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, 2004
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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
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
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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 (check) 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 |_|
Indicate by check (check) whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes |_| or No |X|
Common Stock Outstanding
Common Stock, $.01 par value - 8,485,815 shares as of April 30, 2004.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Financial Statements (Unaudited) for the three
months ended March 31, 2004 and March 31, 2003, include the accounts of the
Registrant and its subsidiaries.
Item 1. Financial Statements
- ------- --------------------
1) Consolidated Condensed Statements of Income for the three months
ended March 31, 2004 and March 31, 2003.
2) Consolidated Condensed Balance Sheets as of March 31, 2004 and
December 31, 2003.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 2004 and March 31, 2003.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
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PART II -- OTHER INFORMATION
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------- ---------------------------------------------------------------------
Securities
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Item 6. Exhibits and Reports on Form 8-K
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i
PART I -- FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
----------- -----------
Operating revenues:
Medical service revenue $ 8,409,524 $ 6,737,951
Other income 73,060 217,045
----------- -----------
8,626,569 6,811,011
Operating cost and expenses:
Cost of medical services 5,162,222 4,202,613
Selling, general and administrative expenses 2,795,470 2,148,446
Provision for doubtful accounts 148,295 95,898
----------- -----------
8,105,987 6,446,957
----------- -----------
Operating income 520,582 364,054
Other income (expense):
Interest income on officer/director note 961 1,128
Interest (expense) on note payable to parent (3,018) --
Other income, net 22,294 13,093
----------- -----------
Income before income taxes, minority interest
and equity in affiliate earnings 540,819 378,275
Income tax provision 216,108 183,265
----------- -----------
Income before minority interest and equity in
affiliate earnings 324,711 195,010
Minority interest in income
of consolidated subsidiaries (55,832) (54,786)
Equity in affiliate earnings 19,033 15,419
----------- -----------
Net income $ 287,912 $ 155,643
=========== ===========
Earnings per share:
Basic $ .04 $ .02
=========== ===========
Diluted $ .03 $ .02
=========== ===========
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003(A)
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,681,496 $ 1,515,202
Accounts receivable, less allowance
of $812,000 at March 31, 2004;
$785,000 at December 31, 2003 5,144,970 4,913,318
Inventories 1,247,022 1,043,710
Deferred income taxes 423,000 412,000
Officer loan and interest receivable 108,464 107,503
Prepaid expenses and other current assets 1,314,039 1,392,721
------------ ------------
Total current assets 9,918,991 9,384,454
------------ ------------
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,333,589 2,332,904
Machinery and equipment 7,061,150 6,039,256
Leasehold improvements 4,004,483 3,548,875
------------ ------------
13,775,433 12,297,246
Less accumulated depreciation and amortization 5,357,023 5,030,550
------------ ------------
8,418,410 7,266,696
------------ ------------
Goodwill 2,291,333 2,291,333
Other assets 679,146 661,891
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Total other assets 2,970,479 2,953,224
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$ 21,307,880 $ 19,604,374
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,671,946 $ 1,167,213
Accrued expenses 3,487,882 3,170,269
Note and accrued interest payable to parent 487,170
Current portion of long-term debt 601,000 575,000
Income taxes payable 220,477 28,949
Payable minority interest acquisition 670,000 670,000
------------ ------------
Total current liabilities 7,138,475 5,611,431
Advances from parent 285,495 234,094
Long-term debt, less current portion 1,960,136 2,097,355
Deferred income taxes -- 59,000
------------ ------------
Total liabilities 9,384,106 8,001,880
------------ ------------
Minority interest in subsidiaries 639,879 632,177
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares:
8,485,815 shares issued and outstanding at March 31, 2004;
7,937,544 shares issued and outstanding at December 31, 2003 84,858 79,376
Capital in excess of par value 4,837,535 5,238,952
Retained earnings 6,361,502 6,073,589
Notes receivable from options exercised -- (421,600)
------------ ------------
Total stockholders' equity 11,283,895 10,970,317
------------ ------------
$ 21,307,880 $ 19,604,374
============ ============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission in
March, 2004.
See notes to consolidated condensed financial statements.
2
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------ ------------
Operating activities:
Net income $ 287,912 $ 155,643
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 330,486 271,821
Amortization 579 578
Bad debt expense 148,295 95,898
Deferred income tax benefit (70,000) --
Minority interest 55,832 54,786
Equity in affiliate earnings (19,033) (15,419)
Increase (decrease) relating to operating activities from:
Accounts receivable (379,947) (532,488)
Inventories (203,312) (92,769)
Interest receivable on officer loan (961) (1,128)
Prepaid expenses and other current assets (21,148) 781,149
Accounts payable 504,733 (505,143)
Accrued interest on note payable to parent 2,162 --
Accrued expenses 437,709 (27,677)
Income taxes payable 191,528 --
------------ ------------
Net cash provided by operating activities 1,264,835 185,251
------------ ------------
Investing activities:
Additions to property and equipment, net of minor disposals (1,482,200) (573,674)
Distribution from affiliate 20,400 77,000
Other assets (4,998) 8,554
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Net cash used in investing activities (1,466,798) (488,120)
------------ ------------
Financing activities:
Advances from parent 51,401 68,458
Note payable to parent 485,008 --
Payments on long-term debt (111,219) (145,115)
Exercise of stock options 5,400 --
Capital contributions by subsidiaries' minority members -- 4,000
Distribution to subsidiary minority members (62,333) (46,600)
------------ ------------
Net cash provided by (used in) financing activities 368,257 (119,257)
------------ ------------
Increase (decrease) in cash and cash equivalents 166,294 (422,126)
Cash and cash equivalents at beginning of period 1,515,202 2,571,916
------------ ------------
Cash and cash equivalents at end of period $ 1,681,496 $ 2,149,790
============ ============
See notes to consolidated condensed financial statements.
3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The company is in one business segment, kidney dialysis operations,
providing outpatient hemodialysis services, home dialysis services, inpatient
dialysis services and ancillary services associated with dialysis treatments.
The company operates 19 kidney dialysis outpatient treatment centers located in
Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia,
including the management of each of a 40% owned Ohio affiliate and an
unaffiliated Georgia center, and has one dialysis facility under construction;
has agreements to provide inpatient dialysis treatments to eight hospitals; and
provides supplies and equipment for dialysis home patients. See "Consolidation."
