FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8527
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.)
1344 Ashton Road, Hanover, Maryland 21076
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(Address of principal executive offices) (Zip Code)
(410) 694-0500
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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 - 3,887,344 shares as of October 31, 2001.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for the
three months and nine months ended September 30, 2001 and September 30, 2000
include the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three months
and nine months ended September 30, 2001 and September 30, 2000.
2) Consolidated Condensed Balance Sheets as of September 30, 2001 and
December 31, 2000.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2001 and September 30, 2000.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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PART II -- OTHER INFORMATION
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Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Medical service revenue $ 5,034,559 $ 2,267,691 $13,129,853 $ 6,032,920
Interest and other income 114,026 124,056 378,152 355,998
----------- ----------- ----------- -----------
5,148,585 2,391,747 13,508,005 6,388,918
Cost and expenses:
Cost of medical services 3,166,574 1,445,669 8,430,073 3,896,506
Selling, general and administrative
expenses 1,643,102 904,186 4,262,826 2,650,451
Interest expense 52,385 19,080 150,139 54,349
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4,862,061 2,368,935 12,843,038 6,601,306
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Income (loss) before income taxes,
minority interest and equity in
affiliate income (loss) 286,524 22,812 664,967 (212,388)
Income tax provision 154,071 19,620 234,195 60,417
----------- ----------- ----------- -----------
Income (loss) before minority interest and
equity in affiliate loss 132,453 3,192 430,772 (272,805)
Minority interest in (income) loss of
consolidated subsidiaries (29,552) --- (78,005) 14,218
Equity in affiliate income (loss) 4,738 --- (41,653) ---
----------- ----------- ----------- -----------
Net income (loss) $ 107,639 $ 3,192 $ 311,114 $ (258,587)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $.03 $--- $.08 $(.07)
==== ==== ==== =====
Diluted $.03 $--- $.08 $(.07)
==== ==== ==== =====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000(A)
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,062,473 $ 793,666
Accounts receivable, less allowance of $448,000 at
September 30, 2001; $306,000 at December 31, 2000 3,682,567 1,692,592
Notes receivable from parent --- 2,200,000
Inventories 604,039 334,127
Prepaid expenses and other current assets 553,373 468,001
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Total current assets 6,902,452 5,488,386
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,226,856 2,207,447
Machinery and equipment 3,954,274 2,914,010
Leasehold improvements 2,127,889 1,720,625
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8,685,230 7,218,293
Less accumulated depreciation and amortization 2,621,840 2,048,148
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6,063,390 5,170,145
Goodwill 523,140 ---
Advances to parent 249,974 414,339
Deferred expenses and other assets 305,920 104,512
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$14,044,876 $11,177,382
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 934,588 $ 553,704
Accrued expenses 1,404,622 689,600
Current portion of long-term debt 350,731 295,031
Income taxes payable 205,726 81,451
Payable subsidiary minority interest acquisition 300,000 ---
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Total current liabilities 3,195,667 1,619,786
Long-term debt, less current portion 2,819,754 1,755,228
Minority interest in subsidiaries 4,205 3,060
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares;
issued and outstanding 3,896,244 shares at September 30, 2001
and 3,979,844 shares at December 31, 2000 38,962 39,798
Capital in excess of par value 5,199,249 5,283,585
Retained earnings 3,208,639 2,897,525
Notes receivable from options exercised (421,600) (421,600)
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Total stockholders' equity 8,025,250 7,799,308
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$14,044,876 $11,177,382
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(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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
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2001 2000
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Operating activities:
Net income (loss) $ 311,114 $ (258,587)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation 573,691 432,881
Amortization 2,906 1,749
Bad debt expense 375,006 143,465
Equity in affiliate loss 41,653 ---
Minority interest 78,005 (14,218)
Increase (decrease) relating to operating activities from:
Accounts receivable (2,297,638) (832,786)
Inventories (269,912) (59,121)
Prepaid expenses and other current assets (221,652) (74,623)
Accounts payable 380,884 (9,299)
Accrued expenses 743,505 99,153
Income tax payable 124,275 66,855
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Net cash used in operating activities (158,163) (504,531)
Investing activities:
