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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8527
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 April 30, 2002.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the three
months ended March 31, 2002 and March 31, 2001 include the accounts of the
Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Income for the three months ended
March 31, 2002 and March 31, 2001.
2) Consolidated Condensed Balance Sheets as of March 31, 2002 and December
31, 2001.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 2002 and March 31, 2001.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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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 INCOME
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2002 2001
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Revenues:
Medical service revenue $5,488,045 $3,796,149
Interest and other income 117,794 123,917
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5,605,839 3,920,066
Cost and expenses:
Cost of medical services 3,394,661 2,460,359
Selling, general and administrative expenses 1,731,349 1,138,486
Provision for doubtful accounts 185,414 73,371
Interest expense 54,318 38,912
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5,365,742 3,711,128
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Income before income taxes, minority interest
and equity in affiliate earnings (loss) 240,097 208,938
Income tax provision 118,735 17,821
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Income before minority interest and equity in
affiliate earnings (loss) 121,362 191,117
Minority interest in income
of consolidated subsidiaries 6,168 ---
Equity in affiliate earnings (loss) 46,704 (41,155)
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Net income $ 161,898 $ 149,962
========== ==========
Earnings per share:
Basic $.04 $.04
==== ====
Diluted $.04 $.04
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
2002 2001(A)
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,432,902 $ 2,479,447
Accounts receivable, less allowance
of $764,000 at March 31, 2002;
$727,000 at December 31, 2001 4,092,979 4,019,578
Inventories 815,533 739,121
Deferred income taxes 252,000 252,000
Prepaid expenses and other current assets 627,139 640,283
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Total current assets 7,220,553 8,130,429
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,238,642 2,221,406
Machinery and equipment 4,446,154 4,361,046
Leasehold improvements 2,360,597 2,244,612
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9,421,604 9,203,275
Less accumulated depreciation and amortization 3,098,629 2,852,739
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6,322,975 6,350,536
Goodwill 523,140 523,140
Advances to parent 149,755 200,728
Deferred income taxes 166,000 166,000
Deferred expenses and other assets 369,037 312,600
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$14,751,460 $15,683,433
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 932,751 $ 1,605,136
Accrued expenses 1,623,651 1,529,844
Current portion of long-term debt 452,000 357,000
Income taxes payable --- 455,000
Payable subsidiary minority interest acquisition 300,000 300,000
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Total current liabilities 3,308,402 4,246,980
Long-term debt, less current portion 2,773,448 2,934,909
Minority interest in subsidiaries 22,351 16,183
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
3,887,344 shares at March 31, 2002 and
December 31, 2001 38,873 38,873
Capital in excess of par value 5,186,580 5,186,580
Retained earnings 3,843,406 3,681,508
Notes receivable from options exercised (421,600) (421,600)
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Total stockholders' equity 8,647,259 8,485,361
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$14,751,460 $15,683,433
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(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission
in March 2002.
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,
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2002 2001
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Operating activities:
Net income $ 161,898 $ 149,962
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 254,231 182,771
Amortization 1,162 583
Bad debt expense 185,414 73,371
Minority interest 6,168 ---
Equity in affiliate (earnings) loss (46,704) 41,155
Increase (decrease) relating to operating
activities from:
Accounts receivable (258,815) (942,840)
Inventories (76,412) (95,383)
Prepaid expenses and other current assets 13,144 (161,586)
Accounts payable (672,385) (82,169)
Accrued expenses 93,808 343,862
Income tax payable (455,000) 18,987
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Net cash used in operating activities (793,491) (471,287)
Investing activities:
Loan to subsidiary medical director practice --- (20,000)
Additions to property and equipment, net of
minor disposals (226,670) (113,016)
Investment in affiliate --- (123,011)
Deferred expenses and other assets (10,896) (2,831)
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Net cash used in investing activities (237,566) (258,858)
Financing activities:
Decrease in advances to parent 50,973 64,914
Repurchase of stock --- (63,347)
Payments on long-term debt (66,461) (57,075)
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Net cash used in financing activities (15,488) (55,508)
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Decrease in cash and cash equivalents (1,046,545) (785,653)
Cash and cash equivalents at beginning of period 2,479,447 793,666
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Cash and cash equivalents at end of period $ 1,432,902 $ 8,013
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See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated condensed 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.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes.
