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, 1999
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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 - 3,546,344 shares as of April 30, 1999.
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, 1999 and March 31, 1998 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, 1999 and March 31, 1998.
2) Consolidated Condensed Balance Sheets as of March 31, 1999 and Decem-
ber 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
1999.
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 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------------
1999 1998
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Revenues:
Medical service revenue $ 1,167,355 $ 818,311
Interest and other income 87,769 126,727
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1,255,124 945,038
Cost and expenses:
Cost of medical services 865,910 586,076
Selling, general and administrative expenses 591,360 455,890
Interest expense 17,026 19,232
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1,474,296 1,061,198
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Loss before income taxes (219,172) (116,160)
Income tax benefit (72,000) (39,000)
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Net loss $ (147,172) $ (77,160)
Loss per share:
Basic $(.04) $(.02)
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Diluted $(.04) $(.02)
===== =====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998(A)
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $4,722,335 $5,366,837
Accounts receivable, less allowance
of $173,000 at March 31, 1999;
$144,000 at December 31, 1998 587,851 460,786
Inventories 170,660 179,189
Prepaid expenses and other current assets 81,953 52,934
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Total current assets 5,562,799 6,059,746
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,408,999 1,404,573
Machinery and equipment 1,569,129 1,381,460
Leasehold improvements 1,223,462 1,149,300
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4,369,948 4,103,691
Less accumulated depreciation and amortization 1,113,621 1,003,995
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3,256,327 3,099,696
Advances to parent 71,535 120,865
Deferred expenses and other assets 64,265 68,617
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$8,954,926 $9,348,924
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 130,379 $ 243,968
Accrued expenses 348,385 292,594
Current portion of long-term debt 171,928 175,902
Income taxes payable --- 232,306
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Total current liabilities 650,692 944,770
Long-term debt, less current portion 679,916 632,664
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,751,344 shares issued:
3,546,344 shares outstanding 37,513 37,513
Capital in excess of par value 4,044,154 4,044,154
Retained earnings 3,857,591 4,004,763
Treasury stock at cost; 205,000 shares (314,940) (314,940)
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Total stockholders' equity 7,624,318 7,771,490
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$8,954,926 $9,348,924
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(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange
Commission in March 1999.
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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1999 1998
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Operating activities:
Net loss $ (147,172) $ (77,160)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 109,891 69,708
Amortization 422 422
Bad debt expense 20,368 28,964
Increase (decrease) relating to operating
activities from:
Accounts receivable (147,433) 36,062
Inventories 8,529 13,634
Prepaid expenses and other current assets (29,019) 20,033
Accounts payable (113,589) (30,284)
Accrued expenses 55,791 7,567
Income tax payable (232,306) (1,579,000)
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Net cash used in operating activities (474,518) (1,510,054)
Investing activities:
Redemption of minority interest in
subsidiaries -- (385,375)
Additions to property and equipment, net
of minor disposals (177,422) (19,083)
Deferred expenses and other assets 3,930 (117,202)
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Net cash used in investing activities (173,492) (521,660)
Financing activities:
Advances (to) from parent 49,330 65,037
Payments on long-term debt (45,822) (36,409)
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Net cash provided by financing activities 3,508 28,628
Decrease in cash and cash equivalents (644,502) (2,003,086)
Cash and cash equivalents at beginning of period 5,366,837 8,102,920
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Cash and cash equivalents at end of period $4,722,335 $6,069,834
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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, 1999
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to
as the "Company". All material intercompany accounts and transactions have
been eliminated in consolidation. The Company is a 68% 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
March 31,
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1999 1998
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Rental income $ 32,487 $ 32,372
Interest income 51,991 91,893
Other income 3,291 2,462
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$ 87,769 $ 126,727
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Earnings per Share
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market
price. No potentially dilutive securities were included in the diluted
earnings per share computation for the three months ended March 31, 1999
or for the same period of the preceding year, as a result of exercise
prices and the net loss, and to include them would be anti-dilutive.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended
March 31,
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1999 1998
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Net (loss) income $ (147,172) $ (77,160)
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Weighted average shares 3,546,344 3,651,344
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Loss per share:
Basic $(.04) $(.02)
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Diluted $(.04) $(.02)
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The Company has various potentially dilutive securities, including stock
options and warrants. See Notes 6 and 7.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board State-
ment No. 130, "Reporting Comprehensive Income" (FAS 130). This statement
establishes rules for the reporting of comprehensive income (loss) and its
components. Comprehensive loss consists of the net loss for the three months
ended March 31, 1999, and for the same period of the preceding year included
the net loss and an unrealized securities gain.
