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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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
-------------------------------
(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.)
1344 Ashton Road, Hanover, Maryland 21076
- ------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
(410) 694-0500
-------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] or No[ ]
Common Stock Outstanding
Common Stock, $.01 par value - 3,887,344 shares as of July 31, 2002.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
------------------------------------------------
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Statements of Income (Unaudited) for the three
months and six months ended June 30, 2002 and June 30, 2001 include the accounts
of the Registrant and its subsidiaries.
Item 1. Financial Statements
- -------- ---------------------
1) Consolidated Condensed Statements of Income for the three months and
six months ended June 30, 2002 and June 30, 2001.
2) Consolidated Condensed Balance Sheets as of June 30, 2002 and
December 31, 2001.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2002 and June 30, 2001.
4) Notes to Consolidated Condensed Financial Statements as of June 30,
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
- -------- Results of Operations
-------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------------
PART II -- OTHER INFORMATION
- -------- ------------------
Item 1. Legal Proceedings
- -------- -------------------
Item 4. Submission of Matters to a Vote of Security Holders
- -------- ----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- -------- -------------------------------------
PART I -- FINANCIAL INFORMATION
---------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ----------- -----------
Revenues:
Medical service revenue $6,315,478 $4,299,145 $11,803,523 $8,095,294
Interest and other income 102,052 140,209 219,846 264,126
---------- ----------- ----------- -----------
6,417,530 4,439,354 12,023,369 8,359,420
Cost and expenses:
Cost of medical services 3,717,051 2,803,140 7,111,712 5,263,499
Selling, general and administrative expenses 1,850,539 1,286,185 3,581,888 2,424,671
Provision for doubtful accounts 241,591 121,682 427,005 195,053
Interest expense 57,520 58,842 111,838 97,754
---------- ----------- ----------- -----------
5,866,701 4,269,849 11,232,443 7,980,977
---------- ----------- ----------- -----------
Income before income taxes, minority interest
and equity in affiliate earnings (loss) 550,829 169,505 790,926 378,443
Income tax provision 211,087 62,303 329,822 80,124
---------- ----------- ----------- -----------
Income before minority interest and equity in
affiliate earnings (loss) 339,742 107,202 461,104 298,319
Minority interest in income
Of consolidated subsidiaries 14,709 48,453 20,877 48,453
Equity in affiliate earnings (loss) 13,621 (5,236) 60,325 (46,391)
---------- ----------- ----------- -----------
Net income $ 338,654 $ 53,513 $ 500,552 $ 203,475
========== =========== =========== ===========
Earnings per share:
Basic $ .09 $ .01 $ .13 $ .05
========== =========== =========== ===========
Diluted $ .08 $ .01 $ .11 $ .05
========== =========== =========== ===========
See notes to consolidated financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001(A)
------------ --------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 1,772,209 $ 2,479,447
Accounts receivable, less allowance
Of $860,000 at June 30, 2002;
$727,000 at December 31, 2001 3,925,662 4,019,578
Inventories 718,483 739,121
Deferred income taxes 252,000 252,000
Prepaid expenses and other current assets 981,844 640,283
------------ --------------
Total current assets 7,650,198 8,130,429
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,284,632 2,221,406
Machinery and equipment 4,683,175 4,361,046
Leasehold improvements 2,464,373 2,244,612
------------ --------------
9,808,391 9,203,275
Less accumulated depreciation and amortization 3,365,776 2,852,739
------------ --------------
6,442,615 6,350,536
Goodwill 923,140 523,140
Advances to parent 98,336 200,728
Deferred income taxes 166,000 166,000
Other assets 390,886 312,600
------------ --------------
$15,671,175 $ 15,683,433
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,062,505 $ 1,605,136
Accrued expenses 2,092,511 1,529,844
Current portion of long-term debt 503,000 357,000
Income taxes payable 61,148 455,000
Payable subsidiary minority interest acquisition 300,000 300,000
------------ --------------
Total current liabilities 4,019,164 4,246,980
Long-term debt, less current portion 2,620,468 2,934,909
Minority interest in subsidiaries 45,630 16,183
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; issued and outstanding
3,887,344 shares at June 30, 2002 and
December 31, 2001 38,873 38,873
Capital in excess of par value 5,186,580 5,186,580
Retained earnings 4,182,060 3,681,508
Notes receivable from options exercised (421,600) (421,600)
------------ --------------
Total stockholders' equity 8,985,913 8,485,361
------------ --------------
$15,671,175 $ 15,683,433
============ ==============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission in
March 2002.
