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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(Name of small business issuer in its charter)
FLORIDA 59-1757642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 MILLER AVENUE, LEMOYNE, PENNSYLVANIA 17043
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (717) 730-6164
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
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Common Stock, $.01 par value
Common Stock Purchase Warrants
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] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price at which the stock
was sold on March 15, 2000 was approximately $5,716,000.
As of March 15, 1999, the Company had 3,686,844 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be on May 24, 2000.
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.
Registrant's Annual Report, Form 10-K for the three years ended
December 31, 1998, Par IV, Exhibits.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 1999
Page
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PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 19
Item 3. Legal Proceedings................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............... 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................... 22
Item 6. Selected Financial Data........................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk......... 29
Item 8. Financial Statements and Supplementary Data....................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 30
PART III
Item 10. Directors and Executive Officers of the Registrant................ 31
Item 11. Executive Compensation............................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 31
Item 13. Certain Relationships and Related Transactions.................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 33
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 ("Securities Act"), and Section 21E of the
Securities Exchange Act of the 1934. The Private Securities Litigation Reform
Act of 1995 (the "Reform Act") contains certain safe harbors for forward-looking
statements. Certain of the forward-looking statements include management's
expectations, intentions, beliefs and strategies regarding our future growth and
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, our proposed sale of our
operations to our parent, Medicore, Inc. ("Medicore" or "parent") and our
potential merger with MainStreet IPO.com Inc. ("MainStreet"), 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 Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such forward-looking statements are subject to substantial risks
and uncertainties that could cause actual results to materially differ from
those expressed in the statements, including the general economic, market and
business conditions, opportunities pursued or not pursued, competition, changes
in federal and state laws or regulations affecting the Company, shareholder
approval of our proposed sale of operations to our parent and merger with
MainStreet, 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 registration statements,
one on Form SB-2, as filed with the Securities and Exchange Commission
("Commission") (effective on April 17, 1996), and a second filed with the
Commission on Form S-3 (effective July 1, 1999). 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.
ITEM 1. BUSINESS
HISTORICAL
Dialysis Corporation of America ("DCA" or the "Company"), a Florida
corporation organized in 1976, develops and operates outpatient kidney dialysis
centers that provide quality dialysis and ancillary services to patients
suffering from chronic kidney failure, generally referred to as end stage renal
disease ("ESRD"). We became a public company in 1977, went private in 1979,
selling all but one of our centers through 1989. We began construction of new
centers in 1995, and in 1996 once again became a public company. In 1997, we
sold our Florida dialysis operations, which included an acute care inpatient
dialysis services agreement with a Florida hospital. DCA currently operates six
outpatient dialysis facilities, four facilities in Pennsylvania located in
Lemoyne, Wellsboro, Carlisle and Chambersburg, through our wholly owned
subsidiaries, Dialysis Services of Pa., Inc. - Lemoyne, Dialysis Services of
Pa., Inc. - Wellsboro, and our 80% owned subsidiaries, Dialysis Services of
Pa., Inc. - Carlisle, and Dialysis Services of Pa., Inc. - Chambersburg, and
two dialysis facilities in New Jersey operated through our 80% owned
subsidiaries, Dialysis Services of NJ., Inc. - Manahawkin and DCA of Vineland,
LLC. The Company treats Method II homecare patients through our subsidiary,
DCA Medical Services, Inc.. Additional new facilities are anticipated,
currently through construction and development of new dialysis centers as
opposed to acquisition.
GENERAL
Management believes the Company distinguishes itself on the basis of
quality patient care. We currently provide outpatient dialysis services through
our six modern outpatient facilities to approximately 170 patients in
Pennsylvania and New Jersey. For the year ended December 31, 1999, we performed
approximately 24,300 dialysis treatments, of which approximately 19,500 were
outpatient treatments, approximately 2,700 were homecare patients, and
approximately 2,100 represented inpatient dialysis treatments. Our facilities
are designed for a maximum of 86 stations to render outpatient dialysis
treatment and training of home dialysis patients.
Our inpatient dialysis treatments are conducted under contractual
relationships currently with three hospitals located in areas serviced by three
of our outpatient dialysis subsidiaries. Homecare, sometimes referred to as
Method II home patient treatment, requires the Company to provide equipment and
supplies, training, patient monitoring and follow-up assistance to patients who
are able to perform their treatments at home.
Our future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate and acceptable
areas, and its 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 much greater personnel
and financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by us. We opened our fifth center in
Chambersburg, Pennsylvania in January, 1999 and our sixth center in Vineland,
New Jersey in February, 2000. Additionally, there is intense competition for
retaining qualified nephrologists, who normally are a substantial if not the
sole source of patient referrals and are responsible for the supervision of the
dialysis centers, and in finding nursing and technical staff at reasonable
rates.
Our medical service revenues are derived primarily from four sources:
(i) outpatient hemodialysis services (50% of medical services revenues for 1999
and 52% for 1998); (ii) home peritoneal dialysis services, including Method II
services (9% of medical services revenues for 1999 and 11% for 1998); (iii)
inpatient hemodialysis services for acute patient care provided through
agreements with hospitals and other healthcare entities (10% of medical services
revenues for 1999 and 11% for 1998); and (iv) ancillary services associated with
dialysis treatments, primarily certain tests and the administration of
erythropoietin ("EPO"), a bio-engineered protein that stimulates the production
of red blood cells, since a deteriorating kidney loses its ability to regulate
red blood cell count, resulting in anemia (31% of medical services revenue for
1999 and 26% for 1998). Dialysis is an ongoing and necessary therapy to sustain
life for kidney dialysis patients and utilization of the Company's services is
substantially predictable. ESRD patients normally receive 156 dialysis
treatments each year. For each of the two years ended December 31, 1998 and
1999, approximately 74% of the Company's revenues were derived from Medicare
reimbursement.
Essential to our operations and income is Medicare reimbursement which
is a fixed rate determined by the Health Care Financing Administration ("HCFA")
of the Department of Health and Human Services ("HHS"). The level of our
revenues and profitability may be adversely affected by future legislation that
could result in rate cuts. Additionally, the Company's operating costs tend to
increase over the years without any comparable increases, if any, in the
prescribed dialysis treatment
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rates, which usually remain fixed and have decreased over the years. There also
may be reductions in commercial third-party reimbursement rates. See "Operations
- - Medicare Reimbursement." The inpatient dialysis service agreements for
treating acute kidney disease are not subject to government fixed rates, but
rather are negotiated with the hospitals, and typically the rates are higher on
a per treatment basis. Our inpatient treatments have accounted for approximately
10% and 11% of our revenues for the years ended December 31, 1999 and 1998,
respectively.
IMPORTANT DEVELOPMENTS
On October 20, 1999, we entered into an Asset Purchase Agreement with
our parent and Dialysis Acquisition Corp. ("Buyer"), a wholly-owned subsidiary
of our parent, to sell our operations to Buyer in conjunction with a merger with
MainStreet through its wholly-owned subsidiary, MainStreet Acquisition, Inc.,
pursuant to a Merger Agreement dated October 20, 1999 between and among the
parties. The result of these proposed transactions would be that our dialysis
operations, instead of being 65% owned by our parent, as they currently are,
would be 100% owned by our parent, and the simultaneous merger would result in
you, as DCA shareholders, becoming shareholders of MainStreet, which would then
be a public company, with its shares anticipated to be trading on the Nasdaq
SmallCap Market. These proposed transactions are subject to approval of our
public shareholders. Medicore (65.4% ownership) and the officers and directors
of our Company and Medicore (approximately 2% ownership, exclusive of options
and warrants) will not be voting their shares. In order to issue its shares to
you as DCA shareholders to have you approve both proposed transactions,
MainStreet filed a registration statement on Form S-4 in conjunction with our
proxy statement with the Securities and Exchange Commission.
MainStreet is a private company with no operating history which has
established a website, www.MainStreetIPO.com, for companies to effect
self-underwritten offerings, direct public offerings, of their securities
through the process of a "Dutch Auction" for a flat fee. A Dutch Auction allows
investors to bid for the offered securities at prices and amounts the investors
believe are worth purchasing. Certain of the shareholders of MainStreet own a
corporation called CEO Letter.com Inc., which, assuming completion of the
proposed transactions, will be contributed to and which CEO Letter will become a
wholly-owned subsidiary of MainStreet. CEO Letter, also with no operational
history, has a website which, for a fee, will provide chief executive officers
of public companies with a forum to discuss their companies with potential
Internet investors.
Both boards of directors of MainStreet and our Company have approved
the two proposals, but our board, due to the conflicts that exist in the
proposed transactions, in particular, the parent to have 100% of our dialysis
operations as opposed to its current 65%, and the commonality of officers and
directors among DCA and Medicore, and Thomas K. Langbein, Chairman and CEO of
DCA and Medicore, President of Medicore, and sole owner and principal of Todd &
Company, Inc., registered with the Commission as a broker-dealer and a member of
the NASD, with Todd having an agreement with MainStreet to be recommended as an
underwriter or selling group member of those companies which want to effect
their public offerings through an underwriter as opposed to a direct public
offering. Other related transactions which preclude our board from making any
recommendations to shareholders include Medicore's recent investment in and loan
to the Linux Global Partners, a private holding company investing in Linux
software companies of which MainStreet and Linux are joint venturing a website,
the same as MainStreet's website, for direct public offerings, which will be for
Linux companies invested in by the Linux Global Partners. Mr. Langbein has
recently become a director of Linux Global Partners.
You should understand there are substantial risks in the proposed
merger with MainStreet. You as public shareholders of our Company, assuming you
approve the proposed transactions, would be relinquishing an approximately 33%
interest in our Company that has over $9,000,000 in assets and approximately
$5,900,00 in revenues, to receive approximately 10% of MainStreet, a company
with no operating history, approximately $285,000 in assets, and no revenues.
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The board's basis for its approval of the sale of assets and merger was
its recognition of the slow and sporadic growth of our dialysis operations over
the last two decades, and thereby shareholder value has been slow. Bart
Pelstring, a director of the Company and recently retired President, has worked
to build the management team and foundation for our future growth, with Stephen
W. Everett now assuming the post of President. With Mr. Everett as our new
President, business development and strategy may become more aggressive, but
there is no assurance growth, no less more rapid growth, will occur, and if so,
as has been past experience, although revenues increased, since 1989 we have
experienced operational losses, thereby reflecting continued languishing of
shareholder value. The losses occur due to construction of our new dialysis
centers, which are in the development stage and generate losses for at least 12
months. Some do not reach a sufficient patient base to provide and sustain
earnings for longer periods. The Internet industry has reflected a more rapid
growth, which could provide greater shareholder value. However, many Internet
companies, although trading at high stock prices, have experienced losses, and
MainStreet has not even commenced operations. There is no assurance MainStreet
will commence operations, or if so, the extent of its revenues; and with little
management experience, there can be no assurance MainStreet will be profitable.
We anticipate calling a special meeting of DCA shareholders to consider
and vote upon the proposals, with each DCA shareholder to receive the final
proxy statement and proxy to vote on the proposals, which proxy statement is
included in the MainStreet registration statement on Form S-4. However, no
solicitations of proxies for a special meeting of our shareholders may commence
until the Commission declares MainStreet's registration statement effective.
MainStreet and our Company have recently received extensive comments
covering the MainStreet registration statement, which includes our proxy
statement. Among the many issues that require response to the staff of the
Commission was the position of the staff that MainStreet's proposed operations
come within the purview of broker-dealer operations as contemplated within the
regulatory framework of the Securities Exchange Act of 1934 and the rules under
that Act. MainStreet is in discussions and communications with the staff, and we
are reviewing the staff comments and evaluating the circumstances and responses.
There is no assurance as to the extent of time that it will take for MainStreet
to resolve its issues with the Commission, nor the extent of time that it will
take MainStreet and ourselves to respond to the staff's comments, what further
comments there may be, and the ultimate ability and timing of having the
Commission declare the MainStreet registration effective in order to submit the
proxy statement/prospectus relating to the proposed transactions to you for your
consideration.
DIALYSIS INDUSTRY
Kidneys generally act as a filter removing harmful substances and
excess water from the blood, enabling the body to maintain proper and healthy
balances of chemicals and water. Chronic kidney failure, or End Stage Renal
Disease ("ESRD") which results from chemical imbalance and buildup of toxic
chemicals, is a state of kidney disease characterized by advanced irreversible
renal impairment.
4
ESRD is a likely consequence of complications resulting from diabetes,
hypertension, advanced age, and specific hereditary, cystic and urological
diseases. ESRD patients, in order to survive, must obtain a kidney transplant,
which procedure is limited due to lack of suitable kidney donors and the
incidence of rejection of transplanted organs, or obtain regular dialysis
treatment for the rest of their lives.
Based upon information published by HCFA, the number of ESRD patients
requiring dialysis treatments in the United States continues to grow and is
thought to be attributable primarily to the aging of the population and greater
patient longevity as a result of improved dialysis technology. The historical
annual growth rate of ESRD patients requiring dialysis services is approximately
8% from approximately 85,000 patients in 1985 to over 250,000 patients in 1996.
