FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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DIALYSIS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
Florida 59-1757642
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
27 Miller Avenue, Lemoyne, Pennsylvania 17043
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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 July 31, 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 and six months ended June 30, 1998 and June 30, 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 and six months ended June 30, 1998 and June 30,
1997.
2) Consolidated Condensed Balance Sheets as of June 30, 1998 and
December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997.
4) Notes to Consolidated Condensed Financial Statements as of June
30, 1998.
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 4. Submission of Matters to a Vote of Security Holders
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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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Medical service revenue $ 815,503 $1,045,966 $1,633,814 $2,080,454
Interest and other income 113,588 87,638 240,315 167,521
---------- ---------- ---------- ----------
929,091 1,133,604 1,874,129 2,247,975
Cost and expenses:
Cost of medical services 596,101 662,091 1,182,177 1,288,698
Selling, general and
administrative expenses 465,622 413,808 921,512 857,192
Interest expense 20,295 19,585 39,527 42,079
---------- ---------- ---------- ----------
1,082,018 1,095,484 2,143,216 2,187,969
(Loss) income before income
taxes and minority interest (152,927) 38,120 (269,087) 60,006
Income tax (benefit) provision (51,000) 14,000 (90,000) 14,000
Loss (income) before minority
interest (101,927) 24,120 (179,087) 46,006
Minority interest in earnings of
consolidated subsidiaries 3,940 3,621
---------- ---------- ---------- ----------
Net (loss) income $ (101,927) $ 20,180 $ (179,087) $ 42,385
========== ========== ========== ==========
(Loss) earnings per share:
Basic $(.03) $.01 $(.05) $.01
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Diluted $(.03) $.01 $(.05) $.01
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See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997(A)
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(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,986,185 $ 8,102,920
Marketable securities 305,644 443,936
Accounts receivable, less allowance
of $111,000 at June 30, 1998; $52,000
at December 31, 1997 343,007 494,163
Inventories 128,475 113,815
Prepaid expenses and other current assets 75,503 156,823
----------- -----------
Total current assets 6,838,814 9,311,657
Property and Equipment:
Land 168,358 168,358
Buildings and improvements 1,404,573 1,402,319
Machinery and equipment 1,249,643 949,749
Leasehold improvements 754,423 442,464
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3,576,997 2,962,890
Less accumulated depreciation 820,185 679,870
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2,756,812 2,283,020
Deferred expenses and other assets 32,090 43,088
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$ 9,627,716 $11,637,765
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 167,583 $ 72,531
Accrued expenses 371,400 370,099
Current portion of long-term debt 160,109 151,844
Income taxes payable 25,164 1,655,164
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Total current liabilities 724,256 2,249,638
Long-term debt, less current portion 663,340 564,673
Advances from parent 294,156 128,727
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 4,029,848 4,208,935
Accumulated other comprehensive income
(loss)-unrealized gain on marketable
securities for sale 40,699
Treasury stock at cost; 100,000 shares (206,250) (206,250)
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Total stockholders' equity 7,945,964 8,048,918
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$9,627,716 $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)
Six Months Ended
June 30,
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1998 1997
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Operating activities:
Net (loss) income $ (179,087) $ 42,385
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation 140,314 124,312
Amortization 845 6,359
Bad debt expense 56,709 23,854
Minority interest 3,621
Increase (decrease) relating to
operating activities from:
Accounts receivable 94,447 (115,561)
Inventories (14,660) 19,955
Prepaid expenses and other current
assets 20,311 16,281
Accounts payable 95,052 57,031
Accrued expenses 16,301 (15,064)
Income tax payable (1,630,000) 14,000
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Net cash (used in) provided by
operating activities (1,399,768) 177,173
Investing activities:
Redemption of minority interest in
subsidiaries (385,375)
Additions to property and equipment, net
of minor disposals (429,606) (408,279)
Deferred expenses and other assets 10,153 3,453
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Net cash used in investing
activities (804,828) (404,826)
Financing activities:
Increase (decrease) in advances from
parent 165,429 (252,237)
Repurchase of stock (206,250)
Payments on long-term debt (77,568) (60,968)
Dividend payments to minority shareholder (2,998)
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Net cash provided by (used in)
financing activities 87,861 (522,453)
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Decrease in cash and cash equivalents (2,116,735) (750,106)
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 $ 5,986,185 $ 3,967,063
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See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 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. The Company believes that it is
presently in compliance with all applicable laws and regulations.