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2001
------------ ------------
Operating activities:
Net income $ 500,552 $ 203,475
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 518,986 371,526
Amortization 4,067 1,744
Bad debt expense 427,005 195,053
Minority interest 20,877 48,453
Equity in affiliate (earnings) loss (60,325) 46,391
Increase (decrease) relating to operating activities from:
Accounts receivable (333,089) (1,331,624)
Inventories 20,638 (134,543)
Prepaid expenses and other current assets (341,561) (57,262)
Accounts payable (542,631) (77,973)
Accrued expenses 562,668 519,214
Income taxes payable (393,852) (5,160)
------------ ------------
Net cash provided by (used in) operating activities 383,335 (220,706)
Investing activities:
Decrease in notes receivable from parent --- 2,200,000
Additions to property and equipment, net of minor disposals (461,065) (285,306)
Acquisition of dialysis center (550,000) ---
Investment in affiliate --- (152,810)
Sale of minority interest in subsidiaries 8,570 ---
Decrease in loan to subsidiary medical director practice --- 5,000
Other assets (22,029) (9,498)
------------ ------------
Net cash (used in) provided by investing activities (1,024,524) 1,757,386
Financing activities:
Decrease in advances to parent 102,392 112,570
Repurchase of stock --- (63,347)
Long-term borrowings --- 787,500
Payments on long-term borrowings (168,441) (134,333)
Deferred financing costs --- (11,572)
------------ ------------
Net cash (used in) provided by financing activities (66,049) 690,818
------------ ------------
(Decrease) increase in cash and cash equivalents (707,238) 2,227,498
Cash and cash equivalents at beginning of period 2,479,447 793,666
------------ ------------
Cash and cash equivalents at end of period $ 1,772,209 $ 3,021,164
============ ============
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated condensed financial statements include the accounts of
Dialysis Corporation of America ("DCA") and its subsidiaries, collectively
referred to as the "company". All material intercompany accounts and
transactions have been eliminated in consolidation. The company is a 62% owned
subsidiary of Medicore, Inc. (the "parent"). See Note 5.
GOVERNMENT REGULATION
A substantial portion of the company's revenues are attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the states in which the company operates. Reimbursement
rates under these programs are subject to regulatory changes and governmental
funding restrictions. Although the company is not aware of any future rate
changes, significant changes in reimbursement rates could have a material effect
on the company's operations. The company believes that it is presently in
compliance with all applicable laws and regulations.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
The company's principal estimates are for estimated uncollectible accounts
receivable as provided for in our allowance for doubtful accounts, estimated
useful lives of depreciable assets, estimates for patient revenues from
non-contracted payors, and the valuation allowance for deferred tax assets based
on the estimated realizability of deferred tax assets. Our estimates are based
on historical experience and assumptions believed to be reasonable given the
available evidence at the time of the estimates. Actual results could differ
from those estimates.
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Rental income $ 43,599 $ 41,540 $ 86,169 $ 83,085
Interest income from Medicore 1,093 58,984 2,201 117,681
Interest income 9,147 2,896 21,920 16,081
Management fee income 42,985 31,834 94,145 38,248
Other income 5,228 4,955 15,411 9,031
-------- -------- -------- --------
$102,052 $140,209 $219,846 $264,126
======== ======== ======== ========
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options,
calculated using the treasury stock method and average market price. No
potentially dilutive securities were included in the diluted earnings per share
computation for the three months or six months ended June 30, 2001 as a result
of exercise prices, and to include them would be anti-dilutive.
Following is a reconciliation of amounts used in the basic and diluted
computations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income $ 338,654 $ 53,513 $ 500,552 $ 203,475
========== ========== ========== ==========
Weighted average shares-denominator basic computation 3,887,344 3,912,844 3,887,344 3,920,540
Effect of dilutive stock options 498,898 --- 467,472 ---
---------- ---------- ---------- ----------
Weighted average shares, as adjusted-denominator
diluted computation 4,386,242 3,912,844 4,354,816 3,920,540
========== ========== ========== ==========
Earnings per share:
Basic $ .09 $ .01 $ .13 $ .05
========== ========== ========== ==========
Diluted $ .08 $ .01 $ .11 $ .05
========== ========== ========== ==========
The company's potentially dilutive securities consist of stock options.