ESRD TREATMENT OPTIONS
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) the patient's home; (2) peritoneal dialysis, either continuous ambulatory
peritoneal dialysis ("CAPD") or continuous cycling peritoneal dialysis ("CCPD");
and/or (3) kidney transplant. The significant portion of ESRD patients receive
treatments at non-hospital owned outpatient dialysis facilities (according to
HCFA, approximately 86%) with the remaining patients treated at home through
hemodialysis or peritoneal dialysis. Patients treated at home are monitored by a
designated outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. This is
accomplished with a dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided by a semi-permeable membrane, and
at the same time the blood circulates through one chamber, a dialyzer fluid is
circulated through the other chamber. The toxins and excess fluid pass through
the membrane into the dialysis fluid. On the average, patients usually receive
three treatments per week with each treatment taking three to five hours.
Dialysis treatments are performed by teams of licensed nurses and trained
technicians pursuant to the staff physician's instructions.
Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant. Additionally, home hemodialysis
requires training for both the patient and the assistant, which usually takes
four to eight weeks. DCA does not currently provide home hemodialysis
(non-peritoneal) services. The use of conventional home hemodialysis has
declined and is minimal due to the patient's suitability and lifestyle, the need
for the presence of a partner and a dialysis machine at home, and the higher
expense involved over CAPD.
A second home treatment for ESRD patients is peritoneal dialysis. There
are several variations of peritoneal dialysis, the most common being CAPD and
CCPD. All forms of peritoneal dialysis use the patient's peritoneal (abdominal)
cavity to eliminate fluid and toxins from the patient. CAPD utilizes dialysis
solution infused manually into the patient's peritoneal cavity through a
surgically-placed catheter. The solution is allowed to remain in the abdominal
cavity for a three to five hour period and is then drained. The cycle is then
repeated. CCPD is performed in a manner similar to CAPD, but utilizes a
mechanical device to cycle dialysis solution while the patient is sleeping.
Peritoneal dialysis is the third most common form of ESRD therapy following
center hemodialysis and renal transplant.
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The third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
BUSINESS STRATEGY
DCA has 23 years' experience in developing and operating dialysis
treatment facilities. Our first priority is top quality patient care. We intend
to continue to establish alliances with physicians and hospitals and to attempt
to initiate dialysis service arrangements with nursing homes and managed care
organizations, and to continue to emphasize our high quality patient care. Our
smaller size allows us to focus on each patient's individual needs while
remaining sensitive to the physicians' professional concerns.
We continue to actively seek and negotiate with physicians and others
to establish new outpatient dialysis facilities. We have entered into agreements
and purchased land for construction of a new facility in Georgia. We are
preparing agreements for a new facility in Ohio, and we are currently in
different phases of negotiations with 10 physicians for potential new facilities
in seven of the eastern states.
SAME CENTER GROWTH
We endeavor to increase same center growth by adding quality staff and
management and attracting new patients to our existing facilities. We seek to
accomplish this objective by rendering high caliber patient care in convenient,
safe and serene conditions for everyone involved. We believe that we have
existing adequate space and stations within our facilities to accommodate
greater patient volume and maximize our treatment potential.
ACQUISITION AND DEVELOPMENT OF FACILITIES
One of the primary elements in acquiring or developing facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of our operations is being approached presently through the
development of our own dialysis facilities. Acquisition of existing outpatient
dialysis centers, which we have not done, is a faster but much more costly means
of growth. The primary reason of physicians for the sale or development of
independently owned centers is the avoidance of administrative and financial
responsibilities, freeing their time to devote to their professional practice.
Other motivating forces are the physician's desire to be part of a larger public
organization allowing for economies of scale and the ability to realize a return
on their investment if they take an interest in the dialysis entity.
To construct and develop a new facility ready for operations may take
an average of four to six months, and approximately 12 months or longer to
generate income, all of which are subject to location,
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size and competitive elements. Three of our more recent centers, Carlisle,
Pennsylvania and Manahawkin and Vineland in New Jersey, are in the developmental
stages since they have not reached the point where the patient base is
sufficient to generate and sustain earnings, and the Carlisle and Manahawkin
subsidiaries have been operating in excess of 12 months. Construction of a 15
station facility may cost in a range of $600,000 to $750,000 depending on
location, size and related services to be provided by the proposed facility.
Acquisition of existing facilities is substantially more expensive based upon
the number of patients, location, competition, nature of facility and
negotiation. Any significant expansion, whether through acquisition or
development of new facilities, is dependent upon existing funds or financing
from other sources. To date, no acquisitions have been made and should such
acquisition opportunities arise, there is no assurance that we would have
available or be able to raise the necessary financing to pursue or complete such
an acquisition.
INPATIENT SERVICES
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by its facilities. Hospitals are willing to enter
into such inpatient care arrangements to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining dialysis equipment, supplies and personnel. It is simpler for the
hospital to engage an independent party with the expertise and the knowledge,
such as DCA, to provide the inpatient dialysis treatments. We believe that these
arrangements are beneficial to our operations, since the contract rates are
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment.
There is no certainty as to when any new centers or service contracts
will be implemented, or the number of stations, or patient treatments such may
involve, or if such will ultimately be profitable. There is no assurance that we
will be able to enter into favorable relationships with physicians who would
become medical directors of such proposed dialysis facilities, or that the
Company will be able to acquire or develop any new dialysis centers within a
favorable geographic area. Newly established dialysis centers, although
contributing to increased revenues, also adversely affect results of operations
due to start-up costs and expenses with a smaller and slower developing patient
base. See "Business Strategy," "Operations" and "Competition" of Item 1,
"Business," and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATIONS
LOCATION, CAPACITY AND USE OF FACILITIES
DCA operates six outpatient dialysis facilities in Pennsylvania and New
Jersey with a total designed capacity of 86 licensed stations. The Company owns
and operates those centers through its subsidiaries, four of which are 80% owned
and two are wholly-owned. The Lemoyne, Pennsylvania dialysis facility is located
on property owned by the Company and leased to that subsidiary. See Item 2,
"Properties."
DCA also provides acute care inpatient dialysis services to three
hospitals in areas serviced by three of our six dialysis facilities and is in
the process of negotiating additional contracts in the areas surrounding its
other facilities and in tandem with development of future proposed sites. Each
of our
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dialysis facilities provides training, supplies and on-call support services for
home peritoneal patients. See "Dialysis Industry" above.
The table below indicates when each subsidiary commenced operations and
the approximate number of patient treatments for the periods indicated.
Dialysis Treatments
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Year Ended
December 31,
Commencement ------------
Subsidiary and Location of Operations 1999 1998
- ----------------------- ------------- ---- ----
Dialysis Services of PA., Inc. - Lemoyne June, 1995 7,600 7,500
Dialysis Services of PA., Inc. - Wellsboro September, 1995 3,000 3,600
Dialysis Services of PA., Inc. - Carlisle September, 1997 3,000 3,500
Dialysis Services of NJ, Inc. - Manahawkin July, 1998 1,300 250 (1/2 yr.)
Dialysis Services of PA., Inc. - Chambersburg January, 1999 2,900 --
DCA of Vineland, LLC February, 2000 -- --
The Company estimates that on average its centers were operating at
approximately 56% of capacity as of December 31, 1999, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe we are able to increase the number of
dialysis treatments at our centers without making additional capital
expenditures.
OPERATIONS OF DIALYSIS FACILITIES
DCA's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. Our facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
DCA maintains a team of expert dialysis specialists to provide for the
individual needs of each patient. In accordance with participation requirements
under the Medicare ESRD program, each facility retains a medical director
qualified and experienced in the practice of nephrology and the administration
of a renal dialysis facility. See "Physician Relationships" below. Each facility
is overseen by a nurse administrator who supervises the daily operations and the
staff, which consists of registered nurses, licensed practical nurses, patient
care technicians, a part-time social worker to assist the patient and family to
adjust to dialysis treatment and to provide help in financial assistance and
planning, and a part-time registered dietitian. These individuals supervise the
patient's needs and treatments. See "Employees" below. The Company must continue
to attract and retain skilled nurses and other staff, competition for whom is
intense.
The Company's facilities offer high-efficiency and conventional
hemodialysis, which, in our experience, provides the most viable treatment for
most patients. We consider our dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment. In 1999, we acquired an additional 32 dialysis machines which are
more advanced and include better
8
safety features and updated technology. The addition of the improved equipment
enhances our ability to provide more efficient treatment.
Our facilities also offer home dialysis (other than hemodialysis),
primarily CAPD and CCPD and Method II. Training programs for CAPD or CCPD
generally encompass two to three weeks at each facility, and such training is
conducted by the facility's home training nurse. After the patient completes
training, they are able to perform treatment at home with equipment and supplies
provided by the Company.
INPATIENT DIALYSIS SERVICES
The Company presently provides inpatient dialysis services to three
hospitals in Pennsylvania under agreements with our subsidiary in the area. Each
agreement is for a one-year term with automatic one-year renewal terms, subject
to termination by notice of either party. Inpatient services are typically
necessary for patients with acute kidney failure resulting from trauma or
similar causes, patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons.
ANCILLARY SERVICES
Our dialysis facilities provide certain ancillary services to ESRD
patients, including the administration of EPO upon a physician's prescription.
EPO is a bio-engineered protein which stimulates the production of red blood
cells and is used in connection with dialysis to treat anemia, a medical
complication frequently experienced by ESRD patients. EPO decreases the
necessity for blood transfusions in ESRD patients. Other ancillary services that
we provide to our patients include electrocardiograms and blood transfusions,
all of which are separately reimbursed by Medicare. See "Medicare Reimbursement"
below.
PHYSICIAN RELATIONSHIPS
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established its practice. Consequently, DCA relies on its ability to develop
affiliations with area nephrologists who may provide additional patients and
quality dialysis care.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. We retain by written
agreement qualified physicians or groups of qualified physicians to serve as
medical directors for each of our facilities. Generally, the medical directors
are board eligible or board certified in internal medicine by a professional
board specializing in nephrology and have had at least 12 months of experience
or training in the care of dialysis patients at ESRD facilities. The medical
directors are typically a significant source of referrals to the particular
center served. Our dialysis centers are operated through subsidiaries, either
corporations or limited liability companies. The medical directors of four of
our six centers have acquired a 20% ownership interest in the centers they
service. We make every effort to comply with federal and state regulations
concerning our relationship with the physicians and our medical directors
treating patients at our facilities (see "Government Regulation" below) and we
know of no limitations on physician ownership in our subsidiaries.
Agreements with medical directors are usually for a term of five years
or more with renewal provisions. Each agreement specifies the duties,
responsibilities and compensation of the medical
9
director. Usually, physician's fees for services are billed to the government
payment authority on a direct basis and paid directly to the physician or the
professional corporation which acts as the medical director for the facility.
Under each agreement, the medical director or professional association maintains
his, her or its own medical malpractice insurance. The agreements also provide
for non-competition in a limited geographic area surrounding that particular
dialysis center during the term of the agreement and upon termination for a
limited period. However, the agreements do not prohibit physicians providing
services at our facility from providing direct patient care services at other
locations; and consistent with the federal and state law, such agreements do not
require a physician to refer patients to our dialysis centers.
The Company's ability to establish a dialysis facility in a particular
area is significantly geared to the availability of a qualified physician or
nephrologist with an existing patient base to serve as the medical director. The
loss of a medical director who could not be readily replaced would have a
material adverse effect on the operations of that facility and the Company.
Compensation of medical directors is separately negotiated for each facility and
generally depends on competitive factors such as the local market, the
physician's qualifications and the size of the facility.
QUALITY ASSURANCE
DCA implements a quality assurance program to maintain and improve the
quality of dialysis treatment and care we provide to our patients in every
facility. Quality assurance activities involve the ongoing examination of care
provided, the identification of deficiencies in that care and any necessary
improvements of the quality of care. Specifically, this program requires each
center's staff, including its medical director and/or nurse administrator to
regularly review quality assurance data, whether related to dialysis treatment
services, equipment, technical and environmental improvements, and staff-patient
and personnel relationships. These evaluations are in addition to assuring
regulatory compliance with HCFA and the Occupational Safety and Health
Administration. Our manager of compliance, who is a registered nurse, oversees
this program in addition to ensuring that the Company meets federal and state
compliance requirements for dialysis centers. See "Government Regulation" below.
PATIENT REVENUES
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by HCFA. It
has been reported by HCFA that 92% of all dialysis patients were covered by
Medicare. The balance of the outpatient charges are paid by private payors
including the patient's medical insurance, private funds or state Medicaid
plans. Pennsylvania and New Jersey, presently the states in which we operate,
provide Medicaid or comparable benefits to qualified recipients to supplement
their Medicare coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect our revenues and dialysis services payments. See
"Medicare Reimbursement" below.
10
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Inpatient treatments accounted for approximately 10% and 11% of our revenues for
the years ended December 31, 1999 and 1998, respectively.
