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, 1998
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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
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
27 Miller Avenue, Lemoyne, Pennsylvania 17043
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(Address of principal executive offices) (Zip Code)
(717) 730-6164
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 3,651,344 shares as of April 30, 1998.
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 ended March 31, 1998 and March 31, 1997 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 ended March 31, 1998 and March 31, 1997.
2) Consolidated Condensed Balance Sheets as of March 31, 1998
and December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for three
months ended March 31, 1998 and March 31, 1997.
4) Notes to Consolidated Condensed Financial Statements as
of March 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations
-------------------------
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
---------------------------------
Item 1. Financial Statements
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1998 1997
---- ----
Revenues:
Medical service revenue $ 818,311 $1,034,488
Interest and other income 126,727 79,883
---------- ----------
945,038 1,114,371
Cost and expenses:
Cost of medical services 586,076 626,607
Selling, general and administrative
expenses 455,890 443,384
Interest expense 19,232 22,494
---------- ----------
1,061,198 1,092,485
(Loss) income before income taxes
and minority interest (116,160) 21,886
Income tax benefit (39,000)
---------- ----------
(Loss) income before minority interest (77,160) 21,886
Minority interest in loss of
consolidated subsidiaries (319)
---------- ----------
Net (loss) income $ (77,160) $ 22,205
========== ==========
(Loss) earnings per share:
Basic $(.02) $.01
===== ====
Diluted $(.02) $.01
===== ====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1998 1997(A)
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,099,834 $ 8,102,920
Marketable securities 263,606 443,936
Accounts receivable, less allowance
of $90,000 at March 31, 1998;
$52,000 at December 31, 1997 429,137 494,163
Inventories 100,181 113,815
Prepaid expenses and other
current assets 91,756 156,823
----------- -----------
Total current assets 6,984,514 9,311,657
Property and Equipment:
Land 168,358 168,358
Buildings and improvements 1,404,573 1,402,319
Machinery and equipment 972,995 949,749
Leasehold improvements 452,547 442,464
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2,998,473 2,962,890
Less accumulated depreciation 749,578 679,870
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2,248,895 2,283,020
Deferred expenses and other assets 159,868 43,088
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$ 9,393,277 $11,637,765
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 42,247 $ 72,531
Accrued expenses 362,666 370,099
Current portion of long-term debt 157,889 151,844
Income taxes payable 76,164 1,655,164
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Total current liabilities 638,966 2,249,638
Long-term debt, less current portion 538,719 564,673
Advances from parent 193,764 128,727
Minority interest in subsidiaries 645,809
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value,
authorized 20,000,000 shares;
3,751,344 shares issued,
3,651,344 shares outstanding 37,513 37,513
Capital in excess of par value 4,044,154 4,008,720
Retained earnings 4,131,775 4,208,935
Accumulated other comprehensive
income (loss)-unrealized gain on
marketable securities for sale 14,636
Treasury stock at cost; 100,000 shares (206,250) (206,250)
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Total stockholders' equity 8,021,828 8,048,918
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$ 9,393,277 $11,637,765
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(A) Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission in March 1998.
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,
--------------------------
1998 1997
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Operating activities:
Net (loss) income $ (77,160) $ 22,205
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation 69,708 59,007
Amortization 422 3,003
Bad debt expense 28,964 37,310
Minority interest (319)
Increase (decrease) relating
to operating activities from:
Accounts receivable 36,062 (105,912)
Inventories 13,634 39,449
Prepaid expenses and other
current assets 20,033 (19,488)
Accounts payable (30,284) (66,293)
Accrued expenses 7,567 (53,105)
Income tax payable (1,579,000)
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Net cash used in operating activities (1,510,054) (84,143)
Investing activities:
Redemption of minority interest
in subsidiaries (385,375)
Additions to property and equipment,
net of minor disposals (19,083) (154,459)
Deferred expenses and other assets (117,202) (47,903)
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Net cash used in investing activities (521,660) (202,362)
Financing activities:
Increase (decrease) in advances
from parent 65,037 (277,801)
Payments on long-term debt (36,409) (30,193)
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Net cash provided by (used in)
financing activities 28,628 (307,994)
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(Decrease) increase in cash and cash
equivalents (2,003,086) (594,499)
Cash and cash equivalents at beginning
of period 8,102,920 4,717,169
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Cash and cash equivalents at end
of period $ 6,099,834 $ 4,122,670
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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, 1998
(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, collec-
tively referred to as the "Company". All material intercompany
accounts and transactions have been eliminated in consolidation. The
Company is a 66.0% owned subsidiary of Medicore, Inc. (the "Parent").
