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, 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
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1757642
- ---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
27 Miller Street, Lemoyne, Pennsylvania 17043
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(717) 730-6164
---------------------------------------------------
(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 - 4,056,344 shares as of July 31, 2000.
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, 2000 and June 30, 1999 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, 2000 and June 30, 1999.
2) Consolidated Condensed Balance Sheets as of June 30, 2000 and December
31, 1999.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2000 and June 30, 1999.
4) Notes to Consolidated Condensed Financial Statements as of June 30,
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
PART II -- OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Item 5. Other Information
- ------ -----------------
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 Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Medical service revenue $2,073,719 $1,454,959 $3,765,229 $2,622,314
Interest and other income 133,088 102,652 231,942 190,421
---------- ---------- ---------- ----------
2,206,807 1,557,611 3,997,171 2,812,735
Cost and expenses:
Cost of medical services 1,320,529 1,019,413 2,450,837 1,885,323
Selling, general and administrative
expenses 890,517 845,237 1,746,265 1,436,597
Interest expense 18,772 16,559 35,269 33,585
---------- ---------- ---------- ----------
2,229,818 1,881,209 4,232,371 3,355,505
---------- ---------- ---------- ----------
Loss before income taxes and minority
interest (23,011) (323,598) (235,200) (542,770)
Income tax provision (benefit) 24,101 (41,000) 40,797 (113,000)
---------- ---------- ---------- ----------
Loss before minority interest (47,112) (282,598) (275,997) (429,770)
Minority interest in loss of
consolidated subsidiaries (14,218) --- (14,218) ---
---------- ---------- ---------- ----------
Net loss $ (32,894) $ (282,598) $ (261,779) $ (429,770)
========== ========== ========== ==========
Loss per share:
Basic $(.01) $(.08) $(.07) $(.12)
===== ===== ===== =====
Diluted $(.01) $(.08) $(.07) $(.12)
===== ===== ===== =====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2000 1999(A)
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,376,670 $ 3,659,390
Accounts receivable, less allowance of $285,000 at
June 30, 2000; $237,000 at December 31, 1999 1,326,428 779,568
Note receivable from parent 2,000,000 ---
Inventories 281,775 219,623
Prepaid expenses and other current assets 387,902 397,361
----------- -----------
Total current assets 5,372,775 5,055,942
Property and equipment:
Land 376,211 168,358
Buildings and improvements 1,594,549 1,425,912
Machinery and equipment 2,139,283 2,051,803
Leasehold improvements 1,694,896 1,660,172
----------- -----------
5,804,939 5,306,245
Less accumulated depreciation and amortization 1,741,121 1,454,190
----------- -----------
4,063,818 3,852,055
Advances to parent 286,985 105,142
Deferred expenses and other assets 11,684 22,808
----------- -----------
$ 9,735,262 $ 9,035,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 348,409 $ 395,002
Accrued expenses 453,684 365,351
Income taxes payable 47,236 ---
Current portion of long-term debt 187,339 143,438
----------- -----------
Total current liabilities 1,036,668 903,791
Long-term debt, less current portion 775,863 869,985
Minority interest in subsidiaries 3,061 2,080
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares,
issued and outstanding 4,056,444 shares at June 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 2,991,335 3,253,114
Notes receivable from options exercised (421,600) ---
----------- -----------
Total stockholders' equity 7,919,670 7,260,091
----------- -----------
$ 9,735,262 $ 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)
Six Months Ended
June 30,
-------------------
2009 1999
---- ----
Operating activities:
Net loss $ (261,779) $ (429,770)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 286,930 219,008
Amortization 1,166 845
Bad debt expense 100,298 45,173
Stock option compensation --- 153,000
Minority interest (14,218) ---
Increase (decrease) relating to operating activities from:
Accounts receivable (647,158) (352,233)
Inventories (62,152) (3,540)
Prepaid expenses and other current assets 9,459 (132,981)
Accounts payable (46,593) (81,785)
Accrued expenses 88,333 187,740
Income tax payable 47,236 (232,306)
----------- -----------
Net cash used in operating activities (498,478) (626,849)
Investing activities:
Loan to parent (2,000,000) ---
Additions to property and equipment, net of minor disposals (465,193) (254,637)
Sale of minority interest in subsidiaries 206,000 4,040
Deferred expenses and other assets 9,938 44,054
----------- -----------
Net cash used in investing activities (2,249,255) (206,543)
Financing activities:
Advances (to) from parent (181,843) 107,775
Payments on long-term debt (83,721) (93,735)
Exercise of warrants and stock options 730,577 ---
Net cash provided by financing activities 465,013 14,040
----------- -----------
Decrease in cash and cash equivalents (2,282,720) (819,352)
Cash and cash equivalents at beginning of period 3,659,390 5,366,837
----------- -----------
Cash and cash equivalents at end of period $ 1,376,670 $ 4,547,485
=========== ===========
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 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:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Rental income $ 39,815 $ 35,915 $ 78,307 $ 68,402
Interest income from Medicore 52,571 544 80,759 1,447
Other interest income 29,746 48,962 56,986 100,050
Other income 10,956 17,231 15,890 20,522
--------- --------- --------- ---------
$ 133,088 $ 102,652 $ 231,942 $ 190,421
Loss per Share
Diluted earnings 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, 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 Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Net loss $ (32,894) $ (282,598) $ (261,779) $ (429,770)
========== ========== ========== ==========
Weighted average shares 3,996,164 3,546,344 3,789,464 3,546,344
========= ========= ========= =========
Loss per share:
Basic $(.01) $(.08) $(.07) $(.12)
===== ===== ===== =====
Diluted $(.01) $(.08) $(.07) $(.12)
===== ===== ===== =====