See Note 6.
COMPREHENSIVE INCOME
Comprehensive income consists of net income for the three months and six
months ended June 30, 2002, and for the same period of the preceding year.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets is comprised as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- --------
Vendor volume discounts receivable $253,358 $209,649
Receivable from affiliate 14,626 115,715
Officer loan receivable 102,624 98,956
Land to be sold (see Note 8) 171,526 ---
Prepaid expenses 386,830 161,552
Other 52,880 54,411
-------- --------
$981,844 $640,283
======== ========
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
ACCRUED EXPENSES
Accrued expenses is comprised as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------------- -------------
Accrued compensation $ 596,960 $ 590,875
Due to insurance companies 975,430 671,935
Other 520,121 267,034
-------------- --------------
$ 2,092,511 $ 1,529,844
============== ==============
REVENUE RECOGNITION
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101). Medical service
revenues are recorded as services are rendered.
GOODWILL
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standard No. 142 (FAS 142), since the
company's goodwill was acquired after June 30, 2001, it will not be amortized
but will be subject to impairment testing under FAS 142 commencing in 2002. See
New Pronouncements below and Note 9.
NEW PRONOUNCEMENTS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Other than expanded disclosure requirements, FAS 141 has had no effect on the
company's consolidated financial statements. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators are present) for
impairment. Separate intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives (with no maximum life). The
amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the provisions of FAS 142 are effective for
fiscal years beginning after December 15, 2001. Pursuant to the provisions of
FAS 142, the goodwill resulting from the company's acquisition of minority
interest in August 2001 is not being amortized for book purposes and is subject
to the annual impairment testing provisions of FAS 142 commencing in 2002, prior
to which it was be subject to the impairment provisions of Accounting Principals
Board Opinion No. 17, "Intangible Assets," and FASB Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and Assets to be Disposed of." This goodwill is also subject to the
transitional goodwill testing provisions of FAS 142 which require testing during
the first six months of 2002 for previously recorded goodwill, which testing
indicated no impairment for this goodwill. The goodwill resulting from the
company's acquisition of a Georgia dialysis center in April 2002 is not being
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
amortized for book purposes and is subject to the annual impairment testing
provision of FAS 142. The company is evaluating the impact of the impairment
testing required by FAS 142, but does not expect that it will have a material
impact on its consolidated results of operations, financial position or cash
flows. See Note 9.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment on Disposal of Long-lived
Assets" (FAS 144). FAS 144 clarifies when a long-lived asset held for sale
should be classified as such. It also clarifies previous guidance under FAS
121, "Accounting for the Impairment of long-lived assets and for long-lived
assets to be disposed of." The company is required to adopt FAS 143 and FAS 144
in 2002. The company does not expect that FAS 143 and FAS 144 will have a
material impact on its consolidated results of operations, financial position or
cash flows.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and six months ended June 30,
2002 and June 30, 2001 are unaudited and include, in the opinion of management
of the company, all adjustments (consisting of normal recurring accruals)
necessary to present fairly the earnings for such periods. Operating results
for the three months and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2002.
While the company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the company's audited financial statements for
the year ended December 31, 2001.
NOTE 3--LONG-TERM DEBT
In December 1988, the company obtained a $480,000 fifteen-year mortgage
through November 2003 on its building in Lemoyne, Pennsylvania with interest at
1% over the prime rate. The remaining principal balance under this mortgage
amounted to approximately $45,000 and $61,000 at June 30, 2002 and December 31,
2001, respectively. Also in December 1988, the company obtained a $600,000
mortgage on its building in Easton, Maryland on the same terms as the Lemoyne
property. The remaining principal balance under this mortgage amounted to
approximately $57,000 and $77,000 at June 30, 2002 and December 31, 2001,
respectively.
The company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development and equipment
line of credit with interest at 8.75% through December 2, 2001 and 1.5% over the
prime rate thereafter which is secured by the acquired assets of DCA of Vineland
and a second mortgage on the company's real property in Easton, Maryland on
which an affiliated bank holds the first mortgage. Outstanding borrowings were
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 3--LONG-TERM DEBT--CONTINUED
subject to monthly payments of interest only through December 2, 2001 with
monthly payments thereafter of $2,917 principal plus interest with any remaining
balance due September 2, 2003. This loan had an outstanding principal balance of
$680,000 at June 30, 2002 and $700,000 at December 31, 2001.