MEDICARE REIMBURSEMENT
DCA is reimbursed primarily from third party payors including Medicaid,
commercial insurance companies, but substantially by Medicare under a
prospective reimbursement system for chronic dialysis services. Each of our
dialysis facilities is certified to participate in the Medicare program. Under
that Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provides us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by HCFA governs the Medicare reimbursement available for a
designated group of dialysis services, including dialysis treatments, supplies
used for such treatments, certain laboratory tests and medications. HCFA
eliminated routine Medicare coverage for such tests as nerve conduction studies,
electrocardiograms, chest x-rays and bone density measurements, and will only
pay for such tests when there is documentation of medical necessity. The
Medicare composite rate is subject to regional differences in wage earnings.
The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $122
and $124 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Medicare Payment Advisory Commission ("MedPAC"), a commission mandated by
the Balanced Budget Act of 1997 and continuing the work of the Prospective
Payment Assessment Commission ("PROPAC"). An average ESRD reimbursement rate is
$126 per treatment for outpatient dialysis services. The current maximum
composite reimbursement rate is $134 per treatment. In 1998, MedPAC recommended
a 2.7% increase in the amount paid to dialysis facilities for performance of
services. The Balanced Budget Refinement Act of 1999 would increase the
composite rate for payment by 1.2% for dialysis services in the year 2000 and an
additional 1.2% for such services in 2001. Congress is not required to implement
such recommendation and could otherwise increase or decrease the Medicare
reimbursement rate.
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO, the allowable rate of which is currently $10 per 1000
units for amounts in excess of three units per patient per year, and certain
physician-ordered tests provided to dialysis patients. These ancillary services
are not significant sources of income to us compared to reimbursement for actual
treatment. However, the proposal to reduce the reimbursement rate of EPO to $9
per 1,000 units recommended by the Office of Inspector General of HHS and
concurred to by HHS (a similar reduction recommended by the President's proposed
2000 budget) could adversely impact our income from EPO if enacted by Congress.
The Company routinely submits claims monthly and is usually paid by Medicare
within 30 days of the submission.
We are unable to predict what, if any, future changes may occur in the
rate of reimbursement. Any reduction in the Medicare composite reimbursement
rate could have a material adverse effect on our business, revenues and net
earnings.
MEDICAID REIMBURSEMENT
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state
11
defined levels and who are otherwise uninsured. The programs also serve as
supplemental insurance programs for the Medicare co-insurance portion and
provide certain coverages (e.g., oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverages without any co-insurance amounts. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon levels of income or
assets. Pennsylvania has a Medical Assistance Program comparable to Medicaid, as
well as New Jersey, with primary and secondary insurance coverage to those who
qualify. We are a licensed ESRD Medicaid provider in New Jersey and
Pennsylvania.
POTENTIAL LIABILITY AND INSURANCE
Participants in the health care industry are subject to lawsuits based
upon alleged negligence, many of which involve large claims and significant
defense costs. DCA, although involved in chronic and acute kidney dialysis
services for approximately 23 years, has never been subject to any suit relating
to its dialysis operations. We currently have general liability insurance,
including professional and products liability, with coverage limits of $1
million per occurrence and $3 million in the aggregate annually. Our insurance
policies provide coverage on an "occurrence" basis and are subject to annual
renewal. A hypothetical successful claim against us in excess of our insurance
coverage could have a material adverse effect upon our business and results of
operations. The medical directors supervising our dialysis operations and other
physicians practicing at the facilities are required to maintain their own
professional malpractice insurance coverage.
GOVERNMENT REGULATION
GENERAL
Regulation of healthcare facilities, including dialysis, is extensive,
with legislation continually proposed relating to safety, maintenance of
equipment and proper records, quality assurance programs, reimbursement rates,
licensing and other areas of operations. Each of the dialysis facilities must be
certified by HCFA, and we must comply with certain rules and regulations
established by HCFA regarding charges, procedures and policies. Each dialysis
center is also subject to periodic inspections by federal and state agencies to
determine if their operations meet the appropriate regulatory standards. These
requirements have been satisfied by each of our dialysis facilities.
Many states have eliminated the requirement for dialysis centers to
obtain a certificate of need, a condition for regulating the establishment and
expansion of dialysis centers. There are no certificate of need requirements in
Pennsylvania or New Jersey where we are presently operating. In past years, we
have always been able to comply with applicable certificate of need laws.
Our record of compliance with federal, state and local governmental
laws and regulations remains excellent. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. We are unable to predict the scope and effect of any changes in
government regulations, particularly any modifications in the reimbursement rate
for medical services or requirements to obtain certification from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions.
12
We regularly review legislative and regulatory changes and developments
and will restructure a business arrangement if we determine such might place our
operations in material noncompliance with such law or regulation. See "Fraud and
Abuse" and "Stark II" below. To date, none of our business arrangements with
physicians, patients or others have been the subject of investigation by any
governmental authority. No assurance can be given, however, that DCA's business
arrangements will not be the subject of a future investigation or prosecution by
a federal or state governmental authority which could result in civil and/or
criminal sanctions.
FRAUD AND ABUSE
Each Year OIG publishes a Fraud and Abuse Civil Plan. For the year
2000, OIG has indicated it plans to concentrate, among other things, on ESRD
reimbursement issues, including oversight of dialysis facilities, separately
billable maintenance dialysis services, and medical appropriateness of tests and
other dialysis-related services. We have reviewed the OIG 2000 Work Plan, and
believe we are in compliance with applicable regulations to be addressed by OIG.
Nevertheless, we will continue to review risk areas inherent to dialysis
treatment and service, and to develop and implement a compliance program. This
program focuses on employee education concerning applicable billing rules,
regulations and insurance carrier interpretations, as well as auditing medical
records to ensure the medical necessity of services provided and billed.
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. The Social Security Act further prohibits, as do many state
laws, the payment of patient referral fees for treatments that are otherwise
paid for by Medicare, Medicaid or similar state programs under the Medicare and
Medicaid Patient and Program Protection Act of 1987, or the "Anti-kickback
Statute." The Anti-kickback Statute and similar state laws impose criminal and
civil sanctions on persons who knowingly and willfully solicit, offer, receive
or pay any remuneration, directly or indirectly, in return for, or to include,
the referral of a patient for treatment, among other things. Included in the
civil penalties is exclusion of the provider from participation in the Medicare
and Medicaid programs. The language of the Anti-kickback Statute has been
construed broadly by the courts. The federal government in 1991, 1992 and late
1999 published regulations that established exceptions, "safe harbors," to the
Anti-kickback Statute for certain business arrangements that would not be deemed
to violate the illegal remuneration provisions of the federal statute. All
conditions of the safe harbor must be satisfied to meet the exception and
immunize the arrangement from prosecution, but failure to satisfy all elements
does not mean the business arrangement violates the illegal remuneration
provision of the statute.
As required by Medicare regulations, each of our dialysis centers is
supervised by a medical director, who is a licensed nephrologist or otherwise
qualified physician. The medical directors are in private practice and are one
of the most important sources of the dialysis center's business, since it is
each physician's patients that primarily utilize the services of the facility.
The compensation of the Company's medical directors is fixed by a Medical
Director Agreement and reflects competitive factors in their respective
location, and the size of the center, and the physician's professional
qualifications. The medical director's fee is fixed in advance for periods of
one to five years and does not take into account the volume of patient
treatments or amounts of referrals to the dialysis center. Four of our
outpatient dialysis centers are owned jointly between the Company and a group of
physicians, who hold a minority position and who also act as the medical
director for those facilities. We attempt to structure our arrangements with our
physicians to comply with the Anti-Kickback Statute. However, many of these
physicians refer patients to our facilities. We believe that the value of the
minority interest represented by stock of our subsidiaries issued to physicians
has been consistent with the fair market
13
value of assets transferred to, or services performed by such physicians for the
subsidiary, and in certain cases, monetary compensation, and there is no intent
to induce referrals to our facilities. See "Business - Physician Relationships"
above. We have never been challenged under these statutes and believe our
arrangements with our medical directors are in material compliance with
applicable law.
Management believes that the illegal remuneration provisions described
above are primarily directed at abusive practices that increase the utilization
and cost of services covered by governmentally funded programs. The dialysis
services provided by the Company generally cannot, by their very nature, be
over-utilized, since dialysis treatment is not elective and cannot be prescribed
unless there is temporary or permanent kidney failure. Medical necessity is
therefore capable of objective documentation, drastically reducing the
possibility of overutilization. There are safe harbors for certain arrangements.
However, these relationships with medical director ownership of a minority
interest in our facility satisfies many but not all of the criteria for the safe
harbor, and there can be no assurance that these relationships will not subject
us to investigation or prosecution by enforcement agencies. In an effort to
further our position of adhering to the law, we have initiated the development
of a compliance plan and medical chart audits to confirm medical necessity of
referrals.
With respect to our inpatient dialysis services, we provide the
hospital or similar healthcare entity with dialysis services, including
qualified nursing and technical personnel, supplies, equipment and technical
services. In certain instances, medical directors of a DCA facility who have a
minority interest in that facility may refer patients to hospitals with which we
have an inpatient dialysis services arrangement. The federal Anti-kickback
Statute could apply, but we believe our acute inpatient hospital services are in
compliance with the law. See "Stark II" below.
We endeavor in good faith to comply with all governmental regulations.
However, there can be no assurance that we will not be required to change our
practices or experience a material adverse effect as a result of any such
potential challenge. We cannot predict the outcome of the rule-making process or
whether changes in the safe harbor rules will affect our position with respect
to the Anti-kickback Statute, but we do believe we will remain in compliance.
STARK II
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993 and became
effective January 1, 1995. Stark II bans physician referrals, with certain
exceptions, for certain "designated health services" as defined in the statute
to entities in which a physician or an immediate family member has a "financial
relationship" which includes an ownership or investment interest in, or a
compensation arrangement between the physician and the entity. This ban is
subject to several exceptions including personal service arrangements,
employment relationships and group practices meeting specific conditions. If
Stark II is found to be applicable to the facility, the entity is prohibited
from claiming payment for such services under the Medicare or Medicaid programs,
is liable for the refund of amounts received pursuant to prohibited claims, can
be imposed with civil penalties of up to $15,000 per referral and can be
excluded from participation in the Medicare and Medicaid programs. In 1998, HCFA
released proposed rules that interpret the provisions of Stark II and Congress'
legislative intent behind their enactment ("Proposed Rules").
For purposes of Stark II, "designated health services" includes, among
others, clinical laboratory services, durable medical equipment, parenteral and
enteral nutrients, home health services, and inpatient and outpatient hospital
services. Dialysis treatments are not included in the statutory list of
"designated
14
health services." In the Proposed Rules, HCFA clarified the definitions of
designated health services, delineating what supplies and services are intended
to be included and excepted from each category. In particular, dialysis
equipment, supplies and services were specifically excepted from the definitions
of durable medical equipment, and inpatient and outpatient health services. HCFA
further indicated that the purpose behind the Stark II prohibition on physician
referral is to prevent Medicare program and patient abuse, and that dialysis is
a necessary medical treatment for those with temporary or permanent kidney
failure that is not susceptible to that type of abuse. HCFA additionally
excluded EPO (see "Business - Operations - Ancillary Services" above) from the
definition of outpatient prescription drugs under the same reasoning.
We believe, based upon the Proposed Rules and the industry practice,
that Congress did not intend to include dialysis services and the services and
items provided by the Company incident to dialysis services within the Stark II
prohibitions. There can be no assurance, though, that final Stark II regulations
will adopt such a position. No final rules have been promulgated, however, and
are not expected to be published until the spring or summer of 2000.
If the provisions of Stark II were found to apply to our arrangements
however, we believe that we would be in compliance. We compensate our
nephrologist-physicians as medical directors of its dialysis centers pursuant to
Medical Director Agreements, which we believe meet the exception for personal
service arrangements under Stark II. Non-affiliated physicians who send or treat
their patients at any of our facilities do not receive any compensation from
DCA.
Medical directors of our facilities which hold a minority
investment interest may refer patients to hospitals with which DCA has an acute
inpatient dialysis service arrangement. Stark II may be interpreted to apply to
these types of interests. According to the Proposed Rules, however, acute care
inpatient hospital arrangements for dialysis services are excluded from the
prohibition on physician referrals if the services provided under these
arrangements are rendered under emergency circumstances and are necessary
treatments. We believe that our contractual arrangements with hospitals for
acute care inpatient dialysis services are in compliance with this exception.
If HCFA or any other government entity takes a contrary position in the
Stark II final regulations or otherwise, we may be required to restructure
certain existing compensation or investment agreements with our medical
directors, or, in the alternative, to refuse to accept referrals for designated
health services from certain physicians. That legislation prohibits Medicare or
Medicaid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on facilities which
submit claims for reimbursement. If such were to be the case, we could be
required to repay amounts reimbursed for drugs, equipment and services that HCFA
determines to have been furnished in violation of Stark II, in addition to
substantial civil monetary penalties, which may adversely affect our operations
and future financial results. We believe that if Stark II is interpreted by HCFA
or any other governmental entity to apply to our arrangements, it is possible
that we will be permitted to bring our financial relationships with referring
physicians into material compliance with the provisions of Stark II on a
prospective basis. However, prospective compliance may not eliminate the amounts
or penalties, if any, that might be determined to be owed for past conduct, and
there can be no assurance that such prospective compliance, if permissible,
would not have a material adverse effect on the Company.