CONSOLIDATION
The consolidated condensed financial statements include the accounts of
Dialysis Corporation of America and its subsidiaries, collectively referred to
as the "company." Intercompany accounts and transactions have been eliminated in
consolidation. As of March 31, 2004, the company is a 57% owned subsidiary of
Medicore, Inc., its parent. The company has a 40% interest in an Ohio dialysis
center which it manages, which is accounted for on the equity method and not
consolidated for financial reporting purposes.
STOCK SPLIT
On January 28, 2004, the company effected a two-for-one stock split. All
share and per share data in the consolidated condensed financial statements and
notes have been adjusted to reflect the two-for-one split.
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. Actual results could differ
from those estimates.
The company's principal estimates are for estimated uncollectible accounts
receivable as provided for in its 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. The company's 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.
4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The company believes that it
is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusions from the Medicare and Medicaid programs.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. Although cash and cash equivalents are largely not federally
insured, the credit risk associated with these deposits that typically may be
redeemed upon demand is considered low due to the high quality of the financial
institutions in which they are invested.
CREDIT RISK
The company's primary concentration of credit risk is with accounts
receivable, which consist of amounts owed by governmental agencies, insurance
companies and private patients. Receivables from Medicare and Medicaid comprised
65% of receivables at March 31, 2004 and 59% at December 31, 2003.
INVENTORIES
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets is comprised as follows:
MARCH 31, DECEMBER 31,
2004 2003
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Vendor volume discounts receivable $ 517,520 $ 610,150
Prepaid expenses 436,400 478,079
Receivable from management service contracts 73,865 130,916
Other 286,254 173,576
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$1,314,039 $1,392,721
========== ==========
5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
ACCRUED EXPENSES
Accrued expenses is comprised as follows:
MARCH 31, DECEMBER 31,
2004 2003
---------- ----------
Due to insurance companies $1,985,959 $1,759,397
Accrued compensation 867,717 985,330
Other 634,206 425,542
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$3,487,882 $3,170,269
========== ==========
VENDOR CONCENTRATION
The company purchases erythropoietin (EPO) from one supplier which
comprised 37% of the company's cost of sales for the first quarter of 2004 and
for the same period of the preceding year. There is only one supplier of EPO in
the United States, and this supplier has recently received FDA approval for an
alternative product available for dialysis patients. There are no other
suppliers of any similar drug available to dialysis treatment providers.
Revenues from the administration of EPO comprised 29% of medical service revenue
for the first quarter of 2004 and 28% for the same period of the preceding year.
REVENUE RECOGNITION
Net revenue is recognized as services are rendered at the net realizable
amount from Medicare, Medicaid, commercial insurers and other third party
payors. The company occasionally provides dialysis treatments on a charity basis
to patients who cannot afford to pay. The amount is not significant.
GOODWILL
Goodwill represents cost in excess of net assets acquired. The company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (FAS 142) effective January 1, 2002. 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. Pursuant to the provisions of FAS 142, the goodwill resulting from
the company's acquisition of minority interests in August, 2001 and June, 2003,
and the goodwill resulting from the company's acquisition of Georgia dialysis
centers in April, 2002 and April, 2003, are not being amortized for book
purposes and are subject to the annual impairment testing provisions of FAS 142,
which testing has indicated no impairment for goodwill. See Note 9.
6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INCOME TAXES
Deferred income taxes are determined by applying enacted tax rates
applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax basis of assets
and liabilities.
STOCK-BASED COMPENSATION
The company follows the intrinsic value method of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its employee stock options because, as
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123 permits a company to elect to follow the intrinsic value method
of APB 25 rather than the alternative fair value accounting provided under FAS
123, but requires pro forma net income and earnings per share disclosures as
well as various other disclosures not required under APB 25 for companies
following APB 25. The company has adopted the disclosure provisions required
under Financial Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (FAS 148). Under APB 25,
because the exercise price of the company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense was
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 148, and has been determined as if the company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for options granted during 2004, 2003, 2002 and 2001, respectively:
risk-free interest rate of 3.25%, 1.44%, 3.73%, and 5.40%; no dividend yield;
volatility factor of the expected market price of the company's common stock of
1.05, 1.07, 1.15, and 1.14, and a weighted-average expected life of 5 years, 4.7
years, 5 years, and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The company's
pro forma information follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Net income, as reported $ 287,912 $ 155,643
Stock-based employee compensation expense under
fair value method, net of related tax effects (17,162) (15,414)
---------- ----------
Pro forma net income $ 270,750 $ 140,229
========== ==========
Earnings per share:
Basic, as reported $ .04 $ .02
========== ==========
Basic, pro forma $ .03 $ .02
========== ==========
Diluted, as reported $ .03 $ .02
========== ==========
Diluted, pro forma $ .03 $ .02
========== ==========
EARNINGS PER SHARE
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, consisting of stock options,
calculated using the treasury stock method and average market price.
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Net income $ 287,912 $ 155,643
========== ==========
Weighted average shares-denominator basic computation 8,158,058 7,895,036
Effect of dilutive stock options 763,894 784,864
---------- ----------
Weighted average shares, as adjusted-denominator
diluted computation 8,921,952 8,679,900
========== ==========
Earnings per share:
Basic $ .04 $ .02
========== ==========
Diluted $ .03 $ .02
========== ==========
The company had various potentially dilutive securities during the periods
presented, consisting of stock options. See Note 7.
8
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
OTHER INCOME
Operating:
Other operating income is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Management fee income $ 82,862 $ 73,060
Litigation settlement 134,183 --
---------- ----------
$ 217,045 $ 73,060
========== ==========
Non-operating:
Other non-operating income (expense) is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
---------- ----------
Rental income $ 46,663 $ 44,002
Interest income 8,589 11,815
Interest (expense) (42,597) (53,786)
Other 9,639 11,062
---------- ----------
Other income, net $ 22,294 $ 13,093
========== ==========
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, and in the case of debt because such
instruments either bear variable interest rates which approximate market or have
interest rates approximating those currently available to the company for loans
with similar terms and maturities.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
9
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2004 and
March 31, 2003 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, 2004 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2004.
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, 2003.
NOTE 3--LONG-TERM DEBT
The company, through its subsidiary, DCA of Vineland, LLC, and pursuant to
a December 3, 1999 loan agreement, obtained a $700,000 development loan with
interest at 8.75% through December 2, 2001, 1 1/2% over the prime rate
thereafter through December 15, 2002 and 1% over prime thereafter with an
interest rate of 5% at March 31, 2004 and December 31, 2003, secured by a
mortgage on the company's real property in Easton, Maryland. Outstanding
borrowings were subject to monthly payments of interest only through December 2,
2001, with monthly payments thereafter of $2,917 principal plus interest through
December 2, 2002 and monthly payments thereafter of $2,217 principal plus
interest with any remaining balance due December 2, 2007. This loan had an
outstanding principal balance of $630,000 at March 31, 2004 and $636,000 at
December 31, 2003.