See Note 5.
Government Regulation
Most 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.
Interest and Other Income
Interest and other income is comprised as follows:
Three Months Ended
March 31,
--------------------------
1998 1997
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Rental income $ 32,372 $ 25,142
Interest income 91,893 51,072
Other income 2,462 3,669
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$126,727 $ 79,883
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Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
FAS 128, "Earnings Per Share", which was adopted on December 31, 1997
requiring a change in the method previously used for computing earnings
per share and restatement of all prior periods. The new requirements
for calculating basic earnings per share exclude the dilutive effect
of stock options and warrants. Earnings per share under the diluted
computation required under FAS 128 includes stock options and warrants
using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and
diluted computations:
Three Months Ended
March 31,
------------------------
1998 1997
---- ----
Net (loss) income $ (77,160) $ 22,205
========== ==========
Weighted average shares-denominator
basic computation 3,651,344 3,588,844
Effect of dilutive stock options:
Stock options granted November 1995 123,222
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Weighted average shares, as adjusted-
denominator diluted computation 3,651,344 3,712,066
========== ==========
(Loss) earnings per share:
Basic $(.02) $.01
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Diluted $(.02) $.01
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
No potentially dilutive securities were included in the diluted
earnings per share computation for the three months ended March 31,
1998. Since there was a loss, to include them would be anti-dilutive.
In addition to the dilutive stock options included in the recon-
ciliation above, which have an exercise price of $1.50 per share,
there were 10,000 medical director options, 2,300,000 common stock
purchase warrants and underwriter options to purchase 100,000 shares
of common of common stock and 200,000 common stock purchase warrants
which have not been included in the diluted earnings per share compu-
tation for the three months ended March 31, 1997 since they were
anti-dilutive.
Comprehensive Income
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) in 1998 which is required by FAS 130 for fiscal years
beginning after December 15, 1997. FAS 130 requires the presentation
of comprehensive income and its components in the financial statements
and the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity
section of the balance sheet. The adoption of FAS 130 has no impact
on the Company's net income (loss) or stockholders' equity. The only
component of other comprehensive income in the Company's balance
sheet is the unrealized gain on marketable securities, which even
prior to adoption of FAS 130 would have been separately reported in
stockholders' equity. Below is a detail of comprehensive income
(loss) for the three months ended March 31, 1998 and March 31, 1997:
Three Months Ended
March 31,
------------------------
1998 1997
---- ----
Net (loss) income $(77,160) $22,205
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax 14,636
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Comprehensive (loss) income $(62,524) $22,205
Segment Reporting
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) in 1998 which is
required by FAS 131 for fiscal years beginning after December 15, 1997.
FAS 131 establishes standards for reporting information about operating
segments in annual financial statements with operating segments rep-
resenting components of an enterprise evaluated by the enterprise's
chief operating decision maker for purposes of making decisions
regarding resource allocation and performance evaluation. FAS 131
also requires that certain segment information be presented in interim
financial statements. Interim information is not required in the first
year of implementation; however, in subsequent years in which the first
year of implementation is a comparative year, any required interim
information for the initial year of implementation must be presented.
