) 8,529
Prepaid expenses and other current assets 156,992 (29,019)
Accounts payable (138,100) (113,589)
Accrued expenses 42,670 55,791
Income tax payable -- (232,306)
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Net cash used in operating activities (54,572) (474,518)
Investing activities:
Additions to property and equipment, net of minor disposals (297,843) (177,422)
Loan to parent (2,000,000)
Deferred expenses and other assets (250) 3,930
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Net cash used in investing activities (2,298,093) (173,492)
Financing activities:
Advances (to) from parent (75,958) 49,330
Payments on long-term debt (46,629) (45,822)
Exercise of warrants 712,215 --
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Net cash provided by financing activities 589,628 3,508
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Decrease in cash and cash equivalents (1,763,037) (644,502)
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 $ 1,896,353 $ 4,722,335
============= =============
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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 64.9% 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
MARCH 31,
------------------------------
2000 1999
------------ ------------
Rental income $ 38,492 $ 32,487
Interest income from Medicore 28,188 903
Other interest income 27,240 51,088
Other income 4,934 3,291
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$ 98,854 $ 87,769
============ ============
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 ended March 31, 2000 or for the same
period 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:
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
Net loss income $ (228,885) $ (147,172)
============ ============
Weighted average shares 3,582,080 3,546,344
============ ============
Loss per share:
Basic $(.06) $(.04)
===== =====
Diluted $(.06) $(.04)
===== =====
The Company has various potentially dilutive securities, including stock
options and warrants. See Notes 6 and 7.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2000
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss consists of the net loss for the three months ended
March 31, 2000, and for the same period of the preceding year.
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 ended March 31, 2000 and
March 31, 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 ended March 31, 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 $117,000 and $125,000 at March 31, 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 $147,000 and $157,000 at March 31, 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 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 and principal with any
remaining balance due September 1, 2003. There were no outstanding borrowings
under this line of credit as of March 31, 2000 or December 31, 1999.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 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 May 2005. Additional financing
of $90,000 during the three months ended March 31, 1999, which represents a
noncash financing activity, is a supplemental disclosure required by FAS 95. The
remaining principal balance under this agreement amounted to approximately
$703,000 and $731,000 at March 31, 2000 and December 31, 1999, respectively.
The prime rate was 9% as of March 31, 2000 and 8.5% as of December 31,
1999.
Interest payments on long-term debt amounted to approximately $10,000
for the three months ended March 31, 2000 and $15,000 for the same period 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 (refunds) payments amounted to ($109,000) for the three
months ended March 31, 2000 and $216,000 for the same period of the preceding
year.
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 for the three months ended March 31,
2000, and for the same period of the preceding year.
The Company had an intercompany advance receivable from the Parent of
approximately $181,000 and $105,000 at March 31, 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
$1,000 for the three months ended March 31, 2000 and for the same period 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 April 1, 2001; therefore, the advance has been
classified as long-term at March 31, 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 Parent
borrowed the funds it utilized for the loans from the Company with an annual
interest rate of 10%. Interest on the note receivable from the Parent amounted
to approximately $27,000 for the three months ended March 31, 2000. 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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 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 March 31, 2000.
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 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 promissory notes.
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. During the first quarter of 2000, approximately
167,000 warrants were exercised with net proceeds to the Company of
approximately $712,000. Certain of these proceeds may go to MainStreetIPO.com
Inc. if the proposed merger with the Company is completed. See Note 9. 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. 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 March
31, 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. ("MainStreet Sub"). The proposed merger
anticipates MainStreet Sub merging into DCA with DCA surviving, changing its
name to MainStreet Sub, and becoming a wholly-owned subsidiary of MainStreet.
The Company's shareholders will receive, on a one-for-one basis, shares of
common stock of MainStreet, which company filed a registration statement in
February 2000 with the SEC covering the issuance of approximately 1,396,000
shares of its common stock, plus approximately 3,419,000 shares for resale by
certain affiliates of the Company, MainStreet and certain private investors of
MainStreet. The Company's proxy statement, which is part of MainStreet's
registration statement, will solicit the approval of the Company's minority
shareholders for the proposed merger and related transactions, at such time the
SEC declares the registration effective. There were extensive comments by the
SEC staff to the registration statement including certain regulatory issues as
to MainStreet's requirement to register as a broker-dealer, which MainStreet is
attempting to resolve.