In April 2001, the company obtained a $788,000 five-year mortgage through
April, 2006, on its building in Valdosta, Georgia with interest at 8.29% until
March, 2002, 7.59% thereafter until December 16, 2002, and prime plus 1/2% with
a minimum of 6.0% effective December 16, 2002, with an interest rate of 6% at
March 31, 2004, and December 31, 2003. 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. The remaining principal balance
under this mortgage amounted to approximately $705,000 at March 31, 2004, and
$715,000 at December 31, 2003.
The equipment financing agreement is for financing for kidney dialysis
machines for the company's dialysis facilities. Financing under the equipment
purchase agreement is a noncash financing activity, which is a supplemental
disclosure required by Financial Accounting Standards Board Statement No 95,
"Statement of Cash Flows." There was no financing under this agreement during
the first quarter of 2004 or the first quarter of 2003. The remaining principal
balance under this financing amounted to approximately $1,226,000 at March 31,
2004, and $1,321,000 at December 31, 2003.
The prime rate was 4.00% as of March 31, 2004, and December 31, 2003. For
interest payments, see Note 11.
10
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 3--LONG-TERM DEBT--CONTINUED
The company's two mortgage agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends above 25%
of the company's net worth, require lenders' approval for a merger, sale of
substantially all the assets, or other business combination of the company, and
require maintenance of certain financial ratios. The company was in compliance
with the debt covenants at March 31, 2004, and December 31, 2003.
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.
For income tax payments, see Note 11.
NOTE 5--TRANSACTIONS WITH PARENT
The company's parent provides certain financial and administrative
services for the company. Central operating costs are charged on the basis of
time spent. In the opinion of management, this method of allocation is
reasonable. The amount of expenses allocated by the parent totaled approximately
$50,000 for the three months ended March 31, 2004 and for the same period of the
preceding year.
The company had an intercompany advance payable to its parent of
approximately $285,000 at March 31, 2004 and $234,000 at December 31, 2003 which
bears interest at the short-term Treasury Bill rate. Interest expense on
intercompany advances payable was approximately $1,000 for the three months
ended March 31, 2004. Interest is included in the intercompany advance balance.
The company's parent has agreed not to require repayment of the intercompany
advance balance prior to April 1, 2005; therefore, the advance has been
classified as long-term at March 31, 2004.
On March 17, 2004, the company issued a demand promissory note to its
parent for up to $1,500,000 of financing for equipment purchases with annual
interest of 1.25% over the prime rate at the time of each advance. The company
borrowed approximately $485,000 under this note during the first quarter of 2004
with an interest rate of 5.25%. Interest expense on the note amounted to
approximately $2,000 for the first quarter of 2004, which represented the amount
of accrued interest payable as of March 31, 2004.
NOTE 6--OTHER RELATED PARTY TRANSACTIONS
The 20% minority interest in DCA of Vineland, LLC was held by a company
owned by the medical director of that facility, who became a director of the
company in 2001. This physician was provided with the right to acquire up to 49%
of DCA of Vineland. In April, 2000, another company owned by this physician
acquired an interest in DCA of Vineland, resulting in the company holding a 51.%
ownership interest in DCA of Vineland and this physician's companies holding a
combined 49% ownership interest of DCA of Vineland.
11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6--OTHER RELATED PARTY TRANSACTIONS--CONTINUED
In July, 2000, one of the companies owned by this physician acquired a 20%
interest in DCA of Manahawkin, Inc. (formerly known as Dialysis Services of NJ,
Inc. - Manahawkin). Under agreements with DCA of Vineland and DCA of Manahawkin,
this physician serves as medical director for each of those dialysis facilities.
In May, 2001, the company loaned its president $95,000 to be repaid with
accrued interest at prime minus 1% (floating prime) on or before maturity on May
11, 2006. This demand loan is collateralized by all of the President's stock
options in the company, as well as common stock from exercise of the options and
proceeds from sale of such stock. Interest income on the loan amounted to
approximately $ 1,000 for the three months ended March 31, 2004 and for the same
period of the preceding year.
Minority members in subsidiaries in certain situations may fund their
portion of required capital contributions by issuance of an interest bearing
note payable to the company which the minority member may repay through their
portion of capital distributions of the subsidiary. The 20% member in DCA of
Chevy Chase, LLC funded approximately $30,000 in capital contributions during
the first quarter of 2004, with no such contributions during the same period of
the preceding year, under a note accruing interest at prime plus 2%, with
interest totaling approximately $3,000 for the three months ended March 31,
2004, with approximately $16,000 of distributions to the member applied against
the note and accrued interest during the first quarter of 2004, with no such
distributions during the same period of the preceding year. These represent
noncash investing activities, which is a supplemental disclosure required by
Financial Accounts Standards Board Statement No. 95, "Statement of Cash Flows."
See Note 11.
NOTE 7--STOCK OPTIONS
In June, 1998, the board of directors granted an option under the now
expired 1995 Stock Option Plan to a board member for 10,000 shares exercisable
at $1.13 per share through June 9, 2003. This option was exercised in June, 2003
with the company receiving an $11,250 cash payment for the exercise price.
In April, 1999, we adopted a stock option plan pursuant to which the board
of directors granted 1,600,000 options exercisable at $.63 per share to certain
of our officers, directors, employees and consultants with 680,000 options
exercisable through April 20, 2000 and 920,000 options exercisable through April
20, 2004, of which 120,000 options to date have been cancelled. In April, 2000,
the 680,000 one-year options were exercised for which we received cash payment
of $3,400 and the balance in three-year promissory notes with the interest at
6.2% and which maturity was extended to April 20, 2004. All the notes were
repaid with stock at fair market value on February 9, 2004. Interest income on
the notes amounted to approximately $3,000 for the three months ended March 31,
2004, and $6,000 for the same period of the preceding year. In March, 2003,
155,714 of the remaining 800,000 options outstanding were exercised for $97,322
with the exercise price satisfied by director bonuses accrued in 2002. In
January, 2004, 130,278 of these options were exercised for $81,424 with the
exercise price satisfied by director bonuses accrued in 2003. In February, 2004,
158,306 of these options were exercised
12
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 7--STOCK OPTIONS--CONTINUED
for $98,941 with the exercise price satisfied by payment of 18,152 shares to the
company for cancellation. In March, 2004, 355,702 of these options were
exercised for $222,314 with the exercise price satisfied by the payment of
54,223 shares to the company. The exercises and share payments to the company
represent noncash investing activity, which is a supplemental disclosure
required by Financial Accounting Standards Board Statement No. 95, "Statement of
Cash Flows." See Note 11.