The Company does not believe that adoption of FAS 131 will significantly
change its segment reporting disclosures.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 1998
and March 31, 1997 are unaudited and include, in the opinion of manage-
ment 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, 1998 are not
necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998.
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 conjunc-
tion with the financial statements and notes included in the Company's
audited financial statements for the year ended December 31, 1997.
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 $184,000 and
$192,000 at March 31, 1998 and December 31, 1997, respectively. In
December 1988, the Company also obtained a $600,000 fifteen-year
mortgage through November 2003 on its building in Easton, Maryland
with interest at 1% over the prime rate. The remaining principal
balance under this mortgage amounted to approximately $230,000 and
$240,000 at March 31, 1998 and December 31, 1997, respectively.
The Company has an equipment purchase agreement for kidney
dialysis machines with interest at rates ranging from 8% to 12%
pursuant to various schedules extending through June 2002. Additional
financing of $17,000 in January 1998, represents a noncash financing
activity which is a supplemental disclosure required by FAS 95. The
remaining principal balance under this agreement amounted to approxi-
mately $283,000 and $285,000 at March 31, 1998 and December 31, 1997,
respectively.
The prime rate was 8.5 % as of March 31, 1998 and December 31,
1997.
Interest payments on long-term debt amounted to approximately
$17,000 for the three months ended March 31, 1998 and $19,000 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. The unrealized gain on marketable securities for sale is
net of deferred taxes of approximately $9,000.
Income tax payments amounted to $1,540,000 for the three months
ended March 31, 1998 with no such payments for the same period of the
preceding year.
NOTE 5--TRANSACTIONS WITH PARENT
The Parent provides certain administrative services to the Company
including office space and general accounting assistance the costs of
which are allocated 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 $60,000 for the three months ended March
31, 1998, and for the same period of the preceding year.
The Company has an intercompany advance payable to the Parent of
approximately $194,000 and $129,000 at March 31, 1998 and December 31,
1997, respectively, which bears interest at the short-term Treasury
Bill rate. Interest on this intercompany advance amounted to approxi-
mately $2,000 for the three months ended March 31, 1998 and $3,000 for
the same period of the preceding year, which is included in the inter-
company advance payable. The Parent has agreed not to require
repayment of the intercompany advances prior to April 1, 1999;
therefore, the advances have been classified as long-term at March 31,
1998.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 6--STOCK OPTIONS
In November 1995, the Company adopted a stock option plan for up
to 250,000 options. Pursuant to this plan, in November, 1995, the Board
of Directors granted 210,000 options to certain of its officers,
directors, employees and consultants of which 19,000 options were
outstanding at March 31, 1998. These options are exercisable for a
period of five years through November 9, 2000 at $1.50 per share.
In August 1996, the Board of Directors granted 15,000 options to
the medical directors at its three kidney dialysis centers of which
10,000 options were outstanding at March 31, 1998. These options are
exercisable for a period of three years through August 18, 1999 at $4.75
per share.
NOTE 7--COMMON STOCK
The Company completed a public offering of common stock and warrants
during the second quarter of 1996, providing it with net proceeds, in-
cluding the exercise of the underwriters' overallotment option, of
approximately $3,445,000.
Pursuant to the offering 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters'
overallotment option, and there are 2,300,000 redeemable common stock
purchase warrants to purchase one common share each with an exercise
price of $4.50 exercisable through April 16, 1999. The underwriters
received options to purchase 100,000 shares of common stock and
200,000 common stock purchase warrants, with the options exercisable
at $4.50 per unit through April 16, 2001 with the underlying warrants
being substantially identical to the public warrants except that they
are exercisable at $5.40 per share.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Effective January 1, 1997 the Company established 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, 1998.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of its
Florida operations pursuant to an Asset Purchase Agreement. Consider-
ation for the assets sold was $5,065,000 consisting of $4,585,000 in
cash and $480,000 of the purchaser's common stock which the purchaser
agreed to register within one year. These shares were carried at
their market value of approximately $444,000 at December 31, 1997
with the difference between the guaranteed value of $480,000 and the
market value reflected as a receivable from the purchaser. In
February 1998, the Company acquired, in a transaction accounted for
as a purchase, the remaining 20% minority interests in two of the
subsidiaries whose assets were sold. The purchase price, totaled
$625,000, which included one-half of the common shares originally
received as part of the consideration of the Sale. The remaining
shares are carried at their market value of approximately $264,000 at
March 31, 1998 with the unrealized gain, net of income tax effect,
included in stockholders' equity in accumulated other comprehensive
income.