The company's principal estimates are for estimated uncollectible accounts
receivable as provided for in our allowance for doubtful accounts, estimated
useful lives of depreciable assets, estimates for patient revenues from non-
contracted payors, and the valuation allowance for deferred tax assets based
on the estimated realizability of deferred tax assets. Our estimates are
based on historical experience and assumptions believed to be reasonable given
the available evidence at the time of the estimates. Actual results could
differ from those estimates.
Interest and Other Income
Interest and other income is comprised as follows:
Three Months Ended
March 31,
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2002 2001
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Rental income $ 42,570 $ 41,545
Interest income from Medicore 1,108 58,697
Interest income 12,773 13,185
Management fee income 51,160 6,415
Other income 10,183 4,075
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$ 117,794 $ 123,917
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Earnings per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options,
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, 2001 as a result of
exercise prices, 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,
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2002 2001
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Net income $ 161,898 $ 149,962
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Weighted average shares-denominator
basic computation 3,887,344 3,979,844
Effect of diluted stock options 436,047 ---
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Weighted average shares, as
adjusted-denominator diluted 4,323,391 3,979,844
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Earnings per share:
Basic $.04 $.04
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Diluted $.04 $.04
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The company has various potentially dilutive securities, including stock
options. See Note 6.
Comprehensive Income
Comprehensive income consists of net income for the three months ended
March 31, 2002, and for the same period of the preceding year.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is comprised as follows:
March 31, December 31,
2002 2001
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Vendor volume discounts receivable $ 214,953 $ 209,649
Receivable from affiliate 51,160 115,715
Officer loan receivable 101,670 98,956
Other 259,356 215,963
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$ 627,139 $ 640,283
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Accrued Expenses
Accrued expenses is comprised as follows:
March 31, December 31,
2002 2001
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Accrued compensation $ 464,674 $ 590,875
Due to insurance companies 788,469 671,935
Other 370,508 267,034
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$1,623,651 $1,529,844
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Revenue Recognition
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101). 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 and Note 9.
New Pronouncements
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 are 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
was 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." The company is evaluating the impact of the
impairment testing required by FAS 142, but does not expect that it will have
a material impact on its consolidated results of operations, financial
position or cash flows. See Note 9.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment on Disposal of
Long-lived Assets" (FAS 144). FAS 144 clarifies when a long-lived asset held
for sale should be classified as such. It also clarifies previous guidance
under FAS 121, "Accounting for the Impairment of long-lived assets and for
long-lived assets to be disposed of." The company is required to adopt FAS
143 and FAS 144 in 2002. The company but does not expect that FAS 143 and
FAS 144 will have a material impact on its consolidated results of operations,
financial position or cash flows.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2002 and
March 31, 2001 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, 2002 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2002.
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, 2001.
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 $53,000 and $61,000 at March 31, 2002 and
December 31, 2001, 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 $67,000 and $77,000 at March 31, 2002 and December
31, 2001, 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% through December 2, 2001 and 1.5% over
the prime rate thereafter 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 were subject to monthly payments of interest only through December
2, 2001 with monthly payments thereafter of $2,917 principal plus interest
with any remaining balance due September 2, 2003. This loan had an
outstanding principal balance of $688,000 at March 31, 2002 and $700,000 at
December 31, 2001.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 3--LONG-TERM DEBT--Continued
In April 2001, the company obtained a $788,000 five-year mortgage through
April 2006 on its building in Valdosta, Georgia with interest initially at
8.29% which was revised to 7.59% in March 2002. Payments are $6,800 including
principal and interest commencing May 2001 with a final payment consisting of
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 $771,000 at March 31, 2002 and
$776,000 at December 31, 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.
Financing under this agreement 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
$1,646,000 and $1,678,000 at March 31, 2002 and December 31, 2001,
respectively.
The prime rate was 4.75% as of March 31, 2002 and December 31, 2001.
Interest payments on debt amounted to approximately $57,000 for the three
months ended March 31, 2002 and $26,000 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 a
portion of the deferred tax assets.