In April 2001, the company obtained a $788,000 five-year mortgage through
April 2006 on its building in Valdosta, Georgia with interest initially at 8.29%
which was revised to 7.59% in March 2002. Payments are $6,800 including
principal and interest commencing May 2001 with a final payment consisting of a
balloon payment and any unpaid interest due April 2006. This mortgage is
guaranteed by the company's parent. The remaining principal balance under this
mortgage amounted to approximately $766,000 at June 30, 2002 and $776,000 at
December 31, 2001.
The company has an equipment purchase agreement for kidney dialysis
machines at its facilities with interest at rates ranging from 4.14% to 10.48%
pursuant to various schedules extending through August 2006. There was no
additional financing during the first half of 2002 and $73,000 additional
financing for the same period of the preceding year. Financing under this
agreement represents a noncash financing activity which is a supplemental
disclosure required by FAS 95, "Statement of Cash Flows." The remaining
principal balance under this agreement amounted to approximately $1,576,000 and
$1,678,000 at June 30, 2002 and December 31, 2001, respectively.
The prime rate was 4.75% as of June 30, 2002 and December 31, 2001.
Interest payments on debt amounted to approximately $31,000 and $77,000 for
the three months and six months ended June 30, 2002 and $44,000 and $86,000 for
the same periods of the preceding year.
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, a valuation allowance has been recognized to offset a portion of the
deferred tax assets.
Income tax payments amounted to approximately $122,000 and $665,00 for the
three months and six months ended June 30, 2002 and $86,000 and $87,000 for the
same periods of the preceding year.
NOTE 5--TRANSACTIONS WITH PARENT
The parent provides certain financial and administrative services to the
company. Central operating costs are charged on the basis of direct usage, when
identifiable, or on the basis of time spent. The amount of expenses allocated
by the parent totaled approximately $50,000 and $100,000 for the three months
and six months ended June 30, 2002, and for the same periods of the preceding
year.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 5--TRANSACTIONS WITH PARENT--CONTINUED
The company had an intercompany advance receivable from the parent of
approximately $98,000 and $201,000 at June 30, 2002 and December 31, 2001,
respectively, which bears interest at the short-term Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approximately
$1,000 and $2,000 for the three months and six months ended June 30, 2002
and $4,000 and $9,000 for the same periods of the preceding year. Interest is
included in the intercompany advance balance. The company has agreed not to
require repayment of the intercompany advance receivable balance prior to July
1, 2003; therefore, the advance has been classified as long-term at June 30,
2002.
In January, March and August, 2000, the company loaned an aggregate of
$2,200,000 to our parent at an annual interest rate of 10%, with a substantial
portion of the loan and accrued interest scheduled to be repaid on January 26,
2001. These funds were loaned by our parent to Linux Global Partners, Inc.
("LGP"), a private company investing in Linux software companies and recently
attempting to initiate the development and marketing of a Linux desktop software
system. Our parent also acquired an approximately 11% interest in LGP. The
company extended the maturity of the loans to our parent, as our parent did with
LGP, in consideration for which we received 100,000 shares of common stock of
LGP, increasing our ownership in LGP to 400,000 shares, with a cost basis of
approximately $140,000 resulting from a write-off of a note secured by 300,000
LGP shares, which is included in deferred expenses and other assets. Interest
income on the notes receivable from our parent, which had the same terms as the
parent's loans to LGP, amounted to approximately $55,000 and $109,000 for the
three months and six months ended June 30, 2001. In May 2001, our parent paid
us $215,500, representing $200,000 of the loan with $15,500 of accrued interest.
In June 2001, our parent repaid to us the remaining outstanding loan of
$2,000,000 and accrued interest of $279,000.
NOTE 6--STOCK OPTIONS
In April 1999, the company adopted a stock option plan pursuant to which
the board of directors granted 800,000 options exercisable at $1.25 per share to
certain of it officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. In April 2000, the 340,000 one-year options were
exercised for which DCA received cash payment of the par value and the balance
in three-year promissory notes with the interest at 6.2%. On January 2, 2001
the company's board of directors granted to the company's president a five-year
option for 165,000 shares exercisable at $1.25 per share with 66,000 options
vested at January 2002 and 33,000 options vesting January 1 for each of the next
three years.
In September 2001, the board of directors granted 75,000 five-year options
exercisable at $1.50 per share through September 5, 2006 to certain officers,
directors and key employees. 15,000 of the options vested immediately with the
remaining 60,000 options to vest 15,000 options each September 5 commencing
September 5, 2002.