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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Comprehensive Loss
Comprehensive loss consists of the net loss for the three months and six
months ended June 30, 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 and six months ended June
30, 2000 and June 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 six months ended June 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 Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's audited financial
statements for the year ended December 31, 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 $109,000 and $125,000 at June 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 $137,000 and $157,000 at June 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
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 June
30, 2000 or December 31, 1999.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 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 May 2005. Addi-
tional financing of $34,000 and $90,000 during the six months ended June 30,
2000 and June 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
$717,000 and $731,000 at June 30, 2000 and December 31, 1999, respectively.
The prime rate was 9.5% as of June 30, 2000 and 8.5% as of December 31,
1999.
Interest payments on long-term debt amounted to approximately $11,000
and $21,000 for the three months and six months ended March 31, 2000 and
$16,000 and $31,000 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 (refunds) payments amounted to ($109,000) for the six months
ended June 30, 2000 with no payments or refunds during the second quarter of
2000, and ($4,000) and $212,000 for the three months and six months ended
June 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 $100,000
for the three months and six months ended June 30, 2000, and for the same
periods of the preceding year.
The Company had an intercompany advance receivable from the Parent of
approximately $287,000 and $105,000 at June 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 approxi-
mately $3,000 and $4,000 for the three months and six months ended June 30,
2000 and $500 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 July 1, 2001; therefore, the advance has been classified
as long-term at June 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 for 30 days with an annual interest
rate of 10%. The Parent borrowed the funds it utilized for the loans from
the Company with an annual interest rate of 10%. Interest on the notes
receivable from the Parent, which have the same maturities as the Parent's
loans to Linux Global Partners, amounted to approximately $50,000 and $77,000
for the three months and six months ended June 30, 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)
June 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 June 30, 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 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. Certain
of these proceeds may go to MainStreetIPO.com Inc. if the proposed merger with
the Company is completed. 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
June 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. ("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 would receive, on a one-for-one
basis, shares of common stock of MainStreet, which company filed a registra-
tion 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 effec-
tive. 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 has been 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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 9--PROPOSED MERGER AND ACQUISITION--Continued
The proposed sale of assets and merger transactions are subject to a
variety of contingencies, most importantly, MainStreet's ability to satisfy
a variety of SEC concerns, the SEC declaring MainStreet's registration
statement, which includes the Company's proxy statement, effective, and
thereafter, shareholder approval. There is no assurance that any of these
contingencies will be satisfied. 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.
Assuming completion of the proposed 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 developed a central website to provide business entities with
the necessary tools to perform direct public offering of their securities.
Based on regulatory issues, MainStreet is restructuring its proposed
operations, but a substantial amount of time has elapsed since it filed its
registration statement in February, 2000, and there can be no assurance that
MainStreet will satisfy the SEC's concerns and the regulatory issues its
proposed plan of operations faces. 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. MainStreet has not initiated its
proposed operations to date.
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 with the Company having the right to convert the
note into common shares of MainStreet at the price of $1.23 per share at
anytime until maturity. The note bears 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. See Note 9.
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 1934. The Private Securities Litigation Reform Act of 1995 contains
certain safe harbors for forward-looking statements. Certain of the forward-
looking statements include the proposed merger with MainStreet and related
sale of all our operations to our Parent, 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 supple-
mented. 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 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 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 mainten-
ance 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 are constructing a new dialysis center which we anticipate
opening in the fourth quarter of 2000. We have a 40% interest in a center
in Ohio, which we anticipate will open in the fourth quarter of 2000. 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 new
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 $619,000 (43%) and
$1,143,000 (44%) for the three months and six months ended June 30, 2000
compared to the same periods of the preceding year. This increase reflects
increased revenues of our Pennsylvania dialysis centers of approximately
$227,000 and $574,000, increased revenues of approximately $16,000 and
$55,000 for our Manahawkin, New Jersey center, and revenues of approxi-
mately $376,000 and $514,000 for our Vineland, New Jersey center which
commenced operations in February, 2000.