15
HEALTH INSURANCE REFORM ACT
Congress has taken action in recent legislative sessions to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers, but there are no significant proposed cuts
in dialysis payments. The ESRD program received a five year waiver from
reduction in Medicare outlays to allow for the results of a HCFA project.
However, future legislation or regulations may be enacted that could
significantly modify the ESRD program or substantially reduce the amount paid to
the Company for its services. Further, statutes or regulations may be adopted
which demand additional requirements in order for us to be eligible to
participate in the federal and state payment programs. Any new legislation or
regulations may adversely affect our business operations, as well as its
competitors.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), provided for health insurance reforms which included a variety of
provisions important to healthcare providers, such as significant changes to the
Medicare and Medicaid fraud and abuse laws. Some of the fraud and abuse
provisions were effective January 1, 1997. While many of the provisions were
self-implementing, some required further rulemaking by HHS which rules became
effective July 1, 1997. HIPAA established two programs that will coordinate
federal, state and local healthcare fraud and abuse activities, to be known as
the "Fraud and Abuse Control Program" and the "Medicare Integrity Program." The
Fraud and Abuse Control Program will be conducted jointly by HHS and the
Attorney General while the Medicare Integrity Program, which is funded by the
Medicare Hospital Insurance Trust Fund, will enable HHS, the Department of
Justice and the FBI to monitor and review specifically Medicare fraud.
Under these programs, these governmental entities will undertake a
variety of monitoring activities which were previously left to providers to
conduct, including medical utilization and fraud review, cost report audits,
secondary payor determinations, reports of fraud and abuse actions against
providers will be shared as well as encouraged by rewarding whistleblowers with
money collected from civil fines. The Incentive Program for Fraud and Abuse
Information, a new program under HIPAA, began in January, 1999 rewarding
Medicare recipients 10% of the overpayment up to $1,000 for reporting Medicare
fraud and abuse. HIPAA further created several new Health Care Fraud Crimes and
extended their applicability to private health plans; but the Anti-kickback
Statute does not apply to private health plans.
HIPAA also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. HIPAA first permits
individuals to petition HHS for written advisory opinions regarding whether an
arrangement gives rise to prohibited remuneration under the federal anti-fraud
abuse laws, constitutes grounds for imposition of civil and criminal sanctions
under the federal anti-fraud and abuse laws or satisfies the requirements of an
existing safe harbor. These opinions are published by HHS. While these opinions
are helpful to gain insight into what is permissible without having a safe
harbor, such opinions will only be binding on HHS and the party receiving the
opinion.
HIPAA increases significantly the civil and criminal penalties for
offenses related to healthcare fraud and abuse. HIPAA increased civil monetary
penalties from $2,000 plus twice the amount for each false claim to $10,000 plus
three times the amount for each false claim. HIPAA expressly prohibits four
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services, (3)
certifying the need for home health services knowing that all of the coverage
requirements have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater
16
reimbursement. However, HIPA creates a tougher burden of proof for the
government by requiring that the government establish that the person "knew or
should have known" a false or fraudulent claim was presented. The "knew or
should have known" standard is defined to require "deliberate ignorance or
reckless disregard of the truth or falsity of the information," thus merely
negligent conduct or billing errors should not violate the Civil False Claims
Act.
As for criminal penalties, HIPAA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also provided with a greatly expanded
subpoena power under HIPAA to investigate fraudulent criminal activities, and
federal prosecutors may utilize asset freezes, injunctive relief and forfeiture
of proceeds to limit fraud during such an investigation.
Although we believe we substantially comply with currently applicable
state and federal laws and regulations and to date has not had any difficulty in
maintaining its licenses or its Medicare and Medicaid authorizations, the
healthcare service industry is and will continue to be subject to substantial
and continually changing regulation at the federal and state levels, and the
scope and effect of such and its impact on our operations cannot be predicted.
No assurance can be given that our activities will not be reviewed or challenged
by regulatory authorities.
Any loss by the Company of its various federal certifications, its
approval as a certified provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of our revenues are derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services would have a material
adverse effect on our business.
ENVIRONMENTAL AND HEALTH REGULATIONS
Our dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of our waste is non-hazardous. HCFA
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. We also follow OSHA's Hazardous Waste
Communications Policy, which requires all employees to be knowledgeable of the
presence of and familiar with the use and disposal of hazardous chemicals in the
facility. Medical waste of each facility is handled by licensed local medical
waste sanitation agencies who are primarily responsible for compliance with such
laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
17
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information for payments by Medicare,
Medicaid and other third-party payors. These laws provide for both criminal and
civil penalties, exclusion from Medicare and Medicaid participation, repayment
of previously collected amounts and other financial penalties under the False
Claims Act. The submission of Medicare cost reports and requests for payment by
dialysis centers are covered by these laws. We believe we have the proper
internal controls and procedures for issuance of accounts and complete cost
reports and payment requests. However, there is no assurance that such reports
and requests are materially accurate and complete and therefore subject to a
challenge under these laws.
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-kickback Statute and Stark
II. We have no reason to believe that it is not in compliance with such state
laws.
COMPETITION
The dialysis industry is very competitive. There are numerous providers
who have dialysis facilities in the same areas as the Company. Many are owned by
physicians or major corporations which operate dialysis facilities regionally,
nationally and internationally. Our operations are small in comparison with
those corporations. Some of our major competitors are public companies,
including Fresenius Medical Care, Gambro Healthcare, Inc., Renal Care Group,
Inc., Total Renal Care Holdings, Inc., and Everest Healthcare Service Corp. Most
of these companies have substantially greater financial resources, many more
centers, patients and services than DCA, and by virtue of such have a
significant advantage over us in competing for nephrologists and acquisitions of
dialysis facilities in areas and markets we target. Competition for acquisitions
has increased the cost of acquiring existing dialysis facilities. We also face
competition from hospitals that provide dialysis treatments. We have also
experienced competition from admitting physicians of our centers who have opened
their own dialysis facilities.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision and operations of the center. Our medical directors usually
are subject to non-compete restrictions within a limited geographic area from
the center they administer. Additionally, there is always substantial
competition for obtaining qualified, competent nurses and technical staff at
reasonable labor costs.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation in lieu of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations, currently the most
limiting factor, renal transplantations could become a more significant
competitive aspect to the dialysis treatments we provide. Although kidney
transplant is a preferred treatment for ESRD, certain patients who have
undergone such transplants have lost their transplant function and returned to
dialysis treatments.
18
EMPLOYEES
As of March 15, 2000, DCA had 65 full time employees, including nurse
administrators, clinical registered nurse managers, registered nurses, chief
technician, technical specialists, patient care technicians, and clerical
employees. We retain 33 part time employees consisting of registered nurses,
patient care technicians and clerical employees. Occasionally, we utilize
employees on a "per diem" basis to supplement staffing.
We retain eight part-time independent contractors who include the
social workers and dietitians at each facility. These are in addition to the
medical directors, who are independent contractors and who supervise patient
treatment at each facility.
We believe our relationship with our employees is good and we have not
suffered any strikes or work stoppages. None of our employees is represented by
any labor union. We are an equal opportunity employer.
ITEM 2. PROPERTIES
DCA owns two properties, one located in Lemoyne, Pennsylvania and the
second in Easton, Maryland. The Maryland property consists of approximately
7,400 square feet, most of which is leased to a competitor. The lease was
renewed for an additional five years through March 31, 2003. The lease is
guaranteed by the tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses our
dialysis center of approximately 5,400 square feet, approved for 13 dialysis
stations with space available for expansion. We use approximately 2,500 square
feet for our executive offices. One of our Pennsylvania subsidiaries,
leases this facility from us under a five year lease that commenced December 23,
1998 at an annual rental of $43,088 per annum plus separately metered utilities,
insurance and additional rent of $5,386 per year covering common area
maintenance expenses, with two renewals of five years each at escalating base
rent for each renewal period.
The Easton, Maryland property is subject to two mortgages from
affiliated Maryland banking institutions. The Lemoyne, Pennsylvania property is
also subject to a mortgage from one of the Maryland banking institutions which
holds one of the mortgages on the Easton, Maryland property. As of December 31,
1999, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $125,000 and the first mortgage on the Easton property was
approximately $157,000. Each of these mortgages is under the same terms and
extends through November, 2003, bears interest at 1% over the prime rate, and is
secured by the real property and the Company's personal property at each
respective location. The bank also has a lien on rents due the Company and
security deposits from leases of the properties, and each tenant is required to
sign a tenant subordination agreement as part of its lease with us. Written
approval of the bank is required for all leases, assignments or sublettings,
alterations and improvements and sales of the properties. The Easton, Maryland
property has a second mortgage to secure a three-year loan to our Vineland, New
Jersey subsidiary, for up to $700,000 at an annual interest rate of 8.75%, which
loan we guaranty, and is further secured by that subsidiary's personal property,
exclusive of its dialysis equipment. See Item 7, "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and Note 2 to "Notes
to Consolidated Financial Statements."
19
DCA also leases space at its Lemoyne, Pennsylvania property to an
unrelated party for its own business activities unrelated to dialysis services.
The lease is for approximately 1,500 square feet through December 31, 2002, at
an aggregate rental of approximately $13,500 per annum.
In addition to our Lemoyne, Pennsylvania facility, we presently have
five other dialysis facilities. Each is leased from unaffiliated parties under
five year leases, all with two renewals of five years each, for space ranging
from 3,500 square feet to 7,000 square feet. The rentals for these facilities
range from $25,000 to $74,000 per annum, some adding utilities, real estate
taxes and costs for casualty insurance premiums. We sublet 1,800 square feet at
our Chambersburg, Pennsylvania facility to the physicians who are our medical
directors at that facility for their medical offices in Chambersburg. The
sublease is on a commercially reasonable basis and is structured to comply with
the safe harbor provisions of the "Anti-kickback Statute." See "Governmental
Regulation - Fraud and Abuse" above.
We recently acquired property in South Georgia for $207,000 and
anticipate commencement of construction of a new facility at that location in
the second quarter of 2000. We are actively pursuing the additional development
of dialysis facilities, one in Ohio, as well as other areas of the country which
would entail the acquisition or lease of additional property.
We construct all of our dialysis facilities, and each is relatively new
with state-of-the-art equipment and facilities. The dialysis stations are
equipped with modern dialysis equipment under a November, 1996 master
lease/purchase agreement with a $1.00 purchase option at the end of the term.
Payments under the various schedules extend through May, 2005. See Note 2 to
"Notes to Consolidated Financial Statements."
None of our dialysis facilities are operating at full capacity. See
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at each of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043 as well as with its parent, Medicore ("Medicore" or the
"Parent"), at 2337 West 76th Street, Hialeah, Florida.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in or subject to any material pending legal
actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year
ended December 31, 1999 to a vote of security holders through the solicitation
of proxies or otherwise. Since Medicore owns approximately 65% of our equity,
proxies are not solicited, but rather we provide our shareholders with an
Information Statement and an Annual Report. The Information Statement provides
similar information to shareholders as does a proxy statement, except there is
no solicitation of proxies.
20
As noted under Item 1, "Business - Important Events," we, together with
MainStreet, prepared a proxy statement/prospectus which is preliminary and has
been included in MainStreet's registration statement filed with the Commission.
The document is not for circulation until all comments of the Commission are
adequately dealt with and MainStreet's registration statement is declared
effective. Extensive comments were received from the staff of the Commission,
including broker-dealer regulatory issues relating to the proposed operations of
MainStreet. There is no assurance when, if at all, the proxy
statement/prospectus will be finalized or declared effective by the Commission.
See Item 1, "Business - Important Information."
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on the Nasdaq SmallCap Market on
April 17, 1996, under the symbol "DCAI." The table below indicates the high and
low bid prices for our common stock for the four quarters for the years ended
December 31, 1998 and 1999 as reported by Nasdaq.
BID PRICE
---------
1998* HIGH LOW
---- ---- ---
1st Quarter................... $2.56 $1.31
2nd Quarter................... 1.94 1.25
3rd Quarter................... 1.94 0.88
4th Quarter................... 1.25 0.56
BID PRICE
---------
1999 HIGH LOW
---- ---- ---
1st Quarter................... $1.75 $ .69
2nd Quarter................... 3.30 .56
3rd Quarter................... 4.50 1.94
4th Quarter**................. 6.88 1.34
- ---------------
* The common stock did not trade actively in 1998.
** The price increases may be, in part or primarily, the result of the
announcement during the fourth quarter of the execution of the Merger
Agreement with MainStreet and related agreements.
At March 16, 2000, the high and low sales price of our common stock was
$4.75 and $4.66, respectively.
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
At March 16, 2000, we had 98 shareholders of record and approximately
765 beneficial owners of our common stock.