Immediately prior to the proposed merger, the Company will be selling
all of its assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of
its Parent, Medicore, Inc., with this subsidiary also assuming all liabilities
of the Company. The proposed sale of assets and merger transactions are subject
to a variety of contingencies, most importantly shareholder approval. Should the
Company's minority shareholders approve the transactions, Medicore will own 100%
of the dialysis operations, and the Company's shareholders will become
shareholders of MainStreet.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 2000
(UNAUDITED)
NOTE 9--PROPOSED MERGER AND ACQUISITION--CONTINUED
Assuming completion of the merger, 20% of the net proceeds from exercise
of the Company's publicly traded warrants from the date of the Merger Agreement,
October 20, 1999, up to $1,000,000, would go to Medicore with the balance of the
proceeds to remain with MainStreet. If the merger is not completed, net proceeds
from warrant exercises would remain with the Company to be used in its business
and for development of additional dialysis centers. See Note 7.
MainStreet is a recently established company which has developed a
central website to provide business entities with the necessary tools to perform
direct public offering of their securities. Another company, CEO Letter, LLC,
which will become a wholly-owned subsidiary of MainStreet at the time of the
merger, provides chief executive officers of public companies the forum to
discuss their companies over the internet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
the 1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the future of the Company's growth and operations, the character and
development of the dialysis industry, anticipated revenues, 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 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.
Among the factors that could cause actual results to differ materially are the
factors detailed in the risks discussed in the "Risk Factors" section included
in the Company's Registration Statement Form SB-2, as filed with the Securities
and Exchange Commission (effective April 17, 1996), and Form S-3, effective July
1, 1999, and as amended or supplemented. Accordingly, readers are cautioned not
to place undue reliance on such forward-looking statements, which speak only as
of the date made and which the Company undertakes no obligation to revise to
reflect events after the date made.
Essential to the Company is Medicare reimbursement which is a fixed rate
determined by the Health Care Financing Administration ("HCFA"). The level of
the Company's revenues and profitability may be adversely affected by potential
legislation resulting in rate cuts. Additionally, operating costs tend to
increase over the years without any comparable increases, if any, in the
prescribed dialysis treatment reimbursement rates, which usually remain fixed
and have decreased over the years. There also may be reductions in commercial
third-party reimbursement rates.
The dialysis industry is highly competitive and subject to extensive
regulation. There are a variety of anti-kickback regulations, extensive
prohibitions relating to self-referrals, violations of which are punishable by
criminal or civil penalties, including exclusion from Medicare and other
governmental programs. Although 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 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 maintenance
entities. We opened our fifth center in Chambersburg, Pennsylvania during the
first quarter of 1999 and our sixth center in Vineland, New Jersey in February,
2000. We acquired property in South Georgia in February, 2000, on which we
anticipate beginning construction of a new dialysis center in the immediate
future. 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.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the recent millennium change concerned the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, were faced to ensure continued proper operations
and reporting of financial condition. We have not experienced any material
unanticipated negative consequences from the Year 2000 issues.
RESULTS OF OPERATIONS
Medical service revenues increased approximately $524,000 (45%) for the
three months ended March 31, 2000 compared to the same period of the preceding
year. This increase reflects increased revenues of our Pennsylvania dialysis
centers of approximately $348,000, increased revenues of approximately $39,000
for the Manahawkin, New Jersey center, and revenues of approximately $137,000
for the Vineland, New Jersey center which commenced operations in February,
2000. Although the operations of new centers have resulted in additional
revenues, they 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 $11,000 for the
three months ended March 31, 2000 compared to the same period of the preceding
year. This increase includes an increase of $27,000 in interest from our Parent
including interest on a note receivable and an advance receivable, a decrease of
$24,000 in interest from liquid investments as a result of a reduction in
invested funds and an increase in rental income. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
Cost of medical services sales as a percentage of sales decreased to 67%
for the three months ended March 31, 2000 compared to 74% for the same period 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
$264,000 (45%) for the three months ended March 31, 2000 compared to the same
period of the preceding year. This increase reflected 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 51% for the three months
ended March 31, 2000, and the same period for the preceding year.
As a result of having centers in the developmental stage which have not
achieved a sufficient patient count to sustain profitable operations, we have
continued to experience operational losses.