Additions to property and equipment, net of minor disposals (931,036) (897,542)
Decrease (increase) in notes receivable from parent 2,200,000 (2,200,000)
Loans to subsidiary medical director practice (20,332) ---
Investment in affiliate (170,227) ---
Purchase of minority interest in subsidiary (300,000) ---
Sale of minority interest in subsidiaries --- 206,000
Increase in notes receivable --- (140,000)
Deferred expenses and other assets (3,382) (26,315)
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Net cash provided by (used in) investing activities 775,023 (3,057,857)
Financing activities:
Decrease (increase) in advances to parent 164,365 (304,202)
Repurchase of stock (85,172) ---
Long-term borrowings 787,500 ---
Payments on long-term borrowings (203,174) (112,280)
Exercise of warrants and stock options --- 730,577
Deferred financing costs (11,572) ---
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Net cash provided by financing activities 651,947 314,095
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Increase (decrease) in cash and cash equivalents 1,268,807 (3,248,293)
Cash and cash equivalents at beginning of year 793,666 3,659,390
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Cash and cash equivalents at end of period $ 2,062,473 $ 411,097
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See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 62% 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 Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
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Rental income $ 42,570 $ 40,943 $ 125,655 $ 119,251
Interest income from Medicore 3,200 57,460 120,881 138,219
Other interest income 25,237 18,054 41,318 75,039
Management fee income 36,013 --- 74,261 ---
Other income 7,006 7,599 16,037 23,489
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$ 114,026 $ 124,056 $ 378,152 $ 355,998
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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 nine months ended September 30, 2000, as a result of
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 Nine Months Ended
September 30, September 30,
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2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ 107,639 $ 3,192 $ 311,114 $ (258,587)
========== ========== ========== ==========
Weighted average shares,
denominator-basic computation 3,910,820 4,056,444 3,917,434 3,879,107
Effect of dilutive stock securities:
Stock options 77,395 105,395 25,798 ---
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Weighted average shares as adjusted,
denominator-diluted computation 3,988,215 4,161,839 3,943,232 3,879,107
========== ========== ========== ==========
Earnings (loss) per share:
Basic $.03 $.-- $.08 $(.07)
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Diluted $.03 $.-- $.08 $(.07)
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The Company had various potentially dilutive securities during the periods
presented, including stock options and warrants. See Notes 6 and 7.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 nine months ended September 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.
Goodwill
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standard No. 142 (FAS 142), since the
Company's goodwill was acquired after June 30, 2001, it will not be amortized
but will be subject to impairment testing under FAS 142 commencing in 2002.
See "New Pronouncements"
below.
New Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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 consolidated financial statements.
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Other than expanded disclosure requirements, FAS 141 has had no effect on the
Company's consolidated financial statements. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators are present)
for impairment. Separate intangible assets that do not have indefinite lives
will continue to be amortized over their useful lives (with no maximum life).
The amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2002, the provisions of FAS 142 will be effective
for fiscal years beginning after December 15, 2001. Pursuant to the provisions
of FAS 142, the goodwill resulting from the Company's acquisition of minority
interest in August 2001 will not be amortized and will be subject to the
impairment testing provisions of FAS 142 commencing in 2002, prior to which it
will be subject to the impairment provisions of Accounting Principals Board
Opinion No. 17, "Intangible Assets", and FASB Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and
Assets to be Disposed of." See Note 10.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and nine months ended
September 30, 2001 and September 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 (losses) for such
periods. Operating results for the three and nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2001.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 2--INTERIM ADJUSTMENTS--Continued
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 $69,000 and $93,000 at September 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 $87,000 and $117,000 at September 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 September 30, 2001 and
December 31, 2000.
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 $780,000 at September 30, 2001.