Interest and Other Income
Interest and other income is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
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Rental income $ 34,073 $ 31,725 $ 66,446 $ 56,867
Interest income 75,138 48,568 167,031 99,640
Other income 4,377 7,345 6,838 11,014
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$113,588 $ 87,638 $240,315 $167,521
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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 Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
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Net (loss) income $ (101,927) $ 20,180 $ (179,087) $ 42,385
========== ========== ========== ==========
Weighted average shares-denominator
basic computation 3,651,344 3,561,371 3,651,344 3,575,032
Effect of dilutive stock options:
Stock options granted November 1995 84,318 103,769
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Weighted average shares, as
adjusted-denominator
diluted computation 3,651,344 3,645,689 3,651,344 3,678,801
========== ========== ========== ==========
(Loss) earnings per share:
Basic $(.03) $.01 $(.05) $.01
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Diluted $(.03) $.01 $(.05) $.01
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 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 and six months
ended June 30, 1998. Since there was a loss, to include them would be
anti-dilutive.
In addition to the dilutive stock options included in the reconcilia-
tion 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 computation for the three
months or six months ended June 30, 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 compre-
hensive 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
and six months ended June 30, 1998 and June 30, 1997:
Three Months Ended Six Months Ended
June 30, June 30,
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1998 1997 1998 1997
---- ---- ---- ----
Net (loss) income $(101,927) $ 20,180 $(179,087) $ 42,385
Other comprehensive income:
Unrealized gain on marketable
securities, net of tax 26,063 40,699
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Comprehensive (loss) income $ (75,864) $ 20,180 $(138,388) $ 42,385
========= ========= ========= =========
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 representing com-
ponents 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 state-
ments. Interim information is not required in the first year of imple-
mentation; 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)
June 30, 1998
(Unaudited)
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended June 30, 1998 and
June 30, 1997 are unaudited and include, in the opinion of management of
the Company, all adjustments (consisting of normal recurring accruals)
necessary to present fairly the earnings for such periods. Operating
results for the three months and six months ended June 30, 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 Con-
solidated 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, 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 $176,000 and $192,000 at
June 30, 1998 and December 31, 1997, 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 $220,000
and $240,000 at June 30, 1998 and December 31, 1997, respectively.
The Company has an equipment purchase agreement for certain kidney
dialysis machines at its facilities with interest at rates ranging from
8% to 12% pursuant to various schedules extending through July 2002.
Additional financing of $185,000 during the first half of 1998 represents
a noncash financing activity which is a supplemental disclosure required
by FAS 95. The remaining principal balance under this agreement amounted
to approximately $427,000 and $285,000 at June 30, 1998 and December 31,
1997, respectively.
The prime rate was 8.5 % as of June 30, 1998 and December 31, 1997.
Interest payments on long-term debt amounted to approximately $17,000
and $34,000 for the three months and six months ended June 30, 1998 and
$18,000 and $37,000 for the same periods of the preceding year.
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary dif-
ferences 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 six months ended
June 30, 1998 with no such payments for the three months ended June 30,
1998 or during the first half 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 and $120,000 for the three months
and six months ended June 30, 1998, and for the same periods of the
preceding year.
The Company has an intercompany advance payable to the Parent of
approximately $294,000 and $129,000 at June 30, 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 $3,000 and $5,000 for the three months and six months ended
June 30, 1998 and $1,000 and $4,000 for the same periods of the pre-
ceding year, which is included in the intercompany advance payable.