In January, 2001, the board of directors granted to our Chief Executive
Officer and President a five-year option for 330,000 shares exercisable at $.63
per share with 66,000 options vesting at January, 2001, and 66,000 options
vesting in equal annual increments on January 1 for each of the next four years.
In January, 2004, 56,384 of these options were exercised for $35,240 with the
exercise price satisfied by a director bonus accrued in 2003.
In September, 2001, the board of directors granted five-year options for
an aggregate of 150,000 shares exercisable at $.75 per share through September
5, 2006, to certain officers, directors and key employees. 30,000 of the options
vested immediately with the remaining 120,000 options to vest in equal
increments of 30,000 options each September 5, commencing September 5, 2002. In
March, 2003, 3,570 of these options were exercised for $2,678 with the exercise
price satisfied by director bonuses accrued in 2002. In January, 2004, 4,576 of
these options were exercised for $3,432 with the exercise price satisfied by
director bonuses accrued in 2003. These exercises represent noncash investing
activity, which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No. 95, "Statement of Cash Flows." See Note 11. In
January, 2004, 7,200 of these options were exercised with the company receiving
a $5,400 cash payment for the exercise price leaving 134,654 of these options
outstanding as of March 31, 2004. As of March 31, 2004, an aggregate of 120,000
of these options had vested, of which 15,346 have been exercised.
In March, 2002, the board of directors granted a five-year option to an
officer for 60,000 shares exercisable at $1.58 per share through February 28,
2007. The option was to vest in equal annual increments of 15,000 shares on each
February 28 from 2003 through 2006. The 15,000 options that had vested in
February, 2003, were exercised by the officer in October, 2003, and the
remaining 45,000 options expired unvested due to the July 31, 2003 resignation
of the officer.
In May, 2002, the board of directors granted five-year options for an
aggregate of 21,000 shares to the company's employees of which 11,000 were
outstanding at March 31, 2004. Most of these options with respect to each
individual employee are for 1,000 shares of common stock, with one option for
3,000 shares. These options are exercisable at $2.05 per share through May 28,
2007, with all options vesting on May 29, 2004. Options for 10,000 shares have
been cancelled as a result of the termination of the employees holding those
options, with 6,000 options having been cancelled during 2003.
In June, 2003, the board of directors granted to an officer a five-year
option for 50,000 shares exercisable at $1.80 per share through June 3, 2008.
The option vests annually in increments of 12,500 shares on each June 4 from
2004 to 2007.
13
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 7--STOCK OPTIONS--CONTINUED
In August, 2003, the board of directors granted a three-year option to a
director who serves on several of the company's committees including the audit
committee, for 10,000 shares exercisable at $2.25 per share through August 18,
2006. The option vests in two annual increments of 5,000 shares commencing on
August 19, 2004.
In January, 2004, the board of directors granted a five year option to an
employee for 20,000 shares exercisable at $3.09 per share through January 12,
2009. The option vests in annual increments of 5,000 shares on each January 13
from 2005 through 2008.
On January 28, 2004, the company effected a two-for-one stock split of its
outstanding common stock. All option amounts and exercise prices have been
adjusted to reflect the stock split. Split-adjusted option exercise prices
resulting in a fraction of a cent have been rounded up to the nearest cent for
purposes of these notes to the financial statements of the company.
NOTE 8--COMMITMENTS
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 21 year old age requirement. The company and its parent established a new
401(k) plan effective January, 2003, which allows employees, in addition to
regular employee contributions, to elect to have a portion of bonus payments
contributed. As an incentive to save for retirement, the company will match 10%
of an employee's contribution resulting from any bonus paid during the year and
may make a discretionary contribution with the percentage of any discretionary
contribution to be determined each year with only employee contributions up to
6% of annual compensation considered when determining employer matching. The
company's expense for employer matching contributions amounted to approximately
$600 for the three months ended March 31, 2004, with no matching contributions
for the same period of the preceding year.
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 August, 2001 and $300,000 was paid 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 assets
acquired. The goodwill is being 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 whom the company acquired the
minority interest has agreements to act as medical director of one other
dialysis subsidiary of the company. See Note 1.
In April, 2002, the company acquired a dialysis center in Royston, Georgia
for $550,000. This transaction resulted in $400,000 of goodwill representing the
excess of the $550,000 purchase price over the $150,000 fair value of the assets
acquired. The goodwill is being 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.
14
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 9--ACQUISITIONS--CONTINUED
During the second quarter of 2003, the company acquired the assets of a
Georgia dialysis center and the 30% minority interests in each of two of its
existing Georgia dialysis centers for a total consideration of $1,415,000, of
which $745,000 was paid and $670,000 is payable in June, 2004, which has been
presented as a current liability as of March 31, 2004. These acquisitions
resulted in $1,368,000 of goodwill, representing the excess of the purchase
price over the fair value of the net assets acquired. The goodwill is being
amortized for tax purposes over a 15-year period. The company's decision to make
these acquisitions was based on its expectation of profitability resulting from
management's evaluation of the operations of these dialysis centers. The party
from whom the 30% minority interests were purchased was the medical director of
one of the facilities at which the 30% interest was acquired and is the medical
director of two other of the company's Georgia dialysis facilities. See Note 1.
NOTE 10--LOAN TRANSACTIONS
The company customarily funds the establishment and operations of its
dialysis facility subsidiaries, usually until they become self-sufficient,
including subsidiaries in which medical directors hold interests ranging from
20% to 49%. Except in limited circumstances, such funding is generally made
without formalized loan documents, as the operating agreements for the
subsidiaries provide for cash flow and other proceeds to first pay any such
financing that the company provides, exclusive of any tax payment distributions.
One such loan exists with DCA of Vineland, LLC. In April, 2000, a company owned
by the medical director of DCA of Vineland acquired an interest in DCA of
Vineland for $203,000, which was applied to reduce the company's loan. The
outstanding principal indebtedness of the company's loan was approximately
$340,000 at March 31, 2004 and $425,000 at December 31, 2003. See Note 6.