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 2006. Additional
financing of $536,000 and $108,000 during the nine months ended September 30,
2001 and September 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 $1,535,000 and $1,140,000 at September 30, 2001 and December 31,
2000, respectively.
The prime rate was 6% as of September 30, 2001 and 9.5% as of December 31,
2000.
Interest payments on long-term debt amounted to approximately $74,000 and
$160,000 for the three months and nine months ended September 30, 2001 and
$9,000 and $30,000 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 $21,000 and
$108,000 for the three months and nine months ended September 30, 2001 and
($3,000) and $106,000 for the same periods of the preceding year.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 5--TRANSACTIONS WITH PARENT
The Parent provides certain financial and administrative services to the
Company. Central operating costs are charged on the basis of direct usage,
when identifiable, or on the basis of time spent. The amount of expenses
allocated by the Parent totaled approximately $50,000 and $150,000 for the
three months and nine months ended September 30, 2001, and for the same
periods of the preceding year.
The Company had an intercompany advance receivable from the Parent of
approximately $250,000 and $414,000 at September 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 $3,000 and $12,000 for the three months and nine months ended
September 30, 2001 and $4,000 and $8,000 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 October 1, 2002; therefore, the advance has been classified
as long-term at September 30, 2001.
In January, March and August, 2000, we loaned an aggregate of $2,200,000
to our Parent at an annual interest rate of 10%, with a substantial portion of
the loan and accrued interest scheduled to be repaid on January 26, 2001.
These funds were loaned by our Parent to Linux Global Partners ("LGP"), a
private company investing in Linux software companies and recently attempting
to initiate the development and marketing of a Linux desktop software system.
Our Parent also acquired an approximately 11% interest in LGP. We extended the
maturity of the loans to our Parent, as it did with LGP, in consideration for
which we received 100,000 shares of common stock of LGP, increasing our
ownership in LGP to 400,000 shares. Interest income on the notes receivable
from the Parent, which have the same terms as the Parent's loans to LGP,
amounted to approximately $109,000 for the nine months ended September 30,
2001, all of which was earned during the first half of 2001, and $53,000 and
$130,000 for the three months and nine months ended September 30, 2000.
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.
In May 2001, our Parent paid us $215,500, representing $200,000 of the loan
with $15,500 of accrued interest. 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 vesting 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' overallot-
ment 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
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 7--COMMON STOCK--(Continued)
being substantially identical to the public warrants except that they were
exercisable at $5.40 per share. The underwriters' options expired unexercised.
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 a total of
approximately 84,000 shares at a cost of approximately $85,000 during the nine
months ended September 30, 2001.
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
September 30, 2001.
NOTE 10--ACQUISITION OF MINORITY INTEREST
In August 2001, the Company acquired the 30% minority interest in DCA of
So. Ga., LLC, for $600,000 of which $300,000 was paid in cash and $300,000 is
payable in August, 2002. This transaction resulted in $523,000 goodwill
representing the excess of the $600,000 purchase price over the $77,000
fair value of the minority interest acquired. The goodwill will be amortized
for tax purposes over a 15-year period. The Company's decision to make this
investment was based largely on the profitability of DCA of So. Ga. Subsequent
to this acquisition, DCA of So. Ga. will continue to be included in the
Company's consolidated condensed statement of operations; however, minority
interest in DCA of So. Ga.'s results of operations will not be recorded
subsequent to the Company's acquisition of the minority interest. The party
from which the Company acquired the minority interest has an agreement to act
as medical director of another of the Company's subsidiaries. If this party
should fail to satisfy the terms of that agreement, the purchase price of the
30% minority interest in DCA of So. Ga. would be reduced to $300,000. See
Note 1.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 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 our 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. Words
such as "anticipate," "estimate," "expects," "prospects," "plans," and
"believes," and words and terms of similar substance used in connection with
any discussions of future operating or financial performance, identify forward-
looking statements. 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 state-
ments 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 statements, Form SB-2,
as filed with the SEC (effective April 17, 1996), and Form S-3, effective July
1, 1999, and as amended or supplemented. We base our forward-looking
statements on information currently available to us, and we assume no
obligation to revise such statements to reflect events after the date made.