Income tax payments amounted to approximately $543,000 for the three
months ended March 31, 2002 and $1,000 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, 2002, and for the same period of the preceding year.
The company had an intercompany advance receivable from the parent of
approximately $150,000 and $201,000 at March 31, 2002 and December 31, 2001,
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, 2002 and $4,000
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,
2003; therefore, the advance has been classified as long-term at March 31,
2002.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
NOTE 5--TRANSACTIONS WITH PARENT--Continued
In January, March and August, 2000, the company 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, Inc.
("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. The company extended the maturity of the loans to our parent, as our
parent 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, with
a cost basis of approximately $140,000 resulting from a write-off of a note
secured by 300,000 LGP shares, which is included in deferred expenses and
other assets. Interest income on the notes receivable from our parent, which
had the same terms as the parent's loans to LGP, amounted to approximately
$54,000 for the three months ended March 31, 2001. 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 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 DCA 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 4 years.
In September 2001, the board of directors granted 75,000 five-year
options exercisable at $1.50 per share through September 5, 2006 to certain
officers, directors and key employees. 15,000 of the options vested
immediately with the remaining 60,000 options to vest 15,000 options each
September 5 commencing September 5, 2002.
In March 2002, the board of directors granted a five-year option for
30,000 shares exercisable at $3.15 per share through February 28, 2007 to an
officer. The options vest 7,500 each February 28 from 2003 through 2006.
NOTE 7--REPURCHASE OF COMMON STOCK
In September 2000, the company announced its intent to repurchase up to
an additional 300,000 shares of its common stock at current market prices.
The company repurchased and cancelled approximately 77,000 shares in the
fourth quarter of 2000 with a repurchase cost of approximately $65,000, and
repurchased and cancelled an additional 67,000 shares in the first quarter
of 2001 at a cost of approximately $63,000. Total repurchases during 2001
were approximately 93,000 shares at a cost of approximately $98,000.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
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, 2002.
NOTE 9--ACQUISITION OF MINORITY INTEREST
In August 2001, the company acquired the remaining 30% minority interest
in DCA of So. Ga., LLC, giving the company a 100% ownership interest, 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. 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
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations, commonly known as MD&A, is our attempt to provide the investor
with a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through
our eyes as management. Generally, MD&A is intended to cover expected
effects of known or reasonably expected uncertainties, expected effects of
known trends on future operations, and prospective effects of events that have
had a material effect on past operating results. In conjunction with our
discussion of MD&A, shareholders should read the company's consolidated
condensed financial statements, including the notes, contained in this
Quarterly Report on Form 10-Q.
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 growth of our company and our future
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." Words such as "anticipate," "estimate," "expects," "projects,"
"intends," "plans" and believes" and such words and terms of similar substance
used in connection with any discussions of future operations or financial
performance identify forward-looking statements. Such forward-looking
statements, like all statements about expected future events, 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, competition, changes in federal and state laws or regulations
affecting our operations, and other factors discussed periodically in our
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 our
Annual Report on Form 10-K (Item 1, "Business"), as filed with the SEC and
provided to our shareholders. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date made and which we undertake no obligation to revise to reflect events
after the date made.
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through its 12 outpatient dialysis centers, plus
an additional center in which it holds a minority interest, and through its
acute inpatient dialysis services agreements with hospitals, provides dialysis
treatments to the hospital's dialysis patients. We also provide homecare
services, including home peritoneal dialysis and method II services, the
latter relating to providing patients with supplies and equipment. Dialysis
Corporation of America also provides ancillary services associated with
dialysis treatments, primarily the administration of EPO.
Approximately 59% of our medical revenues are derived from Medicare and
Medicaid reimbursement with rates established by the Center for Medicare and
Medicaid Services ("CMS"), and which rates are subject to legislative changes.
Over the last two years, Medicare rates have slightly increased, but are not
related to the increasing costs of operations. Dialysis is typically
reimbursed at higher rates from private payors, such as the patient's
insurance carrier, as well as higher payments received under negotiated
contracts with hospitals for acute inpatient dialysis services.
The healthcare industry is subject to extensive regulations of federal
and state authorities. There are a variety of fraud and abuse measures to
combat waste, which include 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. 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
restructure our practice and will not experience material adverse effects as
a result of any such challenges or changes.