In March 2002, the board of directors granted a five-year option for 30,000
shares exercisable at $3.15 per share through February 28, 2007 to an officer.
The options vest 7,500 each February 28 from 2003 through 2006.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
NOTE 6--STOCK OPTIONS--CONTINUED
In May, 2002, the board of directors granted five-year options to 17
employees, most options for 500 shares of common stock of the company, with two
options for 1,500 shares of common stock, all options exercisable at $4.10 per
share through May 28, 2007. All the options vest on May 29, 2004, and if there
is a change in affiliation of the employee with responsibilities to the company
which are of a lesser nature than prior to the affiliation change, the company
has the discretion to terminate the option of such employee.
NOTE 7--REPURCHASE OF COMMON STOCK
In September 2000, the company announced its intent to repurchase up to
300,000 shares of its common stock at current market prices. The company
repurchased and cancelled approximately 77,000 shares in the fourth quarter of
2000 with a repurchase cost of approximately $65,000, and repurchased and
cancelled an additional 67,000 shares in the first quarter of 2001 at a cost of
approximately $63,000. Total repurchases during 2001 were approximately 93,000
shares at a cost of approximately $98,000. There were no repurchases during the
first half of 2002.
NOTE 8--COMMITMENTS AND CONTINGENCIES
In May 2002, the company purchased land on which it will construct a
facility for a new dialysis center in Cincinnati, Ohio. Upon completion, the
company has agreed to sell the property to a corporation owned by one of the
minority members of DCA of Cincinnati, and who will be the medical director of
that dialysis facility. See Note 1, Prepaid Expenses and Other Current Assets.
The company has a 401(k) savings plan (salary deferral plan) with an
eligibility requirement of one year of service and a 21 year old age
requirement. The company has made no contributions under this plan as of June
30, 2002.
NOTE 9--ACQUISITIONS
In August 2001,the company acquired the remaining 30% minority interest in
DCA of So. Ga., LLC, giving the company a 100% ownership interest, for $600,000
of which $300,000 was paid in cash and $300,000 is payable in August, 2002. This
transaction resulted in $523,000 goodwill representing the excess of the
$600,000 purchase price over the $77,000 fair value of the minority interest
acquired. The goodwill will be amortized for tax purposes over a 15-year period.
The company's decision to make this investment was based largely on the
profitability of DCA of So. Ga. The party from which the company acquired the
minority interest has an agreement to act as medical director of another of the
company's subsidiaries. If this party should fail to satisfy the terms of that
agreement, the purchase price of the 30% minority interest in DCA of So. Ga.
would be reduced to $300,000. See Note 1.
In April 2002, the company acquired a dialysis center in Royston, Georgia
for $550,000, which was paid in cash. This transaction resulted in $400,000
goodwill representing the excess of the $550,000 purchase price over the
$150,000 fair value of the assets acquired. The goodwill will be amortized for
tax purposes over a 15-year period. The company's decision to make this
investment was based on its expectation of future profitability resulting from
its review of this dialysis center's operations prior to making the acquisition.
See Note 1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
-----------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide the investor with
a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated condensed financial
statements, including the notes, contained in this Quarterly Report on Form
10-Q.
FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of the
1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the growth of our company and our future operations, the character and
development of the dialysis industry, anticipated revenues, our need for and
sources of funding for expansion opportunities and construction, expenditures,
costs and income and similar expressions concerning matters that are not
considered historical facts. Forward-looking statements also include our
statements regarding liquidity, anticipated cash needs and availability, and
anticipated expense levels in Management's Discussion and Analysis of Financial
Condition and Results of Operations. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans" and "believes" and such words and
terms of similar substance used in connection with any discussions of future
operations or financial performance identify forward-looking statements. Such
forward-looking statements, like all statements about expected future events,
are subject to substantial risks and uncertainties that could cause actual
results to materially differ from those expressed in the statements, including
the general economic, market and business conditions, opportunities pursued or
not pursued, competition, changes in federal and state laws or regulations
affecting our operations, and other factors discussed periodically in our
filings. Many of the foregoing factors are beyond our control. Among the
factors that could cause actual results to differ materially are the factors
detailed in the risks discussed in the "Risk Factors" section included in our
Annual Report on Form 10-K (Item 1, "Business"), as filed with the SEC and
provided to our shareholders. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date made and which we undertake no obligation to revise to reflect events after
the date made.