The pro forma consolidated condensed financial information pre-
sented below reflects the Sale as if it had occurred on January 1,
1997. For purposes of pro forma statement of operations information,
no assumption has been made that expenses have been eliminated which
were included in corporate expense allocations by the Company and its
Parent, to the business operations sold and which were included in the
actual results of operations of these businesses. Such expenses
amounted to approximately $35,000 for the three months ended March 31,
1997.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 9--SALE OF SUBSIDIARIES' ASSETS--(Continued)
No assumption has been included in the pro forma information as to
investment income to be realized from investment of the proceeds of the
sale.
The summary pro forma information is not necessarily representative
of what the Company's results of operations would have been if the Sale
had actually occurred as of January 1, 1997 and may not be indicative of
the Company's operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Three Months Ended
March 31,
----------------------------
1998 1997
---- ----
Total revenue $ 888,000 $ 619,000
========= =========
Net loss $(171,000) $ (90,000)
========= =========
Loss per share:
Basic $(.05) $(.03)
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Diluted $(.05) $(.03)
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Item 2. Management's Discussion and Analysis of Financial Condition
------------------------------------------------------------
and Results of Operations
-------------------------
Forward Looking Information
The statements contained in this Quarterly Report on Form 10-Q
that are not historical are forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements regarding
management's expectations, intentions, beliefs, or strategies regarding
the future. Forward looking statements also include the Company's
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" including anticipated
development and acquisition of dialysis centers, new facility completions
and related anticipated costs. All forward looking statements included
in this document are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward looking statement. It is important to note that the Company's
actual results could differ materially from those in such forward looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed in the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement Form
SB-2, as filed with the Securities and Exchange Commission (effective on
April 17, 1996). Accordingly, readers are cautioned not to place undue
reliance on such forward looking statements.
The dialysis industry is highly competitive and subject to
extensive regulation, including the limitation on fees for dialysis
treatment and services. 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 sole source of patient
referrals and are responsible for the supervision of the dialysis
centers. There is also substantial competition for obtaining quali-
fied 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 does the Company,
and by virtue of such have a significant advantage in competing for
acquisitions of dialysis facilities in areas targeted by the Company.
The Company's future growth depends primarily on the availability
of suitable dialysis centers for acquisition or development in appro-
priate and acceptable areas, and the Company's ability to compete with
larger companies with greater personnel and financial resources to
develop these new potential dialysis centers at costs within the budget
of the Company. Its ability to retain qualified nephrologists, nursing
and technical staff at reasonable rates is also a significant factor.
Management continues in negotiations with nephrologists for the acqui-
sition or development of new dialysis facilities, as well as with
hospitals and other health care maintenance entities. The Company
opened a new center in Carlisle, Pennsylvania in July 1997. Its
fourth center in Manahawkin, New Jersey is presently under construc-
tion and two additional centers, one in Pennsylvania and one in New
Jersey are in the planning and architectural stage. Several agreements
for acute inpatient services are under review but there is no assurance
that such agreements will be completed. There is no certainty as to when
any new centers or service contracts will be implemented, or the number
of stations, or patient treatments such may involve, or if such will
ultimately be profitable. Newly established dialysis centers,
although contributing to increased revenues, also adversely affect
results of operations due to start-up costs and expenses with a
smaller developing patient base.