Our growth depends primarily on the availability of suitable dialysis
centers for development or acquisition in appropriate and acceptable areas,
and our ability to develop these new potential dialysis centers at costs
within our budget while competing with larger companies, some of which are
public companies or divisions of public companies with greater personnel and
financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by us. Additionally, there is intense
competition for retaining qualified nephrologists who are responsible for the
supervision of the dialysis centers. There is no certainty as to when any new
centers or inpatient service contracts with hospitals will be implemented, or
the number of stations, or patient treatments such may involve, or if such
will ultimately be profitable. It has been our experience that newly
established dialysis centers, although contributing to increased revenues,
have adversely affected our results of operations due to start-up costs and
expenses and a smaller patient base until they mature.
Results of Operations
Medical service revenues increased approximately $1,692,000 (45%) for
the three months ended March 31, 2002, compared to the same period of the
preceding year. This increase includes increased revenues of our Pennsylvania
dialysis centers of approximately $311,000; including revenues of
approximately $113,000 for our new Mechanicsburg center which commenced
operations in January 2002, increased revenues of approximately $262,000 for
our New Jersey centers; and increased revenues of approximately $1,091,000 for
our Georgia centers, two of which became operational in the third quarter of
2001.
Interest and other income decreased by approximately $6,000 for the
three months ended March 31, 2002, compared to the same period of the
preceding year. This decrease includes a decrease in interest from our
parent of $58,000 including interest on a note receivable and an advance
receivable with the decrease due primarily to our parent's repayment of the
note, an increase in management fee income of $45,000 pursuant to a Management
Services Agreement with our 40% owned Toledo, Ohio affiliate, an increase in
miscellaneous other income of $6,000 and an increase in rental income of
$1,000. In spite of an increase in average invested funds, interest income
other than interest from our parent was approximately the same for the three
months ended March 31, 2002 as for the same period of the preceding year due
to a decrease in average interest rates. See Note 1 to "Notes to Consolidated
Condensed Financial Statements."
Cost of medical services as a percentage of medical service revenue
decreased to 62% for the three months ended March 31, 2002 compared to 65% for
the same period of the preceding year as a result of decreases in both supply
costs and payroll costs as a percentage of sales.
Selling, general and administrative expenses, increased by approximately
$593,000 for the three months ended March 31, 2002, compared to the same
period of the preceding year. This increase reflects operations of our new
dialysis centers in Georgia and Pennsylvania as well as increased support
activities resulting from expanded operations. Selling, general and
administrative expenses, as a percent of medical service revenues amounted to
approximately 32% for the three months ended March 31, 2002, compared to 30%
for the same period of the preceding year, primarily as a result of additional
support activities.
Provision for doubtful accounts increased approximately $112,000 for the
three months ended March 31, 2002 compared to the same period of the preceding
year as a result of expanded operations. The provision amounted to 3% of sales
for the three months ended March 31, 2002 compared to 2% for the same period of
the preceding year. This increase reflects different collectibility levels
associated with the company's operations in different geographic areas, such
as our expanded Georgia operations and with new centers, such as our
Mechanicsburg, Pennsylvania center.
Although operations of additional 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 sustain profitable operations.
Interest expense increased by approximately $15,000 for the three months
ended March 31, 2002, compared to the same period of the preceding year
primarily as a result of additional equipment financing agreements, and our
April, 2001 Georgia mortgage with the effect of the increased borrowings
offset somewhat by lower interest rates.
The prime rate was 4.75% at March 31, 2002 and December 31, 2001.
Equity in affiliate earnings (loss) represents equity in the results of
operations of our Ohio affiliate, in which we have a 40% ownership interest.
This dialysis center, which commenced operations in February, 2001, was
profitable for the first quarter of 2002, but operated at a loss for the same
period of the preceding year.
Liquidity and Capital Resources
Working capital totaled $3,912,000 at March 31, 2002, which reflected
an increase of approximately $ 29,000 (1%) during the three months ended
March 31, 2002. Included in the changes in components of working capital was
a decrease in cash and cash equivalents of $1,047,000, including net cash
used in operating activities of $793,000 (which is largely related to the
decreases in accounts payable and income taxes payable from substantial
payments in the first quarter of 2002), net cash used in investing activities
of $238,000 (mostly additions to property and equipment) and net cash used in
financing activities of $16,000 (including a decrease in advances to our
parent of $51,000, and debt repayments of $66,000).