We do not anticipate that we will pay dividends in the foreseeable
future. The board of directors intends to retain earnings, if any, for use in
the business. Future dividend policy will be at the discretion of the board of
directors, and will depend on our earnings, capital requirements, financial
condition and other similar relevant factors. We have experienced operational
losses since 1989. See Item 6, "Selected Financial Data," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Future events are subject to the proposed merger with MainStreet,
which may result in our shareholders becoming MainStreet shareholders, with the
dialysis operations being wholly-owned (in lieu of 65% owned) by Medicore. There
is no assurance that the proposed merger will be approved or completed. See Item
1, "Business - Important Events."
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1999 is derived from the audited consolidated financial statements of the
Company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
Years Ended December 31,
------------------------------------------------------
1999 1998 1997(1) 1996 1995
------- ------- ------- ------- -------
Revenues .................................... $ 5,866 $ 4,004 $ 9,221 $ 4,137 $ 2,668
Net (loss) income ........................... (668) (204) 1,993 (23) (167)
(Loss) earnings per share
Basic ..................................... (.19) (.06) .56 (.01) (.07)
Diluted ................................... (.19) (.06) .55 (.01) (.07)
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31,
------------------------------------------------------
1999 1998 1997(1) 1996 1995
------- ------- ------- ------- -------
Working capital ............................. $ 4,152 $ 5,115 $ 7,062 $ 4,529 $ 651
Total assets ................................ 9,036 9,349 11,638 7,522 3,972
Intercompany receivable from
Medicore (non-current portion) ............ 105
Long term debt, net of current portion(2).... 870 633 693 585 152
Stockholders' equity ........................ 7,260 7,771 8,049 6,000 2,569
- -------------------------
(1) Reflects the sale of substantially all the assets of our Florida subsidiary,
Dialysis Services of Florida, Inc. - Fort Walton Beach and related Florida
dialysis operations, including the homecare operations of another subsidiary,
Dialysis Medical, Inc., to Renal Care Group, Inc. and its affiliates for
$5,065,000 of which consideration $4,585,000 was cash with the balance
consisting of 13,873 shares of Renal Care Group common stock. We owned 80% of
Dialysis Services of Florida and Dialysis Medical, Inc., and on February 20,
1998 the 20% interest of Dialysis Services of Florida owned by our former
medical director and his 20% interest in Dialysis Medical, Inc. were redeemed
for approximately $625,000 of which sum included 6,936 shares of the Renal Care
Group common stock valued at $240,000 with the balance in cash. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to "Notes to Consolidated Financial Statements."
(2) Includes advances from Medicore.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Medical service revenues increased approximately $1,946,000 (55%) for
the year ended December 31, 1999 compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,460,000 including increased revenues of approximately $882,000
for our dialysis center located in Chambersburg, Pennsylvania, which commenced
operations in January, 1999, and increased revenues of approximately $486,000
for our Manahawkin, New Jersey center, which received regulatory approval in
December, 1998. Although the operations of new centers have resulted in
additional revenues, they are still in the developmental stage and, accordingly,
their operating results will adversely affect our results of operations until
they achieve a sufficient patient count to cover fixed operating costs.
Interest and other income decreased by approximately $85,000 for the
year ended December 31, 1999 compared to the preceding year. This decrease is
largely due to a decrease in interest earned as a result of a decrease in
invested funds.
Cost of medical services sales as a percentage of sales increased to
72% in 1999 compared to 71% in 1998, reflecting an increase in supply costs as a
percentage of sales and a decrease in healthcare salaries as a percentage of
sales.
Selling, general and administrative expenses increased by approximately
$942,000 (51%) for 1999 compared to the preceding year. This increase reflected
operations of the Company's new dialysis centers, $153,000 in compensation
expense from issuance of stock options and approximately $93,000 associated with
our decision not to go through with plans to construct a facility in Toms River,
New Jersey, as well as increased support activities resulting from expanded
operations. Selling general and administrative expenses as a percent of medical
services revenue amounted to 51% for the year ended December 31, 1999, compared
to 52% for the preceding year.
As a result of having centers in the developmental stage which have not
achieved a sufficient patient count to sustain profitable operations, we have
continued to experience operational losses.
Interest expense decreased by approximately $9,000 during the
comparable periods largely as a result of reduced average outstanding
borrowings.
1998 COMPARED TO 1997
Medical service revenues decreased approximately $823,000 (19%) for the
year ended December 31, 1998 compared to the preceding year. This decrease
reflects the loss of revenues, which amounted to approximately $1,663,000 for
the preceding year, from the sale of our Florida dialysis operations on October
31, 1997, which was offset to some degree by increased revenues of our
Pennsylvania dialysis centers of approximately $782,000 including increased
revenues of approximately $510,000 at our dialysis center located in Carlisle,
Pennsylvania, which commenced operations in July 1997 and $58,000 from a new
dialysis center located in Manahawkin, New Jersey, which received regulatory
approval in
24
December, 1998. Although the operations of these centers have resulted in
additional revenues, they are in the developmental stage and, accordingly, their
operating results will adversely affect our results of operations until they
achieve a sufficient patient count to cover fixed operating costs.
Interest and other income increased by approximately $37,000 for the
year ended December 31, 1998 compared to the preceding year. This increase is
largely due to interest earned on proceeds invested from the October 1997 sale
of our Florida dialysis operations.
Revenues for 1997 included a gain of approximately $4,431,000 upon the
sale of substantially all of the assets of our Florida subsidiary, and its
related operations.
Cost of medical services sales as a percentage of sales increased to
72% in 1999 compared to 71% in 1998 reflecting an increase in supply costs as
a percentage of sales, and a decrease in healthcare salaries as a percentage
of sales.
Selling, general and administrative expenses increased by approxi-
Mately $942,000 (51%) for 1999 compared to the preceding year. This increase
reflected operations of our new dialysis centers, $153,000 in compensation
expense from issuance of stock options and approximately $93,000 associated
with our decision not to go through with plans to construct a facility in
Toms River, New Jersey as well as increased support activities resulting from
expanded operations. Selling, general and administrative expenses as a
percent of medical services revenue amounted to 51% and 52% for the year
ended December 31, 1999 compared to the preceding year.
As a result of having centers in the developmental stage which have
not achieved a sufficient patient count to sustain profitable operations, we
have continued to experience operational losses.
Interest expense decreased by approximately $9,000 during the
comparable periods largely as a result of reduced average outstanding
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $4,152,000 at December 31, 1999, which
reflected a decrease of approximately $963,000 during the current year.
Included in the changes in components of working capital was a decrease in
cash and cash equivalents of $1,707,000, which included net cash used in
operating activities of $773,000, net cash used in investing activities of
$768,000 (including additions to property and equipment of $816,000 primarily
related to new centers), and net cash used in financing activities of $166,000
(including a decrease in the advances due from our parent of $16,000 and debt
repayments of $182,000). The change in working capital also reflected increases
of approximately $319,000 in accounts receivable and $151,000 in accounts
payable due to increased sales activity. Other current assets increased
approximately $302,000 largely as a result of an income tax receivable of
approximately $248,000 and income taxes payable decreased $233,000 due to
payment of taxes.
We have mortgages on two of our buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of approximately
$282,000 at December 31, 1999. 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 Maryland dialysis center
continues to lease space from us in our building. The Pennsylvania center
relocated during 1995 and we constructed our
25
own dialysis facility at the property that commenced treatments in June 1995.
See Note 2 to "Notes to Consolidated Financial Statements."
We have an equipment financing agreement for kidney dialysis machines
for our facilities, which has an outstanding balance of approximately $731,000
at December 31, 1999 and approximately $449,000 at December 31, 1998. This
included additional equipment financing of approximately $387,000 during 1999.
See Note 2 to "Notes to Consolidated Financial Statements."
We opened our fifth center in Chambersburg, Pennsylvania in January,
1999 and opened our sixth center in Vineland, New Jersey in February, 2000.
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 provides us
with an immediate ongoing operation, which most likely would be generating
income. Development of a dialysis facility to initiate operations takes four to
six months and usually 12 months or longer to generate income. We consider three
of our centers, Carlisle, Pennsylvania and Manahawkin and Vineland in New
Jersey, to be in the developmental stage, since they have not developed a
patient base sufficient to generate and sustain earnings for those subsidiaries.
Carlisle and Manahawkin have been operational for approximately 29 months and 19
months, respectively. We have entered into agreements with medical directors,
and intend to establish additional facilities in Georgia and Ohio.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisitions of
existing centers or the development of our own dialysis centers requires
capital, which was the basis for our security offering in 1996 and sale of our
Florida dialysis operations in 1997. We are presently in different phases of
negotiations with approximately 10 physicians for additional outpatient centers
in Georgia, Maryland, New Jersey Ohio, Pennsylvania, South Carolina and
Virginia. No assurance can be given that we will be successful in implementing
our growth strategy or that our available funds will be adequate to finance such
expansion. See Item 1, "Business - Business Strategy" and Notes 7 and 9 to
"Notes to Consolidated Financial Statements."
We believe that current levels of working capital will enable us to
meet our liquidity demands for at least the next twelve months as well as expand
our dialysis facilities and thereby our patient base.
In January, 2000, we loaned $1,500,000 to our parent, Medicore, at an
annual interest rate of 10%, with the loan and accrued interest to be repaid by
the parent on January 26, 2001. The parent utilized this loan to fund a loan by
it to Linux Global Partners, which invests in Linux software companies, in
conjunction with which the parent acquired a 6% ownership interest in Linux for
$90, with an option to increase its ownership to 8%, which would include making
an additional loan of $500,000 to Linux for which the parent would borrow the
funds from us.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the recent millennium change concerned the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, were faced to ensure
26
continued proper operations and reporting of financial condition. Management was
fully aware of the Year 2000 issues, made its assessments, which included
testing each component of software and hardware systems to insure each component
operated properly with the date advanced to the year 2000, developing awareness
and educating employees and patients regarding the Year 2000 issue and advising
them of contingency plans, in case of total operating failure, which would
include transferring the patients to our backup hospitals or referring to other
non-affiliated dialysis centers. The education phase was ongoing to assure staff
and patients of the nature of the Year 2000 issue and the contingency plans then
available. Now that the Year 2000 has arrived, we have not experienced any
computer or other year 2000 problems within any of our systems or with third
party suppliers or providers.
In mid-year 1999, we installed a new Year 2000 compliant accounting
package, providing us with our own independent system of bookkeeping, accounting
and financial records and reducing our reliance on Medicore's system and staff.
This new system's cost, for equipment, software and training, was approximately
$40,000.
One of the most significant risks in our operations with respect to the
recent millenium change related to billing and collection from third-party
payors, and, in particular, Medicare. We receive a substantial portion of our
revenues from Medicare for treatment of dialysis patients and related services.
HCFA, through whom the Medicare program and payments are effected, has indicated
it has done and continues to accomplish all it can to insure the Medicare ESRD
program continues operating smoothly and that dialysis providers, like
ourselves, may continue to timely bill electronically for patient services with
Medicare payments to be made timely. In 1998, we installed a new electronic
billing software program that was developed according to Medicare's compliance
guidelines, which guidelines require not only system but also Year 2000
compatibility. We initiated electronic Medicare billing in January, 1999 without
any problems. Other third-party payors, such as insurance companies, are
presently billed with hard copy. The costs of the software modifications were
minimal, approximately $1,000, and we do not anticipate any further costs with
respect to Year 2000 compliance, and, if any, such would not be anticipated to
be material.
With respect to non-information technology systems, which typically
include embedded technology, such as microcontrollers, the major equipment used
in patient dialysis treatment is not date sensitive and did not pose any threat
of a system breakdown due to the Year 2000 issue. Most of our dialysis equipment
is new. We retain technicians who test and maintain dialysis operations
equipment.
In addition to addressing our own internal software system and
equipment, we had communicated with all of our suppliers, service providers and
other key third parties, including banks, hospitals, insurance companies, drug
and medical equipment and soft good suppliers, utilities, waste removal and
water and sewer services with whom we deal to determine the extent of their Year
2000 compliance, what actions they were taking to assess and address that issue,
and whether they would be compliant. We received written assurances from these
third parties indicating that they were Year 2000 compliant, and, in fact, we
have not experienced any material adverse effects in entering into the Year
2000.
We assumed a worse case scenario that some of our critical suppliers
might experience a millenium problem and limit, delay or be unable to deliver
supplies for patient treatment. In response, we identified other sources of
supplies and maintained specific contacts with those suppliers, and had it been
necessary, which it was not, would have requested those suppliers to carry more
inventory earmarked for us. At the millenium change there were no supply
problems.
27
Another area that could have significantly impacted our operations in
providing dialysis treatment to patients related to third-party providers,
specifically, the utility companies providing water, a necessary resource for
dialysis treatments, and electricity. These providers and services are beyond
our control, and we do not have a separate generator for electricity nor other
sources for water. None of these utilities have failed to provide services.
However, we had in place plans to reduce the impact of any such utility
shortages or outages which included notification to our utilities companies of
our dialysis center locations, schedules and emergency services required and a
24-hour contact as well as notification to each of our landlords to assure
access to the facility for our staff and key service providers.