The Parent has agreed not to require repayment of the intercompany
advances prior to July 1, 1999; therefore, the advances have been
classified as long-term at June 30, 1998.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 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 9,000 options were outstanding at June
30, 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 June 30, 1998. These options were originally
exercisable for a period of three years through August 18, 1999 at $4.75
per share with the exercise price for 5,000 of the options having been
reduced to $2.25 per share on June 10, 1998.
On June 10, 1998 the Company's board of directors granted a five-year
non-qualified stock option to a new board member for 5,000 shares exer-
cisable at $2.25 per share through June 9, 2003.
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,
including 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 June 30, 1998.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of its
Florida operations consisting of the assets of two subsidiaries and an
inpatient agreement of another subsidiary pursuant to an Asset Purchase
Agreement. Consideration 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 subsidi-
aries whose assets were sold for an aggregate of $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 $306,000 at June 30, 1998 with the
net unrealized gain of approximately $41,000, which is net of income
tax effect of approximately $25,000, included in stockholders' equity
in accumulated other comprehensive income.
The pro forma consolidated condensed financial information presented
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 approxi-
mately $70,000 for the six months ended June 30, 1997.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 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
Six Months Ended
June 30,
----------------
1997
----
Total revenue $1,253,000
==========
Net loss $ (151,000)
==========
Loss per share:
Basic $(.04)
=====
Diluted $(.04)
=====
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
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 Securi-
ties 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 antici-
pated 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.
Essential to the Company is Medicare reimbursement which is a fixed
rate determined by HCFA. The level of the Company's revenues and profit-
ability may be adversely affected by potential legislation resulting in
rate cuts. Additionally, operating costs tend to increase over the years
without any comparable increases, if any, in the prescribed dialysis
treatment reimbursement rates, which usually remain fixed and have
decreased over the years. There also may be reductions in commercial
third-party reimbursement rates. The Company bills Medicare, Medicaid
and private third-party payors and handles its records of such reim-
bursements electronically.
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 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 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 appropriate
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 and its
fourth center in Manahawkin, New Jersey in July, 1998. 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 agree-
ments 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 proceeding
to deal with modifying the software used by the Company to alleviate any
interruptions in electronic billing and anticipates having the new soft-
ware 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.
Forward-Looking Information--Continued
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 $231,000 (22%) and
$447,000 (21%) for the three months and six months ended June 30, 1998
compared to the same periods of the preceding year. This decrease
reflected lost revenues of approximately $499,000 and $992,000 for the
three months and six months ended June 30, 1998 compared to the same
periods of the preceding year resulting from the sale of the Company's
Florida dialysis operations on October 31, 1997 which were offset to
some degree by increased revenues of the Company's Pennsylvania dialysis
centers of approximately $269,000 and $546,000 for the three months and
six months ended June 30, 1998 including revenues of approximately
$207,000 and $428,000 for the three months and six months ended June 30,
1998 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 sufficient patient count to cover fixed operating costs.
Interest and other income increased approximately $26,000 and
$73,000 for the three months and six months ended June 30, 1998 compared
to the same periods of the preceding year largely due to interest earned
on proceeds invested from the October 1997 sale of the Company's Florida
dialysis operations.
Cost of medical services sales increased to 73% and 72% for the
three months and six months ended June 30, 1998 compared to 63% and 62%
for the same periods 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 developmental stage.
Selling, general and administrative expenses increased approxi-
mately $52,000 and $64,000 for the three months and six months ended
June 30, 1998 compared to the same periods of the preceding year. This
increase reflected the commencement of operations at the new dialysis
center in Carlisle, Pennsylvania, expenses in connection with the startup
of a new dialysis center in Manahawkin, New Jersey and two other planned
centers, and the cost of increased support functions offset by cost de-
creases resulting from the sale of the Florida dialysis operations.