Interest expense remained relatively stable decreasing by approximately
$1,000 for the three months ended March 31, 2000 compared to the same period of
the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $4,342,000 at March 31, 2000, which reflected an
increase of approximately $190,000 during the three months ended March 31, 2000.
Included in the changes in components of working capital was a decrease in cash
and cash equivalents of $1,763,000, which included net cash used in operating
activities of $55,000, net cash used in investing activities of $2,298,000
(including a $2,000,000 loan to our Parent, additions to property and equipment
of $298,000, which includes $208,000 for land in Georgia for a new dialysis
center), and net cash provided by financing activities of $590,000 (including
advances to our Parent of $76,000, and debt repayments of $47,000 and net
proceeds from warrant exercises of $712,000).
During the first quarter of 2000, approximately 167,000 warrants of our
2,300,000 publicly traded redeemable common stock purchase warrants were
exercised with net proceeds to the Company of approximately $712,000. See Notes
7 and 9 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
$264,000 at March 31, 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 $703,000
at March 31, 2000 and $731,000 at December 31, 1999. We through our subsidiary,
DCA of Vineland, LLC, 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 March 31, 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 for
$90. 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.
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 takes four to
six months and usually at least an additional 12 months to generate income. We
consider three of our centers, Carlisle, Pennsylvania and Manahawkin and
Vineland in New Jersey, to be in the developmental stage, since they have not
developed a patient base sufficient to generate and sustain earnings. As of
March 31, 2000, the professional association providing medical director services
to the Vineland, New Jersey center and the professional corporations providing
medical director services to the Manahawkin, New Jersey and Carlisle and
Chambersburg, Pennsylvania facilities had a 20% interest in those subsidiaries.
In April 2000, a professional association with which the medical director for
the Vineland, New Jersey center is affiliated, acquired an additional 29%
interest for $203,000, increasing the minority ownership in that facility to 49%
and reducing DCA's ownership to 51%. We have entered into agreements with
medical directors, and intend to establish additional facilities in Georgia and
Ohio.
In February, 2000, we acquired land in South Georgia on which we plan to
begin construction of a new dialysis center in the immediate future. The
professional associations which will provide medical director services to this
facility will have an initial 30% ownership interest with DCA owning 70%. 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.
We believe that current levels of working capital will enable us to meet
our liquidity demands for at least the next twelve months, as well as expand our
dialysis facilities and thereby our patient base.
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 AND ACQUISITION
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. That proposed transaction also provides for a simultaneous sale of
our operations to our Parent in consideration for approximately 90% of our
Parent's ownership of the Company, our Parent's assumption of our long-term debt
and other liabilities, and our Parent's waiver of most proceeds from the
potential exercise of outstanding warrants and underwriters' options. If these
proposed transactions are completed, which will require approval at a special
meeting by our minority public shareholders (our Parent and officers and
directors of our Company and Parent who own our common stock will not vote their
shares and are deferring to the determination of the minority shareholders), our
operations will be owned 100% by our Parent and our shareholders will become
shareholders of MainStreet. The SEC has provided substantial comments to
MainStreet's registration statement, which includes our proxy statement,
relating to the proposed transactions and issuance of MainStreet shares to our
shareholders. The SEC has also expressed its position as to the regulatory issue
of MainStreet registering as a broker-dealer based upon the proposed operations
of its website for issuers to effect direct public offerings. The parties are
attempting to address and resolve these issues with the SEC. There is no
assurance the sale of our operations to our Parent and the merger with
MainStreet will be approved or completed. See Note 9 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
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.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's redeemable common stock purchase warrants
("Warrants") of which there are approximately 2,130,000 outstanding, were
extended from March 31, 2000 to June 30, 2000, at which date they expire.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
(i) Item 5, "Other Events," re: loan to our Parent,
Medicore, Inc., filed February 15, 2000.
(ii) Item 5, "Other Events" re: extension of warrant exercise
period, filed March 21, 2000.
No financial statements were filed with any of the current
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
By: /s/ DANIEL R. OUZTS
---------------------------------------
DANIEL R. OUZTS, Vice President/Finance
Controller and Chief Financial Officer
Dated: May 15, 2000
EXHIBIT INDEX
Exhibit
No.
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Part I Exhibits
(27) Financial Data Schedule (for SEC use only)