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION
The following represents non-cash financing and investing activities and
other cash flow information:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Interest paid (see Note 3) $ 41,000 $ 44,000
Income taxes paid (see Note 4) 97,000 197,000
Options exercise bonus (191,238 shares 2004;
159,284 shares 2003) (see Note 7) 120,000 100,000
Subsidiary minority member capital
contributions funded by notes (see Note 6) 30,000 --
Subsidiary minority member distributions applied
against notes and accrued interest (see Note 6) 16,000 --
Share payment (514,008 options exercised; 72,375 shares paid)
for stock option exercises (see Note 7) 321,000 --
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide 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. Our discussion of MD&A should be read in conjunction
with our unaudited consolidated condensed financial statements, including the
notes, included elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through 19 outpatient dialysis centers, including a
40% owned Ohio affiliate and one unaffiliated dialysis center which it manages,
to patients with chronic kidney failure, also know as end-stage renal disease or
ESRD. We provide dialysis treatments to dialysis patients of eight hospitals and
medical centers through acute inpatient dialysis services agreements with those
entities. We provide homecare services, including home peritoneal dialysis
through method II services, the latter relating to providing patients with
supplies and equipment.
The following table shows the number of in-center, home peritoneal and
acute inpatient treatments performed by us through the dialysis centers we
operate, including the two centers we manage, one in which we have a 40%
ownership interest, and those hospitals and medical centers with which we have
inpatient acute service agreements for the periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
-------- --------
In center 27,749 22,985
Home peritoneal 1,834 1,662
Acute 2,179 2,072
-------- --------
31,762(1) 26,719(1)
_______________
(1) Treatments by the two managed centers included: in-center treatments
of 2,883 and 2,426 respectively, for the three months ended March 31, 2004
and March 31, 2003; no home peritoneal treatments; and acute treatments of
12 and 53, respectively, for the three months ended March 31, 2004 and
March 31, 2003.
We also provide ancillary services associated with dialysis treatments,
including the administration of EPO for the treatment of anemia in our dialysis
patients. EPO is currently available from only one manufacturer, and no
alternative drug has been available to us for the treatment of anemia in our
dialysis patients. If our available supply of EPO were reduced either by the
manufacturer or due to excessive demand, our revenues and net income would be
adversely affected. The manufacturer of EPO could implement price increases
which would adversely affect our net income. This manufacturer has developed
another anemia drug that could possibly substantially reduce our revenues and
profit from the treatment of anemia in our patients.
16
ESRD patients must either obtain a kidney transplant or obtain regular
dialysis treatments for the rest of their lives. Due to a lack of suitable
donors and the possibility of transplanted organ rejection, the most prevalent
form of treatment for ESRD patients is hemodialysis through a kidney dialysis
machine. Hemodialysis patients usually receive three treatments each week with
each treatment lasting between three and five hours on an outpatient basis.
Although not as common as hemodialysis in an outpatient facility, home
peritoneal dialysis is an available treatment option, representing the third
most common type of ESRD treatment after outpatient hemodialysis and kidney
transplantation.
Approximately 57% of our medical service revenues were derived from
Medicare and Medicaid reimbursement for the three months ended March 31, 2004,
compared to 58% for the same period of the preceding year, with rates
established by CMS, and which rates are subject to legislative changes. Over the
last two years, Medicare reimbursement rates have not increased. Dialysis is
typically reimbursed at higher rates from private payors, such as a patient's
insurance carrier, as well as higher payments received under negotiated
contracts with hospitals for acute inpatient dialysis services.
The following table shows the breakdown of our revenues by type of payor
for the periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------ ------
Medicare 49% 49%
Medicaid and comparable programs 8 9
Hospital inpatient dialysis services 7 10
Commercial insurers and other private payors 36 32
------ ------
100% 100%
====== ======
Our medical service revenues are derived primarily from four sources:
outpatient hemodialysis services, home peritoneal dialysis services, inpatient
hemodialysis services and ancillary services. The following table shows the
breakdown of our medical service revenues (in thousands) derived from our
primary revenue sources and the percentage of total medical service revenue
represented by each source for the periods presented:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2004 2003
----------------- -----------------
Outpatient hemodialysis services $4,087 49% $3,309 49%
Home peritoneal dialysis services 411 5 289 4
Inpatient hemodialysis services 589 7 532 8
Ancillary services 3,323 39 2,608 39
------ ------ ------ ------
$8,410 100% $6,738 100%
====== ====== ====== ======
The healthcare industry is subject to extensive regulation by federal and
state authorities. There are a variety of fraud and abuse measures to combat
waste, including anti-kickback regulations and extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
Unanticipated changes in healthcare programs or laws could require us to
restructure our business practices which, in turn, could materially adversely
affect our business, operations and financial condition. We have developed a
Corporate Integrity Program to assure that we provide the highest level of
patient care and services in a professional and ethical manner consistent with
applicable federal and state laws and regulations. Among the different programs
is our Compliance Program, which has been implemented to assure our compliance
with fraud and abuse laws and to supplement our existing policies relating to
claims submission, cost report preparation, initial audit and human resources,
all geared towards a cost-efficient operation beneficial to patients and
shareholders.
17
Dialysis Corporation of America's future growth depends primarily on the
availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and our ability to manage the development
costs for these potential dialysis centers while competing with larger
companies, some of which are public companies or divisions of public companies
with greater numbers of personnel and financial resources available for
acquiring and/or developing dialysis centers in areas targeted by us.
Additionally, there is intense competition for qualified nephrologists who would
serve as medical directors of dialysis facilities, and be responsible for the
supervision of those dialysis centers. There is no assurance as to when any new
dialysis centers or inpatient service contracts with hospitals will be
implemented, or the number of stations, or patient treatments such center or
service contract may involve, or if such center or service contract 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 in the short term due to start-up costs and
expenses and a smaller patient base.