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through its 12 outpatient dialysis centers, plus an
additional center in which it holds a minority interest, and through its acute
inpatient dialysis services agreements with hospitals, provides dialysis
treatments to the hospital's dialysis patients. We also provide homecare
services, including home peritoneal dialysis and method II services, the latter
relating to providing patients with supplies and equipment. Dialysis
Corporation of America also provides ancillary services associated with dialysis
treatments, primarily the administration of EPO.
Approximately 55% of our medical revenues are derived from Medicare and
Medicaid reimbursement with rates established by the Center for Medicare and
Medicaid Services ("CMS"), and which rates are subject to legislative changes.
Over the last two years, Medicare rates have slightly increased, but are not
related to the increasing costs of operations. Dialysis is typically reimbursed
at higher rates from private payors, such as the patient's insurance carrier, as
well as higher payments received under negotiated contracts with hospitals for
acute inpatient dialysis services.
The healthcare industry is subject to extensive regulations of federal and
state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
There can be no assurance that there will not be unanticipated changes in
healthcare programs or laws or that we will not be required to restructure our
practice and will not experience material adverse effects as a result of any
such challenges or changes.
Our growth depends primarily on the availability of suitable dialysis
centers for development or acquisition in appropriate and acceptable areas, and
our ability to develop these new potential dialysis centers at costs within our
budget while competing with larger companies, some of which are public companies
or divisions of public companies with greater personnel and financial resources
who have a significant advantage in acquiring and/or developing facilities in
areas targeted by us. Additionally, there is intense competition for retaining
qualified nephrologists who are responsible for the supervision of the dialysis
centers. There is no certainty as to when any new centers or inpatient service
contracts with hospitals will be implemented, or the number of stations, or
patient treatments such may involve, or if such will ultimately be profitable.
It has been our experience that newly established dialysis centers, although
contributing to increased revenues, have adversely affected our results of
operations due to start-up costs and expenses and a smaller patient base until
they mature.
RESULTS OF OPERATIONS
Medical service revenues increased approximately $2,016,000 (47%) and
$3,708,000 (46%)for the three months and six months ended June 30, 2002,
compared to the same periods of the preceding year. This increase includes
increased revenues of our Pennsylvania dialysis centers of approximately
$493,000 and $804,000; including revenues of approximately $209,000 and $322,000
for our new Mechanicsburg center which commenced operations in January 2002,
increased revenues of approximately $97,000 and $359,000 for our New Jersey
centers; and increased revenues of approximately $1,426,000 and $2,518,000
for our Georgia centers, including two which became operational in the third
quarter of 2001 and one which was acquired in April 2002. First half 2002
revenue also includes $27,000 of consulting fees.
Interest and other income decreased by approximately $38,000 and $44,000
for the three months and six months ended June 30, 2002, compared to the same
periods of the preceding year. This decrease includes decreases in interest
from our parent of $58,000 and $115,000, including interest on a note receivable
and an advance receivable, with the decreases due primarily to our parent's
repayment of the note, increases in management fee income of $11,000 and $56,000
pursuant to a Management Services Agreement with our 40% owned Toledo, Ohio
affiliate, and increases in rental income of $2,000 and $3,000. Miscellaneous
other income was approximately the same for the second quarter of 2002 compared
to the same period of the preceding year, but increased approximately $6,000 for
the six months ended June 30, 2002 compared to the same period of the preceding
year. See Note 1 to "Notes to Consolidated Condensed Financial Statements."
Cost of medical services as a percentage of medical service revenue
decreased to 59% and 60% for the three months and six months ended June 30, 2002
compared to 65% for the same periods of the preceding year as a result of
decreases in both supply costs and payroll costs as a percentage of sales.
Selling, general and administrative expenses, increased by approximately
$564,000 and $1,157,000 for the three months and six months ended June 30, 2002,
compared to the same periods of the preceding year. This increase reflects
operations of our new dialysis centers in Georgia and Pennsylvania as well as
increased support activities resulting from expanded operations. Selling,
general and administrative expenses, as a percent of medical service revenues
remained relatively stable amounting to approximately 29% and 30% for the three
months and six months ended June 30, 2002, compared to 30% for the same periods
of the preceding year.