Interest expense remained relatively stable increasing approxi-
mately $1,000 and for the three months ended June 30, 1998 and
decreasing approximately $3,000 for the six months ended June 30, 1998
compared to the same periods of the preceding year.
Liquidity and Capital Resources
Working capital totaled $6,115,000 at June 30, 1998, which reflected
a decrease of approximately $947,000 during the six months ended June 30,
1998. Included in the changes in components of working capital was a
decrease in cash and cash equivalents of $2,117,000, which included
net cash used in operating activities of $1,400,000 (including a decrease
in income taxes payable of $1,630,000 primarily resulting from tax pay-
ments on the gain on the sale of the Florida dialysis operations), net
cash used in investing activities of $805,000 (including additions to
property and equipment of $430,000 primarily related to a new center in
Manahawkin, New Jersey and funds used for redemption of minority
interest in subsidiaries of $385,000) and net cash provided by
financing activities of $88,000 (including an increase in the advances
from the Parent of $165,000 and debt repayments of $77,000).
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 $396,000
and $432,000 at June 30, 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."
Liquidity and Capital Resources--Continued
The Company has an equipment purchase agreement for kidney dialysis
machines for its dialysis facilities which had a remaining balance of
$427,000 and $285,000 at June 30, 1998 and December 31, 1997, respec-
tively, which included additional equipment financing of approximately
$185,000 during the during the first half of 1998. See Note 3 to
"Notes to Consolidated Condensed Financial Statements."
The Company believes that current levels of working capital,
including the proceeds of its 1996 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 acquisitions
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 successful in imple-
menting 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."
The Company will begin actual patient care at its fourth center in
Manahawkin, New Jersey pending regulatory approval and 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 the Pennsylvania facility currently under construction
will commence operations in the third quarter of 1998. A lease was
recently negotiated for the center planned in New Jersey. The pro-
fessional corporation providing medical director services to both the
Manahawkin, New Jersey center and the other New Jersey center will have
a 20% interest in those subsidiaries.
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 inflation.
Any rate adjustments relate to legislation and executive and Con-
gressional 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
------------------------------
Item 4. Submission of Matter to a Vote of Security Holders
- ------ --------------------------------------------------
On June 10, 1998, the annual meeting of shareholders was held to
elect four members to the board of directors to serve until the next
annual meeting in 1999. Each nominee, Messrs. Thomas K. Langbein,
Bart Pelstring, Dr. Herbert I. Soller and Robert Trause, was elected
by a vote of 2,576,122 shares for and no votes against. There were
no abstentions and no broker non-votes due to no proxy solicitation
since the parent, Medicore, Inc., owns approximately 66% of the
voting equity of the Company.
Item 5. Other Information
- ------ -----------------
On July 20, 1998, Charles Coe, Vice President of Operations,
resigned.
The Company sold a 20% equity interest in two of its New Jersey
subsidiaries, Dialysis Services of NJ, Inc. - Manahawkin ("Manahawkin")
and Dialysis Services of NJ, Inc. - Toms River ("Toms River"), to
Atlantic Nephrology Group, Inc., a New Jersey professional corporation,
which is providing medical director services to those subsidiaries'
dialysis facilities. The Company owns the remaining 80% interest of
each subsidiary. The Manahawkin dialysis facility is due to begin
providing dialysis treatment to patients pending regulatory approval.
The Toms River dialysis facility is in the initial stage of construction.
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) Stock Purchase Agreement between the Company
and Atlantic Nephrology Group, Inc. dated
April 19, 1998.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
/s/ DANIEL R. OUZTS
By------------------------------
DANIEL R. OUZTS, Vice
President/Finance, Controller
and Chief Financial Officer
Dated: August 10, 1998
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
(10) Material Contracts
Stock Purchase Agreement between the Company and Atlantic
Nephrology Group, Inc. dated April 19, 1998.