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 $114,000 at March 31, 2002, and $138,000 at December
31, 2001. The bank has liens on our real and personal property, including a
lien on all rents due and security deposits from the rental of these
properties. An unaffiliated competitive Maryland dialysis center continues
to lease space from us in our Maryland building. The Maryland property has a
second mortgage to secure a three-year $700,000 loan to our Vineland, New
Jersey subsidiary. This loan which is guaranteed by the company and secured
by that subsidiary's personal property exclusive of its dialysis equipment
had an outstanding balance of $688,000 at March 31, 2002 and $700,000 at
December 31, 2001. In April 2001, we obtained a $788,000 five-year mortgage
on our building in Valdosta, Georgia, which had an outstanding balance of
$771,000 at March 31, 2002 and $776,000 at December 31, 2001. We have an
equipment financing agreement for kidney dialysis machines for our facilities,
which has an outstanding balance of approximately $1,646,000 at March 31, 2002,
and $1,678,000 at December 31, 2001. See Note 3 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 usually more expensive than construction, although acquisition would
provide us with an immediate ongoing operation. We presently plan to expand our
operations primarily through construction of new centers, rather than
acquisition. Development of a dialysis facility to initiate operations
typically takes four to six months and usually 12 months or longer to generate
income. We consider some of our centers to be in the developmental stage,
since they have not developed a patient base sufficient to generate and sustain
earnings.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion requires capital. We opened our
eleventh center in Mechanicsburg, Pennsylvania in January 2002 and acquired
a center in Royston, Georgia in April 2002 for $550,000. We are in the
planning stages for two new centers, one in Ohio and one in Maryland. We are
presently in different phases of negotiations with physicians for additional
outpatient centers. No assurance can be given that we will be successful in
implementing our growth strategy or that financing will be available to
support such expansion.
In 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 100,000 additional LGP shares, in May, 2001, Medicore paid us
$215,000, representing $200,000 of principal plus accrued interest, and in
June, 2001, Medicore paid us 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, the company announced its intent to repurchase up
to approximately 300,000 of its outstanding shares. Approximately 93,000
shares were repurchased for cancellation at a cost of $98,000 during 2001,
with total repurchases for cancellation of 170,000 shares with a cost of
$163,000 since September, 2000. See Note 7 to "Notes to Consolidated
Condensed Financial Statements."
We believe that current levels of working capital and available financing
alternatives 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 Pronouncements
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). In June 2001, the FASB issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (FAS 143). In August 2001, the FASB issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment on
Disposal of Long-lived Assets" (FAS 144). The adoption of the new accounting
pronouncements is not expected to have a significant effect on the company's
results of consolidated operations, financial position or cash flows. See
Notes 1 and 9 to "Notes to Consolidated Condensed Financial Statements."
Critical Accounting Policies
The company has significant accounting policies relating to estimates
and revenue recognition as more fully described in Note 1 to "Notes to
Consolidated Condensed Financial Statements."
Impact of 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. 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.
Quantitative and Qualitative Disclosure About Market Risk
We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities of which we held approximately $700,000 at March 31,
2002.
Interest rate risk on debt is managed by negotiation of appropriate
rates for equipment financing obligations based on current market rates.
There is an interest rate risk associated with our variable rate mortgage
obligations which totaled $808,000 at March 31, 2002.
We have exposure to both rising and falling interest rates. A 1/4%
decrease in rates on our investments in government securities as of March 31,
2002 and a 1% increase in rates on our mortgage debt as of March 31, 2002
would have resulted in a negative impact of approximately $2,000 on our
results of operations for the first quarter of 2002.
We do not utilize financial instruments for trading or speculative
purposes and do not currently use interest rate derivatives.
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------ ---------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(99) Additional Exhibits
(i) Lease between Dialysis Corporation of America and Dr.
Gerald S. Light dated February 15, 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 2002.
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,
Chief Accounting Officer and
Treasurer
Dated: May 14, 2002