We have not experienced any material unanticipated negative
consequences from the Year 2000 issues. We believe our assessment and
implementation of our Year 2000 issues were satisfactorily completed, as
evidenced by our continued and uninterrupted dialysis operations. However, we
have only just entered the new millenium, and there may yet arise Year 2000
problems that we are not aware of These unknowns do not allow us the ability to
predict with any significant accuracy or to quantify these Year 2000 issues'
impact upon us, since they would involve uncertainty of costs we might incur as
a result of these unknown Year 2000 failures that might yet occur despite the
successful implementation of our program.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is
effective for fiscal years beginning after June 15, 2000. FAS 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities and requires, among other things, that all
derivatives be reorganized as either assets or liabilities in the statement
of financial position and that these instruments be measured at fair value.
We are in the process of determining the impact that the adoption of FAS
133 will have on our consolidated financial statements.
PROPOSED MERGER AND ACQUISITION
On October 20, 1999, we entered into an Agreement and Plan of Merger
pursuant to which MainStreet would merge with us and own approximately 80%
of our Company. That proposed transaction also provides for a simultaneous
sale of our operations to our parent in consideration for approximately 90%
of the parent's ownership of the Company, our parent's assumption of our
long-term debt and other liabilities, and our parent's waiver of most
proceeds from the potential exercise of outstanding warrants and under-
writers' options. See Item 1, "Business - Important Developments" and Note
12 to "Notes to Consolidated Financial Statements."
LOAN TO PARENT COMPANY
On January 27, 2000, our parent borrowed $1,500,000 from us with a
10% annual interest rate, with the loan to be repaid with accrued interest
by January 26, 2001. An additional $500,000 was borrowed from us by our
parent under the same terms as the original borrowing. Our parent utilized
the monies to loan to Linux Global Partners, a holding company investing in
Linux software companies. See Note 13 to "Notes to Consolidated Financial
Statements" and "Certain Relationships and Related Transactions" of our
Information Statement relating to our Annual Meeting of Shareholders
anticipated to be held on May 24, 2000, which is incorporated herein by
reference.
RECENT DEVELOPMENTS
Effective March 1, 2000, Bart Pelstring resigned as President,
succeeded by Stephen Everett, formerly our Executive Vice President. Mr.
Pelstring will remain as a director of the Company and our subsidiaries.
28
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. See "Operations - Medicare Reimbursement" and
"Government Regulation" under Item 1, "Business." Therefore, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 liquid funds in short-term
government securities of which we held approximately $3,383,000 at December 31,
1999.
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 $282,000 at December 31, 1999.
We have has exposure to both rising and falling interest rates. A 1/2%
decrease in rates on our year-end investments in government securities and a 1%
increase in rates on our year-end mortgage debt would result in a negative
impact of approximately $12,000 on our result of operations.
We do not utilize financial instruments for trading or speculative
purposes and do not currently use interest rate derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 6, 1999, the board of directors, upon the
recommendation of the audit committee, terminated Ernst & Young LLP as our
independent accountants, and engaged new independent accountants, Wiss &
Company, LLP, for the Company's annual audit for our 1999 fiscal year.
This matter was previously reported on our Current Report on Form 8-K
dated August 27, 1999. For more details you are referred to the caption
"Proposals, 2. Ratification of Wiss & Young, LLP as Independent Auditors" of
our Information Statement relating to the Annual Meeting of Shareholders
anticipated to be held on May 24, 2000, which is incorporated herein by
reference.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the annual meeting of
shareholders, to serve during the ensuing year. The following information
indicates their positions with the Company and age of the executive officers at
March 15, 2000. There are no family relationships between any of the executive
officers and directors of the Company.
Name Age Position Held Since
- ---- --- -------- ----------
Thomas K. Langbein 54 Chairman of the Board and 1980
Chief Executive Officer 1986
Stephen W. Everett 44 President 2000
Daniel R. Ouzts 53 Vice President (Finance)
and Treasurer 1996
For more detailed information about our executive officers and
directors you are referred to the caption "Information About Directors and
Executive Officer" of our Information Statement relating to the annual meeting
of shareholders anticipated to be held on May 24, 2000, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of our Information Statement relating to the annual
meeting of shareholders anticipated to be held on May 24, 2000, incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of our voting securities by each
director and all officers and directors as a group, and for each of the named
executive officers disclosed in the Summary Compensation Table (see "Executive
Compensation" of our Information Statement relating to the annual meeting of
shareholders anticipated to be held on May 24, 2000, incorporated herein by
reference), and by any person known to beneficially own more than 5% of any
class of our voting security, is included under the caption "Beneficial
Ownership of the Company's Securities" of our Information Statement relating to
the annual meeting of shareholders anticipated to be held on May 24, 2000,
incorporated herein by reference.
30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the caption "Certain Relationships and Related Transactions" of
our Information Statement relating to the annual meeting of shareholders
anticipated to be held on May 24, 2000, incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Reports on Form 8-K
None
(c) Exhibits +
(3) (i) Articles of Incorporation++
(ii) By-Laws of the Company++
(4) (i) Form of Common Stock Certificate of the Company++
(ii) Form of Redeemable Common Stock Purchase Warrant++
(iii) Form of Underwriters' Options++
(iv) Form of Warrant Agreement between the Company, Continental
Stock Transfer & Trust Co. and Joseph Dillon & Co., Inc.++
(v) Amendment No. 1 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc. dated March 9, 1999 (incorporated by reference to
the Company's Current Report on Form 8-K dated March 9, 1999,
Item 7(c)(4)(i)).
(vi) Amendment No. 2 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc. dated September 13, 1999.
(vii) Amendment No. 3 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc., dated March 22, 2000 (incorporated by reference to
the Company's Current Report on Form 8-K dated March 20,
2000, Item 7(c)(10)(i)).
32
(10) Material Contracts
(i) Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(1) and James and Roger Stager dated January 15, 1995
(incorporated by reference to Medicore, Inc.'s(2) Annual
Report on Form 10-K for the year ended December 31, 1994
("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3
(10)(lxii)).
(ii) Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) dated December 1, 1998
(incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, Part IV, Item
14(c)(10)(ii)).
(iii) Loan Agreement between the Company and Mercantile-Safe Deposit
and Trust Company dated November 30, 1988(3) (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 ("March, 1998 Form 10-Q"),
Part II, Item 6(a), Part II, Item 10(iii)).
(iv) First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company dated December 1,
1997(3) (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
("1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
(v) Promissory Note to Mercantile-Safe Deposit and Trust Company
dated November 30, 1988(3) (incorporated by reference to the
March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(ii)).
(vi) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(3) (incorporated by
reference to the 1997 Form 10-K, Part IV, Item 14(c)(xxix)).
(vii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(2) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to Medicore,
Inc.'s(2) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 as amended January, 1995 ("September, 1994
Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).
(viii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to the
1994 Medicore(2) Form 10-K, Part IV, Item 14(a)(3)(10)(lx)).
(ix) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Wellsboro(1) and Soldiers &
Sailors Memorial Hospital dated September 28, 1994 [*]
(incorporated by reference to September, 1994 Medicore(2)
Form 10-Q, Part II, Item 6(a)(10)(ii)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
33
(x) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Lemoyne(1) and Pinnacle
Health Hospitals dated June 1, 1997 [*] (incorporated by
reference to the Company's Current Report on Form 8-K dated
June 19, 1997, Item 7(c)(10)(i)).
(xi) 1995 Stock Option Plan of the Company (November 10, 1995).++
(xii) Form of Stock Option Certificate under 1995 Stock Option Plan
(November 10, 1995).++
(xiii) Lease between Dialysis Services of PA., Inc. - Carlisle(1)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to the Company's
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).
(xiv) Lease between Dialysis Services of NJ., Inc. - Manahawkin(4)
and William P. Thomas dated January 30, 1997 (incorporated by
reference to the Company's 1996 Form 10-K, Part IV, Item
14(a) 3 (10)(xxiv)).
(xv) Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(4) dated June 4,
1997 (incorporated by reference to the 1997 Form 10-K, Part
IV, Item 14(c)(xviii)).
(xvi) Equipment Master Lease Agreement BC-105 between the Company
and B. Braun Medical, Inc. dated November 22, 1996
(incorporated by reference to the Company's 1996 Form 10-K,
Part IV, Item 14(a) 3 (10)(xxvii)).
(xvii) Schedule of Leased Equipment 0597 commencing June 1, 1997 to
Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 ("June, 1997 10-Q"), Part II, Item 6(a), Part
II, Item 10(i)).(5)
(xviii) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Carlisle(1) and Carlisle
Hospital dated August 15, 1997 [*] (incorporated by reference
to the Company's Current Report on Form 8-K dated August 29,
1997, Item 7(c)(10)(i)).
(xix) Asset Purchase Agreement by and among the Company, Dialysis
Services of Florida, Inc. - Fort Walton Beach(6), DCA Medical
Services, Inc.(1), Dialysis Medical, Inc., Renal Care Group,
Inc., Renal Care Group of the Southeast, Inc. and Henry M.
Haire, M.D. dated October 31, 1997 (incorporated by reference
to the Company's Current Report on Form 8-K dated November
12, 1997, Part II, Item 7(c)(2.1)).
(xx) Medical Director Agreement between Dialysis Services of NJ,
Inc. - Manahawkin(4) and Atlantic Nephrology Group, Inc.
dated January 21, 1998(7) [*] (incorporated by reference to
the Company's September, 1996 Form 10-Q, Part II, Item 6(a),
Part II, Item 10(i)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
34
(xxi) Lease between Dialysis Services of Pa., Inc. - Chambers-
burg(1) and BPS Development Group dated April 13, 1998
(incorporated by reference to the Company's March, 1998 Form
10-Q, Part II, Item 6(a), Part II, Item 10(i)).
(xxii) Lease between the Company and Wirehead Networking Solutions,
Inc. dated December 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, Part IV, Item 14(c)(10)(xxvi)).
(xxiii) 1999 Stock Option Plan of the Company (May 21, 1999).
(xxiv) Form of Stock Option Certificate under the 1999 Stock Option
Plan (May 21, 1999).
(xxv) Lease between DCA of Vineland, LLC(4) and Maintree Office
Center, L.L.C. dated May 10, 1999.
(xxvi) Medical Director Agreement between DCA of Vineland, LLC(4)
and Vineland Dialysis Professionals dated April 30, 1999.
(xxvii) Medical Director Agreement between Dialysis Services of PA.,
Inc. - Carlisle(4) and Cumberland Valley Nephrology
Associates, P.C. dated April 30, 1999(8).
(xxviii) Management Services Agreement between the Company and DCA of
Vineland, LLC(4) dated April 30, 1999(9).
(xxix) Amendment No. 1 to Management Services Agreement between the
Company and DCA of Vineland, LLC(4) dated October 27, 1999.
(xxx) Indemnity Deed of Trust from the Company to Trustees for the
benefit of St. Michaels Bank dated December 3, 1999
(incorporated by reference to the Company's Current Report on
Form 8-K dated December 13, 1999 ("December Form 8-K"), Item
7(c)(99)(i)).
(xxxi) Guaranty Agreement from the Company to St. Michaels Bank
dated December 3, 1999 (incorporated by reference to the
Company's December Form 8-K, Item 7(c)(99)(ii)).
(xxxii) Promissory Note from Medicore, Inc.(2) to the Company dated
January 27, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K dated February 10, 2000, Item
7(c)10.1)
(xxxiii) Management Services Agreement between DCA of Vineland, LLC(4)
and DCA Medical Services, Inc. (1) dated January 1, 2000(10).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
35
(16)(i) Letter re change in certifying accountant dated August 13,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K dated August 13, 1999, Item 7(c)(16)).
(ii) Letter re change in certifying accountant dated August 27,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K/A#1 dated August 27, 1999, item 7(c)(16)).
(21) Subsidiaries of the Company.
(23) Consent of experts and counsel
(i) Consent of Ernst & Young LLP, Independent Certified Public
Accountants
(ii) Consent of Wiss & Company, LLP, Independent Certified Public
Accountants
(27) Financial Data Schedule (for SEC use only).
- -------------------------
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated December 22, 1995 as amended February 9, 1996, April
2, 1996 and April 15, 1996, Registration No. 33-80877-A, Part II,
Item 27.
(1) Wholly-owned subsidiary.
(2) Parent of the Company owning approximately 68% of the Company's
outstanding common stock. Medicore is subject to Section 13(a)
reporting requirements of the Exchange Act, with its common stock
listed for trading on the Nasdaq SmallCap Market.
(3) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory notes
conform to the exhibit filed but for the amount of each loan.
(4) 80% owned facility.
(5) Dialysis equipment is leased from time to time and a new schedule is
added to the Master Lease; other than the nature of the equipment and
the length of the lease, the Schedules conform to the exhibit filed
and the terms of the Master Lease remain the same.
(6) 100% owned subsidiary, assets sold; now inactive.
(7) Previously filed with the same Medical Director under the name
Oceanview Medical Group, P.A.
(8) There are two Medical Director Agreements with Cumberland Valley
Nephrology Associates, P.C. and such agreements conform to the exhibit
filed but for the facility, the other facility located in
Chambersburg, Pennsylvania.
(9) There are several substantially similar Management Services Agreements
which conform to the exhibit filed but for the name of the particular
subsidiary which entered into the Agreement.