Readers are cautioned not to place undue reliance on such forward-looking
statements.
Essential to the Company is Medicare reimbursement which is a fixed rate
determined by CMS. The level of our 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. A center in Ohio which we manage and in which we hold a minority
interest (40%) opened in February 2001. In August, 2001, we commenced treating
patients in our ninth center in Fitzgerald, Georgia, and our tenth center in
Valdosta, Georgia, our second Valdosta dialysis center.
We have begun construction on an additional Pennsylvania center, and in
November, 2001, signed agreements for a new dialysis facility in Ohio for which
facility construction will begin in the near future. There is no certainty as
to when the new Pennsylvania and Ohio center will commence operations, or the
number of stations or patient treatments which will result, or if these and our
other 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.
On November 7, 2001, we entered into several agreements with Omnicare
Renal Services, an Illinois company engaged in furnishing dialysis equipment
and supplies to ESRD nursing home patients. These agreements primarily relate
to our Company providing home dialysis support services to Omnicare's nursing
home patients, and a consulting agreement to assist Omnicare in its business
and growth. See Part II, "Other Information," Item 5.
Results of Operations
Medical service revenues increased approximately $2,767,000 (122%) and
$7,097,0000 (118%) for the three months and nine months ended September 30, 2001
compared to the same periods of the preceding year. This increase reflects
increased revenues of our Pennsylvania dialysis centers of approximately
$705,000 and $1,448,000, increased revenues of approximately $569,000 and
$1,683,000 for our New Jersey centers, and revenues of approximately $1,493,000
and $3,966,000 for our Georgia centers. 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 decreased by approximately $10,000 for the three
months ended September 30, 2001 and increased by approximately $22,000 for the
nine months ended September 30, 2001 compared to the same periods of the
preceding year. Included are decreases of $54,000 and $17,000 in interest from
our Parent, including interest on a note receivable and an advance receivable; a
net increase of $7,000 for the three months ended September 30, 2001 and a net
decrease of $34,000 for the nine months ended September 30, 2001 in other
interest income reflecting reduced interest rates; and management fee income of
$36,000 and $74,000 pursuant to a Management Services Agreement with our 40%
owned Toledo, Ohio affiliate. See Note 1 to "Notes to Consolidated Condensed
Financial Statements."
Cost of medical services as a percentage of medical service revenue
remained relatively stable amounting to 63% and 64% for the three months and
nine months ended September 30, 2001 compared to 64% and 65% for the same
periods of the preceding year.
Selling, general and administrative expenses increased by approximately
$739,000 (82%) and $1,612,000 (61%) for the three months and nine months
September 30, 2001 compared to the same periods of the preceding year. This
increase reflected operations of our new dialysis centers in Georgia,
including pre-operating and other startup costs of those facilities, 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 nine months ended September
30, 2001, and 40% and 44% the same periods for the preceding year.
Interest expense increased by approximately $33,000 and $96,000 for the
three months and nine months ended September 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.
The prime rate was 6% at September 30, 2001 and 9.50% at December 31, 2000.
Equity in affiliate loss represents equity in the loss incurred by our
Ohio affiliate, in which we have a 40% ownership interest. This dialysis center
commenced operations in February, 2001, and is still in the developmental stage.
Liquidity and Capital Resources
Working capital totaled $3,707,000 at September 30, 2001, which reflected
a decrease of approximately $162,000 (4%) during the nine months ended September
30, 2001. Included in the changes in components of
working capital was an increase in cash and cash equivalents of $1,269,000,
which included net cash used in operating activities of $158,000, net cash
provided by investing activities of $775,000 (including additions to property
and equipment of $931,000, investment in our 40% owned Ohio affiliate of
$170,000, repayment to us by our Parent of $2,200,000 in loans and the initial
$300,000 payment on our acquisition of subsidiary minority interest), and net
cash provided by financing activities of $652,000 (including a decrease in
advances to our Parent of $164,000, debt repayments of $203,000, repurchases
of stock of $85,000 and proceeds from our new Georgia mortgage of $788,000).