RESULTS OF OPERATIONS
The following table shows our results of operations (in thousands) and the
percentage of medical service revenue represented by each line item for the
periods presented:
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2004 2003
--------------------- ---------------------
Medical service revenue $ 8,410 100.0% $ 6,738 100.0%
Other income 217 2.6% 73 1.1%
-------- -------- -------- --------
Total operating revenues 8,627 102.6% 6,811 101.1%
Cost of medical services 5,162 61.4% 4,203 62.4%
Selling, general and administrative expenses 2,796 33.2% 2,148 31.9%
Provision for doubtful accounts 148 1.8% 96 1.4%
-------- -------- -------- --------
Total operating costs and expenses 8,106 96.4% 6,447 95.7%
-------- -------- -------- --------
Operating income 521 6.2% 364 5.4%
Other, net 20 .2% 14 .2%
-------- -------- -------- --------
Income before income taxes, minority interest
and equity in affiliate earnings 541 6.4% 378 5.6%
Income tax provision 216 2.6% 183 2.7%
-------- -------- -------- --------
Income before minority interest and
equity in affiliate earnings 325 3.9% 195 2.9%
Minority interest in income of
consolidated subsidiaries (56) (0.7%) (55) (0.8%)
Equity in affiliate earnings 19 0.2% 16 0.2%
-------- -------- -------- --------
Net income $ 288 3.4% $ 156 2.3%
======== ======== ======== ========
Medical service revenues increased approximately $1,672,000 (25%) for the
three months ended March 31, 2004, compared to the same period of the preceding
year with the increase largely attributable to a 19% increase in total dialysis
treatments performed by us from 24,240 during the first quarter of 2003 to
28,867 during the first quarter of 2004. This increase reflects increased
revenues of approximately $401,000 for our Pennsylvania dialysis centers,
increased revenues of $32,000 for our New Jersey
18
centers, increased revenues of $292,000 for our Georgia centers, increased
revenues of approximately $405,000 for our Maryland center; and increased
revenues of approximately $335,000 for our Ohio center; revenues of
approximately $135,000 for our new Virginia center; and revenues of
approximately $72,000 for our new South Carolina center. Other operating income
increased by approximately $144,000 for the three months ended March 31, 2004
compared to the same period of the preceding year. This includes a litigation
settlement of $134,000 and an increase in management fee income of $10,000
pursuant to management services agreements with our 40% owned Toledo, Ohio
affiliate and our unaffiliated Georgia center.
Cost of medical services sales as a percentage of sales decreased to 61%
for the three months ended March 31, 2004, compared to 62% for the same period
of the preceding year, largely due to a decrease in payroll costs as a
percentage of medical service sales.
Approximately 29% of our medical services revenues for the three months
ended March 31, 2004 was derived from the administration of EPO to our dialysis
patients compared to 28% for the same period of the preceding year. This drug is
only available from one manufacturer in the United States. Price increases for
this product without our ability to increase our charges would increase our
costs and thereby adversely impact our earnings. We cannot predict the timing,
if any, or extent of any future price increases by the manufacturer, or our
ability to offset any such increases.
Selling, general and administrative expenses, those corporate and facility
costs not directly related to the care of patients, including, among others,
administration, accounting and billing, increased by approximately $647,000 for
the three months ended March 31, 2004, compared to the same period of the
preceding year. This increase reflects operations of our new dialysis centers in
Pennsylvania, South Carolina and Virginia, and a center under construction in
Maryland, and increased support activities resulting from expanded operations.
Selling, general and administrative expenses as a percentage of medical services
revenues increased to approximately 33% for the three months ended March 31,
2004, compared to 32% for the same period of the preceding year, including
expenses of new centers incurred prior to Medicare approval for which there were
no corresponding medical service revenues.
Provision for doubtful accounts increased approximately $52,000 for the
three months ended March 31, 2004 compared to the same period of the preceding
year. Medicare bad debt recoveries of $30,000 were recorded during the first
quarter of 2003 with no such recoveries recorded during the first quarter of
2004. Without the effect of the Medicare bad debt recoveries the provision would
have amounted to 2% of sales for the three months ended March 31, 2004 and for
the same period of the preceding year. The provision for doubtful accounts
reflects our collection experience with the impact of that experience included
in accounts receivable presently reserved, plus recovery of accounts previously
considered uncollectible from our Medicare cost report filings. The provision
for doubtful accounts is determined under a variety of criteria, primarily aging
of the receivables and payor mix. Accounts receivable are estimated to be
uncollectible based upon various criteria including the age of the receivable,
historical collection trends and our understanding of the nature and
collectibility of the receivables, and are reserved for in the allowance for
doubtful accounts until they are written off.
Other non-operating income (expense) increased approximately $9,000 for
the three months ended March 31, 2004, compared to the same period of the
preceding year. This includes a decrease in interest income of $3,000; an
increase in rental income of $3,000; an increase in miscellaneous other income
of $2,000; and a decrease in interest expense of $11,000, reflecting lower
average interest rates on variable rate debt and reduced average borrowings.
Interest expense to our parent, Medicore, Inc., increased $3,000 for the three
months ended March 31, 2004 compared to the same period of the preceding year as
a result of an increase in the intercompany advance payable to our parent and
borrowings under a demand promissory note payable to our parent. The prime rate
was 4.00% at March 31, 2004, and December 31, 2003. See Notes 1, 3 and 5 of
"Notes to the Consolidated Condensed Financial Statements."
19
Although operations of additional centers have resulted in additional
revenues, certain of these centers are still in the developmental stage and,
accordingly, their operating results will adversely impact our overall results
of operations until they achieve a patient count sufficient to sustain
profitable operations.
We experienced same-center growth in total treatments of approximately 14%
for the first quarter of 2004 compared to the same period of the preceding year,
and same-center revenues grew approximately 19%. Management continues to search
for ways to operate more efficiently and reduce costs through process
improvements. In addition, we are reviewing technological improvements and
intend to make capital investments to the extent we are confident such
improvements will improve patient care and operating performance.
Minority interest represents the proportionate equity interests of
minority owners of our subsidiaries whose financial results are included in our
consolidated results. Equity in affiliate earnings represents our proportionate
interest in the earnings of our 40% owned Ohio affiliate whose operating results
improved for the three months ended March 31, 2004 compared to the same period
of the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $2,780,000 at March 31, 2004, which
reflected a decrease of $993,000 (26%) during the three months ended March 31,
2004. Included in the changes in components of working capital was an increase
in cash and cash equivalents of $166,000, which included net cash provided by
operating activities of $1,265,000, net cash used in investing activities of
$1,467,000 (including additions to property and equipment of $1,482,000, and
$20,000 distributions received from our 40% owned Ohio affiliate); and net cash
provided by financing activities of $368,000 (including an increase in advances
payable to our parent of $51,000, notes payable to our parent of $485,000, debt
repayments of $111,000, distributions to subsidiary minority members of $62,000,
and $5,000 of receipts from the exercise of stock options). The decrease in
working capital reflects our demand promissory note to fund equipment purchases
and accrued interest payable to our parent of approximately $487,000 and other
expenditures for internally financed acquisitions of fixed assets, and an
increase of approximately $227,000 in amounts refundable to insurance companies.
Our Easton, Maryland building has a mortgage to secure a development loan
for our Vineland, New Jersey subsidiary, which loan is guaranteed by us. This
loan had a remaining principal balance of $630,000 at March 31, 2004 and
$636,000 at December 31, 2003. In April, 2001, we obtained a $788,000 five-year
mortgage on our building in Valdosta, Georgia, which had an outstanding
principal balance of approximately $705,000 at March 31, 2004 and $715,000 at
December 31, 2003. Note 3 to "Notes to Consolidated Financial Statements."