(10) Each subsidiary has the identical Management Services Agreement with
DCA Medical Services, Inc.
36
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to Other Changes Balance
Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of
Classification Of Period Cost and Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 144,000 $ 98,000 $ (5,000)(1) $ 237,000
Valuation allowance for deferred tax asset 80,000 117,000 -- 197,000
--------- --------- --------- ---------
$ 224,000 $ 215,000 $ (5,000) $ 434,000
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 52,000 $ 101,000 $ (9,000)(1) $ 144,000
Valuation allowance for deferred tax asset -- 80,000 -- 80,000
--------- --------- --------- ---------
$ 52,000 $ 181,000 $ (9,000) $ 224,000
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 154,000 $ 37,000 $ (93,000)(1) $ 52,000
(46,000)(2)
Valuation allowance for deferred tax asset 17,000 (17,000) -- --
--------- --------- --------- ---------
$ 171,000 $ 20,000 $(139,000) $ 52,000
========= ========= ========= =========
(1) Uncollectable accounts written off, net of recoveries.
(2) Sale of subsidiaries' assets.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ THOMAS K. LANGBEIN
----------------------------------
Thomas K. Langbein
Chairman of the Board of Directors
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 28, 2000
- ---------------------------
Thomas K. Langbein
/s/ STEPHEN W. EVERETT President March 28, 2000
- ---------------------------
Stephen Everett
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 28, 2000
- --------------------------- Financial Officer and Controller
Daniel R. Ouzts
/s/ BART PELSTRING Director March 28, 2000
- ---------------------------
Bart Pelstring
/s/ ROBERT W. TRAUSE Director March 28, 2000
- ---------------------------
Robert W. Trause
/s/ DR. HERBERT I. SOLLER Director March 28, 2000
- ---------------------------
Dr. Herbert I. Soller
38
ANNUAL REPORT ON FORM 10-K
ITEM I, ITEM 14(a) (1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1999
DIALYSIS CORPORATION OF AMERICA
LEMOYNE, PENNSYLVANIA
FORM 10-K--ITEM 14(A)(1) AND (2)
DIALYSIS CORPORATION OF AMERICA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Dialysis Corporation of
America and subsidiaries are included in Item 8:
Page
----
Consolidated Balance Sheets as of December 31, 1999 and 1998. F-4
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998, and 1997. F-5
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997. F-6
Consolidated Statements of Cash Flows - Years ended December
31, 1999, 1998 and 1997. F-7
Notes to Consolidated Financial Statements - December 31, 1999. F-8
The following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheet of Dialysis
Corporation of America and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. Our audit also included the financial state-
ment schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 1999, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ WISS & COMPANY, LLP
March 10, 2000
Livingston, New Jersey
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheet of Dialysis
Corporation of America and subsidiaries as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1998.
Our audits also included the information related to each of the two years in
the period ended December 31, 1998 on the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 1998,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the two years in the
period ended December 31, 1998, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,659,390 $ 5,366,837
Accounts receivable, less allowance
of $237,000 at December 31, 1999;
$144,000 at December 31, 1998 779,568 460,786
Inventories 219,623 179,189
Prepaid expenses and other current assets 397,361 52,934
----------- -----------
Total current assets 5,055,942 6,059,746
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,425,912 1,404,573
Machinery and equipment 2,051,803 1,381,460
Leasehold improvements 1,660,172 1,149,300
----------- -----------
5,306,245 4,103,691
Less accumulated depreciation and amortization 1,454,190 1,003,995
----------- -----------
3,852,055 3,099,696
Advances to parent 105,142 120,865
Deferred expenses and other assets 22,808 68,617
----------- -----------
$ 9,035,947 $ 9,348,924
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 395,002 $ 243,968
Accrued expenses 365,351 292,594
Current portion of long-term debt 143,438 175,902
Income taxes payable -- 232,306
----------- -----------
Total current liabilities 903,791 944,770
Long-term debt, less current portion 869,985 632,664
Minority interest in subsidiaries 2,080 --
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,546,344 shares issued
and outstanding in 1999; 3,751,344 shares issued and
3,546,344 shares outstanding in 1998 35,463 37,513
Capital in excess of par value 3,971,514 4,044,154
Retained earnings 3,253,114 4,004,763
Treasury stock at cost; 205,000 shares -- (314,940)
----------- -----------
Total stockholders' equity 7,260,091 7,771,490
----------- -----------
$ 9,035,947 $ 9,348,924
=========== ===========
See notes to consolidated financial statements.
F-4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Medical service revenue $ 5,498,541 $ 3,552,279 $ 4,375,165
Gain on sale of subsidiaries' assets -- -- 4,430,663
Interest and other income 367,030 451,656 414,970
----------- ----------- -----------
5,865,571 4,003,935 9,220,798
Cost and expenses:
Cost of medical services 3,964,258 2,516,239 2,712,527
Selling, general and administrative expenses 2,789,529 1,847,175 2,155,459
Interest expense 72,605 81,531 86,129
----------- ----------- -----------
6,826,392 4,444,945 4,954,115
----------- ----------- -----------
(Loss) income before income taxes and minority interest (960,821) (441,010) 4,266,683
Income tax (benefit) provision (292,462) (236,838) 1,699,000
----------- ----------- -----------
(Loss) income before minority interest (668,359) (204,172) 2,567,683
Minority interest in income (loss)
of consolidated subsidiaries -- -- 574,303
----------- ----------- -----------
Net (loss) income $ (668,359) $ (204,172) $ 1,993,380
=========== =========== ===========
(Loss) earnings per share:
Basic $ (.19) $ (.06) $ .56
=========== =========== ===========
Diluted $ (.19) $ (.06) $ .55
=========== =========== ===========
See notes to consolidated financial statements.
F-5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN
COMMON EXCESS OF RETAINED TREASURY
STOCK PAR VALUE EARNINGS STOCK TOTAL
----------- ----------- ----------- ----------- -----------
Balance at January 1, 1997 $ 35,888 $ 3,748,595 $ 2,215,555 $ 6,000,038
Net income 1,993,380 1,993,380
Repurchase of 100,000 shares $ (206,250) (206,250)
Exercise of stock options 1,625 260,125 261,750
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 37,513 4,008,720 4,208,935 (206,250) 8,048,918
Net loss (204,172) (204,172)
Repurchase of 105,000 shares (108,690) (108,690)
Redemption of minority interest in subsidiaries 35,434 35,434
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 37,513 4,044,154 4,004,763 (314,940) 7,771,490
Net loss (668,359) (668,359)
Issuance of stock options as compensation 153,000 153,000
Sale of minority interest in subsidiaries 3,960 3,960
Cancellation of 205,000 treasury shares (2,050) (229,600) (83,290) 314,940 --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ 35,463 $ 3,971,514 $ 3,253,114 $ -- $ 7,260,091
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Operating activities:
Net (loss) income $ (668,359) $ (204,172) $ 1,993,380
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Gain on sale of subsidiaries' assets -- -- (4,430,663)
Depreciation 450,460 332,697 278,761
Amortization 1,743 1,690 11,116
Bad debt expense 98,666 100,856 36,726
Deferred income taxes -- 24,000 --
Gain on sale of securities -- (12,780) --
Minority interest -- -- 574,303
Stock option related compensation expense 153,000 -- 322,125
Increase (decrease) relating to operating activities from:
Accounts receivable (417,448) (67,479) (357,280)
Inventories (40,434) (65,374) (5,223)
Prepaid expenses and other current assets (342,427) 43,825 (12,087)
Accounts payable 151,034 171,437 (76,129)
Accrued expenses 72,757 (62,505) 58,341
Income taxes payable (232,306) (1,422,858) 1,649,164
----------- ----------- -----------
Net cash (used in) provided by operating activities (773,314) (1,160,663) 42,534
Investing activities:
Proceeds from sale of subsidiaries' assets -- -- 4,583,662
Redemption of minority interest in subsidiaries -- (385,375) --
Additions to property and equipment, net of minor disposals (815,919) (904,873) (631,103)
Proceeds from sale of securities -- 252,780 --
Deferred expenses and other assets 44,066 (27,219) (23,429)
Sale of minority interest in subsidiaries 4,040 -- --
----------- ----------- -----------
Net cash (used in) provided by investing activities (767,813) (1,064,687) 3,929,130
Financing activities:
Advances (to) from parent 15,723 (249,592) (240,820)
Repurchase of stock -- (108,690) (206,250)
Payments on long-term debt (182,043) (152,451) (136,502)
Exercise of stock options -- -- 1,625
Dividend payments to minority shareholders -- -- (3,966)
----------- ----------- -----------
Net cash (used in) provided by financing activities (166,320) (510,733) (585,913)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (1,707,447) (2,736,083) 3,385,751
Cash and cash equivalents at beginning of year 5,366,837 8,102,920 4,717,169
----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,659,390 $ 5,366,837 $ 8,102,920
=========== =========== ===========
See notes to consolidated financial statements.
F-7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 five kidney dialysis centers, four located in Pennsylvania
and one in New Jersey and opened a sixth kidney dialysis center in New Jersey in
February 2000, and has agreements to provide inpatient dialysis treatments to
various hospitals and provides supplies and equipment for dialysis home
patients.
CONSOLIDATION
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company." All material intercompany accounts and transactions have been
eliminated in consolidation. The Company is a 68.0% owned subsidiary of
Medicore, Inc. (the "Parent").
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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 state 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
interpretations 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. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
these assets are invested.
F-8
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from 5 to 34 years for buildings and improvements; 4 to 10
years for machinery, computer and office equipment, and furniture; and 5 to 10
years for leasehold improvements, based on the shorter of the lease term or
estimated useful life of the property. Replacements and betterments that
extend the lives of assets are capitalized. Maintenance and repairs are
expensed as incurred. Upon the sale or retirement of assets, the related cost
and accumulated depreciation are removed and any gain on loss is recognized.
LONG-LIVED ASSET IMPAIRMENT
Pursuant to Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
DEFERRED EXPENSES
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
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 Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB25) and related Interpretations in accounting
for its employee stock options. Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" permits a company to elect to
follow the accounting provisions 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.
F-9
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
Net (loss) income $ (668,359) $ (204,172) $1,993,380
=========== ========== ==========
Weighted average shares-denominator
basic computation 3,546,344 3,626,330 3,531,584
Effect of dilutive stock options:
Stock options granted November 1995 -- -- 86,539
----------- ---------- ----------
Weighted average shares, as
adjusted-denominator diluted
computation 3,546,344 3,626,330 3,618,123
=========== ========== ==========
Earnings (loss) per share:
Basic $ (.19) $ (.06) $ .56
=========== ========== ==========
Diluted $ (.19) $ (.06) $ .55
=========== ========== ==========
In addition to the dilutive stock options included in the reconciliation
above, which have an exercise price of $1.50 per share, there were 10,000
medical director options, 2,300,000 common stock purchase warrants and
underwriter options to purchase 100,000 shares of common of common stock and
200,000 common stock purchase warrants which have not been included in the
earnings per share computation since they are anti-dilutive.
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Rental income $1,142,561 $ 121,835 $ 119,792
Interest income 194,984 296,943 227,789
Other 29,485 32,878 67,389
---------- ---------- ----------
$ 367,030 $ 451,656 $ 414,970
========== ========== ==========
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
bear variable interest rates which approximate market.
F-10
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for fiscal
years beginning after June 15, 2000. FAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires, among other things, that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that these
instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
1999 1998
---------- ----------
Mortgage note secured by land and building
with a net book value of $390,000 at
December 31, 1999. Monthly principal
payments of $3,333 plus interest at 1%
over the prime rate through November 2003 $ 156,711 $ 200,040
Mortgage note secured by land and building with
a net book value of $688,000 at December 31, 1999
Monthly principal payments of $2,667 plus interest
at 1% over the prime rate through November 2003 125,289 159,960
Equipment financing agreement secured by equipment
with a net book value of $772,000 at December 31,
1999. Monthly payments totaling $8,582 as of
December 31, 1999, including principal and interest,
as described below, pursuant to various schedules
extending through May 2005 with interest at rates
ranging from 4.14% to 11.84% 731,423 448,566
---------- ----------
1,013,423 808,566
Less current portion 143,438 175,902
---------- ----------
$ 869,985 $ 632,664
========== ==========
F-11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--LONG-TERM DEBT--CONTINUED
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% 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 are subject to monthly payments of interest and principal with any
remaining balance due September 1, 2003. There were no outstanding borrowings
under this line of credit as of December 31, 1999.
The equipment financing agreement provides financing for kidney dialysis
machines for the Company's dialysis facilities in Pennsylvania and New Jersey.
Additional financing totaled approximately $190,000 in 1997, $245,000 in 1998
and $387,000 in 1999. Payments under the agreement are pursuant to various
schedules extending through May 2005. Payments under some schedules begin one
year after commencement of the financing which would increase monthly payments
from $8,582 as of December 31, 1999 to $23,744 if all payments had commenced as
of that date.
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."
The prime rate was 8.50% as of December 31, 1999 and 7.75% as of December
31, 1998.