See Notes 3, 5, 8 and 10 to "Notes to Consolidated Condensed Financial
Statements."
We opened our ninth dialysis center in Fitzgerald, Georgia and our tenth
center in Valdosta, Georgia (our second Valdosta center) in August, 2001. We
began construction on a center in Mechanicsburg, Pennsylvania in October, 2001.
A center in Ohio which we manage and in which we hold a minority interest
(40%), opened in February, 2001. We acquired the 30% minority interest in
our DCA of So. Ga., LLC subsidiary in August, 2001 for $600,000 with $300,000
paid in cash and $300,000 payable in one year. See Notes 1 and 10 to "Notes
to Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment
and initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would
provide us with an immediate ongoing 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 constructing a new
dialysis facility in Pennsylvania and are about to start construction of another
facility in Ohio. We are also in different phases of negotiations for
additional outpatient centers. We have also recently entered into agreements
with Omnicare to provide home dialysis support services to its nursing home
dialysis patients. 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 2000, we loaned an aggregate of $2,200,000 to our Parent, at an annual
interest rate of 10%, which our Parent loaned to LGP. After several extensions
of the January 26, 2001 maturity date, in consideration for which we received
additional LGP shares, in May, 2001, Medicore paid us $215,500, representing
$200,000 of principal with accrued interest, and in June, 2001, Medicore repaid
the remaining $2,000,000 in loans along with approximately $279,000 of 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 LGP.
In September, 2000, we announced our intent to repurchase up to
approximately 300,000 of our outstanding shares. As of September 30, 2001,
approximately 160,000 shares have been repurchased for cancellation at a cost
of approximately $150,000, including 84,000 shares at a cost of $85,000 in 2001.
See Note 8 to "Notes to Consolidated Condensed Financial Statements."
We have mortgages with a Maryland bank on two of our buildings, one in
Lemoyne, Pennsylvania and the other in Easton, Maryland, with a combined
balance of approximately $156,000 at September 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 $780,000 at September 30, 2001. We have an equipment financing
agreement for kidney dialysis machines for our facilities, which had an
outstanding balance of approximately $1,535,000 at September 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
September 30, 2001 and December 31, 2000. See Note 3 to "Notes to Consolidated
Condensed Financial Statements."
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of FAS
133 has had no effect on the Company's consolidated financial statements. In
July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). Other than expanded disclosures, FAS 141 has
had no effect on the Company's consolidated financial statements. Pursuant to
FAS 142, the goodwill arising after June 30, 2001 will not be amortized and
will be subject to the impairment testing provisions of FAS 142 commencing in
2002. See Note 1 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.
PART II -- OTHER INFORMATION
Item 5. Other Information
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On November 7, 2001, we entered into agreements with Lawrence Weber
Medical, Inc. d/b/a Omnicare Renal Services, a DME employer engaged in
furnishing dialysis equipment and supplies to nursing home patients. Under
the Back-Up Facility Agreement we have the exclusive right to provide home
dialysis support services for Omnicare's nursing home patients in several
states. These services include, among others, providing social work and
dietician consultation and planning, assuring the appropriate supplies are
ordered and maintained, and arranging for the provision of all ESRD-related
laboratory tests. We also entered into a consulting agreement to provide
consulting services to Omnicare, including, among others, assisting Omnicare
with the development and expansion of its business, consulting with them on
operational, regulatory and reimbursement matters, and assisting them with
maintaining relationships with nursing home staff, attending physicians, and
other caregivers providing care to home dialysis patients. Under this
agreement, we will implement a quality assurance plan for Omnicare, and
allow Omnicare to participate in our clinical compliance program for
dialysis equipment, supplies and services, and monitor their compliance.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits
Part I Exhibits
None
Part II Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
/s/ DANIEL R. OUZTS
By:--------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Chief
Financial Officer
Dated: November 13, 2001