Interest and other income increased by approximately $30,000 and
$42,000 for the three months and six months ended June 30, 2000 compared
to the same periods of the preceding year. This increase includes
increases in interest from our Parent of $52,000 and $79,000 for the
three months and six months ended June 30, 2000, including interest on a
note receivable and an advance receivable, and decreases in interest from
liquid investments of $19,000 and $43,000 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 six months ended June 30, 2000 compared
to 70% and 72% 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
$45,000 (5%) and $310,000 (22%) for the three months and six months ended
June 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 43% and 46% for the three months and
six months ended June 30, 2000, and 58% and 55% 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
profitable operations, we have continued to experience operational losses.
Interest expense increased by approximately $2,000 for the three months
and six months ended June 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 $4,336,000 at June 30, 2000, which reflected an
increase of approximately $184,000 during the six months ended June 30, 2000.
Included in the changes in components of working capital was a decrease in
cash and cash equivalents of $2,283,000, which included net cash used in
operating activities of $498,000, net cash used in investing activities of
$2,249,000 (including a $2,000,000 loan to our Parent; additions to property
and equipment of $465,000, primarily relating to new centers, including
$208,000 for land in Georgia for a new dialysis center; and $206,000 from
the sale of minority interests in subsidiaries), and net cash provided by
financing activities of $465,000 (including advances to our Parent of
$182,000, debt repayments of $84,000 and net proceeds from warrant exercises
of $727,000).
During the first half of 2000, 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 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
$246,000 at June 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
$717,000 at June 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 June 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 for a period
of 30 days, 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. 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 equip-
ment 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 opera-
tions usually takes approximately four to six months and at least an
additional 12 months to generate income. We consider our Manahawkin, New
Jersey center to be in the developmental stage, since it has not developed a
patient base sufficient to generate and sustain earnings. As of June 30,
2000, 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 a 36% interest for $203,000 in that
center, increasing the minority ownership by professional associations in
which the medical director of this center has an ownership interest to 49%
and reducing DCA's ownership to 51%.
In February, 2000, we acquired land in South Georgia and are constructing
a new dialysis center which we anticipate will commence operations in the
fourth quarter of 2000. The facility will be operated under a 70% owned
subsidiary, DCA of So. Ga., LLC. We have entered into lease and medical
director agreements and are in the planning stage for a new center in Ohio in
which the Company holds a minority ownership interest of 40% and the medical
director holds a majority ownership interest of 60% with the 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.
We believe that current levels of working capital 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.
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. MainStreet has been attempting to address
and resolve these issues with the SEC, and has been engaged in restructuring
its proposed operations to satisfy the SEC's concerns, but to date we are not
aware of MainStreet's ability to satisfy 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 Notes 5, 9 and 10 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 legisla-
tion 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 corres-
ponding increase in reimbursement rates may adversely affect our earnings in
the future.
PART II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On May 24, 2000, the annual meeting of shareholders was held to elect
five members to the board of directors to serve until the next annual meeting
in 2000. Each nominee, Messrs. Thomas K. Lanbein, Stephen W. Everett, Bart
Pelstring, Dr. Herbert I. Soller and Robert Trause, was elected by a vote of
2,470,122 shares for and no votes against. There were no abstentions and no
broker non-votes due to no proxy solicitation since the Parent owned
approximately 65% of the voting equity of the Company. Wiss & Company LLP,
the Company's independent accountants, were ratified as the Company's
independent accountants for 2000, with 2,470,122 votes for ratification, no
votes against, and no abstentions.
Item 5. Other Information
- ------ -----------------
On August 9, 2000, the Company loaned $200,000 at 10% per annum interest
to our Parent for 30 days through September 8, 2000. See Note 5 to "Notes to
Consolidated Condensed Financial Statements," and Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(99) Additional Exhibits
(i) Promissory Note for $200,000 from Medicore, Inc. to the
Company dated August 9, 2000.
(b) Reports on Form 8-K
(i) Item 5, "Other Events" re: loan to MainStreet IPO.com Inc. filed
July 19, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
/s/ Daniel R. Ouzts
By:------------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Chief
Financial Officer
Dated: August 14, 2000
EXHIBIT INDEX
Exhibit
No.
- -------
Part II Exhibits
(99) Additional Exhibits
(i) Promissory Note for $200,000 from Medicore, Inc. to the Company
dated August 9, 2000.