Three Months Ended
March 31,
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1999 1998
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Net loss $(147,172) $ (77,160)
Other comprehensive income:
Unrealized gain on marketable securities,
net of tax --- 14,636
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Comprehensive loss $(147,172) $ (62,524)
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Reclassifications
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
New Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recog-
nized as either assets or liabilities in the statement of financial position
and that these instruments be measured at fair value. The Company is in the
process of determining the impact that the adoption of FAS 133 will have on
its consolidated financial statements.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 1999 and
March 31, 1998 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, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's audited financial
statements for the year ended December 31, 1998.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
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 $149,000 and $160,000 at March 31, 1999
and December 31, 1998, 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 $187,000 and $200,000 at March 31, 1999
and December 31, 1998, respectively.
The Company has an equipment purchase agreement for certain kidney
dialysis machines at its facilities with interest at rates ranging from 4.13%
to 11.84% pursuant to various schedules extending through February 2005.
Additional financing of $90,000 and $17,000 during the three months ended
March 31, 1999 and March 31, 1998, respectively, 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 $516,000 and $449,000 at March 31, 1999 and December 31, 1998,
respectively.
The prime rate was 7.75% as of March 31, 1999 and December 31, 1998.
Interest payments on long-term debt amounted to approximately $15,000 for
the three months ended March 31, 1999 and $17,000 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
deferred tax assets.
Income tax payments amounted to $216,000 for the three months ended March
31, 1999 and $1,540,000 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 $50,000 for the three months ended March 31, 1999, and $60,000
for the same period of the preceding year.
The Company has an intercompany advance receivable from the Parent of
approximately $72,000 and $194,000 at March 31, 1999 and December 31, 1998,
respectively, which bears interest at the short-term Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approxi-
mately $1,000 for the three months ended March 31, 1999 and interest expense
on an intercompany advance payable to the Parent amounted to approximately
$2,000 for the three months ended March 31, 1998. Interest on intercompany
balances 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, 2000; therefore, the advance has been classified
as long-term at March 31, 1999.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(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 4,500 options were outstanding at March
31, 1999. These options are exercisable for a period of five years through
November 9, 2000 at $1.50 per share. On June 10, 1998 the board of directors
granted a five-year non-qualified stock option to a new board member for
5,000 shares exercisable at $2.25 per share through June 9, 2003.
In 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, 1999. 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.
NOTE 7--COMMON STOCK
Pursuant to a 1996 public offering, 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters' over-
allotment 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
originally exercisable through April 16, 1999 but extended to October 16,
1999. The underwriters received options to purchase 100,000 shares of common
stock and 200,000 common stock purchase warrants, with the options exer-
cisable 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, 1999.
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. 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 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 were sold in September 1998 for approximately $253,000
resulting in a gain of approximately $13,000.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 10--REPURCHASE OF COMMON STOCK
In September 1998, the Company announced its intent to repurchase up to
an additional 300,000 shares of its common stock at current market prices
after having acquired 100,000 shares in June 1997 for $206,000. The Company
repurchased 105,000 shares for approximately $109,000 during 1998. The
Company did not repurchase any additional shares during the first quarter of
1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of the 1934. The Private Securities Litigation Reform Act 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 future of the Company's growth and
operations, the character and development of the dialysis industry, antici-
pated revenues, the Company's 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 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." Such forward-looking statements are subject to
substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including the
general economic, market and business conditions, opportunities pursued or
not pursued by the Company, competition, changes in federal and state laws
or regulations affecting the Company, and other factors discussed periodical-
ly in the Company's filings. Many of the foregoing factors are beyond the
control of the Company. 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, which speak only as of the date
made and which the Company undertakes no obligation to revise to reflect
events after the date made.
Essential to the Company is Medicare reimbursement which is a fixed
rate determined by the Health Care Financing Administration ("HCFA"). The
level of the Company's revenues and profitability may be adversely affected
by potential legislation resulting in rate cuts. Additionally, operating
costs tend to increase over the years without any comparable increases, if
any, in the prescribed dialysis treatment reimbursement rates, which usually
remain fixed and have decreased over the years. There also may be reductions
in commercial third-party reimbursement rates.