We have an equipment financing agreement for kidney dialysis machines for
our facilities, which had an outstanding balance of approximately $1,226,000 at
March 31, 2004, and $1,321,000 at December 31, 2003. There was no additional
equipment financing during the first quarter of 2004. See Note 3 to "Notes to
Consolidated Condensed Financial Statements."
In March, 2004, we borrowed approximately $485,000 to finance dialysis
equipment purchases under a demand promissory note to our parent. See Note 5 to
"Notes to Consolidated Condensed Financial Statements."
20
We opened centers in Warsaw, Virginia, Aiken, South Carolina, and
Pottstown, Pennsylvania during the first quarter of 2004. We are in the process
of constructing a new center in Maryland which we anticipate opening during the
second quarter of 2004. Payment of the balance due of $670,000 on the purchase
of minority interests in two of our Georgia dialysis centers is due June, 2004.
See Note 9 to "Notes to Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would provide
us with an immediate ongoing operation, which most likely would be generating
income. We presently plan to expand our operations primarily through
construction of new centers, rather than acquisition. Development of a dialysis
facility to initiate operations takes four to six months and usually up to 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 and are presently in different phases of negotiations
with physicians for the development of additional outpatient centers. Such
expansion requires capital. We have been funding our expansion through
internally generated cash flow. Our future expansion may require us to seek
outside financing. While we anticipate that financing will be available either
from a financial institution or our parent company, Medicore, which is currently
providing us with equipment financing, no assurance can be given that we will be
successful in implementing our growth strategy or that adequate financing will
be available to support our expansion.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December, 2001, the SEC issued a cautionary advice to elicit more
precise disclosure in this Item 2, MD&A, about accounting policies management
believes are most critical in portraying our financial results and in requiring
management's most difficult subjective or complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts, a valuation allowance for our deferred tax assets and
determining the recoverability of our long-lived assets. The basis for our
estimates are historical experience and various assumptions that are believed to
be reasonable under the circumstances, given the available information at the
time of the estimate, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from the amounts
estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition: Revenues are recognized net of contractual
provisions. Contractual provisions are the difference between our gross billed
revenues and what we expect to collect. We receive payments through
reimbursement from Medicare and Medicaid for our outpatient dialysis treatments
coupled with patients' private payments, individually and through private
third-party insurers. A substantial portion of our revenues are derived from the
Medicare ERSD program, which outpatient reimbursement rates are fixed under a
composite rate structure, which includes the dialysis services and
21
certain supplies, drugs and laboratory tests. Certain of these ancillary
services are reimbursable outside of the composite rate. Medicaid reimbursement
is similar and supplemental to the Medicare program. Our acute inpatient
dialysis operations are paid under contractual arrangements, usually at higher
contractually established rates, as are certain of the private pay insurers for
outpatient dialysis. We have developed a sophisticated information and
computerized coding system, but due to the complexity of the payor mix and
regulations, we sometimes receive more or less than the amount expected when the
services are provided. We reconcile any differences at least quarterly.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our patients or
their insurance carriers to make required payments. Based on historical
information, we believe that our allowance is adequate. Changes in general
economic, business and market conditions could result in an impairment in the
ability of our patients and the insurance companies to make their required
payments, which would have an adverse effect on cash flows and our results of
operations. The allowance for doubtful accounts is reviewed monthly and changes
to the allowance are updated based on actual collection experience. We use a
combination of percentage of sales and the aging of accounts receivable to
establish an allowance for losses on accounts receivable.
Valuation Allowance for Deferred Tax Assets: The carrying value of
deferred tax assets assumes that we will be able to generate sufficient future
taxable income to realize the deferred tax assets based on estimates and
assumptions. If these estimates and assumptions change in the future, we may be
required to adjust our valuation allowance for deferred tax assets which could
result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition cost
and compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of the asset may not recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to the future cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset. These computations are complex and
subjective.
Goodwill and Intangible Asset Impairment: In assessing the recoverability
of our goodwill and other intangibles we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. This impairment test requires the determination of the fair
value of the intangible asset. If the fair value of the intangible assets is
less than its carrying value, an impairment loss will be recognized in an amount
equal to the difference. If these estimates or their related assumptions change
in the future, we may be required to record impairment charges for these assets.
We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets," (FAS 142) effective January 1, 2002, and are required
to analyze goodwill and indefinite lived intangible assets for impairment on at
least an annual basis.
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. Therefore, dialysis services revenues cannot be
voluntarily 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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing funds in liquid interest
bearing accounts of which we held approximately $1,674,000 March 31, 2004.
Interest rate risk on debt is managed by negotiation of appropriate rates
for equipment financing and other fixed rate obligations based on current market
rates. There is an interest rate risk associated with our variable rate mortgage
obligations, which totaled approximately $1,335,000 at March 31, 2004, and our
demand promissory note payable to our parent, Medicore, which amounted to
approximately $485,000 at March 31, 2004.
We have exposure to both rising and falling interest rates. Assuming a
relative 15% decrease in rates on our period-end investments in interest bearing
accounts and a relative 15% increase in rates on our period-end variable rate
debt would have resulted in a negative impact of approximately $2,000 on our
results of operations for the quarter ended March 31, 2004.
We do not utilize financial instruments for trading or speculative
purposes and do not currently use interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period of this quarterly report on Form 10-Q for the
first quarter ended March 31, 2004, management carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
President, and the Vice President of Finance and Principal Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"). The disclosure controls and procedures are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act, as is this quarterly report on Form 10-Q, is
recorded, processed, summarized and reported within required time periods
specified by the SEC's rules and forms. Based upon that evaluation, our Chief
Executive Officer and President, and our Vice President of Finance and Principal
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to us,
including our consolidated subsidiaries, required to be included in our periodic
SEC filings.
There were no significant changes in our internal controls over financial
reporting during our most recent fiscal quarter that have materially affected or
are reasonably likely to materially affect, internal controls over financial
reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses, of which there were none.
23
PART II -- OTHER INFORMATION
----------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------- ---------------------------------------------------------------------
Securities.
-----------
EQUITY SECURITIES SOLD BY THE COMPANY DURING THE FIRST QUARTER ENDED MARCH 31,
2004 AND NOT REGISTERED UNDER THE SECURITIES ACT
The only sales of equity securities by the company during this first
quarter ended March 31, 2004, were through the issuances of shares of common
stock pursuant to option exercises by its senior officers and directors.