Provision for doubtful accounts increased approximately $120,000 and
$232,000 for the three months and six months ended June 30, 2002 compared to the
same periods of the preceding year as a result of expanded operations. The
provision amounted to 4% of sales for the three months and six months ended June
30, 2002 compared to 3% and 2% for the same periods of the preceding year. This
increase reflects different collectibility levels associated with the company's
operations in different geographic areas, such as our expanded Georgia
operations and with new centers, such as our Mechanicsburg, Pennsylvania center.
Although operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect results of operations until they achieve
a sufficient patient count to sustain profitable operations.
Interest expense decreased by approximately $1,000 for the three months
ended June 30, 2002, compared to the same period of the preceding year and
increased by approximately $14,000 for the six months ended June 30, 2002
compared to the same period of the preceding year. The increase for the six
month period is primarily a result of additional equipment financing agreements,
and our April, 2001 Georgia mortgage with the effect of the increased borrowings
offset somewhat by lower interest rates.
The prime rate was 4.75% at June 30, 2002 and December 31, 2001.
Equity in affiliate earnings (loss) represents equity in the results of
operations of our Ohio affiliate, in which we have a 40% ownership interest.
This dialysis center, which commenced operations in February, 2001, was
profitable for the first half of 2002, but operated at a loss for the same
period of the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $3,631,000 at June 30, 2002, which reflected a
decrease of approximately $252,000 (6%) during the six months ended June 30,
2002. Included in the changes in components of working capital was a decrease in
cash and cash equivalents of $707,000, including net cash provided by operating
activities of $383,000, net cash used in investing activities of $1,024,000
(including additions to property and equipment of $461,000 and $550,000 for
acquisition of a Georgia dialysis center; see Note 9 to "Notes to Consolidated
Condensed Financial Statements.") and net cash used in financing activities of
$66,000 (including a decrease in advances to our parent of $102,000, and debt
repayments of $168,000).
We have mortgages with a Maryland bank on two of our buildings, one in
Lemoyne, Pennsylvania and the other in Easton, Maryland, with a combined balance
of approximately $102,000 at June 30, 2002, and $138,000 at December 31, 2001.
The bank has liens on our real and personal property, including a lien on all
rents due and security deposits from the rental of these properties. An
unaffiliated competitive dialysis center continues to lease space from us in our
Maryland building. The Maryland property has a second mortgage to secure a
three-year $700,000 loan to our Vineland, New Jersey subsidiary. This loan,
which is guaranteed by the company and secured by that subsidiary's personal
property exclusive of its dialysis equipment, had an outstanding balance of
$680,000 at June 30, 2002 and $700,000 at December 31, 2001. In April 2001, we
obtained a $788,000 five-year mortgage on our building in Valdosta, Georgia,
which had an outstanding balance of $766,000 at June 30, 2002 and $776,000 at
December 31, 2001. We have an equipment financing agreement for kidney dialysis
machines for our facilities, which has an outstanding balance of approximately
$1,576,000 at June 30, 2002, and $1,678,000 at December 31, 2001. See Note 3 to
"Notes to Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which costs include
equipment and initial working capital requirements. Acquisition of an existing
dialysis facility is usually more expensive than construction, although
acquisition would provide us with an immediate ongoing operation. We presently
plan to expand our operations primarily through construction of new centers,
rather than acquisition. Development of a dialysis facility to initiate
operations typically takes four to six months and usually 12 months or longer to
generate income. We consider some of our centers to be in the developmental
stage, since they have not developed a patient base sufficient to generate and
sustain earnings.
We are seeking to expand our outpatient dialysis treatment facilities and
inpatient dialysis care. Such expansion requires capital. We opened our
eleventh center in Mechanicsburg, Pennsylvania in January 2002 and acquired a
center in Royston, Georgia in April 2002 for $550,000. We are developing two
new centers, one in Ohio and one in Maryland. In May 2002, we purchased land
for $172,000 for construction of a facility to house our new Ohio dialysis
operation. We have agreed to construct the facility, and upon completion we
will sell the completed facility to a corporation owned by one of the minority
members and who will be the medical director of the proposed facility and will
lease the facility from that corporation. See Notes 1 and 8 to "Notes to
Consolidated Condensed Financial Statements." We are presently in different
phases of negotiations with physicians for additional outpatient centers. No
assurance can be given that we will be successful in implementing our growth
strategy or that financing will be available to support such expansion.