The dialysis industry is highly competitive and subject to extensive
regulation. 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 patients for and are responsible for the
supervision of the dialysis centers. There is also substantial competition
for obtaining qualified nurses and technical staff. Major companies, some
of which are public companies or divisions of public companies, have many
more centers, physicians and financial resources than 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 acquisition or development of new dialysis
facilities, as well as with hospitals and other health care maintenance
entities. The Company opened a center in Carlisle, Pennsylvania in July
1997. It opened its fourth center in Manahawkin, New Jersey and received
regulatory approval as a Medicare provider during the fourth quarter of 1998
and opened its fifth center in Chambersburg, Pennsylvania during the first
quarter of 1999. Another center in New Jersey is in the planning and
rchitectural stage, with a medical director agreement having been executed.
There is no certainty as to when the new center will commence operations, or
the number of stations or patient treatments which will result, or if the new
center will ultimately be profitable. Newly established dialysis centers,
although contributing to increased revenues, adversely affect results of
operations due to start-up costs and expenses with a smaller developing
patient base.
Year 2000 Readiness
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized informa-
tion systems to properly recognize date sensitive information, with which
many companies, public and private, are faced to ensure continued proper
operations and reporting of financial condition. Failure to correct and
comply with the Year 2000 change may cause systems that cannot recognize the
new date and millenium information to generate erroneous data or to fail to
operate. Management is fully aware of the Year 2000 issues, has made its
assessments and has basically evaluated its computerized systems and equip-
ment, and communicated with its major vendors, and has made the operations
of the Company Year 2000 compliant.
One of the most significant risks in the Company's operations with
respect to the upcoming millenium change relates to billing and collection
from third-party payors, and, in particular, Medicare. The Company receives
a substantial portion of its revenues from Medicare for treatment of
dialysis patients and related services. HCFA, through whom the Medicare
program and payments are effected, has indicated it has done and continues
to accomplish all it can to insure the Medicare ESRD program continues
operating smoothly and that dialysis providers, like the Company, may
continue to timely bill electronically for patient services with Medicare
payments to be made timely. In 1998, the Company installed a new electronic
billing software program that was developed according to Medicare's compliance
guidelines, which guidelines require not only system but also Year 2000
compatibility. The software designer has successfully tested the software
for Year 2000 compliance and the Company initiated its electronic Medicare
billing in January, 1999 without any problems. Other third-party payors,
such as insurance companies, are presently and will continue to be billed
with hard copy. The costs of the software modifications have been minimal,
approximately $1,000, and the Company does not anticipate that any costs
involved in any future Year 2000 compliance will be material or that they
will have a material adverse effect on its business.
With respect to non-information technology systems, which typically
include embedded technology, such as microcontrollers, the major equipment
used in patient dialysis treatment is not date sensitive and should not pose
any threat of a system breakdown due to the Year 2000 issue. Most of the
Company's dialysis equipment is new. The Company retains technicians who
test and maintain dialysis operations equipment.
In addition to addressing its own internal software system, the Company
has communicated with all its suppliers, service providers and other key
third parties, including payroll system providers, banks, hospitals and
insurance companies with whom it deals to determine the extent of their
Year 2000 compliance, what actions they are taking to assess and address
that issue, and whether they will be compliant by the end of 1999. To the
extent such third parties are materially adversely affected by the Year 2000
issue and their problem has not been timely corrected, the Company's opera-
tions could be affected. The Company has received written assurance from
many of these third parties indicating that they are Year 2000 compliant or
are working on it and expect to be by the end of 1999, and that the crucial
supplies and services that are necessary to the Company's operation and
patient treatment including drug and chemical supplies, utilities, cable,
waste removal, water and sewer services will not be affected by the millenium
change.
Another area that could significantly impact the Company's operations in
providing dialysis treatment to patients relates to third-party providers,
specifically, the utility companies providing water, an extremely necessary
resource for dialysis treatments, and electricity. These providers and
services are beyond the control of the Company, and the Company does not have
a separate generator for electricity nor other sources for water. Should any
of these utilities fail to provide services, such would seriously adversely
impact the Company, its patients, as well as the Company's competitors in such
affected areas.
There can be no assurance, however, that the Year 2000 issues, whether
internal and believed to have been addressed, or from third parties, although
the Company has checked and been assured that its third-party payors and
suppliers are Year 2000 compliant or will be prior to the end of 1999, will
not have a material adverse effect on the Company's business, results of
operations or financial condition.