The year 2000 computer information processing challenge associated
with the upcoming millennium change, with which all companies, public
and private, are faced to ensure continued proper operations and
reporting of financial condition, has been assessed by management and
is being addressed. The singular area impacting the Company is in its
electronic billing. No other significant computer issues, particularly
any potential breakdown of the system due to its hardware or software
not being year 2000 compliant, are presently known that would affect
the Company's ability to provide dialysis services, purchase equipment
or conduct general operations. With respect to any financial impact in
view of electronic billing and maintenance of receivables, management
has evaluated its computer systems and discussed the year 2000 issue
with its computer software provider. The software provider is pro-
ceeding to deal with modifying the software used by the Company to
alleviate any interruptions in electronic billing and to have the new
software system available during fiscal 1998. The Company believes
the conversion of its internal software program will be completed in
a timely manner. While the Company does not have a precise estimate
of the cost of the software modifications, it does not anticipate that
the costs will be material or that they will have a material adverse
effect on its business.
In addition to addressing its own internal software system, the
Company is communicating with its suppliers and other key third
parties with whom it deals to determine the extent of their year 2000
problem and what actions they are taking to assess and address that
issue. To the extent such third parties are materially adversely
affected by the year 2000 issue which is not timely corrected, that
could disrupt the Company's relationship with such parties and its
operations. No assurance can be given that the modifications of the
Company's software system or those of its key suppliers and payors
will be successful and that any such year 2000 compliance failures
will not have a material adverse effect on the Company's business or
results of operations.
Results of Operations
Medical service revenue decreased approximately $216,000 (21%)
for the three months ended March 31, 1998 compared to the same
period of the preceding year. This decrease reflected lost revenues
of approximately $493,000 resulting from the sale of the Company's
Florida dialysis operations on October 31, 1997 which were offset to
some degree by revenues of approximately $221,000 from a new dialysis
center located in Carlisle, Pennsylvania, which commenced operations
in July 1997. Although the operations of the new Carlisle center
have resulted in additional revenues, it is in the developmental
stage and, accordingly, its operating results will adversely
affect the Company's results of operations until it achieves a suf-
ficient patient count to cover fixed operating costs.
Interest and other income increased approximately $47,000 for
the three months ended March 31, 1998 compared to the same period of
the preceding year largely due to interest earned on proceeds invested
from the October 1997 sale of the Company's Florida dialysis opera-
tions.
Cost of medical services sales increased to 72% for the three
months ended March 31, 1998 compared to 61% for the same period of
the preceding year reflecting increases in healthcare salaries and
supply costs as a percentage of sales and including the operations
of the Company's new Carlisle center which is still in its develop-
mental stage.
Selling, general and administrative expenses increased approxi-
mately $13,000 for the three months ended March 31, 1998 compared
to the preceding year. This increase reflected the commencement of
operations at the new dialysis center in Carlisle, Pennsylvania and
the cost of increased support functions offset by cost decreases
resulting from the sale of the Florida dialysis operations.
Interest expense decreased approximately $3,000 for the three
months ended March 31, 1998 compared to the same period of the
preceding year reflecting reduced average borrowings.
Liquidity and Capital Resources
Working capital totaled $6,346,000 at March 31, 1998, which
reflected a decrease of approximately $716,000 during the three months
ended March 31, 1998. Included in the changes in components of working
capital was a decrease in cash and cash equivalents of $2,003,000,
which included net cash used in operating activities of $1,510,000
(including a decrease in income taxes payable of $1,579,000 resulting
from tax payments on the gain on the sale of the Florida dialysis
operations), net cash used in investing activities of $522,000
(including funds used for redemption of minority interest in subsidi-
aries of $385,000 and an increase in other assets of $117,000
resulting from development of the Manahawkin, New Jersey center)
and net cash used in financing activities of $29,000 (including an
increase in the advances from the Parent of $65,000 and debt
repayments of $36,000).