In 2000, we loaned an aggregate of $2,200,000 to our parent, at an annual
interest rate of 10%, which our parent loaned to LGP. After several extensions
of the January 26, 2001 maturity date, in consideration for which we received
100,000 additional LGP shares, in May, 2001, Medicore paid us $215,000,
representing $200,000 of principal plus accrued interest, and in June, 2001,
Medicore paid us the remaining $2,000,000 in loans along with approximately
$279,000 of accrued interest. See Note 5 to "Notes to Consolidated Condensed
Financial Statements." Thomas K. Langbein, Chairman of the Board and CEO of our
company and our parent, of which company he is also the President, is a director
of LGP.
In September, 2000, the company announced its intent to purchase up to
approximately 300,000 of its outstanding shares. Approximately 93,000 shares
were purchased at a cost of $98,000 during 2001, with total purchases of 170,000
shares with a cost of $163,000 since September, 2000. See Note 7 to "Notes to
Consolidated Condensed Financial Statements."
We believe that current levels of working capital and available financing
alternatives will enable us to meet our liquidity demands for at least the next
12 months as well as expand our dialysis facilities and thereby our patient
base.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (FAS 143). In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment on Disposal of
Long-lived Assets" (FAS 144). The adoption of the new accounting pronouncements
is not expected to have a significant effect on the company's results of
consolidated operations, financial position or cash flows. See Notes 1 and 9 to
"Notes to Consolidated Condensed Financial Statements."
CRITICAL ACCOUNTING POLICIES
The company has significant accounting policies relating to estimates and
revenue recognition as more fully described in Note 1 to "Notes to Consolidated
Condensed Financial Statements."
IMPACT OF INFLATION
Inflationary factors have not had a significant effect on our operations. A
substantial portion of our revenue is subject to reimbursement rates established
and regulated by the federal government. These rates do not automatically adjust
for inflation. Any rate adjustments relate to legislation and executive and
Congressional budget demands, and have little to do with the actual cost of
doing business. Dialysis services revenues cannot be voluntary increased to
keep pace with increases in nursing and other patient care costs. Increased
operating costs without a corresponding increase in reimbursement rates may
adversely affect our earnings in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities of which we held approximately $517,000 at June 30, 2002.
Interest rate risk on debt is managed by negotiation of appropriate rates
for equipment financing obligations based on current market rates. There is an
interest rate risk associated with our variable rate mortgage obligations which
totaled approximately $782,000 at June 30, 2002.
We have exposure to both rising and falling interest rates. A % decrease
in rates on our investments in government securities as of June 30, 2002 and a
1% increase in rates on our mortgage debt as of June 30, 2002 would have
resulted in a negative impact of approximately $2,000 on our results of
operations for the first half of 2002.
We do not utilize financial instruments for trading or speculative purposes
and do not currently use interest rate derivatives.
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
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The company recently initiated an action against Lawrence Weber
Medical, Inc d/b/a Omnicare Renal Services in the United States District Court
for the Middle District of Pennsylvania asserting a breach by Omnicare of a
Consulting Services Agreement. The company is seeking damages, the return to it
by Omnicare of licensed materials the company provided to Omnicare under the
consulting agreement, costs of the legal action, and other relief as the court
deems equitable. This action is in its initial stages. We will keep you
advised as to its progress.
Item 4. Submission of Matters to a Vote of Security Holders
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We held our annual meeting of stockholders on May 29, 2002 at our
parent's offices in Hasbrouck Heights, New Jersey relating to the election of
six directors. Proxies were not solicited, since our parent, Medicore, Inc.,
owns 2,410,622 shares (62%) of our voting equity. Each nominee, Messrs. Thomas
K. Langbein, Bart Pelstring, Stephen W. Everett, Robert W. Trause, Alexander
Bienenstock, and Dr. David L. Blecker, were elected with 2,783,622 affirmative
votes, approximately 72% of the 3,887,344 outstanding shares. There were no
votes withheld for any of the nominees
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(10) Material Contracts
(i) Construction, Sale and Lease Agreement between the Company,
Pupizion, Inc. and DCA of Cincinnati, LLC (1) dated May, 2002.
____________
(1) 60% owned subsidiary.
(b) Reports on Form 8-K
A Current Report was filed on April 22, 2002 with respect to Item 5, "Other
Events," relating to the acquisition of the Royston, Georgia dialysis facility.
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
By: /s/ DANIEL R. OUZTS
---------------------
DANIEL R. OUZTS, Vice President,
Chief Accounting Officer and Treasurer
Dated: July 31, 2002