Results of Operations
Medical service revenue increased approximately $349,000 (43%) during
the three months ended March 31, 1999 compared to the same period of the
preceding year. This increase reflected increased revenues of the Company's
Pennsylvania dialysis centers of approximately $264,000 for the three months
ended March 31, 1999, including revenues of approximately $144,000 for the
Company's Chambersburg, Pennsylvania dialysis center which commenced opera-
tions in January 1999. Also included in the increase in revenues are
revenues of approximately $85,000 from the Manahawkin, New Jersey center
which commenced operations in the fourth quarter of 1998. Although the
operations of the new centers have resulted in additional revenues, they
are in the developmental stage and, accordingly, their operating results
will adversely affect the Company's results of operations until they achieve
a sufficient patient count to cover fixed operating costs.
Interest and other income decreased approximately $39,000 for the three
months ended March 31, 1999 compared to the same period of the preceding year
largely due to a decrease in interest earned as a result of a decrease in
invested funds.
Cost of medical services sales increased to 74% for the three months
ended March 31, 1999 compared to 72% for the same period of the preceding
year reflecting operations of the Company's new dialysis centers which are
still in their developmental stage.
Selling, general and administrative expenses increased approximately
$135,000 for the three months ended March 31, 1999 compared to the same
period of the preceding year. This increase reflected the commencement of
operations at the Company's new dialysis centers and the cost of increased
support functions.
Interest expense decreased approximately $2,000 for the three months
ended March 31, 1999 compared to the same period of the preceding year as a
result of reduced average outstanding borrowings and lower interest rates.
Liquidity and Capital Resources
Working capital totaled $4,912,000 at March 31, 1999, which reflected a
decrease of approximately $203,000 during the three months ended March 31,
1999. Included in the changes in components of working capital was a
decrease in cash and cash equivalents of $645,000 , which included net cash
used in operating activities of $474,000, net cash used in investing
activities of $173,000 (including additions to property and equipment of
$177,000, primarily related to new centers), and net cash provided by
financing activities of $3,000 (including a decrease in the advances to
the Parent of $49,000, and debt repayments of $46,000).
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 $336,000 and $360,000 at
March 31, 1999 and December 31, 1998, 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 $516,000
and $449,000 at March 31, 1999 and December 31, 1998, respectively, which
included additional equipment financing of approximately $90,000 and $17,000
during the three months ended March 31, 1999 and March 31, 1998, respectively.
See Note 3 to "Notes to Consolidated Condensed Financial Statements".
The Company believes that current levels of working capital, will enable
it to successfully meet its liquidity demands for at least the next twelve
months.
Liquidity and Capital Resources-Continued
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. The Company opened its fifth center in
Chambersburg, Pennsylvania in January 1999. The professional corporation
providing medical director services to the Manahawkin, New Jersey center and
the professional association which is to provide medical director services
to the other New Jersey center presently in the planning and architectural
stage have a 20% interest in those subsidiaries. No assurance can be given
that the Company will be successful in implementing its growth strategy or
that the funds from its securities offering and Florida dialysis operations
sale will be adequate or that sufficient outside financing would be available
to fund expansion. See Notes 7 and 9 to "Notes to Consolidated Condensed
Financial Statements".
New Accounting Pronouncement
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that these instruments be measured at fair value. The Company
is in the process of determining the impact that the adoption of FAS 133
will have on its consolidated financial statements.
Impact of Inflation
Inflationary factors have not had a significant effect on the Company's
operations, although the Company has experienced increased costs of healthcare
salaries and supply costs.
A substantial portion of the Company's revenue is subject to reimburse-
ment rates established and regulated by the federal government. These rates
do not automatically adjust for inflation. Any rate adjustments relate to
legislation and executive and Congressional budget demands, and have little
to do with the actual cost of doing business. Therefore, dialysis services
revenues cannot be voluntarily increased to keep pace with increases in
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) None
(b) Reports on Form 8-K
Form 8-K, Current Report, Item 5, "Other Events" relating to the
extension of the exercise period of the Company's 2,300,000 outstanding
redeemable common stock purchase warrants from April 16, 1999 to October 16,
1999 was filed on March 9, 1999. No financial statements were filed.
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 14, 1999
EXHIBIT INDEX
Exhibit
No.
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Part I Exhibits
(27) Financial Data Schedule (for SEC use only)