During 1988, the Company obtained mortgages totaling $1,080,000 on
its two buildings, one in Lemoyne, Pennsylvania and the other in Easton,
Maryland. The mortgages had a combined remaining balance of $414,000
and $432,000 at March 31, 1998 and December 31, 1997, respectively.
The bank has liens on the real and personal property of the Company,
including a lien on all rents due and security deposits from the rental
of these properties. See Note 3 to "Notes to Consolidated Condensed
Financial Statements".
The Company has an equipment purchase agreement for kidney
dialysis machines for its dialysis facilities which had a remaining
balance of $283,000 and $285,000 at March 31, 1998 and December 31,
1997, respectively, which included additional equipment financing of
approximately $17,000 in the first quarter of 1998. See Note 3 to
"Notes to Consolidated Condensed Financial Statements".
The Company believes that current levels of working capital, in-
cluding the proceeds of its securities offering and the sale of its
Florida dialysis operations will enable it to successfully meet its
liquidity demands for at least the next twelve months.
The Company, having operated on a larger scale in the past, is
seeking to expand its outpatient dialysis treatment facilities and
inpatient dialysis care. Such expansion, whether through acquisi-
tions of existing centers, or the development of its own dialysis
centers, requires capital, which was the basis for the Company's
security offering in 1996 and sale of its Florida dialysis operations
in 1997. No assurance can be given that the Company will be suc-
cessful in implementing its growth strategy or that the funds from
its securities offering and Florida dialysis operations sale will
be adequate to finance such expansion. See Notes 7 and 9 to "Notes
to Consolidated Condensed Financial Statements".
Liquidity and Capital Resources--Continued
The Company has entered into agreements with medical directors,
and intends to establish two new dialysis centers, one in New Jersey
and one in Pennsylvania. It is anticipated that a New Jersey facili-
ty, currently under construction, will commence operations in the
third quarter of 1998. A lease was recently negotiated for a new
center in Pennsylvania and lease negotiations are currently under
way for a new facility in New Jersey.
Impact of Inflation
Inflationary factors have not had a significant effect on the
Company's operations. A substantial portion of the Company's revenue
is subject to reimbursement rates established and regulated by the
federal government. These rates do not automatically adjust for infla-
tion. 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 supply costs
or nursing and other patient care costs.
PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
(10) Material Contracts
(i) Lease Agreement between Dialysis Services
of Pa., Inc. - Chambersburg(1) and BPS
Development Group dated April 13, 1998.
(ii) Promissory Note to Mercantile-Safe De-
posit and Trust Company dated November 30,
1988.(2)
(iii) Mortgage and Security Agreement from the
Company to Mercantile-Safe Deposit and
Trust Company dated November 30, 1988.(2)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter
ended March 31, 1998.
- ----------
(1) Wholly-owned subsidiary.
(2) The Company has two loans with and mortgages and security agreements
and promissory notes to Mercantile-Safe Deposit and Trust Company.
Each mortgage and security agreement and promissory note conforms to
the exhibit filed but for the amount and each document was previously
filed as an exhibit, but is now filed electronically in the EDGAR
system.
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: May 12, 1998
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
(10) Material Contracts
(i) Lease Agreement between Dialysis Services of Pa.,
Inc. - Chambersburg(1) and BPS Development Group
dated April 13, 1998.
(ii) Promissory Note to Mercantile-Safe Deposit and Trust
Company dated November 30, 1988.(2)
(iii) Mortgage and Security Agreement from the Company to
Mercantile-Safe Deposit and Trust Company dated
November 30, 1988.(2)
- ----------
(1) Wholly-owned subsidiary.
(2) The Company has two loans with and mortgages and security agreements
and promissory notes to Mercantile-Safe Deposit and Trust Company.
Each mortgage and security agreement and promissory note conforms to
the exhibit filed but for the amount and each document was previously
filed as an exhibit, but is now filed electronically in the EDGAR
system.