On January 30, 2004, director Alex Bienenstock exercised a portion of his
stock purchase option at $.75 per share for 7,200 shares. The company received
cash consideration from Mr. Bienenstock in the amount of $5,400 representing the
aggregate exercise price for the shares.
On February 4, 2004, director Bart Pelstring exercised his stock purchase
option for 61,562 shares at $.625 per share. The aggregate exercise price for
the shares was $38,476. Mr. Pelstring paid for the option exercise by delivering
to the company 7,508 shares of common stock of the company then owned by him,
the fair market value of which at the time of exercise equaled the aggregate
exercise price for the option shares.
On February 6, 2004, an aggregate of 191,238 shares of common stock were
issued to the company's six directors based upon the exercise of stock purchase
options held by each of them, at the respective exercise prices set forth in the
table below. The consideration for such exercises was paid directly from a
portion of director bonuses granted by the company.
COMMON STOCK
NAME EXERCISE PRICE($) ACQUIRED
- ---- ----------------- --------
Thomas K. Langbein $.625 90,012
Stephen W. Everett .625 69,242
Bart Pelstring .625 15,580
Robert Trause .625 11,828
Dr. David Blecker .75 2,966
Alex Bienenstock .75 1,610
--------
191,238
On February 9, 2004, one director, Robert Trause, and one officer, Daniel
R. Ouzts, Vice President of Finance and Principal Financial Officer, exercised
their options, each at $.625 per share. The option held by Robert Trause was
exercisable for an aggregate of 46,744 shares of the company's common stock for
an aggregate exercise price of $29,215. As consideration for the exercise price
of the option, Mr. Trause delivered to the company 5,144 shares underlying the
option resulting in Mr. Trause receiving an aggregate of 41,600 shares. The
option held by Daniel R. Ouzts was exercisable for an aggregate of 50,000 shares
of the company's common stock for an aggregate exercise price of $31,250. As
consideration for the exercise price of the option Mr. Ouzts delivered to the
company 5,500 shares underlying the option resulting in Mr. Ouzts receiving an
aggregate of 44,500 shares. The shares delivered by each of Messrs. Trause and
Ouzts as consideration for their respective exercise prices were based on the
fair market value of the shares at the time of exercise.
On March 25, 2004, Thomas K. Langbein exercised his option for 355,702
shares at $.625 per share, for an aggregate exercise price of $222,314. The
consideration for the exercise of Mr. Langbein's option was the delivery by Mr.
Langbein of 54,223 shares of common stock of the company then owned by him, the
fair market value of which at the time of exercise equaled the aggregate
exercise price for the option shares.
24
All of the issuances of common stock to the officers and directors set
forth above upon their option exercises were not registered under the Securities
Act of 1933 (the "Securities Act") and were based on the Section 4(2) non-public
offering exemption from the registration requirements of the Securities Act.
Each of the individuals to whom common shares were issued by the company is an
officer and/or director, is sophisticated and knowledgeable about the affairs of
the company, and has full access to information concerning the company, its
operations, financial condition and management. Restrictive legends indicating
the non-transferability of the shares have been placed on the common stock
certificates, and stop-transfer instructions placed against such shares with the
company's transfer agent. The shares of common stock issued to the officers and
directors upon exercise of their options are restricted securities as defined in
Rule 144(a)(3) under the Securities Act, and may not be publicly sold,
transferred or hypothecated without compliance with the registration
requirements of the Securities Act or an available exemption therefrom.
On January 13, 2004, a five-year option for 20,000 shares exercisable at
$3.09 per share was granted a key employee. The option, granted under the
company's 1999 Stock Option Plan, vests over the next four years in equal annual
increments of 5,000 shares on each January 13, commencing in 2005. The option
expires January 12, 2009. This option was granted under the Securities Act
Section 4(2) non-public offering exemption from the registration requirements of
that Act, since the key employee is knowledgeable about and has access to
information concerning the company and its operations.
PURCHASES OF EQUITY SECURITIES BY OR ON BEHALF OF THE COMPANY DURING THE FIRST
QUARTER ENDED MARCH 31, 2004
The following tabular format provides information relating to the
company's common stock repurchases pursuant to publicly announced plans or
programs, and those not made pursuant to publicly announced plans or programs.
(a) (b) (c) (d)
Maximum No. (or
Total No. of Shares Approximate Dollar
(or Units) Purchased Value) of Shares (or
as Part of Publicly Units) that May Yet
Total No. of Shares Average Price Paid Announced Plans Be Purchased Under
Period (or Units) Purchased Per Share (or Unit) or Programs the Plans or Programs
- ------ -------------------- ------------------- ----------- ---------------------
January 1, 2004 to
January 31, 2004 -0- -0- -0- 240,000(2)
February 1, 2004 to
February 28, 2004 18,152(1) (1) -0- 240,000(2)
March 1, 2004 to
March 31, 2004 54,223(1) (1) -0- 240,000(2)
Total 72,375
(1) All of such shares were acquired by the company in lieu of cash
consideration pursuant to the exercise of options by two officers and two
directors. The fair market value of the shares delivered as consideration by
such officers and directors to the company equaled the aggregate exercise price
of their respective options See "Equity Securities Sold by the Company During
the First Quarter Ended March 31, 2004 and Not Registered Under the Securities
Act" above.
(2) The company has a common stock repurchase program, which was announced in
September, 2000, for the repurchase of up to 600,000 shares at the then current
market prices of approximately $.90 (post-split, $.45) per share. The repurchase
program was reiterated in September, 2001, and continues, but repurchases are
unlikely at the current market prices. The closing price of our common stock on
May 10, 2004 was $4.50.
25
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
31.2 Certifications of Principal Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934.
32 Section 1350 Certifications
32.1 Certifications of the Chief Executive Officer and the
Principal Financial Officer pursuant to Rule 13a-14(b)
of the Securities Exchange Act of 1934 and U.S.C.
Section 1350.
(b) Reports on Form 8-K
Current reports on Form 8-K were filed as follows:
(i) A report dated January 9, 2004, amended February 4, 2004,
reporting information pursuant to Item 4, "Change in
Registrant's Certifying Accountants."
(ii) A report dated January 13, 2004, Item 5, reporting information
pursuant to "Other Events and Required FD Disclosure,"
reporting with respect to the registrant's two-for one stock
split.
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, Finance
Principal Financial Officer
Dated: May 14, 2004
26
EXHIBIT INDEX
Exhibit No.
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certifications of Principal Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certifications of the Chief Executive Officer and the
Principal Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and U.S.C. Section 1350.