Scheduled maturities of long-term debt outstanding at December 31, 1999 are
approximately: 2000-$143,438; 2001-$252,863; 2002-$251,686; 2003-$242,527;
2004-$121,905; thereafter-$1,004. Interest payments on the above debt amounted
to approximately $54,000 in 1999, $64,000 in 1998, and $77,000 in 1997,
respectively.
The Company's various debt agreements contain certain restrictive covenants
that, among other things, restrict the payment of dividends, rent commitments,
additional indebtedness and prohibit issuance or redemption of capital stock and
require maintenance of certain financial ratios.
NOTE 3--INCOME TAXES
Subsequent to the completion of the Company's public offering in April 1996,
the Company files separate federal and state income tax returns. The net
operating loss carryforwards that were available at December 31, 1995 were
utilized prior to the completion of its public offering.
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. Significant components of
the Company's deferred tax liabilities and assets are as follows:
F-12
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 3--INCOME TAXES--CONTINUED
DECEMBER 31,
---------------------------
1999 1998
-------- --------
Deferred tax liabilities:
Depreciation $ 25,000 $ --
--------- --------
Total deferred tax liabilities 25,000 --
Deferred tax assets:
Depreciation and amortization --- 11,000
Accrued expenses 26,000 15,000
Bad debt allowance 96,000 54,000
--------- --------
Subtotal 122,000 80,000
State net operating loss carryforward 100,000 ---
--------- --------
Total deferred tax assets 222,000 (80,000)
Valuation allowance for deferred tax assets (197,000) (80,000)
--------- --------
Net deferred tax asset 25,000 ---
--------- --------
Net deferred taxes $ --- $ ---
========= ========
A valuation allowance has been provided that fully offsets the deferred tax
asset recorded at December 31, 1998 as management believes that it is more
likely than not that, based on the weight of the available evidence, the
deferred tax asset will not be realized.
Significant components of the income tax provision (benefit) are as follows:
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ (324,720) $ (301,000) $ 1,488,000
State 32,258 40,162 235,000
----------- ----------- -----------
(292,462) (260,838) 1,723,000
Deferred --- 24,000 (24,000)
----------- ----------- -----------
(292,462) $ (236,838) $ 1,699,000
=========== =========== ===========
The reconciliation of income tax attributable to income (loss) before
income taxes computed at the U.S. federal statutory rate to income tax expense
(benefit) is:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Statutory tax rate (34%) applied to income (loss)
before income taxes $ (325,395) $ (149,943) $ 1,450,700
Adjustments due to:
State taxes, net of federal benefit 21,290 25,049 155,200
Change in valuation allowance 117,000 80,000 (17,300)
Benefits of net operating losses -- -- --
Non-deductible items 3,395 2,973 2,900
Prior year tax return accrual adjustment (108,752) (194,917) 107,500
----------- ----------- -----------
$ (292,462) $ (236,838) $ 1,699,000
=========== =========== ===========
Income tax payments were approximately $223,000 in 1999, $1,162,000 in 1998
and $50,000 in 1997.
F-13
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 4--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. In the opinion of management, this
method of allocation is reasonable. The amount of expenses allocated by the
Parent totaled approximately $200,000 for the year ended December 31, 1999 and
$240,000 for each of the years ended December 31, 1998 and 1997.
As of December 31, 1999 and December 31, 1998, the Company had an
intercompany advance receivable from the Parent of approximately $105,000 and
$121,000, respectively, which bore interest at the short-term Treasury Bill
rate. Interest income on the intercompany advance receivable amounted to
approximately $2,000 and $1,000 for the years ended December 31, 1999 and
December 31, 1998, respectively. Interest on an intercompany advance payable
amounted to approximately $6,000 and $7,000 for the years ended December 31,
1998 and December 31, 1997, respectively. Interest is included in the
intercompany advance balance. The Company has agreed not to require repayment of
the intercompany advance receivable from the Parent prior to January 1, 2001,
and therefore, the advance has been classified as long-term at December 31,
1999.
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1999, 1998 and 1997, respectively, the
Company paid premiums of approximately $161,000, $124,000 and $87,000 for
insurance obtained through two persons, one a director of the Company and the
Parent, and the other a relative of an officer and director of the Company and
the Parent.
For the years ended December 31, 1999, 1998 and 1997, respectively, legal
fees of $132,000, $80,000 and $61,000 were paid to an attorney who acts as
general counsel and Secretary for the Company and the Parent.
NOTE 6--STOCK OPTIONS
The Company has elected to follow 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 is
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standard Board Statement No. 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. 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.
In November, 1995, the Company adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November, 1995, the board of directors
granted 210,000 options to certain of its officers, directors, and employees and
consultants of which 4,500 options were outstanding at December 31, 1999. These
options vested immediately and are exercisable for a period of five years
through November 9, 2000 at $1.50 per share. On June 10, 1998, the board of
directors granted an option under the 1995 plan to a new board member for 5,000
shares exercisable at $2.25 per share through June 9, 2003. On December 31, 1997
162,500 options were exercised by officers for which the Company received cash
payments of the par value and the Company forgave the remaining balance due and
recorded compensation expense of approximately $322,000.
F-14
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6 --STOCK OPTIONS--CONTINUED
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. The Company recorded expense of $153,000 on 340,000 of
these options pursuant to FAS 123 and APB 25.
Pro forma information regarding net income and earnings per share is
required by FAS 123, 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/modified during 1999 and 1998, respectively:
risk-free interest rate of 5.65% for the 1999 options and 5.55% for the options
granted/modified during 1998; no dividend yield; volatility factor of the
expected market price of the Company's common stock of .95 and .93, and a
weighted-average expected life of 1.9 years and 2.0 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
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period, and since the options
vested immediately, the Company's pro forma disclosure recognizes expense upon
issuance of the options. No pro forma information is provided for 1997 as no
options were granted. The Company's pro forma information follows:
1999 1998
---- ----
Pro forma net loss $(985,759) $(209,039)
========= =========
Pro forma loss per share $ (.28) $ (.06)
========= =========
A summary of the Company's stock option activity, and related information
for the options issued in 1998, 1996 and 1995 follows:
F-15
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6--STOCK OPTIONS--Continued
1999 1998 1997
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 19,500 29,000 209,000
Granted 800,000 $1.25 10,000 $2.25 --
Cancellations -- (5,000) 4.75 --
Exercised -- -- (162,500) $1.50
Expired (10,000) 3.50 (14,500) 1.50 (17,500) 2.43
-------- -------- --------
Outstanding-end of year 809,500 19,500 29,000
======== ======== ========
Outstanding and exercisable
at end of year
April 1999 options 800,000 1.25 -- --
November 1995 options 4,500 1.50 4,500 1.50 19,000 1.50
August 1996 and June 1998 options 5,000 2.25 10,000 2.25 10,000 4.75
August 1996 options -- 5,000 4.75 --
-------- -------- --------
809,500 19,500 29,000
======== ======== ========
Weighted-average fair value of
options granted during the year $ .59 $ .79
======== ========
The remaining contractual life at December 31, 1999 is .3 years for 340,000
options issued in April 1999, 4.3 years for 460,000 options issued in April
1999, 3.4 years for the options issued in June 1998, and .9 years for the
options issued in November 1995.
The Company has 3,409,500 shares reserved for future issuance, including:
2,300,000 shares for Warrants; 9,500 shares under the 1995 plan; 800,000 shares
under the 1999 plan; and 300,000 shares for underwriter options.
NOTE 7--COMMON STOCK
Pursuant to a 1996 public offering 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters overallotment
option, and 2,300,000 redeemable common stock purchase warrants to purchase one
common share each at an exercise price of $4.50 originally exercisable through
April 16, 1999 and extended to March 31, 2000. The underwriters received options
to purchase 100,000 units each consisting of one share of common stock and two
common stock purchase warrants, for a total of 100,000 shares of common stock
and 200,000 common stock purchase warrants, with the options exercisable at
$4.50 per unit from April 17, 1997 through April 16, 2001 with the underlying
warrants being substantially identical to the public warrants except that they
are exercisable at $5.40 per share.
F-16
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 8--COMMITMENTS
The Company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 1999 are approximately:
2000-$217,048; 2001-$202,784; 2002-$186,506; 2003-$166,584; thereafter-$71,215.
Total rent expense was approximately $173,000, $49,000 and $73,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
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 has made no contributions under
this plan as of December 31, 1999.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of substantially
all of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA Medical
Services, Inc. pursuant to an Asset Purchase Agreement. Consideration for the
assets sold was $5,065,000 consisting of $4,585,000 in cash and $480,000 of the
purchaser's common stock. The Company recorded a gain on the Sale of
approximately $2,747,000, representing a pre-tax gain of $4,431,000, net of
estimated income taxes of approximately $1,684,000, of which approximately
$537,000 of the net after tax gain relates to the 20% minority interest in two
of the subsidiaries whose assets were sold. In February 1998, the Company
acquired, in a transaction accounted for as a purchase, the remaining 20%
minority interests in two of the subsidiaries whose assets were sold. The
purchase price, totaled $625,000, which included one-half of the common shares
originally received as part of the consideration of the Sale. All of the common
shares were sold in September 1998 for approximately $253,000 resulting in a
gain of approximately $13,000.
The pro forma consolidated condensed financial information presented below
reflects the Sale as if it had occurred on January 1, 1997, accordingly,
revenues and expenses of the businesses sold have been excluded for the period
prior to the sale. For purposes of pro forma statement of operations
information, no assumption has been made that expenses have been eliminated
which were included in corporate expense allocations by the Company and its
Parent, to the business operations sold and which were included in the actual
results of operations of these businesses. Such expenses amounted to
approximately $125,000 for the year ended December 31, 1997. No assumption
has been included in the pro forma information as to investment income to be
realized from investment of the proceeds of the Sale.
The summary pro forma financial information, which excludes the gain on
the Sale and related income taxes, is not necessarily representative of what
the Company's results of operations would have been if the Sale had actually
occurred as of January 1, 1997.
SUMMARY PRO FORMA INFORMATION
Year Ended December 31, 1997
----------------------------
Total revenues $3,079,000
==========
Net loss $ (530,000)
===========
Loss per share:
Basic $(.15)
=====
Diluted $(.15)
======
F-17
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 10--REPURCHASE OF COMMON STOCK
In September 1998, the Company announced its intent to repurchase up to an
additional 300,000 shares of its common stock at current market prices after
having acquired 100,000 shares in June 1997 for approximately $206,000. The
Company repurchased 105,000 shares for approximately $109,000 during 1998. The
Company did not purchase any additional shares during 1999. All treasury shares
were cancelled during the second quarter of 1999.
NOTE 11--CAPITAL EXPENDITURES
Capital expenditures were as follows:
1999 1998 1997
---- ---- ----
$1,203,000 $1,149,000 $ 825,000
========== ========== ==========
NOTE 12--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger with MainStreet IPO.com Inc. ("MSI") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet"). The proposed merger is anticipated
to be effected by MainStreet merging into DCA with DCA surviving, changing its
name to MainStreet, and becoming a wholly-owned subsidiary of MSI. The
Company's shareholders will receive, on a one-for-one basis, shares of common
stock of MSI, which company filed a registration statement in February 2000
with the SEC covering the issuance of approximately 1,396,000 shares of its
common stock, plus approximately 3,419,000 shares for resale by certain
affiliates of the Company, MSI and certain private investors of MSI. The
Company will issue a proxy statement which is part of MSI's registration
statement, seeking its minority shareholders' approval of the merger and
related transactions, at such time the SEC declares the registration effective.
Immediately prior to the proposed merger, the Company will be selling all of
its assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of its
parent, Medicore, Inc., with this subsidiary also assuming all liabilities of
the Company. The proposed sale of assets and merger transactions are subject to
a variety of contingencies, most importantly shareholder approval. Should the
Company's minority shareholders approve the transactions, Medicore will own
100% of the dialysis operations, and the Company's shareholders will become
shareholders of MSI.
MSI is a recently established company which has developed a central website
to provide business entities with the necessary tools to perform direct public
offering of their securities. Another company, CEO Letter, LLC, which will
become a wholly-owned subsidiary of MSI at the time of the merger, provides
chief executive officers of public companies the forum to discuss their
companies to the multitude of potential internet investors.
NOTE 13--LOAN TO PARENT COMPANY
On January 27, 2000, the Company's Parent acquired a 6% interest
in Linux Global Partners, a private holding company investing in Linux
software companies, and loaned Linux Global Partners $1,500,000 with a 10%
annual interest rate. The Parent obtained an option to acquire an additional
2% interest in and to loan $500,000 more to Linux Global Partners, which 2%
interest it acquired and additional loan it made on March 27, 2000. The Parent
borrowed the funds it utilized for the loan from the Company with an annual
interest rate of 10%. The companies in which Linux Global Partners invests
intend to use Linux IPO.com, Inc. website for any of their future public
offerings. Linux IPO.com is a 50% owned subsidiary of Linux Global Partners,
with 50% owned by MainStreet.
The Parent, issued options to purchase 150,000 shares of its common stock to
MSI and 2 officers of MSI as a finder's fee in conjunction with Medicore's
investment in Linux Global Partners.
F-18